<PAGE>
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED
VARIABLE AND FIXED ANNUITY CONTRACT
ISSUED BY
American Foundation Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Telephone: 1-800-456-6330
This Prospectus describes the individual flexible premium deferred variable
and fixed annuity contract (the "Contract") offered by American Foundation Life
Insurance Company ("American Foundation Life"). The Contract is designed for
individual investors who desire to accumulate capital on a tax deferred basis
for retirement or other long term investment purpose. It may be purchased on a
non-qualified basis. The Contract may also be sold for use with retirement plans
receiving special federal income tax treatment under the Internal Revenue Code
such as pension and profit sharing plans (including H.R. 10 plans), tax
sheltered annuity plans, and individual retirement annuities or accounts.
Purchase Payments will be allocated, as designated by the Owner(s), to one
or more of the Sub-Accounts of Variable Annuity Account A of American Foundation
(the "Variable Account"), or the Guaranteed Account or both. The assets of each
Sub-Account will be invested solely in a corresponding investment portfolio
(each, a "Fund") of Protective Investment Company, Oppenheimer Variable Account
Funds, MFS-Registered Trademark- Variable Insurance Trust, and Calvert Variable
Series Portfolios.
The Contract Value, except for the Guaranteed Account Value, will vary
according to the investment performance of the Funds in which the selected
Sub-Accounts are invested. The Owner(s) bear the investment risk of amounts
allocated to the Variable Account.
This Prospectus sets forth basic information about the Contract and the
Variable Account that a prospective investor should know before investing.
Additional information about the Contract and the Variable Account is contained
in the Statement of Additional Information, which has been filed with the
Securities and Exchange Commission. The Statement of Additional Information is
dated the same date as this Prospectus and is incorporated herein by reference.
The Table of Contents for the Statement of Additional Information is on Page xx
of this Prospectus. You may obtain a copy of the Statement of Additional
Information free of charge by writing or calling American Foundation Life at the
address or telephone number shown above.
PLEASE READ THIS PROSPECTUS CAREFULLY. INVESTORS SHOULD KEEP A COPY FOR
FUTURE REFERENCE. THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS
FOR EACH OF THE FUNDS.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN
INVESTMENT IN THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE LOSS OF
PURCHASE PAYMENTS (PRINCIPAL).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions............................................................... 4
Expense Tables............................................................ 7
Summary................................................................... 11
Condensed Financial Information........................................... 12
The Company, Variable Account and Funds................................... 13
American Foundation Life Insurance Company.............................. 13
Variable Annuity Account A of American Foundation....................... 13
Administration.......................................................... 13
The Funds............................................................... 14
Other Investors in the Funds............................................ 16
Addition, Deletion or Substitution of Investments....................... 16
Description of the Contracts.............................................. 17
Issuance of a Contract.................................................. 17
Purchase Payments....................................................... 17
Free Look Period........................................................ 18
Allocation of Purchase Payments......................................... 18
Variable Account Value.................................................. 18
Transfers............................................................... 20
Surrenders and Partial Surrenders....................................... 21
The Guaranteed Account.................................................... 22
Death Benefit............................................................. 23
Suspension or Delay in Payments........................................... 24
Charges and Deductions.................................................... 24
Surrender Charge (Contingent Deferred Sales Charge)..................... 24
Administration Charges.................................................. 25
Transfer Fee............................................................ 25
Mortality and Expense Risk Charge....................................... 25
Contract Maintenance Fee................................................ 26
Fund Expenses........................................................... 26
Premium Taxes........................................................... 26
Other Taxes............................................................. 26
Annuity Options........................................................... 27
Annuity Income Payments................................................. 27
Death of Annuitant or Owner After Annuity Commencement Date............. 28
Yields and Total Returns.................................................. 28
Federal Tax Matters....................................................... 30
Introduction............................................................ 30
The Company's Tax Status................................................ 30
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Taxation of Annuities in General.......................................... 30
Tax Deferral During Accumulation Period................................. 30
Taxation of Partial and Full Surrenders................................. 31
Taxation of Annuity Payments............................................ 32
Taxation of Death Benefit Proceeds...................................... 32
Assignments, Pledges, and Gratuitous Transfers.......................... 33
Penalty Tax on Premature Distributions.................................. 33
Aggregation of Contracts................................................ 33
Qualified Retirement Plans................................................ 34
In General.............................................................. 34
Direct Rollovers........................................................ 36
Federal Income Tax Withholding............................................ 36
General Matters........................................................... 36
Modification............................................................ 36
Reports................................................................. 36
Inquiries............................................................... 37
Distribution of the Contracts............................................. 37
Legal Proceedings......................................................... 37
Voting Rights............................................................. 38
Financial Statements...................................................... 38
Statement of Additional Information Table of Contents..................... 39
</TABLE>
3
<PAGE>
DEFINITIONS
"We", "us", "our", "American Foundation Life", and "Company" refer to
American Foundation Life Insurance Company. "You" and "your" refer to the
person(s) who has been issued a Contract.
ACCUMULATION UNIT: A unit of measurement used to calculate the value of a
Sub-Account.
ADMINISTRATIVE OFFICE: 2801 Highway 280 South, Birmingham, Alabama 35223.
AGE: The age on the birthday immediately prior to any date for which age is
to be determined.
ALLOCATION OPTION: Any account within the Guaranteed Account and any
Sub-Account to which Purchase Payments may be allocated or Contract Value
transferred under this Contract.
ANNIVERSARY VALUE: At any time, the sum of: (1) the Contract Value on a
Contract Anniversary; plus (2) all Purchase Payments made since that Contract
Anniversary; minus (3) any partial surrenders (and any associated charges) made
since that Contract Anniversary. An Anniversary Value is determined for each
Contract Anniversary through the earlier of: (1) the deceased Owner's 80th
birthday, or (2) the date of the deceased Owner's death.
ANNUITANT: The person on whose life annuity payments are based. The Owner
is the Annuitant unless the Owner designates another person as the Annuitant.
The Owner may change the Annuitant by Written Notice prior to the Annuity
Commencement Date. However, if any Owner is not an individual, the Annuitant may
not be changed.
ANNUITY COMMENCEMENT DATE: The date as of which Annuity Income Payments are
determined (i.e., the date as of which the Annuity Purchase Value is applied to
a selected Annuity Option). The initial Annuity Income Payment must be within
one month of the Annuity Commencement Date.
ANNUITY INCOME PAYMENT: Payments made by the Company that are determined on
the Annuity Commencement Date and are based on the Annuity Option selected.
ANNUITY OPTION: The payout option selected by the Owner(s) pursuant to
which the Company makes Annuity Income Payments.
ANNUITY PURCHASE VALUE: At any time prior to the Annuity Commencement Date,
the greater of: (1) Surrender Value, or (2) 95% of Contract Value (less
applicable premium tax).
BENEFICIARY: The person or persons entitled to receive the Death Benefit
upon the death of an Owner. Unless designated irrevocably, the Owner may change
the Beneficiary by Written Notice prior to the death of any Owner.
PRIMARY--The Primary Beneficiary is the surviving Joint Owner, if any. If
there is no surviving Joint Owner, the Primary Beneficiary is the person
or persons designated on the application or, if changed by the Owner, the
person or persons so named in our records.
CONTINGENT--The person or persons named to receive the Death Benefit if
the Primary Beneficiary is not living at the time of an Owner's death. If
no Beneficiary designation is in effect or if no Beneficiary is living at
the time of an Owner's death, the estate of the deceased Owner is the
Beneficiary.
IRREVOCABLE--An irrevocable Beneficiary is one whose written consent is
needed before the Owner can change the Beneficiary designation or
exercise certain other rights.
CODE: The Internal Revenue Code of 1986, as amended.
CONTRACT ANNIVERSARY: The same month and day as the Effective Date in each
subsequent year of the Contract.
4
<PAGE>
CONTRACT VALUE: At any time, the sum of: (1) the Variable Account Value,
and (2) the Guaranteed Account Value.
CONTRACT YEAR: Any period of 12 months commencing with the Effective Date
or any Contract Anniversary.
DCA FIXED ACCOUNT: The DCA Fixed Account is part of the Company's general
account and is not part of or dependent upon the investment performance of the
Variable Account. Only Purchase Payments may be allocated to the DCA Fixed
Account, which is available only for dollar cost averaging. No transfers may be
made to the DCA Fixed Account from other Allocation Options.
DEATH BENEFIT: The amount, if any, paid to a Beneficiary upon the death of
an Owner prior to the Annuity Commencement Date. Only one Death Benefit is
payable under this Contract even though the Contract may, in some circumstances,
continue beyond an Owner's death. References to the death of an Owner mean the
death of the first of two Joint Owners to die.
EFFECTIVE DATE: The date as of which the initial Purchase Payment is
credited under the Contract and the date the Contract takes effect. Contract
Years are measured from the Effective Date. The Effective Date is shown on the
specifications page of the Contract.
FIXED ACCOUNT: The Fixed Account is part of the Company's general account
and is not part of or dependent upon the investment performance of the Variable
Account.
FUND: Any open-end management investment company or investment portfolio
thereof, or unit investment trust or series thereof, in which a corresponding
Sub-Account invests.
GUARANTEED ACCOUNT: The Fixed Account, DCA Fixed Account and any other
account that we may offer with interest rate guarantees.
GUARANTEED ACCOUNT VALUE: At any time prior to the Annuity Commencement
Date, the sum of: (1) Purchase Payments allocated to the Guaranteed Account;
plus, (2) Variable Account Value transferred into the Guaranteed Account; plus,
(3) interest credited to the Guaranteed Account; minus, (4) Contract Value
transferred out of the Guaranteed Account; minus, (5) the amount of any partial
surrenders removed from the Guaranteed Account, including any surrender charges
and applicable premium tax; minus, (6) fees deducted from the Guaranteed
Account.
INTEREST GUARANTEED PERIOD: The term for which an interest rate is
guaranteed for an account within the Guaranteed Account.
MAXIMUM ANNIVERSARY VALUE: The greatest Anniversary Value attained.
NET ASSET VALUE PER SHARE: The value per share of any Fund as computed on
any Valuation Day as described in the Fund prospectus.
NON-QUALIFIED CONTRACTS: Contracts which are not Qualified Contracts.
OWNER: The person or persons who own the Contract and are entitled to
exercise all rights and privileges provided in the Contract. Two persons may own
the Contract together; they are called Joint Owners. Provisions relating to
action by the Owner mean, in the case of Joint Owners, both Owners acting
together. Individuals as well as non-natural persons, such as corporations or
trusts, may be Owners.
PAYEE: Person or persons designated by the Owner to receive the Annuity
Income Payments under the Contract. The Annuitant is the Payee unless another
party is designated as the Payee.
PIC: Protective Investment Company.
5
<PAGE>
PURCHASE PAYMENT(S): Amount(s) paid by the Owner and accepted by the
Company as consideration for this Contract.
QUALIFIED CONTRACTS: Contracts issued in connection with retirement plans
that receive favorable tax treatment under Sections 401, 403, 408 or 457 of the
Code.
QUALIFIED PLANS: Retirement plans that receive favorable tax treatment
under Sections 401, 403, 408, or 457 of the Code.
SUB-ACCOUNT: A separate division of the Variable Account. Each Sub-Account
invests in a corresponding Fund.
SUB-ACCOUNT VALUE: Prior to the Annuity Commencement Date, the total amount
equal to that part of any Purchase Payment(s) allocated to the Sub-Account plus
any Contract Value transferred to the Sub-Account, adjusted by investment
performance, and decreased by partial surrenders (including any applicable
surrender charges and premium tax), any Contact Value transferred out of the
Sub-Account and any fees deducted from the Sub-Account. Sub-Account Value can be
determined at any time by multiplying the Accumulation Unit value for a
Sub-Account by the number of Accumulation Units of that Sub-Account credited
under a Contract.
SURRENDER VALUE: The amount available for a full surrender. It is equal to
the Contract Value minus any applicable surrender charge, contract maintenance
fee and premium tax.
VALUATION DAY: Each day on which the New York Stock Exchange is open for
business.
VALUATION PERIOD: The period which begins at the close of regular trading
on the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next Valuation Day.
VARIABLE ACCOUNT: Variable Annuity Account A of American Foundation, a
separate investment account of the Company.
VARIABLE ACCOUNT VALUE: The sum of all Sub-Account Values.
WRITTEN NOTICE: A notice or request submitted in writing in a form
satisfactory to the Company that is received at the Administrative Office.
Written Notice to change or assign the Contract is effective as of the date that
the Notice was signed, however, the Company is not responsible for following any
instruction or making any change or assignment before receipt of the Notice.
6
<PAGE>
EXPENSE TABLES
The following expense information assumes that the entire Contract Value is
Variable Account Value.
<TABLE>
<S> <C>
OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Purchase Payments................................. None
Maximum Surrender Charge Imposed on Purchase Payments (contingent deferred
sales charge)........................................................... 7%
Transfer Processing Fee................................................... None*
ANNUAL CONTRACT MAINTENANCE FEE............................................. $ 30
ANNUAL ACCOUNT EXPENSES
(as a percentage of net assets)
Mortality and Expense Risk Charge......................................... 1.25%
Administration Charge..................................................... 0.15%
Total Account Expenses.................................................... 1.40%
</TABLE>
<TABLE>
<S> <C>
ANNUAL FUND EXPENSES
(as percentage of average net assets)
PIC FUNDS (1)
MONEY MARKET FUND
-----------------
Management (Advisory) Fees................................................ 0.60%
Other Expenses After Reimbursement....................................... 0.00%
Total Annual Fund Expenses (after reimbursements)........................ 0.60%
<CAPTION>
CORE U.S. EQUITY
FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.80%
Other Expenses After Reimbursement....................................... 0.00%
Total Annual Fund Expenses (after reimbursements)........................ 0.80%
<CAPTION>
CAPITAL GROWTH
FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.80%
Other Expenses After Reimbursement....................................... 0.00%
Total Annual Fund Expenses (after reimbursements)........................ 0.80%
<CAPTION>
SMALL CAP VALUE
FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.80%
Other Expenses After Reimbursement....................................... 0.00%
Total Annual Fund Expenses (after reimbursements)........................ 0.80%
<CAPTION>
INTERNATIONAL
EQUITY FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 1.10%
Other Expenses After Reimbursement....................................... 0.00%
Total Annual Fund Expenses (after reimbursements)........................ 1.10%
<CAPTION>
GROWTH AND INCOME
FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.80%
Other Expenses After Reimbursement....................................... 0.00%
Total Annual Fund Expenses (after reimbursements)........................ 0.80%
<CAPTION>
GLOBAL INCOME
FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 1.10%
Other Expenses After Reimbursement....................................... 0.00%
Total Annual Fund Expenses (after reimbursements)........................ 1.10%
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
OPPENHEIMER FUNDS
<CAPTION>
AGGRESSIVE GROWTH
FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.71%
Other Expenses........................................................... 0.02%
Total Annual Fund Expenses............................................... 0.73%
<CAPTION>
GROWTH FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.73%
Other Expenses........................................................... 0.02%
Total Annual Fund Expenses............................................... 0.75%
<CAPTION>
GROWTH & INCOME
FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.75%
Other Expenses........................................................... 0.08%
Total Annual Fund Expenses............................................... 0.83%
<CAPTION>
STRATEGIC BOND
FUND
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.75%
Other Expenses........................................................... 0.08%
Total Annual Fund Expenses............................................... 0.83%
MFS FUNDS
<CAPTION>
MFS EMERGING
GROWTH SERIES
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.75%
Other Expenses After Reimbursement(2).................................... 0.15%
Total Annual Fund Expenses (after reimbursements)........................ 0.90%
<CAPTION>
MFS RESEARCH
SERIES
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.75%
Other Expenses After Reimbursement(2).................................... 0.13%
Total Annual Fund Expenses (after reimbursements)........................ 0.88%
<CAPTION>
MFS GROWTH WITH
INCOME SERIES
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.75%
Other Expenses After Reimbursement (2)(3)................................ 0.25%
Total Annual Fund Expenses (after reimbursements) (3).................... 1.00%
<CAPTION>
MFS TOTAL RETURN
SERIES
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.75%
Other Expenses After Reimbursement (2)(3)................................ 0.25%
Total Annual Fund Expenses (after reimbursements) (3).................... 1.00%
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
CALVERT FUNDS
<CAPTION>
SOCIAL SMALL CAP
GROWTH PORTFOLIO
-----------------
<S> <C>
Management (Advisory) Fees................................................ 1.00%
Other Expenses After Reimbursement....................................... 0.20%
Total Annual Fund Expenses (after reimbursements) (4).................... 1.20%
<CAPTION>
SOCIAL BALANCED
PORTFOLIO
-----------------
<S> <C>
Management (Advisory) Fees................................................ 0.69%
Other Expenses After Reimbursement....................................... 0.12%
Total Annual Fund Expenses (after reimbursements) (4).................... 0.81%
</TABLE>
- ------------------------
* American Foundation Life reserves the right to charge a Transfer Fee in the
future. (See "Charges and Deductions".)
(1) The annual expenses listed for all of the PIC Funds are net of certain
reimbursements by PIC's investment manager. (See "The Funds".) Absent the
reimbursements, total expenses for the period ended December 31, 1997 were:
Money Market Fund 1.42%, CORE U.S. Equity Fund 0.86%, Small Cap Value Fund
0.89%, International Equity Fund 1.37%, Growth and Income Fund 0.85%,
Capital Growth Fund 0.97%, and Global Income Fund 1.32%. PIC's investment
manager has voluntarily agreed to reimburse certain of each Fund's expenses
in excess of its management fees. Although this reimbursement may be ended
on 120 days notice to PIC, the investment manager has no present intention
of doing so.
(2) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based on the amount of cash maintained by the Series with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses."
(3) The investment advisor has agreed to bear expenses for these Series, subject
to reimbursement by these Series, such that each such Series' "Other
Expenses" shall not exceed 0.25% of the average daily net assets of the
Series during the current fiscal year. See the Funds prospectus,
"Information Concerning Shares of Each Series--Expenses." Otherwise, "Other
Expenses" for the Growth With Income Series and Total Return Series would be
0.35% and 0.27%, respectively, and "Total Operating Expenses" would be 1.10%
and 1.02%, respectively, for these Series.
(4) The figures have been restated to reflect an increase in transfer agency
expenses of 0.01% for each portfolio expected to be incurred in 1998.
Management Fees includes for Calvert Social Balanced a performance
adjustment, which depending on performance, could cause the fee to be as
high as 0.85% or as low as 0.55%. Effective December 1, 1997, the Calvert
Social Small Cap Growth advisory fee was reduced from the annual rate of
1.50% to 0.90%, and the administrative services fee was reduced from the
annual rate of 0.20% to 0.10%. The Calvert Social Small Cap Growth expenses
have been restated to reflect the lower advisory fee and administrative
services fee. "Other Expenses" include the fee that could have been charged
by the portfolios' custodian, without reduction for an expense off-set by
the custodian of 0.03% for the Calvert Social Balanced portfolio, and 0.31%
for the Calvert Social Small Cap Growth portfolio. Total annual fund
expenses (restated) after reduction for the expense off-set would be 0.78%
for the Calvert Social Balanced portfolio, and 0.89% for the Calvert Social
Small Cap Growth portfolio. Management Fees for Calvert Social Small Cap
Growth include an administrative service fee of 0.10% paid to the Advisor's
affiliate.
The above tables are intended to assist the owner in understanding the costs
and expenses that he or she will bear directly or indirectly. The tables reflect
the expenses for the Account and reflect the investment management fees and
other expenses and total expenses for each Fund for the period January 1, 1997
to December 31, 1997. For a more complete description of the various costs and
expenses see "Charges and Deductions" and the prospectuses for each of the
Funds, which accompany this prospectus. IN ADDITION TO THE EXPENSES LISTED
ABOVE, PREMIUM TAXES VARYING FROM 0 TO 3.5% MAY BE APPLICABLE IN CERTAIN STATES.
CURRENTLY, NO PREMIUM TAX IS IMPOSED FOR CONTRACTS ISSUED IN NEW YORK.
9
<PAGE>
EXAMPLES
An Owner would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
1. If the Contract is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PIC Money Market............................................................. $ 91 $ 115 $ 141 $ 239
PIC CORE U.S. Equity......................................................... 93 121 151 260
PIC Capital Growth........................................................... 93 121 151 260
PIC Small Cap Value.......................................................... 93 121 151 260
PIC International Equity..................................................... 96 130 166 290
PIC Growth and Income........................................................ 93 121 151 260
PIC Global Income............................................................ 96 130 166 290
Oppenheimer Aggressive Growth................................................ 92 119 147 252
Oppenheimer Growth........................................................... 92 119 148 254
Oppenheimer Growth & Income.................................................. 93 122 153 263
Oppenheimer Strategic Bond................................................... 93 122 153 263
MFS Emerging Growth.......................................................... 94 124 156 270
MFS Research................................................................. 94 124 157 272
MFS Growth With Income....................................................... 95 127 161 280
MFS Total Return............................................................. 95 127 161 280
Calvert Social Small Cap Growth.............................................. 101 145 191 338
Calvert Social Balanced...................................................... 93 120 149 256
</TABLE>
2. If the Contract is not surrendered or is annuitized* at the end of the
applicable time period:
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PIC Money Market............................................................. $ 21 $ 65 $ 111 $ 239
PIC CORE U.S. Equity......................................................... 23 71 121 260
PIC Capital Growth........................................................... 23 71 121 260
PIC Small Cap Value.......................................................... 23 71 121 260
PIC International Equity..................................................... 26 80 136 290
PIC Growth and Income........................................................ 23 71 121 260
PIC Global Income............................................................ 26 80 136 290
Oppenheimer Aggressive Growth................................................ 22 69 117 252
Oppenheimer Growth........................................................... 22 69 118 254
Oppenheimer Growth & Income.................................................. 23 72 123 263
Oppenheimer Strategic Bond................................................... 23 72 123 263
MFS Emerging Growth.......................................................... 24 74 126 270
MFS Research................................................................. 24 74 127 272
MFS Growth With Income....................................................... 25 77 131 280
MFS Total Return............................................................. 25 77 131 280
Calvert Social Small Cap Growth.............................................. 31 95 161 338
Calvert Social Balanced...................................................... 23 70 119 256
</TABLE>
- ------------------------
* Currently, no surrender charge will be applied to the Contract Value upon
annuitization. (See "Charges and Deductions".)
The examples assume that no transfer fee or premium taxes have been
assessed. The examples assume that the contract maintenance fee is $30. The
contract maintenance fee reflected in the above examples is based on an
anticipated average Contract Value of $49,545, for purposes of the examples
based on a $1,000 investment.
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5%
ANNUAL RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED AMOUNT.
10
<PAGE>
SUMMARY
THE CONTRACT
HOW IS A CONTRACT ISSUED? The Contract is an individual flexible premium
deferred variable and fixed annuity contract that American Foundation Life
issues upon receipt of completed application information and an initial Purchase
Payment. (See "Issuance of Contract".)
WHAT ARE THE PURCHASE PAYMENTS? The minimum amount which American
Foundation Life will accept as an initial Purchase Payment is $5,000 for a
Non-Qualified Contract and $2,000 for a Qualified Contract. Subsequent Purchase
Payments may be made at any time. The minimum subsequent Purchase Payment is
$250, unless the payment is made electronically under the Automatic Purchase
Plan. Currently, we will accept a minimum payment of $100 under this Plan. The
maximum aggregate Purchase Payments we will accept without prior Administrative
Office approval is $1,000,000. (See "Purchase Payments".)
CAN I CANCEL THE CONTRACT? You have the right to return the Contract within
a certain number of days (which varies by state and is never less than ten days)
after you receive it. The returned Contract will be treated as if it were never
issued. American Foundation Life will refund the Contract Value in states where
permitted. This amount may be more or less than the Purchase Payments. Where
required, we will refund Purchase Payments. (See "Free Look Period".)
CAN I TRANSFER AMOUNTS IN THE CONTRACT? Prior to the Annuity Commencement
Date, you may request transfers of Contract Value from one Allocation Option to
another. However, no transfers may be made into the DCA Fixed Account. At least
$100 must be transferred. American Foundation Life reserves the right to limit
the maximum amount that may be transferred from the Fixed Account to the greater
of (a) $2,500; or (b) 25% of the value of the Fixed Account per Contract Year.
The Company reserves the right to limit the number transfers in any Contract
Year to 12 or to charge a Transfer Fee of $25 for each transfer in excess of 12
during any Contract Year. (See "Transfers".)
CAN I SURRENDER THE CONTRACT? Upon Written Notice before the Annuity
Commencement Date, You may surrender the Contract and receive its Surrender
Value. (See "Surrenders and Partial Surrenders".)
IS THERE A DEATH BENEFIT? If any Owner dies prior to the Annuity
Commencement Date and while this Contract is in force, a Death Benefit may be
payable to the Beneficiary. The Death Benefit is determined as of the end of the
Valuation Period during which we receive due proof of the Owner's death. The
amount of the Death Benefit will depend upon the age of the Owner on the date of
death.
In general, if the Owner dies on or before his or her 90th birthday, the
Death Benefit is the greater of: (1) the Contract Value; or (2) total Purchase
Payments made under the Contract reduced by any partial surrenders and any
associated Surrender Charges; or (3) the Maximum Anniversary Value.
If the Owner dies after his or her 90th birthday, the Death Benefit is the
Contract Value. (See "Death Benefit".)
ARE THERE CHARGES AND DEDUCTIONS FROM MY CONTRACT? The following charges
and deductions are made in connection with the Contract:
SURRENDER CHARGES. Full or partial surrenders are subject to a surrender
charge. The surrender charge is equal to a specified percentage (maximum 7%) of
each Purchase Payment surrendered. No surrender charge applies to Contract Value
in excess of aggregate Purchase Payments (less prior partial surrenders of
Purchase Payments). The surrender charge is calculated using the assumption that
the Contract Value in excess of aggregate Purchase Payments (less prior partial
surrenders of Purchase Payments) is surrendered before any Purchase Payments and
that Purchase Payments are surrendered on a first-in-first-out basis. (See
"Surrender Charge".)
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MORTALITY AND EXPENSE RISK CHARGE. We will deduct a mortality and expense
risk charge to compensate us for assuming certain mortality and expense risks.
The charge is equal, on an annual basis, to 1.25% of the average daily net
assets of the Variable Account.
ADMINISTRATION CHARGE. We will deduct an administration charge equal, on an
annual basis, to .15% of the average daily net assets of the Variable Account.
CONTRACT MAINTENANCE FEE. A contract maintenance fee of $30 is deducted
from the Contract Value on each Contract Anniversary, and on any day that the
Contract is surrendered, if the surrender occurs on a day other than the
Contract Anniversary. Under certain circumstances, this fee may be waived. (See
"Contract Maintenance Fee".)
TAXES. Some states impose premium taxes at rates ranging up to 3.5%. The
State of New York does not currently impose a premium tax on annuity contracts.
If premium taxes are applicable to your Contract, we will deduct them from your
Contract by applying the premium tax rate to one of the following: Your Purchase
Payment(s), amounts that You surrender, the Death Benefit, or the Annuity
Purchase Value. The Company reserves the right to impose a charge for other
taxes attributable to the Variable Account. (See "Charges and Deductions".)
INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES OF THE FUNDS. The net assets
of each Sub-Account of the Variable Account will reflect the investment
management fee incurred by the corresponding Fund as well as other operating
expenses of that Fund. For each Fund, the investment manager is paid a daily fee
for its investment management services. The management fees are based on the
average daily net assets of the Fund. (See "Funds Expenses" and the Funds'
Prospectuses.)
WHAT ANNUITY OPTIONS ARE AVAILABLE? Currently, we apply the Contract Value
to an Annuity Option on the Annuity Commencement Date, unless you choose to
receive the Surrender Value in a lump sum. Annuity Options include: Payments for
a Fixed Period and Life Income with Payments for a Guaranteed Period. (See
"Annuity Options".)
IS THE CONTRACT AVAILABLE FOR QUALIFIED RETIREMENT PLANS? The Contract may
be issued for use with retirement plans receiving special federal income tax
treatment under the Code such as pension and profit sharing plans (including
H.R. 10 plans), "tax sheltered" annuity plans, and individual retirement
annuities or accounts. (See "Federal Tax Matters".)
FEDERAL TAX STATUS
Generally, a distribution from the Contract, which includes a full or
partial surrender or payment of a Death Benefit, will result in taxable income
if there has been an increase in the Contract Value. In certain circumstances, a
10% penalty tax may also apply. (See "Federal Tax Matters".)
CONDENSED FINANCIAL INFORMATION
No condensed financial information is provided for the Variable Account
because, as of the date of this Prospectus, the Variable Account had not yet
commenced operations.
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THE COMPANY, VARIABLE ACCOUNT AND FUNDS
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
The Contracts are issued by American Foundation Life Insurance Company, a
wholly owned subsidiary of Protective Life Insurance Company, which is the chief
operating subsidiary of Protective Life Corporation, a Delaware insurance
holding company whose stock is traded on the New York Stock Exchange. American
Foundation Life was organized as an Alabama insurance company in 1978. American
Foundation Life is authorized to transact insurance business in 29 states
(including New York) and offers a variety of individual life, annuity, and group
dental insurance products. The Company's assets for the fiscal year ending 1997
were in excess of 100 million dollars.
VARIABLE ANNUITY ACCOUNT A OF AMERICAN FOUNDATION
Variable Annuity Account A of American Foundation is a separate investment
account of American Foundation Life. The Variable Account was established under
Alabama law by the Board of Directors of American Foundation on December 1,
1997. The Variable Account is registered with the Securities and Exchange
Commission (the "SEC") as a unit investment trust under the Investment Company
Act of 1940 (the "1940 Act") and meets the definition of a separate account
under federal securities laws. This registration does not involve supervision by
the SEC of the management or investment policies or practices of the Variable
Account.
American Foundation Life owns the assets of the Variable Account. These
assets are held separate from other assets and are not part of American
Foundation Life's general account. The portion of the assets of the Variable
Account equal to the reserves or other contract liabilities with respect to the
Variable Account are not chargeable with the liabilities that arise from any
other business American Foundation Life conducts. American Foundation Life may
transfer to its general account any assets of the Variable Account which exceed
the reserves and other contract liabilities of the Variable Account (which will
always be at least equal to the aggregate Variable Account Value under the
Contracts). American Foundation Life may accumulate in the Variable Account the
charge for mortality and expense risks, and investment results applicable to
those assets that are in excess of the net assets supporting the Contracts. The
income, gains and losses, both realized and unrealized, from the assets of the
Variable Account are credited to or charged against the Variable Account without
regard to any other income, gains or losses of American Foundation Life.
The Variable Account has seventeen Sub-Accounts: PIC Money Market; PIC CORE
U.S. Equity; PIC Capital Growth; PIC Small Cap Equity; PIC International Equity;
PIC Growth and Income; PIC Global Income; Oppenheimer Capital Appreciation;
Oppenheimer Growth; Oppenheimer Growth & Income; Oppenheimer Strategic Bond; MFS
Emerging Growth; MFS Research; MFS Growth With Income; MFS Total Return; Calvert
Social Small Cap Growth; and Calvert Social Balanced. Each Sub-Account invests
in shares of a corresponding Fund. Therefore, the investment experience of Your
Contract depends on the experience of the Sub-Accounts that You select.
ADMINISTRATION
Pursuant to the terms of an agreement with American Foundation Life,
Protective Life Insurance Company administers the Contracts at the
Administrative Office (Protective Life's home office) at 2801 Highway 280 South,
Birmingham, Alabama 35223. Contract administration includes: processing
applications for the Contracts and subsequent Owner requests; processing
Purchase Payments, transfers, surrenders and Death Benefit claims as well as
performing record maintenance and disbursing Annuity Income Payments.
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THE FUNDS
Each Sub-Account invests in a corresponding Fund. Each Fund is an investment
portfolio of one of the following investment companies: PIC (the "PIC Funds")
managed by Investment Distributors Advisory Services, Inc., and subadvised by
Goldman Sachs Asset Management or Goldman Sachs Asset Management International;
Oppenheimer Variable Account Funds (the "Oppenheimer Funds") managed by
OppenheimerFunds, Inc.; MFS Variable Insurance Trust (the "MFS Funds") managed
by Massachusetts Financial Services Company; or Calvert Variable Series
Portfolios (the "Calvert Funds") managed by Calvert Asset Management Company,
Inc. Shares of these Funds are offered only to: (1) the Variable Account, (2)
separate accounts of other life insurance companies supporting variable annuity
contracts or variable life insurance policies, and (3) certain qualified
retirement plans. Such shares are not offered directly to investors but are
available only through the purchase of such contracts or policies or through
such plans. See the prospectus for each Fund for details about that Fund.
There is no guarantee that any Fund will meet its investment objectives.
Please refer to the prospectus for each of the Funds you are considering for
more information.
THE PIC FUNDS
PIC MONEY MARKET FUND. This Fund seeks to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity. This Fund will pursue its objective by investing exclusively in
high quality money market instruments. An investment in the Money Market
Fund is neither insured nor guaranteed by the U.S. Government and the Fund
cannot assure that it will be able to maintain a stable net asset value of
$1 per share.
PIC CORE U.S. EQUITY FUND. This Fund seeks a total return consisting of
capital appreciation plus dividend income. This Fund will pursue its
objective by investing, under normal circumstances, at least 90% of its
total assets in equity securities selected using both fundamental research
and a variety of quantitative techniques that seek to maximize the Fund's
reward to risk ratio.
PIC CAPITAL GROWTH FUND. This Fund seeks long-term capital growth. The
Fund will pursue its objective by investing, under normal circumstances, at
least 65% of its total assets in equity securities having long-term capital
appreciation potential.
PIC SMALL CAP VALUE FUND. This Fund seeks long-term capital growth.
This Fund will pursue its objective by investing, under normal
circumstances, at least 65% of its total assets in equity securities of
companies with public stock market capitalizations of $1 billion or less at
the time of investment.
PIC INTERNATIONAL EQUITY FUND. This Fund seeks long-term capital
appreciation. This Fund will pursue its objective by investing, primarily in
equity and equity-related securities of companies that are organized outside
the United States or whose securities are primarily traded outside the
United States.
PIC GROWTH AND INCOME FUND. This Fund seeks long-term growth of capital
and growth of income. This Fund will pursue its objectives by investing,
under normal circumstances, at least 65% of its total assets in equity
securities having favorable prospects of capital appreciation and/or
dividend paying ability.
PIC GLOBAL INCOME FUND. This Fund seeks high total return, emphasizing
current income and, to a lesser extent, providing opportunities for capital
appreciation. This Fund will pursue its objectives by investing in high
quality fixed-income securities of U.S. and foreign issuers and through
foreign currency transactions.
THE OPPENHEIMER FUNDS
AGGRESSIVE GROWTH FUND. This Fund seeks to achieve capital appreciation
by investing in "growth-type" companies.
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GROWTH FUND. This Fund seeks to achieve capital appreciation by
investing in securities of well-known established companies.
GROWTH & INCOME FUND. This Fund seeks a high total return (which
includes growth in the value of its shares as well as current income) from
equity and debt securities. From time to time this Fund may focus on small
to medium capitalization common stocks, bonds and convertible securities.
STRATEGIC BOND FUND. This Fund seeks a high level of current income
principally derived from interest on debt securities and seeks to enhance
such income by writing covered call options on debt securities.
THE MFS FUNDS
MFS EMERGING GROWTH SERIES. This Fund seeks to provide long-term growth
of capital.
MFS RESEARCH SERIES. This Fund seeks to provide long-term growth of
capital and future income.
MFS GROWTH WITH INCOME SERIES. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS TOTAL RETURN SERIES. This Fund seeks primarily to provide
above-average income (compared to a portfolio invested entirely in equity
securities) consistent with the prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income.
THE CALVERT FUNDS
SOCIAL SMALL CAP GROWTH (formerly Strategic Growth) PORTFOLIO. This
Fund seeks maximum long-term growth through investments primarily in the
equity securities of small capitalized growth companies that have
historically exhibited exceptional growth characteristics, and that, in the
Advisor's opinion, have strong earnings potential relative to the U.S.
market as a whole. The Fund is designed to provide long-term growth of
capital by investing in enterprises that make a significant contribution to
society through their products and services and through the way they do
business.
SOCIAL BALANCED PORTFOLIO. This Fund seeks to achieve a total return
above the rate of inflation through an actively managed, non-diversified
portfolio of common and preferred stocks, bonds, and money market
instruments that offer income and capital growth opportunity and that
satisfy the social concern criteria established for the Fund.
THERE IS NO ASSURANCE THAT THE STATED OBJECTIVES AND POLICIES OF ANY OF THE
FUNDS WILL BE ACHIEVED.
MORE DETAILED INFORMATION CONCERNING THE INVESTMENT OBJECTIVES, POLICIES AND
RESTRICTIONS OF THE FUNDS, THE EXPENSES OF THE FUNDS, THE RISKS ATTENDANT TO
INVESTING IN THE FUNDS AND OTHER ASPECTS OF THEIR OPERATIONS CAN BE FOUND IN THE
CURRENT PROSPECTUSES FOR THE FUNDS, WHICH ACCOMPANY THIS PROSPECTUS, AND THE
CURRENT STATEMENT OF ADDITIONAL INFORMATION FOR EACH OF THE FUNDS. THE FUNDS'
PROSPECTUSES SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING THE
ALLOCATION OF PURCHASE PAYMENTS OR TRANSFERS AMONG THE SUB-ACCOUNTS.
Each Fund sells its shares to the Variable Account in accordance with the
terms of a participation agreement between the appropriate investment company
and American Foundation Life. The termination provisions of these agreements
vary. Should a participation agreement relating to a Fund terminate, the
Variable Account would not be able to purchase additional shares of that Fund.
In that event, Owners would no longer be able to allocate Variable Account Value
or Purchase Payments to Sub-Accounts investing in that Fund. In certain
circumstances, it is also possible that a Fund may refuse to sell its shares to
the Variable Account despite the fact that the participation agreement relating
to that Fund has not been terminated. Should a Fund decide to discontinue
selling its shares to the Variable Account, American Foundation Life would not
be able to honor requests from Owners to allocate Purchase Payments or transfer
Account Value to the Sub-Account investing in shares of that Fund.
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American Foundation Life has entered into agreements with the investment
managers or advisers of several of the Funds pursuant to which each such
investment manager or adviser pays American Foundation Life a servicing fee
based upon an annual percentage of the average daily net assets invested by the
Variable Account in the Funds managed by that manager or adviser. These fees are
in consideration for administrative services provided to the Funds by American
Foundation Life. Payments of fees under these agreements by managers or advisers
do not increase the fees or expenses paid by the Funds or their shareholders.
OTHER INVESTORS IN THE FUNDS
Currently, PIC sells shares of its Funds only to American Foundation Life as
the underlying investment for the Variable Account and to certain separate
accounts of Protective Life Insurance Company as the underlying investment for
variable annuity and variable life insurance contracts issued by Protective
Life. PIC may in the future sell shares of its Funds to other separate accounts
of American Foundation Life or its life insurance company affiliates to support
other variable annuity contracts or variable life insurance contracts. Upon
obtaining any necessary regulatory approval, PIC may also sell shares to certain
retirement plans qualifying under Section 401 of the Code. American Foundation
Life currently does not foresee any disadvantages to Owners that would arise
from the sale of PIC Fund shares to support variable annuity and variable life
insurance contracts of its affiliates or from the possible sale of shares to
such retirement plans. However, the board of directors of PIC will monitor
events in order to identify any material irreconcilable conflicts that might
possibly arise if such shares were also offered to support variable annuity
contracts other than the Contracts or variable life insurance contracts or to
retirement plans. In event of such a conflict, the board of directors would
determine what action, if any, should be taken in response to the conflict. In
addition, if American Foundation Life believes that the PIC's response to any
such conflicts insufficiently protects Owners, it will take appropriate action
on its own, including withdrawing the Account's investment in the Fund. (See the
PIC Prospectus for more detail.)
Shares of the Oppenheimer, MFS and Calvert Funds are sold to separate
accounts of insurance companies, which may or may not be affiliated with
American Foundation Life or each other, a practice known as "shared funding."
They may also be sold to separate accounts to serve as the underlying investment
for both variable annuity contracts and variable life insurance policies, a
practice known as "mixed funding." As a result, there is a possibility that a
material conflict may arise between the interests of Owners of American
Foundation Life's Contracts, whose Contract Values are allocated to the Variable
Account, and of owners of other contracts whose contract values are allocated to
one or more other separate accounts investing in any one of the Funds. Shares of
some of these Funds may also be sold to certain qualified pension and retirement
plans. As a result, there is a possibility that a material conflict may arise
between the interests of Contract Owners generally or certain classes of
Contract Owners, and such retirement plans or participants in such retirement
plans. In the event of any such material conflicts, American Foundation Life
will consider what action may be appropriate, including removing the Fund from
the Variable Account or replacing the Fund with another fund. As is the case
with PIC, the board of directors (or trustees) of the Oppenheimer Funds, MFS
Funds and Calvert Funds monitors events related to their Funds to identify
possible material irreconcilable conflicts among and between the interests of
the Fund's various investors. There are certain risks associated with mixed and
shared funding and with the sale of shares to qualified pension and retirement
plans, as disclosed in each Fund's prospectus.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
American Foundation Life reserves the right, subject to applicable law, to
make additions to, deletions from, or substitutions for the shares that are held
in the Variable Account or that the Variable Account may purchase. If the shares
of a Fund are no longer available for investment or if in American Foundation
Life's judgment further investment in any Fund should become inappropriate in
view of the purposes of the Variable Account, American Foundation Life may
redeem the shares, if any, of that Fund and
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substitute shares of another registered open-end management company or unit
investment trust. American Foundation Life will not substitute any shares
attributable to a Contract's interest in the Variable Account without notice and
any necessary approval of the SEC and state insurance authorities.
American Foundation Life also reserves the right to establish additional
Sub-Accounts of the Variable Account, each of which would invest in shares
corresponding to a new Fund. Subject to applicable law and any required SEC
approval, American Foundation Life may, in its sole discretion, establish new
Sub-Accounts or eliminate one or more Sub-Accounts if marketing needs, tax
considerations or investment conditions warrant. Any new Sub-Accounts may be
made available to existing Owner(s) on a basis to be determined by American
Foundation Life.
If any of these substitutions or changes are made, American Foundation Life
may by appropriate endorsement change the Contract to reflect the substitution
or other change. If American Foundation Life deems it to be in the best interest
of Owner(s) and Annuitants, and subject to any approvals that may be required
under applicable law, the Variable Account may be operated as a management
company under the 1940 Act, it may be de-registered under that Act if
registration is no longer required, or it may be combined with other American
Foundation Life separate accounts. American Foundation Life reserves the right
to make any changes to the Variable Account required by the 1940 Act or other
applicable law or regulation.
DESCRIPTION OF THE CONTRACTS
ISSUANCE OF A CONTRACT
To purchase a Contract, certain application information and an initial
Purchase Payment must be submitted to American Foundation Life through a
licensed representative of American Foundation Life, who is also a registered
representative of a broker-dealer having a distribution agreement with
Investment Distributors, Inc. The minimum initial Purchase Payment is $5,000 for
Non-Qualified Contracts and $2,000 for Qualified Contracts. American Foundation
Life reserves the right to accept or decline a request to issue a Contract.
Contracts may be sold to or in connection with retirement plans which do not
qualify for special tax treatment as well as retirement plans that qualify for
special tax treatment under the Code. Generally, the maximum age for Owners on
the Effective Date is 85.
If the necessary application information for a Contract is accompanied by
the initial Purchase Payment, the initial Purchase Payment (less any applicable
premium tax) will be allocated to the Allocation Options as directed in the
application within two business days of receipt of the Purchase Payment at the
Administrative Office. If the necessary application information is not received,
American Foundation Life will retain the Purchase Payment for up to five
business days while it attempts to complete the information. If the necessary
application information is not complete after five days, American Foundation
Life will inform the applicant of the reason for the delay and the initial
Purchase Payment will be returned immediately unless the applicant specifically
consents to American Foundation Life retaining it until the information is
complete. Once the information is complete, the initial Purchase Payment will be
allocated to the appropriate Allocation Options within two business days.
Information necessary to complete an application may be transmitted to the
Company by telephone, facsimile, or electronic media.
PURCHASE PAYMENTS
Subsequent Purchase Payment(s) may be accepted by American Foundation Life.
The Company reserves the right to reject any Purchase Payment. The Company
further reserves the right to limit the maximum aggregate Purchase Payment that
can be made without prior approval. This amount is currently $1,000,000. The
minimum subsequent Purchase Payment that will be accepted is $250, unless the
payment is made electronically under the Automatic Purchase Plan.
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Under the current Automatic Purchase Payment plan, the Owner can select a
monthly or quarterly payment schedule pursuant to which Purchase Payments will
be automatically deducted from a bank account. Each automatic purchase payment
must be at least $100.
FREE LOOK PERIOD
You have the right to return the Contract within a certain number of days
after you receive it by returning it to the Administrative Office or the sales
representative who sold it along with a written cancellation request. The number
of days is determined by state law (and is at least ten days) in the state where
the Contract is delivered. Return of the Contract by mail is effective on being
received by us. We will treat the returned Contract as if it had never been
issued. However, in states where permitted, American Foundation Life will refund
the Contract Value and any charges deducted from either Purchase Payments or
Contract Value. This amount may be more or less than the aggregate amount of
your Purchase Payments up to that time. Where required, we will refund the
Purchase Payment.
ALLOCATION OF PURCHASE PAYMENTS
Owners must indicate in the application how Purchase Payments are to be
allocated among the Allocation Options. These allocation instructions apply to
both initial and subsequent Purchase Payments. If such instructions are
indicated by percentages, whole percentages must be used. Owners may not
allocate any Purchase Payment to more than 10 Allocation Options.
For Individual Retirement Annuities and Contracts issued in states where,
upon cancellation during the free look period, we return at least your Purchase
Payments, we reserve the right to allocate your initial Purchase Payment (and
any subsequent Purchase Payment made during the free look period) to the PIC
Money Market Sub-Account until the expiration of the number of days in the free
look period starting from the date the Contract is mailed from the
Administrative Office. Thereafter, all Purchase Payments will be allocated
according to your allocation instructions then in effect.
Owners may change allocation instructions by Written Notice at any time.
Owners also may change instructions by telephone, facsimile transmission or
automated telephone system. The Company reserves the right to limit or eliminate
any of these non-written communication methods for any Contract or class of
Contracts at any time for any reason.
We will send you a confirmation of all instructions communicated to us to
determine if they are genuine. For non-written instructions regarding
allocations, We will require a form of personal identification prior to acting
on instructions and we will record any telephone voice instructions. If we
follow these procedures, we will not be liable for any losses due to
unauthorized or fraudulent instructions.
VARIABLE ACCOUNT VALUE
SUB-ACCOUNT VALUE. A Contract's Variable Account Value at any time is the
sum of the Sub-Account Values and therefore reflects the investment experience
of the Sub-Accounts to which it is allocated. There is no guaranteed minimum
Variable Account Value. The Sub-Account Value for any Sub-Account as of the
Effective Date is equal to the amount of the initial Purchase Payment allocated
to that Sub-Account. On subsequent Valuation Days prior to the Annuity
Commencement Date, the Sub-Account Value is equal to that part of any Purchase
Payment allocated to the Sub-Account and any Contract Value transferred to the
Sub-Account, adjusted by interest income, dividends, net capital gains or losses
(realized or unrealized), decreased by partial surrenders (including any
applicable surrender charges and premium tax), Contract Value transferred out of
the Sub-Account and fees deducted from the Sub-Account.
DETERMINATION OF ACCUMULATION UNITS. Purchase Payments allocated to and
Contract Value transferred to a Sub-Account are converted into Accumulation
Units. The number of Accumulation Units is determined by dividing the dollar
amount directed to the Sub-Account by the value of the Accumulation Unit for
that Sub-Account for the Valuation Day as of which the allocation or transfer
occurs. Purchase
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Payments allocated to or amounts transferred to a Sub-Account under a Contract
increase the number of Accumulation Units of that Sub-Account credited to the
Contract. The Company executes such allocations and transfers as of the end of
the Valuation Period in which it receives a Purchase Payment or Written Notice
or other instruction requesting a transfer.
Certain events reduce the number of Accumulation Units of a Sub-Account
credited to a Contract. Partial surrenders or transfers from a Sub-Account
result in the cancellation of the appropriate number of Accumulation Units of
that Sub-Account as do payments resulting from the following events: a
surrender, a Death Benefit claim, application of the Annuity Purchase Value to
an Annuity Option, and deduction of the annual contract maintenance fee.
Accumulation Units are canceled as of the end of the Valuation Period in which
the Company receives Written Notice of or other instructions regarding the
event.
DETERMINATION OF ACCUMULATION UNIT VALUE. The Accumulation Unit value at
the end of every Valuation Day is the Accumulation Unit value at the end of the
previous Valuation Day multiplied by the net investment factor. Therefore, the
Sub-Account Value for a Contract may be determined on any day by multiplying the
number of Accumulation Units attributable to the Contract in that Sub-Account by
the Accumulation Unit value for that Sub-Account on that day.
NET INVESTMENT FACTOR. The net investment factor measures the investment
performance of a Sub-Account from one Valuation Period to the next. For each
Sub-Account, the net investment factor reflects the investment performance of
the Fund in which the Sub-Account invests and the charges assessed against that
Sub-Account for a Valuation Period. Each Sub-Account has a net investment factor
for each Valuation Period which may be greater or less than one. Therefore, the
value of an Accumulation Unit may increase or decrease. The net investment
factor for any Sub-Account for any Valuation Period is determined by dividing
(1) by (2) and subtracting (3) from the result, where:
(1) is the result of:
a. the net asset value per share of the Fund held in the Sub-Account,
determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain distributions
made by the Fund to the Sub-Account, if the "ex-dividend" date occurs
during the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved for, which is
determined by the Company to have resulted from the investment
operations of the Sub-Account.
(2) is the net asset value per share of the Fund held in the Sub-Account,
determined at the end of the last prior Valuation Period.
(3) is a factor representing the Mortality and Expense Risk Charge and the
Administration Charge for the number of days in the Valuation Period.
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TRANSFERS
Prior to the Annuity Commencement Date, you may instruct us to transfer
Contract Value between and among the Allocation Options. You must transfer at
least $100, or if less, the entire amount in the Allocation Option each time you
make a transfer. If after the transfer, the Contract Value remaining in any
Allocation Option from which a transfer is made would be less than $100, then we
will automatically transfer the entire Contract Value in that Allocation Option
instead of the requested amount. We reserve the right to limit the number of
transfers to no more than 12 per year. For each additional transfer over 12
during each Contract Year, we reserve the right to charge a Transfer Fee which
will not exceed $25. The Transfer Fee, if any, will be deducted from the amount
being transferred. (See "Charges and Deductions-- Transfer Fee".)
Transfers involving a Guaranteed Account are subject to additional
restrictions. The maximum amount that may be transferred from the Fixed Account
during a Contract Year is the greater of: (1) $2,500, or (2) 25% of the Fixed
Account Value. Transfers into the DCA Fixed Account are not permitted.
Owners may request transfers by Written Notice at any time. Owners also may
request transfers by telephone, facsimile transmission, or automated telephone
system. The Company reserves the right to limit or eliminate any of these
non-written communication methods for any Contract or class of Contracts at any
time for any reason.
We will send you a confirmation of all transfer requests communicated to Us
by such non-written methods to ensure that they are genuine. We will require a
form of personal identification prior to acting on non-written requests and We
will record telephone requests. If we follow these procedures we will not be
liable for any losses due to unauthorized or fraudulent transfer requests.
RESERVATION OF RIGHTS. We reserve the right without prior notice to modify,
restrict, suspend or eliminate the transfer privileges (including acceptance of
non-written instructions) at any time, for any class of Contracts, for any
reason. In particular, we reserve the right to not honor transfers requested by
a third party holding a power of attorney from an Owner where that third party
requests transfers during a single Valuation Period on behalf of the Owners of
two or more Contracts.
DOLLAR COST AVERAGING. If you elect at the time of application or at any
time thereafter by Written Notice, You may systematically and automatically
transfer, on a monthly or quarterly basis, specified dollar amounts from the DCA
Fixed Account or any other Allocation Option to any Allocation Option (except
that no transfers may be made into the DCA Fixed Account). The minimum amount
per transfer is $100. This is known as the "dollar-cost averaging" method of
investment. By transferring equal amounts of Contract Value on a regularly
scheduled basis, as opposed to allocating a larger amount at one particular
time, an Owner may be less susceptible to the impact of market fluctuations in
the value of Sub-Account Accumulation Units. American Foundation Life, however,
makes no guarantee that the dollar cost averaging method will result in a profit
or protection against loss.
Dollar cost averaging transfers may be made on the 1st through the 28th day
of each month. If elected, transfers will commence on the next occurring day of
the month that you select following our receipt of your instructions. If no day
is selected, transfers will occur on the same day of the month as Your Contract
Anniversary, or on the 28th day of the month if your Contract Anniversary occurs
on the 29th, 30th or 31st day of the month. In states where, upon cancellation
during the free look period, we are required to return your Purchase Payment, we
reserve the right to delay commencement of dollar cost averaging transfers until
the expiration of the free look period.
We will process dollar cost averaging transfers until the earlier of the
following: (1) the designated number of transfers have been completed, or (2)
the Owner instructs us by Written Notice to cancel the automatic transfers. Any
time dollar cost averaging transfers end, all Contract Value remaining in the
DCA Fixed Account will be transferred to the Fixed Account.
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Automatic transfers made to facilitate the dollar cost averaging will not
count toward the 12 transfers permitted each Contract Year if American
Foundation Life elects to limit transfers or the designated number of free
transfers in any Contract Year if the Company elects to charge for transfers in
excess of that number in any Contract Year. We reserve the right to discontinue
offering the automatic transfers upon 30 days' written notice to the Owner.
PORTFOLIO REBALANCING. At the time of application or at any time thereafter
by Written Notice, you may instruct American Foundation Life to automatically
transfer, on a quarterly, semi-annual or annual basis, your Variable Account
Value between and among specified Sub-Accounts to achieve a particular
percentage allocation of Variable Account Value among such Sub-Accounts
("Portfolio Rebalancing"). Such percentage allocations must be in whole numbers
and must allocate amounts only among the Sub-Accounts. No Variable Contract
Value may be transferred to the Guaranteed Account as part of Portfolio
Rebalancing. Unless you instruct otherwise when electing rebalancing, the
percentage allocation of your Variable Account Value for Portfolio Rebalancing
is based on your Purchase Payment allocation instructions in effect at the time
of rebalancing. Any allocation instructions from you that differ from your
current Purchase Payment allocation instructions, are deemed to be a request to
change your Purchase Payment allocation.
Once elected, Portfolio Rebalancing begins on the first quarterly,
semi-annual or annual anniversary following election. You may change or
terminate Portfolio Rebalancing by Written Notice, or by non-written
communication methods if you have previously authorized us to accept such
transfer requests by such methods. Portfolio Rebalancing transfers will not
count as one of the 12 transfers during any Contract Year if the Company elects
to limit transfers or the designated number of free transfers in any Contract
Year if the Company elects to charge for transfers in excess of that number in
any Contract Year. American Foundation Life reserves the right to discontinue
Portfolio Rebalancing upon 30 days' written notice to the Owner.
SURRENDERS AND PARTIAL SURRENDERS
PARTIAL SURRENDERS. At any time before the Annuity Commencement Date, an
Owner may make a partial surrender of the Contract Value. The Company will
withdraw the amount requested from the Contract Value as of the Valuation Period
during which written notice requesting the partial surrender is received. Any
applicable surrender charge will be deducted from the amount requested. (See
"Surrender Charge".)
In the case of certain Qualified Plans, federal tax law imposes restrictions
on the form and manner in which benefits may be paid. For example, spousal
consent may be needed in certain instances before a distribution may be made.
The Owner may specify the amount of the partial surrender to be made from
any of the Allocation Options. If the Owner does not so specify, or if the
amount in the designated account(s) is inadequate to comply with the request,
the partial surrender will be made from each Allocation Option based on the
proportion that the value of each Allocation Option bears to the total Contract
Value.
A partial surrender may have federal income tax consequences. (See "Taxation
of Partial and Full Surrenders".)
SURRENDER. At any time before the Annuity Commencement Date, the Owner may
request a surrender of the Contract for its Surrender Value. The Surrender Value
will be determined as of the end of the Valuation Day on which written notice
requesting surrender and the Contract are received at the Home Office. The
Surrender Value will be paid in a lump sum unless the Owner requests payment
under a payment option. A surrender may have federal income tax consequences.
(See "Taxation of Partial and Full Surrenders".)
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SURRENDER AND PARTIAL SURRENDER RESTRICTIONS. The Owner's right to make
surrenders and partial surrenders is subject to any restrictions imposed by
applicable law or employee benefit plan.
RESTRICTIONS ON DISTRIBUTIONS FROM CERTAIN TYPES OF CONTRACTS. There are
certain restrictions on surrenders and partial surrenders of Contracts used as
funding vehicles for Code Section 403(b) retirement plans. Section 403(b)(11) of
the Code restricts the distribution under Section 403(b) annuity contracts of:
(1) contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988, (2) earnings on those contributions, and (3)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. Distributions of those amounts may
only occur upon the death of the employee, attainment of age 59 1/2, separation
from service, disability, or hardship. In addition, income attributable to
salary reduction contributions may not be distributed in the case of hardship.
SYSTEMATIC WITHDRAWALS. Currently, the company offers a systematic
withdrawal plan. This plan allows you to pre-authorize periodic partial
surrenders prior to the Annuity Commencement Date. You may elect to participate
in this plan at the time of application or at a later date by properly
completing an election form. In order to participate in the plan you must have:
(1) made an initial Purchase Payment of at least $12,000, or (2) a Surrender
Value as of the previous Contract Anniversary equal to $12,000. There may be
federal income tax consequences to systematic withdrawals from the Contract and
the Owner should, therefore, consult with his or her tax advisor before
participating in any systematic withdrawal plan. (See "Taxation of Partial and
Full Surrenders".)
When you elect systematic withdrawals, you will instruct American Foundation
Life to withdraw a level dollar amount from the Contract on a monthly or
quarterly basis. The amount requested must be at least $100 per withdrawal. You
may instruct us as to the Allocation Options from which the withdrawals should
be made. If no instruction is given, the amount you request will be withdrawn
from each Allocation Option based on the proportion that the value of each
Allocation Option bears to the total Contract Value.
We will pay you the amount requested each month or quarter as applicable and
cancel the applicable Accumulation Units. If the amount to be withdrawn from an
Allocation Option exceeds the value available, no further systematic withdrawal
transactions will be processed.
The maximum amount that can be withdrawn without a surrender charge under
the plan each year, is the greater of (1) 10% of all Purchase Payments made, as
of the date of the request, or (2) cumulative earnings calculated as of each
Contract Anniversary. Unless you instruct us to reduce the monthly withdrawal
amount so that the annual amount would not exceed the above limits, we will
continue to process withdrawals for the designated monthly amount. Once the
amount of the withdrawals exceeds the above limits, we reserve the right to
deduct a surrender charge, if otherwise applicable, from the remaining payments
made during that Contract Year. (See "Surrender Charge".)
If you request a partial surrender that is not part of the systematic
withdrawal plan in a year when the systematic withdrawal plan has been utilized,
that partial surrender will be subject to any applicable surrender charge. (See
"Surrender Charge".) Systematic withdrawals will terminate in the event that a
non-systematic withdrawal plan partial surrender is made from a Contract
participating in the plan and the Surrender Value after the partial surrender
does not equal or exceed $12,000.
Systematic withdrawals may be discontinued by the Owner at any time upon
written request. We reserve the right to discontinue the systematic withdrawal
plan upon written notice to you.
THE GUARANTEED ACCOUNT
The Guaranteed Account has not been, and are not required to be, registered
with the SEC under the Securities Act of 1933, and neither these accounts nor
the Company's general account have been registered as an investment company
under the 1940 Act. Therefore, neither the Guaranteed Account, the Company's
general account, nor any interests therein are generally subject to regulation
under the 1933 Act or the 1940 Act. The disclosures relating to the Guaranteed
Account included in this prospectus are for the
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Owner's information and have not been reviewed by the SEC. However, such
disclosures may be subject to certain generally applicable provisions of federal
securities law relating to the accuracy and completeness of statements made in
prospectuses.
The Fixed Account and the DCA Fixed Account are part of American Foundation
Life's general account. The assets of American Foundation Life's general account
support its insurance and annuity obligations and are subject to American
Foundation Life's general liabilities from business operations. Since the Fixed
Account and the DCA Fixed Account are part of the general account, American
Foundation Life assumes the risk of investment gain or loss on this amount.
You may allocate some or all of your Purchase Payments and may transfer some
or all of your Contract Value to an account within the Guaranteed Account,
except that transfers may not be made into the DCA Fixed Account. Amounts
allocated or transferred to an account within the Guaranteed Account earn
interest from the date the funds are credited to the account, or such other date
as directed on the application we use to issue your Contract. The interest rate
we apply to Purchase Payments and transfers will remain in effect for the
Interest Guaranteed Period. The Interest Guaranteed Period for the Fixed Account
and the DCA Fixed Account is one year.
After an Interest Guaranteed Period expires, a new Interest Guaranteed
Period will begin. The interest rate for the new Interest Guaranteed Period will
be set by us and may not be the same as the interest rate then in effect for
Purchase Payments or transfers for that account.
We, in our sole discretion, establish interest rates for each account in the
Guaranteed Account, but will not declare a rate which is less than an annual
effective interest rate of 3.00%. Because American Foundation Life anticipates
changing the current interest rates for accounts within the Guaranteed Account
from time to time, allocations to accounts within the Guaranteed Account may be
credited with different current interest rates. For the purposes of interest
crediting, amounts deducted, transferred or withdrawn from the Guaranteed
Account will be separately accounted for on a "first-in, first-out" (FIFO)
basis.
GUARANTEED ACCOUNT VALUE. The Guaranteed Account Value at any time is equal
to the sum of: (1) Purchase Payments allocated to the Guaranteed Account; plus,
(2) amounts transferred into the Guaranteed Account; plus, (3) interest credited
to the Guaranteed Account; minus, (4) amounts transferred out of the Guaranteed
Account; minus, (5) the amount of any partial surrenders removed from the
Guaranteed Account, including any surrender charges and applicable premium tax;
minus, (6) fees deducted from the Guaranteed Account, including the contract
maintenance fee.
DEATH BENEFIT
If any Owner dies before the Annuity Commencement Date and while this
Contract is in force, the Company will pay a Death Benefit to the Beneficiary.
In the case of certain Qualified Contracts, regulations promulgated by the
Treasury Department prescribe certain limitations on the designation of a
Beneficiary.
The Death Benefit is determined as of the end of the Valuation Period in
which due proof of death is received by us. The Death Benefit will depend upon
the age of the Owner when he or she dies.
If the Owner dies on or before his or her 90th birthday, the Death Benefit
is the greatest of: (1) the Contract Value, (2) aggregate Purchase Payments made
under the Contract reduced by any partial surrenders and any associated charges,
or (3) the Maximum Anniversary Value. The Maximum Anniversary Value is the
greatest Anniversary Value attained. The Anniversary Value is the sum of: (1)
the Contract Value on a Contract Anniversary; plus (2) all Purchase Payments
made since that Contract Anniversary; minus (3) any partial surrenders (and any
associated charges) made since that Contract Anniversary. An Anniversary Value
is determined for each Contract Anniversary through the earlier of: (1) the
deceased Owner's 80th birthday, or (2) the date of that Owner's death.
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If the Owner dies after his or her 90th birthday, the Death Benefit is the
Contract Value.
Only one Death Benefit is payable under this Contract, even though the
Contract may, in some circumstances, continue beyond the time of an Owner's
death.
The Death Benefit may be taken in one sum immediately. In this event, the
Contract will terminate. If the Death Benefit is not taken in one sum
immediately, then the entire interest in the Contract must be distributed under
one of the following options:
(1) the entire interest must be distributed over the life of the
Beneficiary, or over a period not extending beyond the life expectancy of
the Beneficiary, with distributions beginning within one year of the
Owner's death, or
(2) the entire interest must be distributed within 5 years of the Owner's
death.
If the Beneficiary is the deceased Owner's spouse, then the surviving spouse may
elect, in lieu of receiving the Death Benefit, to continue the Contract and
become the new Owner. The surviving spouse may select a new Beneficiary. Upon
this spouse's death, the Death Benefit will become payable to the new
Beneficiary and must then be distributed to the new Beneficiary in one sum
immediately or according to either paragraph (1) or (2) above.
If any Owner is not an individual, the death of the Annuitant is treated as
the death of an Owner.
SUSPENSION OR DELAY IN PAYMENTS
Payments of a partial or full surrender of the Variable Account Value or
Death Benefit are usually made within seven (7) calendar days. However, the
Company may delay such payment of a partial or full surrender of the Variable
Account Value or Death Benefit for any period in the following circumstances:
1) when the New York Stock Exchange is closed; or
2) when trading on the New York Stock Exchange is restricted; or
3) when an emergency exists (as determined by the SEC as a result of which
(a) the disposal of securities in the Variable Account is not reasonably
practicable, or (b) it is not reasonably practicable to determine fairly
the value of the net assets of the Variable Account); or
4) when the SEC, by order, so permits for the protection of Owners.
American Foundation Life further reserves the right to delay payment of a
partial or full surrender of the Guaranteed Account Value for up to six months
in those states where applicable law requires us to reserve such right.
CHARGES AND DEDUCTIONS
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL. No charge for sales expenses is deducted from Purchase Payments at
the time Purchase Payments are paid. However, within certain time limits
described below, a surrender charge (contingent deferred sales charge) is
deducted from the Contract Value if a partial surrender or surrender is made
before the Annuity Commencement Date. Currently, no surrender charge is applied
when the Contract is annuitized under an available Annuity Option on the Annuity
Commencement Date.
CHARGE FOR PARTIAL OR FULL SURRENDER. The surrender charge is equal to the
percentage of each Purchase Payment surrendered as specified in the table below.
The surrender charge is separately calculated and applied to each Purchase
Payment at any time that the Purchase Payment is surrendered. No such surrender
charge applies to the Contract Value in excess of aggregate Purchase Payments.
The surrender charge is calculated using the assumption that all Contract Value
in excess of aggregate Purchase Payments
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is surrendered before any Purchase Payments and that Purchase Payments are
surrendered on a first-in-first-out basis.
The surrender charge is as follows:
<TABLE>
<CAPTION>
NUMBER OF FULL YEARS ELAPSED SURRENDER CHARGE AS A PERCENTAGE
BETWEEN THE DATE OF RECEIPT OF PURCHASE PAYMENT WITHDRAWN
OF PURCHASE PAYMENT(S) & DATE OF SURRENDER IN A FULL YEAR
- ------------------------------------------------------------- -----------------------------------
<S> <C>
Less than 1 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6+ 0%
</TABLE>
The surrender charge is not applied to the payment of a Death Benefit.
Currently, the surrender charge is not applied to systematic withdrawals made
within the limits described in the "Systematic Withdrawals" section of this
prospectus. (See "Death Benefits" and "Systematic Withdrawals.")
Surrenders will result in the cancellation of Accumulation Units from each
applicable Sub-Account(s) and/or in a reduction of the Guaranteed Account Value.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. Surrender charges may be
decreased or waived on Contracts issued to a trustee, employer or similar entity
pursuant to a retirement plan or when sales are made in a similar arrangement
where offering the Contracts to a group of individuals under such a program
results in saving of sales expenses. The entitlement to such a reduction in
surrender charge will be determined by the Company.
In addition, surrender charges are waived for a surrender or partial
surrender of a Contract Value under Contracts issued to employees and registered
representatives of any member of the selling group and their spouses and minor
children, or to officers, directors, trustees or bona-fide full time employees
of American Foundation Life or the investment advisers of any of the Funds or
their affiliated companies (based upon the Owner's status at the time the
Contract is purchased).
ADMINISTRATION CHARGES
We will deduct an administration charge equal, on an annual basis, to .15%
of the daily net asset value of each Sub-Account. This deduction is made to
reimburse American Foundation Life for expenses incurred in the administration
of the Contract and the Variable Account. The administration charge is deducted
only from the Variable Account Value.
TRANSFER FEE
Currently, there is no charge for transfers. American Foundation Life
reserves the right, however, to charge $25 for each transfer after the first 12
transfers in any Contract Year. For the purpose of assessing the fee, each
request would be considered to be one transfer, regardless of the number of
Allocation Options affected by the transfer in one day. The fee would be
deducted from the amount being transferred.
MORTALITY AND EXPENSE RISK CHARGE
To compensate American Foundation Life for assuming mortality and expense
risks, we deduct a daily mortality and expense risk charge equal on an annual
basis, to 1.25% of the average annual daily net assets of the Variable Account.
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The mortality risk American Foundation Life assumes is that Annuitant(s) may
live for a longer period of time than estimated when the guarantees in the
Contract were established. Because of these guarantees, each payee is assured
that the Annuitant's longevity will not have an adverse effect on Annuity Income
Payments received. The mortality risk that American Foundation Life assumes also
includes a guarantee to pay a Death Benefit if an Owner dies before the Annuity
Commencement Date. The expense risk that American Foundation Life assumes is the
risk that the administration charge, contract maintenance fee and transfer fees
may be insufficient to cover actual future expenses.
CONTRACT MAINTENANCE FEE
Prior to the Annuity Commencement Date, the contract maintenance fee is $30
and is deducted from the Contract Value on each Contract Anniversary, and on any
day that the Contract is surrendered, if such surrender occurs on any day other
than the Contract Anniversary. The contract maintenance fee deduction will be
apportioned among the Allocation Options in the same proportion as the value of
each Allocation Option bears to the total Contract Value. The contract
maintenance fee will be waived by American Foundation Life in the event that the
Purchase Payments made adjusted for any partial surrenders, or the Contract
Value, equals or exceeds $50,000 on the date(s) the contract maintenance fee is
to be deducted.
In addition, the contract maintenance fee may be reduced or waived for
Contracts issued to employees and registered representatives of any member of
the selling group and their spouses and minor children, or to officers,
directors, trustees, or bona-fide full time employees of American Foundation
Life or the investment advisers of any of the Funds or their affiliated
companies (based upon the Owner's status at the time the Contract is purchased).
Such waiver or reduction will only be made to the extent that American
Foundation Life estimates that it will incur lower administrative expenses or
perform fewer administrative services.
FUND EXPENSES
The net assets of each Sub-Account of the Variable Account will reflect the
investment management fees and other operating expenses incurred by the Funds.
For each Fund, an investment manager is paid a daily fee for its services. (See
the prospectuses for the Funds, which accompany this Prospectus.)
PREMIUM TAXES
Some states impose premium taxes at rates ranging up to 3.5%. The State of
New York does not currently impose a premium tax on annuities. If premium taxes
are applicable to your Contract, we will deduct them from your Contract by
applying the premium tax rate to one of the following: your Purchase Payment(s),
your surrender amount(s), your Death Benefit, or the amount applied to an
Annuity Option.
OTHER TAXES
Currently, no charge will be made against the Variable Account for federal,
state or local taxes other than premium taxes. American Foundation Life may,
however, make such a charge in the future if income or gains within the Variable
Account will result in any federal income tax liability to American Foundation
Life. Charges for other taxes attributable to the Variable Account, if any, may
also be made.
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ANNUITY OPTIONS
The Annuity Commencement Date may not be later than the Annuitant's 90th
birthday unless approved by American Foundation Life. Annuity Commencement Dates
that occur at an advanced age for the Annuitant (E.G., past age 85), may, in
certain circumstances, have adverse income tax consequences. (See "Federal
Income Tax Matters".) Distributions from Qualified Contracts may be required
before the Annuity Commencement Date. You may change the Annuity Commencement
Date and the Annuity Option selected, but any such change must be by Written
Notice received at the Administrative Office at least 30 days prior to the
scheduled Annuity Commencement Date. On the Annuity Commencement Date we apply
the Contract Value to the Annuity Option that you select. If you have not
selected an Annuity Option by the Annuity Commencement Date, we apply Contract
Value under Option 1--Payments for a 5 Year Certain Period. We reserve the right
at any time to apply the Annuity Purchase Value rather than the Contract Value
to the selected Annuity Option.
The Annuity Options are fixed, which means that each Annuity Option will
result in a guaranteed amount to be paid during the annuity period that is not
in any way dependent upon the investment experience of the Variable Account.
The following Annuity Options are currently being offered. Additional
Annuity Options are offered for Qualified Contracts, however certain
restrictions apply.
Annuity Option 1--Payment for a Certain Period: Payments are made for
any selected period of not less than 5 nor more than 30 years. The amount of
each payment depends on the Annuity Purchase Value applied, the period
selected and the monthly payment rates in effect on the Annuity Commencement
Date.
Annuity Option 2--Life Income with Payments for a Certain Period:
Payments are made as long as the named Annuitant remains alive. In addition,
regardless of when the named Annuitant dies, Payments will continue for the
certain period selected, which may be up to 30 years. Payments stop at the
end of the selected certain period or when the named Annuitant dies,
whichever is later.
After the death of the Annuitant, any remaining guaranteed payments shall be
payable to the Beneficiary unless you specified otherwise before the Annuitant's
death.
MINIMUM AMOUNTS. We reserve the right, where permitted, to pay the total
amount of this Contract in one lump sum, if less than $5,000, or, if monthly
payments are less than $100, to make payments quarterly, semi-annually, or
annually at our option. In some states, including New York, lower minimum
amounts apply.
If we have available at the time an Annuity Option is elected, options or
payment rates on a more favorable basis than those guaranteed, the higher
benefits shall apply.
ANNUITY INCOME PAYMENTS
The company generally makes first payment under any Annuity Option one month
following the Annuity Commencement Date. Subsequent payments are made in
accordance with the manner of payment selected.
The Annuity Option selected must result in each Annuity Income Payment being
an amount at least equal to the minimum payment amount according to American
Foundation Life's rules then in effect. If at any time such Payments are less
than the minimum payment amount, we have the right to change the frequency to an
interval resulting in a payment at least equal to the minimum. If any amount due
is less than the minimum per year, we may make other arrangements that are
equitable to the Payee.
Once Annuity Income Payments have commenced, no surrender of the Contract
may be made.
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DEATH OF ANNUITANT OR OWNER AFTER ANNUITY COMMENCEMENT DATE
In the event that any Owner dies on or after the Annuity Commencement Date,
the Beneficiary becomes the new Owner. If any Owner or Annuitant dies on or
after the Annuity Commencement Date and before all the Annuity Income Payments
under the Annuity Option selected have been paid, any remaining portion of such
Payments will be paid out at least as fast as under the Annuity Option in effect
when the Owner or Annuitant died.
YIELDS AND TOTAL RETURNS
From time to time, American Foundation Life may advertise or include in
sales literature yields, effective yields, and total returns for the
Sub-Accounts. THESE FIGURES ARE BASED ON HISTORIC RESULTS AND DO NOT INDICATE OR
PROJECT FUTURE PERFORMANCE. The Funds have been in existence prior to the
commencement of the offering of the Contract described in this prospectus, and
prior to the investment by the Sub-Accounts in such Funds. The Variable Account
may advertise or include in sales literature the performance of the Sub-Accounts
that invest in these Funds for these prior periods. The performance information
of any period prior to the commencement of the offering of the Contract and the
investments by the Sub-Accounts is calculated as if the Contract had been
offered during those periods and the Sub-Account had invested in those Funds
during those periods, using current charges and expenses. In addition, such
performance information is accompanied by standardized versions of average
annual total returns (discussed below) for the Sub-Accounts. American Foundation
Life also may, from time to time, advertise or include in sales literature
Sub-Account performance relative to certain performance rankings and indices
compiled by independent organizations. More detailed information as to the
calculation of performance information, as well as comparisons with unmanaged
market indices, appears in the Statement of Additional Information.
Yields, effective yields, and total returns for the Sub-Accounts are based
on the investment performance of the corresponding Funds. The Funds' performance
also reflects the Funds' expenses. Certain of the expenses of each Fund may be
reimbursed by the investment manager. (See the Prospectuses for the Funds.)
The yield of the PIC Money Market Sub-Account refers to the annualized
income generated by an investment in the Sub-Account over a specified seven-day
period. The yield is calculated by assuming that the income generated for that
seven-day period is generated each seven day period over a 52 week period 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 the
Sub-Account is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
The yield of a Sub-Account (except the PIC Money Market Sub-Account) refers
to the annualized income generated by an investment in the Sub-Account over a
specified 30 day or one-month period. The yield is calculated by assuming that
the income generated by the investment during that 30 day or one month period is
generated each period over a 12 month period and is shown as a percentage of the
investment.
The total return of a Sub-Account refers to return quotations assuming an
investment under a Contract has been held in the Sub-Account for various periods
of time. Average annual return refers to total return quotations that are
annualized based on an average return over various periods of time.
When a Sub-Account has been in operation for 1, 5, and 10 years,
respectively, American Foundation Life will provide standard annual total return
for these periods. If a Sub-Account has been in operation for less than any of
these periods, American Foundation Life will also include standard average
annual total return figures measured from the date that Sub-Account began
operations.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which the quotations are provided. Average annual
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<PAGE>
total return information shows the average percentage change in the value of an
investment in the Sub-Account from the beginning date of the measuring period to
the end of that period. This standardized version of average annual total return
reflects all historical investment results, less all charges and deductions
applied against the Sub-Account (including any Surrender Charge that would apply
if an Owner terminated the Contract at the end of each period indicated, but
excluding any deductions for premium taxes).
In addition to the standard version of average annual total return described
above, total return performance information computed on two different
non-standard bases may be used in advertisements or sales literature. Average
annual total return information may be presented, computed on the same basis as
the standard version except deductions will include neither the surrender charge
nor the Contract maintenance fee. In addition, American Foundation Life may from
time to time disclose average annual total return in other non-standard formats
and cumulative total return for Contracts funded by the Sub-Accounts.
American Foundation Life may, from time to time, also disclose yield,
standard average annual total returns, and non-standard total returns for the
Funds.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the calculation of other performance data, please refer to
the Statement of Additional Information.
In advertising and sales literature, the performance of each Sub-Account may
be compared to the performance of other variable annuity issuers in general or
to the performance of particular types of variable annuities investing in mutual
funds, or investment portfolios of mutual funds with investment objectives
similar to each of the Sub-Accounts. Lipper Analytical Services, Inc.
("Lipper"), the Variable Annuity Research Data Service ("VARDS"), and
Morningstar Inc. ("Morningstar") are independent services which monitor and rank
the performance of variable annuity issuers in each of the major categories of
investment objectives on an industry-wide basis.
Lipper and Morningstar rankings include variable life insurance issuers as
well as variable annuity issuers. VARDS rankings compare only variable annuity
issuers. The performance analyses prepared by Lipper, Morningstar and VARDS each
rank such issuers on the basis of total return, assuming reinvestment of
distributions, but do not take sales charges, redemption fees, or certain
expense deductions at the separate account level into consideration. In
addition, VARDS prepares risk adjusted rankings, which consider the effects of
market risk on total return performance. This type of ranking provides data as
to which funds provide the highest total return within various categories of
funds defined by the degree of risk inherent in their investment objectives.
Advertising and sales literature may also compare the performance of each
Sub-Account to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
managing an investment portfolio. Other independent ranking services and indices
may also be used as a source of performance comparison.
American Foundation Life may also report other information including the
effect of tax-deferred compounding on a Sub-Account's investment returns, or
returns in general, which may be illustrated by tables, graphs, or charts.
All income and capital gains derived from Sub-Account investments are
reinvested and can lead to substantial long-term accumulation of assets,
provided that the underlying Fund's investment experience is positive.
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FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the Contract
is not exhaustive, does not purport to cover all situations, and is not intended
as tax advice. The federal income tax treatment of the Contract is unclear in
certain circumstances, and a qualified tax adviser should always be consulted
with regard to the application of law to individual circumstances. This
discussion is based on the Code, Treasury regulations, and interpretations
existing on the date of this Prospectus. These authorities, however, are subject
to change by Congress, the Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated
with the purchase of the Contract. In addition, American Foundation Life MAKES
NO GUARANTEE REGARDING ANY TAX TREATMENT--FEDERAL, STATE OR LOCAL--OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
THE COMPANY'S TAX STATUS
American Foundation Life is taxed as a life insurance company under the
Code. Since the operations of the Variable Account are a part of, and are taxed
with, the operations of the Company, the Variable Account is not separately
taxed as a "regulated investment company" under the Code. Under existing federal
income tax laws, investment income and capital gains of the Variable Account are
not taxed to the extent they are applied under a Contract. American Foundation
Life does not anticipate that it will incur any federal income tax liability
attributable to such income and gains of the Variable Account, and therefore
does not intend to make provision for any such taxes. If American Foundation
Life is taxed on investment income or capital gains of the Variable Account,
then American Foundation Life may impose a charge against the Variable Account
in order to make provision for such taxes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any
increase in an Owner's Contract Value is generally not taxable to the Owner
until received, either in the form of annuity payments as contemplated by the
Contracts, or in some other form of distribution. However, this rule applies
only if (1) the investments of the Variable Account are "adequately diversified"
in accordance with Treasury Department regulations, (2) the Company, rather than
the Owner, is considered the owner of the assets of the Variable Account for
federal income tax purposes, and (3) the Owner is an individual (or an
individual is treated as the Owner for tax purposes).
DIVERSIFICATION REQUIREMENTS. The Code and Treasury Department regulations
prescribe the manner in which the investments of a segregated asset account,
such as the Variable Account, are to be "adequately diversified." If the
Variable Account fails to comply with these diversification standards, the
Contract will not be treated as an annuity contract for federal income tax
purposes and the Owner would generally be taxable currently on the excess of the
Contact Value over the premiums paid for the Contact. American Foundation Life
expects that the Variable Account, through the Funds, will comply with the
diversification requirements prescribed by the Code and Treasury Department
regulations.
OWNERSHIP TREATMENT. In certain circumstances, variable annuity contract
owners may be considered the owners, for federal income tax purposes, of the
assets of a segregated asset account, such as the Variable Account, used to
support their contracts. In those circumstances, income and gains from the
segregated asset account would be includable in the contract owners' gross
income. The Internal Revenue Service (the "IRS") has stated in published rulings
that a variable contract owner will be considered the owner of the assets of a
segregated asset account if the owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. In
addition, the Treasury
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Department announced, in connection with the issuance of regulations concerning
investment diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor, rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated that guidance would be issued by way of regulations or
rulings on the "extent to which policyholders may direct their investments to
particular sub-accounts of a segregated asset account without being treated as
owners of the underlying assets." As of the date of this Prospectus, no such
guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of the assets of a segregated
asset account. For example, the owner of this Contract has the choice of more
Allocation Options to which to allocate Purchase Payments and Variable Account
values, and may be able to transfer among Allocation Options more frequently
than in such rulings. These differences could result in the Owner being treated
as the owner of the assets of the Variable Account and thus subject to current
taxation on the income and gains from those assets. In addition, the Company
does not know what standards will be set forth in the regulations or rulings
which the Treasury Department has stated it expects to issue. American
Foundation Life therefore reserves the right to modify the Contract as necessary
to attempt to prevent Contract Owners from being considered the owners of the
assets of the Variable Account. However, there is no assurance such efforts
would be successful.
NON-NATURAL OWNER. As a general rule, Contracts held by "non-natural
persons" such as a corporation, trust or other similar entity, as opposed to a
natural person, are not treated as annuity contracts for federal tax purposes.
The income on such Contracts (as defined in the tax law) is taxed as ordinary
income that is received or accrued by the Owner of the Contract during the
taxable year. There are several exceptions to this general rule for non-natural
Owners. First, Contracts will generally be treated as held by a natural person
if the nominal owner is a trust or other entity which holds the Contract as an
agent for a natural person. However, this special exception will not apply in
the case of any employer who is the nominal owner of a Contract under a
non-qualified deferred compensation arrangement for its employees.
In addition, exceptions to the general rule for non-natural Owners will
apply with respect to (1) Contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) certain Qualified Contracts, (3)
Contracts purchased by employers upon the termination of certain Qualified
Plans, (4) certain Contracts used in connection with structured settlement
agreements, and (5) Contracts purchased with a single purchase payment when the
annuity starting date is no later than a year from purchase of the Contract and
substantially equal periodic payments are made, not less frequently than
annually, during the annuity period.
DELAYED ANNUITY COMMENCEMENT DATES. If the Contract's Annuity Commencement
Date occurs (or is scheduled to occur) at a time when the Annuitant has reached
an advanced age (E.G., past age 85), it is possible that the Contract would not
be treated as an annuity for federal income tax purposes. In that event, the
income and gains under the Contract could be currently includable in the Owner's
income.
The remainder of this discussion assumes that the Contract will be treated
as an annuity contract for federal income tax purposes.
TAXATION OF PARTIAL AND FULL SURRENDERS
In the case of a partial surrender, amounts received generally are
includable in income to the extent the Owner's Contract Value before the
surrender exceeds his or her "investment in the contract." In the case of a full
surrender, amounts received are includable in income to the extent they exceed
the "investment in the contract." For these purposes, the investment in the
contract at any time equals the total of the Purchase Payments made under the
Contract to that time (to the extent such payments were neither deductible when
made nor excludable from income as, for example, in the case of certain
contributions to Qualified Contracts) less any amounts previously received from
the Contract which were not included in income. Partial and full surrenders may
be subject to a 10% penalty tax. (See "Penalty on
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Premature Distributions".) Partial and full surrenders also may be subject to
federal income tax withholding requirements. (See "Federal Income Tax
Withholding".) In addition, in the case of partial and full surrenders from
certain Qualified Plans, mandatory withholding requirements may apply, unless a
"direct rollover" of the amount surrendered is made. (See "Direct Rollovers".)
Under the Waiver of Surrender Charges provision of the Contract, amounts
distributed may not be subject to Surrender Charges if the Owner has a terminal
illness or if the Owner enters, for a period of at least 90 days, certain
nursing home facilities. Such distributions will be treated as surrenders for
federal tax purposes.
The Contract provides a Death Benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Contract Value. As described
elsewhere in this Prospectus, the Company imposes certain charges with respect
to the Death Benefit. It is possible that these charges (or some portion
thereof) could be treated for federal tax purposes as a partial surrender of the
Contract.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each Annuity Income Payment taxable as ordinary
income is equal to the excess of the payment over the exclusion amount. The
exclusion amount is the amount determined by multiplying (1) the payment by (2)
the ratio of the investment in the contract, adjusted for any period certain or
refund feature, to the total expected amount of Annuity Income Payments for the
term of the Contract (determined under Treasury Department regulations). Annuity
Income Payments may be subject to federal income tax withholding requirements.
(See "Federal Income Tax Withholding".) In addition, in the case of Annuity
Income Payments from certain Qualified Plans, mandatory withholding requirements
may apply, unless a "direct rollover" of such Annuity Income Payments is made.
(See "Direct Rollovers".) A simplified method of determining the taxable portion
of Annuity Income Payments applies to certain Qualified Contracts.
Once the total amount of the investment in the Contract is excluded using
this ratio, Annuity Income Payments will be fully taxable. If Annuity Income
Payments cease because of the death of the Annuitant and before the total amount
of the investment in the Contract is recovered, the unrecovered amount generally
will be allowed as a deduction.
There may be special income tax issues present in situations where the Owner
and the Annuitant are not the same person and are not married to one another. A
tax advisor should be consulted in those situations.
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the Annuity Commencement Date, amounts may be distributed from a
Contract because of the death of an Owner or, in certain circumstances, the
death of the Annuitant. Such Death Benefit proceeds are includable in income as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender, as described above, or (2) if distributed under an Annuity
Option, they are taxed in the same manner as Annuity Income Payments, as
described above. After the Annuity Commencement Date, where a guaranteed period
exists under an Annuity Option, and the Annuitant dies before the end of that
period, payments made to the Beneficiary for the remainder of that period are
includable in income as follows: (1) if received in a lump sum, they are
included in income to the extent that they exceed the unrecovered investment in
the contract at that time, or (2) if distributed in accordance with the existing
Annuity Option selected, they are fully excluded from income until the remaining
investment in the contract is deemed to be recovered, and all Annuity Income
Payments thereafter are fully includable in income.
Proceeds payable on death may be subject to federal income tax withholding
requirements. (See "Federal Income Tax Withholding".) In addition, in the case
of such proceeds from certain Qualified Plans, mandatory withholding
requirements may apply, unless a "direct rollover" of such proceeds is made.
(See "Direct Rollovers".)
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ASSIGNMENTS, PLEDGES, AND GRATUITOUS TRANSFERS
Other than in the case of Contracts issued in connection with certain
Qualified Plans (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) any portion of the Contract Value
is treated for federal income tax purposes as a surrender of such amount or
portion. The investment in the contract is increased by the amount includable as
income with respect to such assignment or pledge, though it is not affected by
any other aspect of the assignment or pledge (including its release). If an
Owner transfers a Contract without adequate consideration to a person other than
the Owner's spouse (or to a former spouse incident to divorce), the Owner will
be taxed on the difference between his or her Contract Value and the investment
in the contract at the time of transfer. In such case, the transferee's
investment in the contract will be increased to reflect the increase in the
transferor's income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a Contract has not been issued in connection with a Qualified Plan,
there generally is a 10% penalty tax on the amount of any payment from the
Contract that is includable in income unless the payment is: (a) received on or
after the Owner reaches age 59 1/2; (b) attributable to the Owner's becoming
disabled (as defined in the tax law); (c) made on or after the death of the
Owner or, if the Owner is not an individual, on or after the death of the
primary annuitant (as defined in the tax law); (d) made as a series of
substantially equal periodic payments (not less frequently than annually) for
the life (or life expectancy) of the Annuitant or the joint lives (or joint life
expectancies) of the Annuitant and a designated beneficiary (as defined in the
tax law), or (e) made under a Contract purchased with a single Purchase Payment
when the annuity starting date is no later than a year from purchase of the
Contract and substantially equal periodic payments are made, not less frequently
than annually, during the annuity period. (Similar rules, discussed below, apply
in the case of certain Contracts issued in connection with Qualified Plans.)
AGGREGATION OF CONTRACTS
In certain circumstances, the amount of an Annuity Income Payment or a
surrender from a Contract that is includable in income may be determined by
combining some or all of the annuity contracts owned by an individual not issued
in connection with Qualified Plans. For example, if a person purchases a
Contract offered by this Prospectus and also purchases at approximately the same
time an immediate annuity issued by American Foundation Life, the IRS may treat
the two contracts as one contract. In addition, if a person purchases two or
more deferred annuity contracts from the same insurance company (or its
affiliates) during any calendar year, all such contracts will be treated as one
contract for purposes of determining whether any payment not received as an
annuity (including surrenders prior to the Annuity Commencement Date) is
includable in income. The effects of such aggregation are not clear; however, it
could affect the amount of a withdrawal or an annuity payment that is taxable
and the amount which might be subject to the 10% penalty tax described above.
LOSS OF INTEREST DEDUCTION WHERE CONTRACT IS HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
In the case of Contracts issued after June 8, 1997 to a non-natural taxpayer
(such as a corporation or a trust), or held for the benefit of such an entity,
recent changes in the tax law may result in otherwise deductible interest no
longer being deductible by the entity, regardless of whether the income on such
Contracts is treated as ordinary income that is received or accrued by the owner
during the taxable year. Entities that are considering purchasing the Contract,
or entities that will be beneficiaries under a Contract, should consult a tax
adviser.
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QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types of
retirement plans which receive favorable treatment under the Code. Numerous
special tax rules apply to the participants in Qualified Plans and to Contracts
used in connection with Qualified Plans. Therefore, no attempt is made in this
Prospectus to provide more than general information about use of the Contract
with the various types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of
plan and the terms and conditions of the plan itself. For example, both the
amount of the contribution that may be made, and the tax deduction or exclusion
that the Owner may claim for such contribution, are limited under Qualified
Plans and vary with the type of plan. Also, for full surrenders, partial
surrenders and Annuity Income Payments under Qualified Contracts, there may be
no "investment in the contract" and the total amount received may be taxable.
Similarly, loans from Qualified Contracts, where available, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loan must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising any loan privileges that are available.)
If this Contract is used in connection with a Qualified Plan, the Owner and
Annuitant must be the same individual. In addition, special rules apply to the
time at which distributions must commence and the form in which the
distributions must be paid. For example, the length of any guarantee period may
be limited in some circumstances to satisfy certain minimum distribution
requirements under the Code. Furthermore, failure to comply with minimum
distribution requirements applicable to Qualified Plans will result in the
imposition of an excise tax. This excise tax generally equals 50% of the amount
by which a minimum required distribution exceeds the actual distribution from
the Qualified Plan. In the case of Individual Retirement Accounts or Annuities
("IRAs"), distributions of minimum amounts (as specified in the tax law) must
generally commence by April 1 of the calendar year following the calendar year
in which the Owner attains age 70 1/2. In the case of certain other Qualified
Plans, distributions of such minimum amounts must generally commence by the
later of this date or April 1 of the calendar year following the calendar year
in which the employee retires.
There may be a 10% penalty tax on the taxable amount of payments from
certain Qualified Contracts. There are exceptions to this penalty tax which vary
depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Owner reaches age 59 1/2, (b) received on or after the Owner's death
or because of the Owner's disability (as defined in the tax law), or (c) made as
a series of substantially equal periodic payments (not less frequently than
annually) for the life (or life expectancy) of the Owner or for the joint lives
(or joint life expectancies) of the Owner and his designated beneficiary (as
defined in the tax law). These exceptions, as well as certain others not
described herein, generally apply to taxable distributions from other Qualified
Plans (although, in the case of plans qualified under sections 401 and 403,
exception "c" above for substantially equal periodic payments applies only if
the Owner has separated from service). In addition, the penalty tax does not
apply to certain distributions from IRAs taken after December 31, 1997 which are
used for qualified first time home purchases or for higher education expenses.
Special conditions must be met for these two exceptions to the penalty tax.
Those wishing to take a distribution from an IRA for these purposes should
consult their tax adviser.
When issued in connection with a Qualified Plan, a Contract will be amended
as generally necessary to conform to the requirements of the plan. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, the Company shall not be bound by terms and
conditions of Qualified Plans to the extent such terms and conditions contradict
the Contract, unless the Company consents.
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Following are brief descriptions of various types of Qualified Plans in
connection with which the Company may issue a Contract.
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES. Section 408 of the Code
permits eligible individuals to contribute to an individual retirement program
known as IRAs. IRAs are subject to limits on the amounts that may be
contributed, the persons who may be eligible and on the time when distributions
may commence. Also, subject to the direct rollover and mandatory withholding
requirements (discussed below), distributions from certain Qualified Plans may
be "rolled over" on a tax-deferred basis into an IRA. The Contract may not,
however, be used in connection with an "Education IRA" under Section 530 of the
Code, or as a "SIMPLE IRA" under Section 408(p) of the Code.
IRAs generally may not invest in life insurance contracts, but an annuity
that is purchased by, or used as, an IRA may provide a death benefit that equals
the greater of the premiums paid and the contract's cash value. The Contract
provides a Death Benefit that in certain circumstances may exceed the greater of
the Purchase Payments and the Contract Value. It is possible that the Death
Benefit could be viewed as violating the prohibition on investment in life
insurance contracts with the result that the Contract would not be viewed as
satisfying the requirements of an IRA.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. The Contract provides a
Death Benefit that in certain circumstances may exceed the greater of the
Purchase Payments and the Contract Value. It is possible that such Death Benefit
could be characterized as an incidental death benefit. There are limitations on
the amount of incidental benefits that may be provided under pension and profit
sharing plans. In addition, the provision of such benefits may result in
currently taxable income to participants. Employers intending to use the
Contract in connection with such plans should seek competent advice.
SECTION 403(b) POLICIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. Purchasers of the Contracts for use as a "Section 403(b) Policy"
should seek competent advice as to eligibility, limitations on permissible
amounts of purchase payments and other tax consequences associated with such
Contracts. In particular, purchasers and their advisers should consider that the
Contract provides a Death Benefit that in certain circumstances may exceed the
greater of the Purchase Payments and the Contract Value. It is possible that
such Death Benefit could be characterized as an incidental death benefit. If the
Death Benefit were so characterized, this could result in currently taxable
income to purchasers. In addition, there are limitations on the amount of
incidental death benefits that may be provided under a Section 403(b) Policy.
Even if the Death Benefit under the Contract were characterized as an incidental
death benefit, it is unlikely to violate those limits unless the purchaser also
purchases a life insurance contract as part of his or her Section 403(b) Policy.
Section 403(b) Policies contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. These amounts can be paid only if
the employee has reached age 59 1/2, separated from service, died, become
disabled, or in the case of hardship. Amounts permitted to be distributed in the
event of hardship are limited to actual contributions; earnings thereon can not
be distributed on account of hardship. (These limitations on withdrawals do not
apply to the extent the Company is directed to transfer some or all of the
Contract Value to the issuer of another Section 403(b) Policy or into a Section
403(b)(7) custodial account.)
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DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. Generally, a Contract purchased by a
state or local government or a tax-exempt organization will not be treated as an
annuity contract for federal income tax purposes. Those who intend to use the
Contracts in connection with such plans should seek competent advice.
DIRECT ROLLOVERS
If your Contract is used in connection with a pension, profit-sharing, or
annuity plan qualified under sections 401(a) or 403(a) of the Code, or is a
Section 403(b) Policy, any "eligible rollover distribution" from the Contract
will be subject to direct rollover and mandatory withholding requirements. An
eligible rollover distribution generally is any taxable distribution from a
qualified pension plan under section 401(a) of the Code, qualified annuity plan
under section 403(a) of the Code, or section 403(b) annuity or custodial
account, excluding certain amounts (such as minimum distributions required under
section 401(a)(9) of the Code and distributions which are part of a "series of
substantially equal periodic payments" made for life or a specified period of 10
years or more).
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, you cannot elect out of withholding with respect to an eligible
rollover distribution. However, this 20% withholding will not apply if, instead
of receiving the eligible rollover distribution, you elect to have it directly
transferred to certain Qualified Plans. Prior to receiving an eligible rollover
distribution, you will receive a notice (from the plan administrator or the
Company) explaining generally the direct rollover and mandatory withholding
requirements and how to avoid the 20% withholding by electing a direct transfer.
FEDERAL INCOME TAX WITHHOLDING
American Foundation Life will withhold and remit to the federal government a
part of the taxable portion of each distribution made under a Contract unless
the distributee notifies American Foundation Life at or before the time of the
distribution that he or she elects not to have any amounts withheld. In certain
circumstances, American Foundation Life may be required to withhold tax. The
withholding rates applicable to the taxable portion of periodic annuity payments
(other than eligible rollover distributions) are the same as the withholding
rates generally applicable to payments of wages. In addition, the withholding
rate applicable to the taxable portion of non-periodic payments (including
surrenders prior to the Annuity Commencement Date) is 10%. Regardless of whether
you elect not to have federal income tax withheld, you are still liable for
payment of federal income tax on the taxable portion of the payment. As
discussed above, the withholding rate applicable to eligible rollover
distributions is 20%.
GENERAL MATTERS
MODIFICATION
No one is authorized to modify or waive any term or provision of this
Contract unless we agree to the modification or waiver in writing and it is
signed by our President, Vice-President or Secretary. We reserve the right to
change or modify the provisions of this Contract to conform to any applicable
laws, rules or regulations issued by a government agency. Where required, we
will obtain all necessary approvals, including that of the Owner.
REPORTS
At least annually, we will send to you at the address contained in our
records a report showing the current Contract Value, the current value of your
Allocation Options, your current investment allocation and any other information
required by law.
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INQUIRIES
Inquiries regarding a Contract may be made by writing to American Foundation
Life at the Administrative Office.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be offered on a continuous basis and American Foundation
Life does not anticipate discontinuing the offering of the Contracts.
Nevertheless, American Foundation Life reserves the right to discontinue the
offering at any time. Investment Distributors, Inc. serves as principal
underwriter (as defined in the 1940 Act) for the Contracts. Investment
Distributors, Inc. has agreed to use its best efforts to sell the Contracts.
Investment Distributors, Inc., is a wholly-owned subsidiary of Protective Life
Corporation and has the same address as American Foundation Life. Applications
for Contracts are solicited by agents who are licensed by applicable state
insurance authorities to sell American Foundation Life's Contracts and who are
also registered representatives of broker/dealers having a distribution
agreement with Investment Distributors, Inc. or broker/dealers having a
distribution agreement with such broker/dealer. Investment Distributors, Inc. is
an affiliate of American Foundation Life Insurance Company and is registered
with the SEC under the Securities Exchange Act of 1934 as a broker/dealer.
Investment Distributors, Inc. is a member of the National Association of
Securities Dealers, Inc. The maximum commission American Foundation Life will
pay is 7.0% of the Purchase Payments for the sale of a Contract, not including
subsequent asset-based commissions.
PREPARATION FOR YEAR 2000
Older computer hardware and software often denote the year using two digits
rather than four; for example, the year 1997 often is denoted by such hardware
and software as "97." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including American Foundation Life, its customers,
business partners, suppliers, banks, custodians and administrators) who rely on
computers or devices containing computer chips.
Protective Life, on behalf of itself and its affiliates including American
Foundation Life, has developed and is implementing a Year 2000 transition plan
intended to identify and modify or replace primary hardware and/or software
systems on which it relies that have a Year 2000 issue. Protective Life is also
developing and implementing a plan to identify and modify or replace secondary
hardware and/or software systems on which it relies that have a Year 2000 issue.
Substantial resources are being devoted to this effort; however the costs to
develop and implement these plans are not expected to be material. Protective
Life is also confirming that its service providers are implementing plans to
identify and modify or replace their systems that have a Year 2000 issue.
Protective Life currently anticipates that its systems will be able to
process transactions dated beyond 1999 on or before December 31, 1999. There can
be no assurance, however, that Protective Life's efforts will be successful,
that interaction with other service providers with Year 2000 issues will not
impair Protective Life's operations, or that the Year 2000 issue will not
otherwise adversely affect Protective Life.
LEGAL PROCEEDINGS
There are at present no legal proceedings to which the Variable Account is a
party or the assets of the Variable Account are subject. American Foundation
Life is involved in pending and threatened proceedings in which claims for
monetary damages or penalties may be asserted. Management, after consultation
with legal counsel, does not believe that such proceedings are material, nor
does it anticipate the ultimate liability arising from any such proceeding would
be material, to American Foundation Life in relation to its total assets. Such
proceedings are not related to the Variable Account.
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VOTING RIGHTS
In accordance with its view of applicable law, American Foundation Life will
vote the Fund shares held in the Variable Account at special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Sub-Accounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or American Foundation Life determines
that it is allowed to vote such shares in its own right, it may elect to do so.
The number of votes which are available to an Owner will be calculated
separately for each Sub-Account of the Variable Account, and may include
fractional votes. The number of votes attributable to a Sub-Account will be
determined by applying an Owner's percentage interest, if any, in a particular
Sub-Account to the total number of votes attributable to that Sub-Account. An
Owner holds a voting interest in each Sub-Account to which the Variable Account
Value is allocated. The Owner has voting interest only prior to the Annuity
Commencement Date.
The number of votes which are available to the Owner will be determined as
of the date coincident with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of that Fund. Voting
instructions will be solicited by written communication prior to such meeting in
accordance with procedures established by the Fund.
Shares as to which no timely instructions are received and shares held by
American Foundation Life in a Sub-Account as to which no Owner has a beneficial
interest will be voted in proportion to the voting instructions which are
received with respect to all Contracts participating in that Sub-Account. Voting
instructions to abstain on any item to be voted upon will be applied to reduce
the votes eligible to be cast on that item.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports, and other material relating to the appropriate Fund.
FINANCIAL STATEMENTS
The audited balance sheets for American Foundation Life as of December 31,
1997 and 1996 and the related statements of income, stockholder's equity, and
cash flows for the three years in the period ended December 31, 1997 and the
related financial statement schedules as well as the Report of Independent
Accountants are contained in the Statement of Additional Information.
No financial statements for the Variable Account have been provided because,
as of the date of this prospectus, the Variable Account had not yet commenced
operations.
38
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL CONTRACT PROVISIONS............................................ 3
The Contract............................................................ 3
Error in Age or Sex..................................................... 3
Incontestability........................................................ 3
Non-Participation....................................................... 3
Assignment.............................................................. 3
CALCULATION OF YIELDS AND TOTAL RETURNS................................... 3
PIC Money Market Sub-Account Yield...................................... 4
Other Sub-Account Yields................................................ 5
Average Annual Total Returns............................................ 5
Other Total Returns..................................................... 6
Effect of the Contract Maintenance Fee on Performance Data.............. 6
SAFEKEEPING OF ACCOUNT ASSETS............................................. 7
STATE REGULATION.......................................................... 7
RECORDS AND REPORTS....................................................... 7
LEGAL MATTERS............................................................. 7
EXPERTS................................................................... 7
OTHER INFORMATION......................................................... 7
FINANCIAL STATEMENTS...................................................... 8
</TABLE>
39
<PAGE>
PART B
INFORMATION REQUIRED TO BE IN THE
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
2801 Highway 280 South
Birmingham, Alabama 35223
Telephone: (800) 456-6330
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY ACCOUNT A OF AMERICAN FOUNDATION
INDIVIDUAL FLEXIBLE PREMIUM
DEFERRED VARIABLE AND FIXED ANNUITY CONTRACT
This Statement of Additional Information contains information in addition to
the information described in the Prospectus for the individual flexible premium
deferred variable and fixed annuity contract (the "Contract") offered by
American Foundation Life Insurance Company. This Statement of Additional
Information is not a Prospectus. It should be read only in conjunction with the
Prospectuses for the Contract and the Funds. The Prospectus is dated the same as
this Statement of Additional Information. You may obtain a copy of the
Prospectus by writing or calling us at our address or phone number shown above.
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS MAY 1, 1998
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
ADDITIONAL CONTRACT PROVISIONS............................................................................ 3
The Contract............................................................................................ 3
Error in Age or Sex..................................................................................... 3
Incontestability........................................................................................ 3
Non-Participation....................................................................................... 3
Assignment.............................................................................................. 3
CALCULATION OF YIELDS AND TOTAL RETURNS................................................................... 3
PIC Money Market Sub-Account Yield...................................................................... 4
Other Sub-Account Yields................................................................................ 5
Average Annual Total Returns............................................................................ 5
Other Total Returns..................................................................................... 6
Effect of the Contract Maintenance Fee on Performance Data.............................................. 6
SAFEKEEPING OF ACCOUNT ASSETS............................................................................. 7
STATE REGULATION.......................................................................................... 7
RECORDS AND REPORTS....................................................................................... 7
LEGAL MATTERS............................................................................................. 7
EXPERTS................................................................................................... 7
OTHER INFORMATION......................................................................................... 7
FINANCIAL STATEMENTS...................................................................................... 8
</TABLE>
2
<PAGE>
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
The Contract and its attachments, including the copy of your Application and
any endorsements, riders and amendments, constitute the entire agreement between
you and us. All statements in the Application shall be considered
representations and not warranties. The terms and provisions of this Contract
are to be interpreted in accordance with the Internal Revenue Code of 1986, as
amended (the "Code") and applicable regulations.
ERROR IN AGE OR SEX
When a benefit of the Contract is contingent upon any person's age or sex,
we may require proof of such. We may suspend payments until proof is provided.
When we receive satisfactory proof, we will make the payments which were due
during the period of suspension.
If, after proof of age and sex is furnished it is determined that the
information in the Application was not correct, we will adjust any benefit under
the Contract to that which would be payable based upon the correct age and sex.
If we have underpaid a benefit because of the error, we will make up the
underpayment in a lump sum. If the error resulted in an overpayment, we will
deduct the amount of the overpayment from any current or future payment due
under the Contract. Underpayments and overpayments will bear interest at an
annual effective interest rate of 3%.
INCONTESTABILITY
We shall not contest the Contract.
NON-PARTICIPATION
The Contract is not eligible for dividends and will not participate in
American Foundation Life's surplus or profits.
ASSIGNMENT
You have the right to assign the Contract if it is a Non-Qualified Contract.
We do not assume responsibility for the assignment. Any claim made under an
assignment is subject to proof of the nature and extent of the assignee's
interest prior to payment by us. Assignments have federal income tax
consequences. (See "Assignments, Pledges and Gratuitous Transfers" in the
prospectus.)
All instructions and requests to change or assign the Contract must be in
writing in a form acceptable to us, and signed by the Owner(s). The instruction,
change or assignment will relate back to and take effect on the date it was
signed, except we will not be responsible for following any instruction or
making any change or assignment before we receive it.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, American Foundation Life may disclose yields, total
returns, and other performance data pertaining to the Contracts for a
Sub-Account. Such performance data will be computed or accompanied by
performance data computed, in accordance with the standards defined by the
Securities and Exchange Commission ("SEC").
Because of the charges and deductions imposed under a Contract, yields for
the Sub-Accounts will be lower than the yields for their respective Funds. The
calculations of yields, total returns, and other performance data do not reflect
the effect of premium tax that may be applicable to a particular Contract.
Premium tax rates currently range from 0% to 3.50% based on the state in which
the Contract is sold. Currently, New York does not impose a premium tax.
3
<PAGE>
PIC MONEY MARKET SUB-ACCOUNT YIELD
From time to time, advertisements and sales literature may quote the current
annualized yield of the PIC Money Market Sub-Account for a seven-day period in a
manner which does not take into consideration any realized or unrealized gain,
or losses on shares of the PIC Money Market Fund or on its portfolio securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven day period in value of a
hypothetical account under a Contract having a balance of 1 Accumulation Unit of
the PIC Money Market Sub-Account at the beginning of the period, dividing such
net change in account value by the value of the hypothetical account at the
beginning of the period to determine the base period return, and annualizing
this quotient on a 365-day basis. The net change in account value reflects: 1)
net income from the PIC Money Market Fund attributable to the hypothetical
account, and 2) charges and deductions imposed under the Contract attributable
to the hypothetical account. The charges and deductions reflect the per unit
charges for the hypothetical account for: 1) the annual contract maintenance
fee, 2) administration charge, and 3) the mortality and expense risk charge. For
purposes of calculating current yields for a Contract, an average per unit
contract maintenance fee is used based on the $30 contract maintenance fee
deducted at the end of each Contract Year. Current yield will be calculated
according to the following formula:
Current Yield = ((NCS-ES)/UV) X (365/7)
<TABLE>
<CAPTION>
WHERE:
<S> <C>
NCS the net change in the value of the Fund (exclusive of unrealized gains or losses on
the sale of securities and unrealized appreciation and depreciation) for the
seven-day period attributable to a hypothetical Account having a balance of 1
Sub-Account Accumulation Unit.
ES per unit expenses attributable to the hypothetical account for the seven-day
period.
UV The Accumulation Unit value as of the end of the last day of the prior seven-day
period.
</TABLE>
The effective yield of the PIC Money Market Sub-Account determined on a
compounded basis for the same seven-day period may also be quoted.
The effective yield is calculated by compounding the unannualized base
period return according to the following formula:
Effective Yield = (1 + ((NCS-ES)/UV))to the power of "365/7" - 1
<TABLE>
<CAPTION>
WHERE:
<S> <C>
NCS the net change in the value of the portfolio (exclusive of realized gains and
losses on the sale of securities and unrealized appreciation and depreciation)
for the seven-day period attributable to a hypothetical account having a balance
of 1 Sub-Account Accumulation Unit.
ES per Accumulation Unit expenses attributable to the hypothetical account for the
seven-day period.
UV the Accumulation Unit value as of the end of the last day of the prior seven-day
period.
</TABLE>
Because of the charges and deductions imposed under the Contract, the
current and effective yields for the PIC Money Market Sub-Account will be lower
than such yields for the PIC Money Market Fund.
The current and effective yields on amounts held in the PIC Money Market
Sub-Account normally will fluctuate on a daily basis. THEREFORE, THE DISCLOSED
YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The PIC Money Market Sub-Account's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the PIC Money Market Fund, the types of quality of
portfolio securities held by the PIC Money Market Fund and the PIC Money Market
Fund's operating expenses. Yields on amounts held in the PIC Money Market Sub-
Account may also be presented for periods other than a seven day period.
4
<PAGE>
OTHER SUB-ACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Sub-Accounts (except the PIC Money Market
Sub-Account) for a Contract for 30-day or one-month periods. The annualized
yield of a Sub-Account refers to income generated by the Sub-Account over a
specific 30 day or one month period. Because the yield is annualized, the yield
generated by a Sub-Account during a 30-day or one-month period is assumed to be
generated each period over a 12-month period.
The yield is computed by: 1) dividing the net investment income of the Fund
attributable to the Sub-Account Accumulation Units, less Sub-Account expenses
for the period; by 2) the maximum offering price per Accumulation Unit on the
last day of the period times the daily average number of units outstanding for
the period; by 3) compounding that yield for a six-month period; and by 4)
multiplying that result by 2. Expenses attributable to the Sub-Account include
the annual contract maintenance fee, the administration charge and the mortality
and expense risk charge. The yield calculation assumes an contract maintenance
fee of $30 per year per Contract deducted at the end of each Contract Year. For
purposes of calculating the 30-day (or one-month yield), an average
administration fee per dollar of Contract value in the Variable Account is used
to determine the amount of the charge attributable to the Sub-Account for the
30-day or one-month period. The 30 day or one month yield is calculated
according to the following formula:
Yield = 2 X [(((N1-ES)/(U X UV)) + 1)to the power of 6 - 1]
<TABLE>
<CAPTION>
WHERE:
<S> <C>
N1 net income of the Fund for the 30 day or one month period attributable to the
Sub-Account Accumulation Units.
ES expenses of the Sub-Account for the 30 day or one month period.
U the average number of Accumulation Units outstanding.
UV the Accumulation Unit value as ofthe end of the last day in the 30 day or one month
period.
</TABLE>
Because of the charges and deductions imposed under the Contracts, the yield
for the Sub-Account will be lower than the yield for the corresponding Fund.
The yield on the amounts held in the Sub-Accounts normally will fluctuate
over time. Therefore, the disclosed yield for any given past period is not an
indication or representation of future yields or rates of return. The
Sub-Account's actual yield is affected by the types and quality of portfolio
securities held by the corresponding Fund and its operating expenses.
Yield calculations do not take into account the surrender charge under the
Contract equal to 2% to 7% of Purchase Payments made during the six years prior
to the surrender (including the year in which the surrender is made) on amounts
surrendered under the Contract.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns for one or more of the Sub-Accounts for various periods of
time.
When a Sub-Account has been in operation for 1, 5, and 10 years,
respectively, the Company will provide standard annual total return for these
periods. If a Sub-Account has been in operation for less than any of these
periods, American Foundation Life will also include standard average annual
total return figures measured from the date that Sub-Account began operations.
Average annual total returns for other periods of time may, from time to time,
also be disclosed.
Average annual total returns represent the average annual compounded rates
of return that would equate an initial investment of $1,000 under a Contract to
the Surrender Value of that investment as of the last day of each of the
periods. The ending date of each period for which total return quotations are
5
<PAGE>
provided will generally be for the most recent month-end practicable considering
the type and media of the communication and will be stated in the communication.
Average annual total returns will be calculated using Sub-Account unit
values computed on each Valuation Day based on the performance of the
Sub-Account's underlying Fund, the deductions for the mortality and expense risk
charge and the administration charge. The average annual total return
calculation also assumes that the contract maintenance fee is $30 per year per
contract deducted at the end of each Contract Year. For purposes of calculating
standard average annual total return, an average per dollar contract maintenance
fee attributable to the hypothetical account for the period for the quotation
standard average annual total returns will therefore reflect a deduction of the
surrender charge for any period less than eight years. The total return will
then be calculated according to the following formula:
TR = (ERV/P)to the power of 1/N - 1
<TABLE>
<CAPTION>
WHERE:
<S> <C> <C>
TR = the average annual total return net of Sub-Account recurring charges.
ERV = the ending redeemable value (net of any applicable surrender charge) of the
hypothetical account at the end of the period.
P = a hypothetical single purchase payment of $1,000.
N = the number of years in the period.
</TABLE>
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the surrender charge and in certain
cases the contract maintenance fee may be assumed to be waived. These are
calculated in exactly the same way as standard average annual total returns
described above, except that the ending Surrender Value of the hypothetical
account for the period is replaced with an ending value for the period that does
not take into account any charges on amounts surrendered and in certain cases
the contract maintenance fee may be assumed to be waived.
American Foundation Life may disclose cumulative total returns in
conjunction with the standard formats described above. The cumulative total
returns will be calculated using the following formula:
CTR = (ERV/P) - 1
<TABLE>
<CAPTION>
WHERE:
<S> <C> <C>
CTR = The cumulative total return net of Sub-Account recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of the
period. (In certain cases the Contract maintenance fee may be assumed to be
waived.)
P = A hypothetical single Purchase Payment of $1,000.
</TABLE>
EFFECT OF THE CONTRACT MAINTENANCE FEE ON PERFORMANCE DATA
The Contract provides for a $30 annual contract maintenance fee to be
deducted annually at the end of each Contract Year or upon a full surrender. For
purposes of reflecting the contract maintenance fee in yield and total return
quotations, the annual charge is converted into a per dollar per day charge
based on the average Variable Account Value of all Contracts on the last day of
the period for which quotations are provided. The per-dollar per-day average
charge is then adjusted to reflect the basis upon which the particular quotation
is calculated.
6
<PAGE>
SAFEKEEPING OF ACCOUNT ASSETS
Title to the assets of the Variable Account are held by American Foundation
Life. The assets are kept physically segregated and held separate and apart from
the Company's general account assets and from the assets in any other separate
account.
Records are maintained of all purchases and redemptions of Fund shares held
by each of the Sub-Accounts.
The officers and employees of American Foundation Life are covered by an
insurance company blanket bond issued in the amount of $15 million dollars. The
bond insures against dishonest and fraudulent acts of officers and employees.
STATE REGULATION
American Foundation Life is subject to regulation and supervision by the
Department of Insurance of the State of Alabama which periodically examines its
affairs. It is also subject to the insurance laws and regulations of all
jurisdictions where it is authorized to do business. A copy of the Contract form
has been filed with, and where required approved by, insurance officials in each
jurisdiction where the Contracts are sold. American Foundation Life is required
to submit annual statements of its operations, including financial statements,
to the insurance departments of the various jurisdictions in which it does
business for the purposes of determining solvency and compliance with local
insurance laws and regulations.
RECORDS AND REPORTS
American Foundation Life will maintain all records and accounts relating to
the Variable Account. As presently required by the 1940 Act and regulations
promulgated thereunder, reports containing such information as may be required
under the Act or by any other applicable law or regulation will be sent to
Owner(s) periodically at the last known address.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.
EXPERTS
The balance sheets for American Foundation Life as of December 31, 1997 and
1996 and the related statements of income, stockholder's equity, and cash flows
for the three years in the period ended December 31, 1997 and the related
financial statement schedules included in this Statement of Additional
Information have been included herein in reliance on the report of Coopers &
Lybrand LLP, independent accountants, given on the authority of such firm as
experts in accounting and auditing.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities
Act of 1933 as amended, with respect to the Contracts discussed in this
Statement of Additional Information. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this Statement
of Additional Information concerning the content of the Contracts and other
legal instruments are intended to be summaries. For a complete statement of the
terms of these documents, reference should be made to the instruments filed with
the SEC at 450 Fifth Street, N.W., Washington, DC 20549.
7
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2
Statements of Income for the years ended December 31, 1997, 1996, and 1995............ F-3
Balance Sheets as of December 31, 1997 and 1996....................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and
1995................................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995........ F-6
Notes to Financial Statements......................................................... F-7
Financial Statement Schedules:
Schedule III -- Supplementary Insurance Information................................. S-1
Schedule IV -- Reinsurance.......................................................... S-2
</TABLE>
All other schedules to the financial statements required by Article 7 of
Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
American Foundation Life Insurance Company
Birmingham, Alabama
We have audited the financial statements and financial statement schedules
of American Foundation Life Insurance Company listed in the index on page F-1 of
this Form N-4. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Foundation Life
Insurance Company as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
February 11, 1998
Birmingham, Alabama
F-2
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
1997-$3,010,990; 1996-$2,768,199; 1995-$2,620,919).............. $ 8,415,833 $ 9,458,003 $ 6,925,097
Net investment income............................................. 6,233,845 6,611,489 5,507,867
Realized investment gains (losses)................................ (59,889) (28,070) 838,977
Other income...................................................... 8,718 2,406 (8)
------------- ------------- -------------
Total revenues.................................................. 14,598,507 16,043,828 13,271,933
------------- ------------- -------------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance
ceded: 1997-$4,430,527; 1996-$4,031,931; 1995-$2,997,130)....... 9,075,762 9,675,240 6,347,405
Amortization of deferred policy acquisition costs................. 320,288 346,710 444,570
Other operating expenses (net of reinsurance ceded:
1997-$60,900; 1996-$75,843; 1995-$88,551)....................... 2,406,314 2,361,076 2,296,628
------------- ------------- -------------
Total benefits and expenses..................................... 11,802,364 12,383,026 9,088,603
------------- ------------- -------------
INCOME BEFORE INCOME TAX............................................ 2,796,143 3,660,802 4,183,330
------------- ------------- -------------
INCOME TAX EXPENSE (BENEFIT)
Current........................................................... 548,581 1,743,864 1,193,221
Deferred.......................................................... 402,108 (499,191) 229,111
------------- ------------- -------------
Total income tax expense........................................ 950,689 1,244,673 1,422,332
------------- ------------- -------------
NET INCOME.......................................................... 1,845,454 2,416,129 2,760,998
------------- ------------- -------------
PREFERRED STOCK DIVIDENDS........................................... 100,000 100,000 100,000
------------- ------------- -------------
INCOME AVAILABLE TO COMMON SHAREHOLDERS............................. $ 1,745,454 $ 2,316,129 $ 2,660,998
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
BALANCE SHEETS
AS OF DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1997-$67,110,502;
1996-$61,914,714)............................................................ $ 68,201,559 $ 61,224,888
Mortgage loans................................................................. 10,902,986 14,757,881
Investment real estate, net of accumulated depreciation (1997-$93,376;
1996-$82,659)................................................................ 407,624 420,341
Policy loans................................................................... 11,635,376 13,535,012
Short-term investments......................................................... 873,844 5,272,698
-------------- --------------
Total Investments............................................................ 92,021,389 95,210,820
-------------- --------------
Cash............................................................................. 2,218,201 1,574,181
Accrued investment income........................................................ 1,230,529 1,183,991
Accounts and premiums receivable, net of allowances for uncollectible accounts
(1997-$7,000; 1996-$7,000)..................................................... 1,233,659 1,042,547
Reinsurance receivables.......................................................... 7,680,586 9,938,962
Deferred policy acquisition costs................................................ 1,692,285 1,919,471
Other assets..................................................................... 70,809 84,124
-------------- --------------
$ 106,147,458 $ 110,954,096
-------------- --------------
-------------- --------------
LIABILITIES
Policy liabilities and accruals
Future policy benefits and claims.............................................. $ 56,254,682 $ 59,560,434
Unearned premiums.............................................................. 463,232 182,499
-------------- --------------
Total policy liabilities and accruals........................................ 56,717,914 59,742,933
-------------- --------------
Annuity deposits................................................................. 929,124 973,155
Other policyholders' funds....................................................... 12,080,458 17,946,695
Other liabilities................................................................ 8,964,653 8,764,449
Deferred income taxes............................................................ 2,005,168 979,751
-------------- --------------
80,697,317 88,406,983
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES--NOTE E
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; shares authorized, issued and outstanding:
2,000.......................................................................... 2,000 2,000
Common stock, $10 par value; shares authorized, issued and outstanding:
200,000........................................................................ 2,000,000 2,000,000
Additional paid-in capital....................................................... 6,200,000 6,200,000
Net unrealized gains (losses) on investments (net of income tax: 1997-
$381,870; 1996-$(241,439)...................................................... 709,187 (448,387)
Retained earnings................................................................ 16,538,954 14,793,500
-------------- --------------
25,450,141 22,547,113
-------------- --------------
$ 106,147,458 $ 110,954,096
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON PAID-IN GAINS (LOSSES) RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL ON INVESTMENTS EARNINGS EQUITY
--------- ---------- ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.............. $2,000,000 $3,863,733 $(2,400,868) $17,816,373 $21,279,238
-------------
Net income for 1995................... 2,760,998 2,760,998
Increase in net unrealized gains on
investments (net of income
tax-$2,083,521)..................... 3,869,396 3,869,396
Reclassification adjustment for
amounts included in net income (net
of income tax-$(293,642))........... (545,335) (545,335)
-------------
Comprehensive income for 1995......... 6,085,059
-------------
Common dividends ($25 per share)...... (5,000,000) (5,000,000)
Preferred dividends ($50 per share)... (100,000) (100,000)
Capital contribution.................. 338,267 338,267
--------- ---------- ---------- -------------- ----------- -------------
Balance, December 31, 1995.............. 2,000,000 4,202,000 923,193 15,477,371 22,602,564
-------------
Net income for 1996................... 2,416,129 2,416,129
Decrease in net unrealized gains on
investments (net of income
tax-$(748,368))..................... (1,389,826) (1,389,826)
Reclassification adjustment for
amounts included in net income (net
income tax-$9,824).................. 18,246 18,246
-------------
Comprehensive income for 1996......... 1,044,549
-------------
Redemption feature of preferred stock
removed-- Note G.................... $2,000 1,998,000 2,000,000
Common dividends ($15 per share)...... (3,000,000) (3,000,000)
Preferred dividends ($50 per share)... (100,000) (100,000)
--------- ---------- ---------- -------------- ----------- -------------
Balance, December 31, 1996.............. 2,000 2,000,000 6,200,000 (448,387) 14,793,500 22,547,113
-------------
Net income for 1997................... 1,845,454 1,845,454
Increase in net unrealized gains on
investments (net of income
tax-$602,348)....................... 1,118,646 1,118,646
Reclassification adjustment for
amounts included in net income (net
of income tax-$20,961).............. 38,928 38,928
-------------
Comprehensive income for 1997......... 3,003,028
-------------
Preferred dividends ($50 per share)... (100,000) (100,000)
--------- ---------- ---------- -------------- ----------- -------------
Balance, December 31, 1997.............. $2,000 $2,000,000 $6,200,000 $ 709,187 $16,538,954 $25,450,141
--------- ---------- ---------- -------------- ----------- -------------
--------- ---------- ---------- -------------- ----------- -------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,845,454 $ 2,416,129 $ 2,760,998
Adjustments to reconcile net income to cash
Amortization of deferred policy acquisition costs....... 320,288 346,710 444,570
Deferred income taxes................................... 1,025,417 (499,191) 229,111
Interest credited to universal life and investment
products.............................................. 1,059,710 1,111,034 420,717
Policy fees assessed on universal life and investment
products.............................................. (1,048,883) (1,179,765) (562,637)
Change in accrued investment income and other
receivables........................................... 2,020,726 (6,955) 1,090,377
Change in policy liabilities and other policyholders'
funds of traditional life and health products......... (8,576,735) (1,612,231) (1,502,827)
Change in receivable from Protective Life Insurance
Company............................................... 0 24,817,851 0
Change in other liabilities............................. 200,205 (2,294,791) 9,672,280
Other, net.............................................. (79,787) (326,038) (499,410)
-------------- -------------- -------------
Net cash provided by operating activities................... (3,233,605) 22,772,753 12,053,179
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale.......................... 135,907,273 98,454,653 57,139,644
Other................................................... 3,661,121 1,545,594 3,406,789
Sale of investments
Investments available for sale.......................... 4,386,839 46,567,425 10,993,261
Other................................................... 0 400,000 683,815
Cost of investments acquired
Investments available for sale.......................... (139,609,229) (165,042,338) (65,099,357)
Other................................................... 0 (310,000) (1,286,586)
-------------- -------------- -------------
Net cash (used in) provided by investing activities......... 4,346,004 (18,384,666) 5,837,566
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to stockholders................................. (100,000) (3,100,000) (5,100,000)
Change in universal life products deposits................ (368,379) (723,167) (12,550,883)
Capital contribution...................................... 0 0 338,267
-------------- -------------- -------------
Net cash used in financing activities....................... (468,379) (3,823,167) (17,312,616)
-------------- -------------- -------------
INCREASE IN CASH............................................ 644,020 564,920 578,129
CASH AT BEGINNING OF YEAR................................... 1,574,181 1,009,261 431,132
-------------- -------------- -------------
CASH AT END OF YEAR......................................... $ 2,218,201 $ 1,574,181 $ 1,009,261
-------------- -------------- -------------
-------------- -------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Income taxes............................................ $ 548,581 $ 1,830,301 $ 1,030,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Acquisitions and bulk reinsurance assumptions
Assets acquired......................................... $ 24,937,851
Liabilities assumed..................................... (25,678,706)
-------------
Net..................................................... $ (740,855)
-------------
-------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements of American Foundation Life Insurance
Company (the Company) are prepared on the basis of generally accepted accounting
principles. Such accounting principles differ from statutory reporting practices
used by insurance companies in reporting to state regulatory authorities. (see
also Note B.)
All outstanding shares of the Company's common stock are owned by Protective
Life Insurance Company (Protective), which is the principal operating subsidiary
of Protective Life Corporation (PLC), and insurance holding company domiciled in
the state of Delaware. All outstanding shares of the Company's preferred stock
are owned by PLC. Protective is a wholly-owned subsidiary of PLC. Other
affiliated insurers include Empire General Life Assurance Corporation, Wisconsin
National Life Insurance Company, Protective Life Insurance Corporation of
Alabama, Protective Life Insurance Company of Kentucky, Community National
Assurance Company, Capital Investors Life Insurance Company, West Coast Life
Insurance Company, Western Diversified Life Insurance Company, Western
Diversified Casualty Insurance Company and Citizen's Accident & Health Insurance
Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make various estimates
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities, as well as the reported amounts of revenues
and expenses.
NATURE OF OPERATIONS
The Company, since it is licensed in the State of New York, is the entity
through which PLC markets, distributes, and services insurance and annuity
products in New York. The operating results of companies in the insurance
industry have historically been subject to significant fluctuations due to
competition, economic conditions, interest rates, investment performance,
maintenance of insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities;" SFAS No. 130, "Reporting Comprehensive Income;"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
SFAS No. 130 requires the presentation of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. The Company has reconfigured the Statements of
Stockholders' Equity presented herein in accordance with this Statement. SFAS
No. 131 requires additional disclosures with respect to the Company's operating
segments.
The adoption of these accounting standards did not have a material effect on
the Company's financial statements but has resulted in changed disclosure and
financial statement presentation.
INVESTMENTS
The Company has classified all of its investments in fixed maturities,
equity securities, and short-term investments as "available for sale."
F-7
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
- Fixed maturities (bonds and redeemable preferred stocks)--at current
market value.
- Mortgage loans on real estate--at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
- Investment real estate--at cost, less allowances for depreciation computed
on the straight-line method. With respect to real estate acquired through
foreclosure, cost is the lesser of the loan balance plus foreclosure costs
or appraised value.
- Policy loans--at unpaid balances.
- Short-term investments--at cost, which approximates current market value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses, net of income tax, reported as a
component of stockholders' equity. The market values of fixed maturities
increase or decrease as interest rates fall or rise. Therefore, although the
provisions of SFAS No. 115 do not affect the Company's operations, its reported
stockholders' equity will fluctuate significantly as interest rates change.
The Company's balance sheets at December 31, prepared on the basis of
reporting investments at amortized cost rather than at market values, are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Total investments............................................ $ 90,930,332 $ 95,900,646
All other assets............................................. 14,126,069 15,743,276
-------------- --------------
$ 105,056,401 $ 111,643,922
-------------- --------------
-------------- --------------
Deferred income taxes........................................ $ 1,623,298 $ 1,221,190
All other liabilities........................................ 78,692,149 87,427,232
-------------- --------------
80,315,447 88,648,422
Stockholders' equity......................................... 24,740,954 22,995,500
-------------- --------------
$ 105,056,401 $ 111,643,922
-------------- --------------
-------------- --------------
</TABLE>
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
F-8
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
Traditional Life and Health Insurance Products--Traditional life insurance
products consist principally of those products with fixed and guaranteed
premiums and benefits and include whole life insurance policies, term life
insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies. Life insurance and immediate annuity premiums
are recognized as revenue when due. Health insurance premiums are recognized as
revenue over the terms of the policies. Benefits and expenses are associated
with earned premiums so that profits are recognized over the life of the
contracts. This is accomplished by means of the provision for liabilities for
future policy benefits and the amortization of deferred policy acquisition
costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions as to
investment yields, mortality, persistency, and other assumptions based on the
Company's experience modified as necessary to reflect anticipated trends and to
include provisions for possible adverse deviation. The liability for future
policy benefits and claims on traditional life and health insurance products
included estimated unpaid claims that have been reported to the Company and
claims incurred but not yet reported. Policy claims are charged to expense in
the period that the claims are incurred.
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance beginning of year........................... $ 5,008,998 $ 3,862,708 $ 4,215,218
Less reinsurance.................................. 801,709 370,612 523,208
------------ ------------ ------------
Net balance beginning of year....................... 4,207,289 3,492,096 3,692,010
------------ ------------ ------------
Incurred related to:
Current year........................................ 5,947,439 6,293,400 5,961,369
Prior year.......................................... (331,984) (153,466) (645,639)
------------ ------------ ------------
Total incurred.................................... 5,615,455 6,139,934 5,315,730
------------ ------------ ------------
Paid related to:
Current year........................................ 4,913,958 4,883,873 4,632,399
Prior year.......................................... 1,387,081 540,868 883,245
------------ ------------ ------------
Total paid........................................ 6,301,039 5,424,741 5,515,644
------------ ------------ ------------
Net balance end of year............................. 3,521,705 4,207,289 3,492,096
Plus reinsurance.................................. 203,199 801,709 370,612
------------ ------------ ------------
Balance end of year................................. $ 3,724,904 $ 5,008,998 $ 3,862,708
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
UNIVERSAL LIFE AND INVESTMENT PRODUCTS
Universal life and investment products include universal life insurance,
deferred annuities, and annuities without life contingencies. Revenues for
universal life and investment products consist of policy fees that have been
assessed against policy account balances for the costs of insurance, policy
administration, and surrenders. Benefit reserves for universal life and
investment products represent policy account balances before applicable
surrender charges plus certain deferred policy initiation fees that are
recognized in income over the term of the policies. Policy benefits and claims
that are charged to expense
F-9
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
include benefit claims incurred in the period in excess of related policy
account balances and interest credited to policy account balances. Interest
credit rates for universal life and investment products ranged from 3.0% to 9.4%
in 1996.
At December 31, 1997, the surrender value of the Company's annuities which
approximates market value was approximately $900,000.
POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life and health
insurance that vary with and are primarily related to the production of new
business have been deferred. Traditional life and health insurance acquisition
costs are amortized over the premium-payment period of the related policies in
proportion to the ratio of annual premium income to total anticipated premium
income.
PARTICIPATING POLICIES
Participating business comprises approximately 4% of the ordinary life
insurance in force and 2% of the ordinary life insurance premium income.
Policyholder dividends totaled $159,315 in 1997, $164,204 in 1996 and $165,195
in 1995.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. Deferred federal income taxes arise from the
recognition of temporary differences between the bases of assets and liabilities
determined for financial reporting purposes and the bases determined for income
tax purposes. Such temporary differences are principally related to the deferral
of policy acquisition costs and the provision for future policy benefits and
expenses.
RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets or stockholders' equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles (GAAP) differ in some respects from statutory accounting
practices prescribed or permitted by insurance regulatory authorities. The most
significant differences are as follows: (a) acquisition costs of obtaining new
business are deferred and amortized over the approximate life of the policies
rather than charged to operations incurred; (b) benefit liabilities are computed
using a net level method and are based on realistic estimates of expected
mortality, and withdrawals as adjusted to provide for possible unfavorable
deviation from such assumptions; (c) deferred income taxes are provided for
temporary differences between financial and taxable earnings; (d) the Asset
Valuation Reserve and Interest Maintenance Reserve are restored to stockholders'
equity; (e) agents' debit balances, and prepaid expenses are reported as assets
rather than being charged directly to surplus (referred to as nonadmitted
items); (f) certain items of interest income, principally accrual of mortgage
and bond discounts, are amortized differently and (g) bonds are stated at market
instead of amortized cost.
F-10
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (CONTINUED)
The reconciliations of net income and stockholder's equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying financial statements are as follows:
<TABLE>
<CAPTION>
NET INCOME STOCKHOLDER'S EQUITY
---------------------------------- -------------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory reporting
practices:............................ $2,794,015 $2,558,227 $3,329,528 $20,467,722 $18,031,163 $18,781,333
Additional (deductions) by adjustment
Deferred policy acquisition costs, net
of amortization..................... (320,288) (346,710) (444,570) 1,692,285 1,919,471 2,266,181
Deferred income taxes................. 402,108 499,191 (229,111) (2,005,168) (979,751) (2,217,485)
Asset Valuation Reserve............... 730,240 560,732 428,236
Interest Maintenance Reserve.......... (85,826) (89,611) (92,251) 161,051 285,805 360,767
Nonadmitted items..................... 10,431 7,090 19,491
Redeemable preferred stock............ (2,000,000)
Other valuation and timing
differences......................... (944,555) (204,968) 197,402 4,393,580 2,722,603 4,419,378
---------- ---------- ---------- ----------- ----------- -----------
In conformity with generally accepted
accounting principles................. $1,845,454 $2,416,129 $2,760,998 $25,450,141 $22,547,113 $22,602,564
---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- -----------
</TABLE>
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturities........................................................ $ 4,701,611 $ 4,708,490 $ 3,402,581
Mortgage loans on real estate........................................... 1,146,325 1,431,687 1,618,753
Investment real estate.................................................. 65,584 73,756 141,147
Policy loans............................................................ 643,653 752,828 621,733
Other, principally short-term investments............................... 112,127 160,644 119,116
------------ ------------ ------------
6,669,300 7,127,405 5,903,330
Investment expenses..................................................... 435,455 (515,916) (395,463)
------------ ------------ ------------
$ 6,233,845 $ 6,611,489 $ 5,507,867
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturities........................................................ $ (59,889) $ 22,247 $ (49,213)
Mortgage loans and other investments.................................... 0 (50,317) 888,190
------------ ------------ ------------
$ (59,889) $ (28,070) $ 838,977
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-11
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
In 1997 gross gains on the sale of investments available for sale (fixed
maturities and short-term investments) were approximately $10,000 and gross
losses were approximately $70,000. In 1996 gross gains were approximately
$20,000. In 1995 gross gains were approximately $30,000, and gross losses were
approximately $80,000.
The amortized cost and estimated market values of the Company's investments
classified as available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUES
- --------------------------------------------------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Mortgage-backed securities............................. $ 11,348,224 $ 348,395 $ 0 $ 11,696,619
US Government and authorities.......................... 8,746,050 242,265 4,982 8,983,333
Public utilities....................................... 9,228,405 198,255 5,441 9,421,219
Convertibles and bonds with warrants................... 694,485 0 168,610 525,875
All other corporate bonds.............................. 37,093,338 572,155 90,980 37,574,513
------------- ------------ ----------- -------------
67,110,502 1,361,070 270,013 68,201,559
Short-term investments................................... 873,844 0 0 873,844
------------- ------------ ----------- -------------
$ 67,984,346 $ 1,361,070 $ 270,013 $ 69,075,403
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1996 COST GAINS LOSSES VALUES
- --------------------------------------------------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Mortgage-backed securities............................. $ 13,735,012 $ 339,977 $ 2,226 $ 14,072,763
US Government and authorities.......................... 12,422,028 126,802 228,413 12,320,417
Public utilities....................................... 9,362,109 121,808 225,851 9,258,066
Convertibles and bonds with warrants................... 694,263 0 173,638 520,625
All other corporate bonds.............................. 25,701,302 46,069 694,354 25,053,017
------------- ----------- ------------ -------------
61,914,714 634,656 1,324,482 61,224,888
Short-term investments................................... 5,272,698 5,272,698
------------- ----------- ------------ -------------
$ 67,187,412 $ 634,656 $ 1,324,482 $ 66,497,586
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
</TABLE>
F-12
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of fixed maturities at
December 31, by expected maturity, are shown as follows. Expected maturities are
derived from rates of prepayment that may differ from actual rates of
prepayment.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
1997 COST VALUES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 2,171,455 $ 2,177,162
Due in one year through five years............................. 27,762,163 28,202,077
Due in five years through ten years............................ 34,516,587 35,136,758
Due after 10 years............................................. 2,660,297 2,685,564
------------- -------------
$ 67,110,502 $ 68,201,559
------------- -------------
------------- -------------
<CAPTION>
ESTIMATED
AMORTIZED MARKET
1996 COST VALUES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 4,495,939 $ 4,476,940
Due in one year through five years............................. 10,399,809 10,573,805
Due five years through ten years............................... 41,732,094 41,093,106
Due after 10 years............................................. 5,286,872 5,081,037
------------- -------------
$ 61,914,714 $ 61,224,888
------------- -------------
------------- -------------
</TABLE>
The approximate percentage distribution of the Company's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1997 1996
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
AAA........................................................................ 26.8% 40.5%
AA......................................................................... 1.7 5.2
A.......................................................................... 24.3 9.8
BBB........................................................................ 37.4 37.0
BB or Less................................................................. 9.8 7.5
--------- ---------
100.0% 100.0%
--------- ---------
--------- ---------
</TABLE>
At December 31, 1997 and 1996, the Company had bonds which were rated less
than investment grade of $6.7 million and $4.5 million, having an amortized cost
of $6.8 million and $4.8 million, respectively.
The change in unrealized gains (losses), net of income tax, on fixed
maturities for the year ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Fixed maturities................................... $ 1,157,574 $ (1,371,579) $ 3,324,060
</TABLE>
At December 31, 1997, approximately 99% of the Company's mortgage loans were
commercial loans of which 46% were retail, 44% were office buildings, and 10%
were industrial. The Company specializes in making mortgage loans on either
credit-oriented or credit-anchored commercial properties, most of which are
strip shopping centers in smaller towns and cities. No single tenant's leased
space represents more than 10% of mortgage loans. Approximately 96% of the
mortgage loans are on properties located in the
F-13
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
following states listed in decreasing order of significance: Tennessee, Alabama,
Virginia, Florida and Colorado.
Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $0.5
million would become due in 1999 to 2002.
At December 31, 1997, the average mortgage loan was $0.5 million, and the
weighted average interest rate was 9.84%. The largest single mortgage loan was
$2.0 million. While the Company's mortgage loans do not have quoted market
values, at December 31, 1997 and 1996, the Company estimates the market value of
its mortgage loans to be $11.6 million and $15.5 million, respectively, using
discounted cash flows from the next call date.
At December 31, 1997 and 1996, the Company's problem mortgage loans and
foreclosed properties totaled $0.4 million and $0.4 million, respectively. Since
the Company's mortgage loans are collateralized by real estate, any assessment
of impairment is based upon the estimated fair value of the real estate. Based
on the Company's evaluation of its mortgage loan portfolio, the Company does not
expect any material losses on its mortgage loans.
The Company believes it is not practicable to determine the fair value of
its policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0%.
NOTE D -- FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax income...................... 35.00% 35.00% 35.00%
Tax-exempt interest............................................................. (7.20) (7.33) (7.37)
Other adjustments............................................................... 6.20 6.33 6.37
--------- --------- ---------
Effective income tax rate....................................................... 34.00% 34.00% 34.00%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for federal income tax differs from amounts currently payable
due to certain items reported for financial statement purposes in periods which
differ from those in which they are reported for income tax purposes.
Details of the deferred income tax provision for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Deferred policy acquisition costs...................................... $ (100,971) $ (530,008) $ (344,176)
Benefit and other policy liability changes............................. (72,878) 1,698,144 1,371,080
Temporary differences of investment income............................. (199,660) (208,432) (4,063,846)
Other items............................................................ 775,617 (1,458,895) 3,266,053
----------- ------------- -------------
$ 402,108 $ (499,191) $ 229,111
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
F-14
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- FEDERAL INCOME TAXES (CONTINUED)
The components of the Company's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred income tax assets
Policy and policyholder liability reserves.......................................... $ 401,636 $ 328,758
Deferred policy acquisition costs................................................... 195,580 94,609
------------ ------------
597,216 423,367
------------ ------------
Deferred income tax liabilities:
Unrealized gain on investments...................................................... 516,942 93,293
Other............................................................................... 2,085,442 1,309,825
------------ ------------
2,602,384 1,403,118
------------ ------------
Net deferred income tax liability................................................... $ 2,005,168 $ 979,751
------------ ------------
------------ ------------
</TABLE>
The Company's income tax returns are included in the consolidated income tax
returns of PLC. The allocation of income tax liabilities among affiliates is
based upon separate income tax return calculations. At December 31, 1997 and
1996 no amounts were payable to PLC for income tax liabilities.
NOTE E -- COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. The Company does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against insurers in the
jurisdictions in which the Company does business involving the insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents, and
other matters. Increasingly these lawsuits have resulted in the award of
substantial judgments against the insurer that are disproportionate to the
actual damages, including material amounts of punitive damages. In addition in
some class action and other lawsuits involving insurer's sales practices,
insurers have made material settlement payments. In some states (including
Alabama), juries have substantial discretion in awarding punitive damages which
creates the potential for unpredictable material adverse judgments in any given
punitive damage suit. The Company and its affiliates, like other insurers, in
the ordinary course of business, are involved in such litigation. Although the
outcome of any such litigation cannot be predicted with certainty, the Company
believes that at the present time there are no pending or threatened lawsuits
that are reasonably likely to have a material adverse effect on the financial
position, results of operation, or liquidity of the Company.
NOTE F -- STOCKHOLDERS' EQUITY AND RESTRICTIONS
Dividends on common stock are noncumulative and are paid as determined by
the Board of Directors. At December 31, 1997, approximately $6.1 million of
stockholders' equity excluding net unrealized gains and losses represented net
assets of the Company that cannot be transferred in the form of dividends,
loans, or advances to Protective Life. In general, dividends up to specified
levels are considered ordinary and may be paid thirty days after written notice
to the insurance commissioner of the state of domicile
F-15
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- STOCKHOLDERS' EQUITY AND RESTRICTIONS (CONTINUED)
unless such commissioner objects to the dividend prior to the expiration of such
period. Dividends in larger amounts are considered extraordinary and are subject
to affirmative prior approval by such commissioner. The maximum amount that
would qualify as ordinary dividends to Protective Life by the Company in 1998 is
estimated to be $3.4 million.
NOTE G -- PREFERRED STOCK
The Company's preferred stock has a provision for an annual minimum
cumulative dividend, when and if declared, of $50.00 per share, and additional
dividends to the extent the Company's statutory earnings for the immediately
preceeding year exceed $1.0 million. The minimum dividend and any accumulation
must be paid before any dividend on any other class of capital stock may be
paid. The additional dividends are noncumulative and are in preference to any
other dividend on any other class of capital stock. Dividends of $100,000 were
declared and paid in each of 1997, 1996 and 1995 on the participating preferred
stock. As of December 31, 1997, all cumulative preferred dividends have been
paid.
During 1996, the Company's articles of incorporation were amended such that
the preferred stock is redeemable at $1,000 per share solely at the Company's
discretion. At December 31, 1995, the preferred stock was reported as
"Redeemable Preferred Stock", whereas at December 31, 1996, it is reported as a
component of stockholders' equity.
NOTE H -- RELATED PARTY MATTERS
The Company has no employees; therefore, the Company purchases data
processing, legal, investment, and management services from PLC and other
affiliates. The cost of such services was $375,023 in 1997, $383,069 in 1996,
and $243,236 in 1995.
Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amount of approximately $200,000 and approximately
$300,000 at December 31, 1997 and 1996, respectively. The Company routinely
receives from or pays to affiliates under the control of PLC reimbursements for
expenses incurred on one another's behalf. Receivables and payables among
affiliates are generally settled monthly.
NOTE I -- REINSURANCE
The Company assumes risks from and reinsures certain parts of its risks with
other insurers under yearly renewable term, coinsurance, and modified
coinsurance agreements. Yearly renewable term and coinsurance agreements are
accounted for by passing a portion of the risk to the reinsurer. Generally, the
reinsurer receives a proportionate part of the premiums less commissions and is
liable for a corresponding part of all benefit payments. Modified coinsurance is
accounted for similarly to coinsurance except that the liability for future
policy benefits is held by the original company, and settlements are made on a
net basis between the companies. While the amount retained on an individual life
will vary based upon age and mortality prospects of the risk, the Company
generally will not carry more than $500,000 individual life insurance on a
single risk. In many cases, the retention is less.
The Company has reinsured approximately $133 million, $163 million and $164
million, in face amount of life insurance risks with other insurers representing
$0.7 million, $0.9 million and $1.0 million of premium income for 1997, 1996 and
1995, respectively. The Company has also reinsured accident and health risks
representing $2.3 million, $1.9 million and $1.6 million, of premium income for
1997, 1996 and 1995, respectively. In 1997 and 1996, policy and claim reserves
relating to insurance ceded of $7.5 million
F-16
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I -- REINSURANCE (CONTINUED)
and $9.1 million respectively are included in reinsurance receivables. Should
any of the reinsurers be unable to meet its obligation at the time of the claim,
obligation to pay such claim would remain with the Company. At December 31, 1997
and 1996, the Company had paid $0.2 million and $0.8 million, respectively, of
ceded benefits which are recoverable from reinsurers.
NOTE J -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated market values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT MARKET VALUES AMOUNT MARKET VALUES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities.................................. $ 67,110,502 $ 68,201,559 $ 61,914,714 $ 61,224,888
Mortgage loans on real estate..................... 10,902,986 11,649,144 14,757,881 15,467,129
Short-term investments............................ 873,844 873,844 5,272,698 5,272,698
Cash................................................ 2,218,201 2,218,201 1,574,181 1,574,181
Liabilities (see Note A)............................
Annuity deposits.................................... 929,124 929,124 973,155 973,155
</TABLE>
NOTE K -- OPERATING SEGMENTS
PLC operates seven divisions whose principal strategic focuses can be
grouped into three general categories: Life Insurance, Specialty Insurance
Products, and Retirement Savings and Investment Products. Each division has a
senior officer of PLC responsible for its operations. A division is generally
distinguished by products and/or channels of distribution.
The Life Insurance category includes the Acquisitions, Individual Life, and
West Coast Divisions. The Specialty Insurance Products category includes the
Dental and Consumer Benefits ("Dental") and Financial Institutions Divisions.
And the Retirement Savings and Investment Products category includes the
Guaranteed Investment Contracts and Investment Products Divisions.
The Company, since it is licensed in the State of New York, is the entity
through which PLC markets and distributes products in New York. As of December
31, 1997, the Company was involved in the operations of two of PLC's Divisions:
the Acquisitions Division and the Dental Division. PLC's Investment Products
Division has plans to begin marketing through the Company in 1998.
The Company also has an additional business segment which is described
herein as Corporate and Other. The Corporate and Other segment primarily
consists of net investment income and expenses not attributable to the Divisions
above.
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated net
income and assets. Operating segment income is generally income before income
tax, adjusted to exclude any pre-tax minority interest in income of consolidated
subsidiaries. Premiums and policy fees, other income, benefits and settlement
expenses, and amortization of deferred policy acquisition costs are attributed
directly to each operating segment. Net investment income is allocated based on
directly related assets required for transacting the business of that
F-17
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
segment. Realized investment gains (losses) and other operating expenses are
allocated to the segments in a manner which most appropriately reflects the
operations of that segment. Unallocated realized investment gains (losses) are
deemed not to be associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
Operating segment income and assets for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
DENTAL AND TOTAL
CONSUMER CORPORATE CONSOLIDATED
ACQUISITIONS BENEFITS AND OTHER ADJUSTMENTS NET INCOME
------------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1997
Premiums and policy fees................... $ 4,257,328 $ 4,158,505 $ 0 $ 8,415,833
Net investment income...................... 4,590,650 1,026,054 617,141 6,233,845
Realized investment gains (losses)......... (59,889) (59,889)
Other income............................... 8,718 8,718
------------- ------------ ---------- ------------ -------------
Total revenues......................... 8,856,696 5,184,559 557,252 14,598,507
------------- ------------ ---------- ------------ -------------
Benefits and settlement expenses........... 5,994,962 3,080,800 9,075,762
Amortization of deferred acquisitions
costs.................................... 320,288 320,288
Other operating expenses................... 912,398 1,493,916 2,406,314
------------- ------------ ---------- ------------ -------------
Total benefits and expenses............ 7,227,648 4,574,716 0 11,802,364
------------- ------------ ---------- ------------ -------------
Income before income tax................... 1,629,048 609,843 557,252 2,796,143
Income tax expense......................... 950,689 950,689
------------- ------------ ---------- ------------ -------------
Net income................................. $ 1,845,454
------------- ------------ ---------- ------------ -------------
------------- ------------ ---------- ------------ -------------
1996
Premiums and policy fees................... $ 4,540,107 $ 4,917,896 $ 9,458,003
Net investment income...................... 5,569,799 1,049,427 $ (7,737) 6,611,489
Realized investment gains (losses)......... (28,070) (28,070)
Other income............................... 2,406 2,407
------------- ------------ ---------- ------------ -------------
Total revenues......................... 10,112,312 5,967,323 (35,807) 0 16,043,828
------------- ------------ ---------- ------------ -------------
Benefits and settlement expenses........... 5,813,515 3,861,725 9,675,240
Amortization of deferred acquisitions
costs.................................... 346,710 346,710
Other operating expenses................... 855,442 1,505,634 2,361,076
------------- ------------ ---------- ------------ -------------
Total benefits and expense............. 7,015,667 5,367,359 0 0 12,383,026
------------- ------------ ---------- ------------ -------------
Income before income tax................... 3,096,645 599,964 (35,807) 0 3,660,802
Income tax expenses........................ 1,244,673 1,244,673
------------- ------------ ---------- ------------ -------------
Net income................................. $ 2,416,129
------------- ------------ ---------- ------------ -------------
------------- ------------ ---------- ------------ -------------
</TABLE>
F-18
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
DENTAL AND TOTAL
CONSUMER CORPORATE CONSOLIDATED
ACQUISITIONS BENEFITS AND OTHER ADJUSTMENTS NET INCOME
------------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1995
Premiums and policy fees................... $ 4,001,233 $ 2,923,864 $ 6,925,097
Net investment income...................... 5,504,153 3,714 5,507,867
Realized investment gains (losses)......... $ 838,977 838,977
Other income............................... (8) (8)
------------- ------------ ---------- ------------ -------------
Total revenues......................... 9,505,378 2,927,578 838,977 0 13,271,933
------------- ------------ ---------- ------------ -------------
Benefits and settlement expenses........... 4,888,566 1,458,839 6,347,405
Amortization of deferred acquisitions
costs.................................... 444,570 444,570
Other operating expenses................... 934,200 1,362,428 2,296,628
------------- ------------ ---------- ------------ -------------
Total benefits and expenses............ 6,267,336 2,821,267 0 0 9,088,603
------------- ------------ ---------- ------------ -------------
Income before income tax................... 3,238,042 106,311 838,977 0 4,183,330
Income tax expenses........................ $ 1,422,332 1,422,332
------------- ------------ ---------- ------------ -------------
Net Income................................. $ 2,760,998
------------- ------------ ---------- ------------ -------------
------------- ------------ ---------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
DENTAL AND
CONSUMER CORPORATE AND
ACQUISITIONS BENEFITS OTHER TOTAL
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
1997
Investment and other assets........................ $ 76,644,539 $ 7,111,880 $ 20,698,754 $ 104,455,173
Deferred policy acquisition costs.................. 1,692,285 1,692,285
------------- ------------- ------------- --------------
Total Assets....................................... $ 78,336,824 $ 7,111,880 $ 20,698,754 $ 106,147,458
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
1996
Investment and other assets........................ $ 78,189,386 $ 12,870,675 $ 17,974,564 $ 109,034,625
Deferred policy acquisition costs.................. 1,919,471 1,919,471
------------- ------------- ------------- --------------
Total Assets....................................... $ 80,108,857 $ 12,870,675 $ 17,974,564 $ 110,954,096
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
1995
Investment and other assets........................ $ 83,689,559 $ 14,055,339 $ 19,021,559 $ 116,766,457
Deferred policy acquisition costs.................. 2,266,181 2,266,181
------------- ------------- ------------- --------------
Total Assets....................................... $ 85,955,740 $ 14,055,339 $ 19,021,559 $ 119,032,638
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
F-19
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- -----------------------------------------------------------------------------------------------------------------
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS PREMIUMS
POLICY BENEFITS AND OTHER AND NET
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT
SEGMENT COSTS COSTS PREMIUMS FUNDS FEES INCOME
- ----------------------------------- ----------- ----------- -------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Acquisitions..................... $1,692,285 $56,177,703 $463,232 $ 6,048,563 $4,257,328 $4,590,650
Dental and Consumer Benefits..... 0 76,979 0 6,961,019 4,158,505 1,026,054
Corporate and Other.............. 0 0 0 0 0 617,141
----------- ----------- -------- ------------- ---------- -----------
$1,692,285 $56,254,682 $463,232 $13,009,582 $8,415,833 $6,233,845
----------- ----------- -------- ------------- ---------- -----------
----------- ----------- -------- ------------- ---------- -----------
Year Ended December 31, 1996:
Acquisitions..................... $1,919,471 $59,483,455 $182,499 $ 6,028,180 $4,540,107 $5,569,799
Dental and Consumer Benefits..... 0 76,979 0 12,891,670 4,917,896 1,049,427
Corporate and Other.............. 0 0 0 0 0 (7,737)
----------- ----------- -------- ------------- ---------- -----------
$1,919,471 $59,560,434 $182,499 $18,919,850 $9,458,003 $6,611,489
----------- ----------- -------- ------------- ---------- -----------
----------- ----------- -------- ------------- ---------- -----------
Year Ended December 31,1995:
Acquisitions..................... $2,266,181 $61,003,603 $71,803 $ 6,170,504 $4,001,233 $5,504,153
Dental and Consumer Benefits..... 0 650,651 0 13,170,351 2,923,864 3,714
Corporate and Other.............. 0 0 0 0 0 0
----------- ----------- -------- ------------- ---------- -----------
$2,266,181 $61,654,254 $71,803 $19,340,855 $6,925,097 $5,507,867
----------- ----------- -------- ------------- ---------- -----------
----------- ----------- -------- ------------- ---------- -----------
<CAPTION>
- ----------------------------------- -------------------------------------------------
COL. G COL. H COL. I COL. J
- ----------------------------------- -------------------------------------------------
AMORTIZATION
REALIZED BENEFITS OF
INVESTMENT AND DEFERRED
GAINS SETTLEMENT ACQUISITION
SEGMENT (LOSSES) EXPENSES COSTS EXPENSES (1)
- ----------------------------------- ---------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Acquisitions..................... $ 0 $5,994,962 $320,288 $ 912,398
Dental and Consumer Benefits..... 0 3,080,800 0 1,493,916
Corporate and Other.............. (59,889) 0 0 0
---------- ----------- -------- ------------
$(59,889) $9,075,762 $320,288 $2,406,314
---------- ----------- -------- ------------
---------- ----------- -------- ------------
Year Ended December 31, 1996:
Acquisitions..................... $ 0 $5,813,515 $346,710 $ 855,442
Dental and Consumer Benefits..... 0 3,861,725 0 1,505,634
Corporate and Other.............. (28,070) 0 0 0
---------- ----------- -------- ------------
$(28,070) $9,675,240 $346,710 $2,361,076
---------- ----------- -------- ------------
---------- ----------- -------- ------------
Year Ended December 31,1995:
Acquisitions..................... 0 $4,888,566 $444,570 $ 934,200
Dental and Consumer Benefits..... 0 1,458,839 0 1,362,428
Corporate and Other.............. $838,977 0 0 0
---------- ----------- -------- ------------
$838,977 $6,347,405 $444,570 $2,296,628
---------- ----------- -------- ------------
---------- ----------- -------- ------------
</TABLE>
S-1
<PAGE>
SCHEDULE IV -- REINSURANCE
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- -----------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Life insurance in force (1)...... $ 229,717 $ 133,080 $ 367,176 $ 463,813 79.2%
---------- ---------- ---------- ---------- ---
---------- ---------- ---------- ---------- ---
Premiums and policy fees:
Life insurance................... $2,926,434 $ 752,253 $2,124,374 $4,298,555 49.4%
Accident and health insurance.... 6,325,182 2,258,737 50,833 4,117,278 1.2%
---------- ---------- ---------- ----------
TOTAL............................ $9,251,616 $3,010,990 $2,175,207 $8,415,833
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Year Ended December 31, 1996:
Life insurance in force (1)...... $ 247,048 $ 169,330 $ 549,583 $ 627,301 87.6%
---------- ---------- ---------- ---------- ---
---------- ---------- ---------- ---------- ---
Premiums and policy fees:
Life insurance................... $3,222,836 $ 910,593 $2,698,743 $5,010,986 53.9%
Accident and health insurance.... 6,245,784 1,857,606 58,839 4,447,017 1.3%
---------- ---------- ---------- ----------
TOTAL............................ $9,468,620 $2,768,199 $2,757,582 $9,458,003
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Year Ended December 31, 1995:
Life insurance in force (1)...... $ 270,714 $ 42,165 $ 520,659 $ 749,208 69.5%
---------- ---------- ---------- ---------- ---
---------- ---------- ---------- ---------- ---
Premiums and policy fees:
Life insurance................... $3,821,959 $1,005,330 $ 753,690 $3,570,319 21.1%
Accident/health insurance........ 4,909,882 1,615,589 60,485 3,354,778 1.8%
---------- ---------- ---------- ----------
TOTAL............................ $8,731,841 $2,620,919 $ 814,175 $6,925,097
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Dollars in thousands
S-2
