<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1998
FILE NO. 333-41577
FILE NO. 811-8537
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-4
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. 1 /X/
POST-EFFECTIVE AMENDMENT NO. / /
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 1 /X/
</TABLE>
------------------------
VARIABLE ANNUITY ACCOUNT A OF AMERICAN FOUNDATION
(Exact Name of Registrant)
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
(Name of Depositor)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (205) 879-9230
------------------------
STEVE M. CALLAWAY, ESQUIRE
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA, 35223
(Name and Address of Agent for Services)
------------------------
COPY TO:
STEPHEN E. ROTH, ESQUIRE
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
(202) 383-0158
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the registration statement.
Title of Securities Being Registered: Interests in a separate account issued
through variable annuity contracts.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), SHALL
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULES 481(a) AND 495(a)
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Registration Statement of Information Required by Form N-4.
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
PART A
1. Cover Page........................................... Cover Page
2. Definitions.......................................... Definitions
3. Synopsis............................................. Expense Tables; Summary
4. Condensed Financial Information...................... Condensed Financial Information
5. General Description of Registrant, Depositor and
Portfolio Companies................................ The Company, Variable Account and Funds
a. Depositor........................................ The Company, Variable Account and Funds-- American
Foundation Life Insurance Company
b. Registrant....................................... The Company, Variable Account and Funds-- Variable
Account A of American Foundation
c. Portfolio Company................................ The Company, Variable Account and Funds-- The Funds
d. Fund Prospectus.................................. The Company, Variable Account and Funds-- The Funds
e. Voting Rights.................................... Voting Rights
f. Administrators................................... The Company, Variable Account and Funds
6. Deductions and Expenses.............................. Charges and Deductions
a. General.......................................... Charges and Deductions; Summary
b. Sales Load %..................................... Charges and Deductions--Surrender Charge
c. Special Purchase Plan............................ Surrenders; Transfers; Charges and Deductions
d. Commissions...................................... Distribution of Contracts
e. Expenses--Registrant............................. Charges and Deductions; Expense Tables
f. Fund Expenses.................................... Charges and Deductions
g. Organizational Expenses.......................... N/A
7. General Description of Variable Annuity Contracts.... Description of the Contracts
a. (i) Allocation of Purchase Payments.............. Description of the Contracts--Purchase Payments,
Allocation of Purchase Payments
(ii) Transfers....................................... Description of Variable Annuity Contract-- Transfers
b. Changes.......................................... Description of Variable Annuity Contract--
Modification; The Company, Variable Account and
Funds--Addition, Deletion and Substitution of
Investments
c. Inquiries........................................ General Matters--Inquiries
8. Annuity Options...................................... Annuity Options; Summary
9. Death Benefit........................................ Description of the Contract--Death Benefit; Summary
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
10. Purchases and Contract Value......................... Description of the Contracts
a. Purchases........................................ Description of the Contracts--Purchase Payments
b. Valuation........................................ Description of the Contracts--Variable Account Value
c. Daily Calculation................................ Description of the Contracts--Variable Account Value
d. Underwriter...................................... Distribution of Contracts
11. Redemptions.......................................... Description of the Contracts
a. --By Owners...................................... Description of the Contracts--Surrenders and Partial
Surrenders; Payments
--By Annuitant....................................... Description of the Contracts--Annuity Options
b. Delay in Payment................................. Suspension or Delay in Payments
c. Lapse............................................ Description of the Contracts--Annuity Options
d. Free Look Period................................. Description of the Contracts--Free Look Period
12. Taxes................................................ Federal Tax Matters
13. Legal Proceedings.................................... Legal Proceedings
14. Table of Contents in the Statement of Additional
Information........................................ Statement of Additional Information Table of Contents
PART B
15. Cover Page........................................... Cover Page
16. Table of Contents.................................... Statement of Additional Information Table of Contents
17. General Information and History...................... See Prospectus--The Company, Variable Account and
Funds
18. Services
a. Fees and Expenses of Registrant.................. See Prospectus--Charges and Deductions
b. Management Contract.............................. See Prospectus--The Company, Variable Account and
Funds
c. Custodian and Independent Public Accountant.... Safekeeping of Account Assets; Experts
d. Assets of Registrants............................ Safekeeping of Accounts Assets
e. Affiliated Persons............................... N/A
f. Principal Underwriter............................ See Prospectus--Distribution of Contracts
19. Purchase of Securities Being Offered................. See Prospectus--Distribution of Contracts
20. Underwriter.......................................... See Prospectus--Distribution of Contracts
21. Calculation of Performance Data...................... Calculation of Yields and Total Returns
22. Annuity Options...................................... See Prospectus--Annuity Options; Summary
23. Financial Statements................................. Financial Statements
</TABLE>
<PAGE>
PART A
INFORMATION REQUIRED TO BE IN THE PROSPECTUS
<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 , 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions............................................................... 4
Expense Tables............................................................ 7
Summary................................................................... 12
Condensed Financial Information........................................... 13
The Company, Variable Account and Funds................................... 14
American Foundation Life Insurance Company.............................. 14
Variable Annuity Account A of American Foundation....................... 14
Administration.......................................................... 14
The Funds............................................................... 15
Other Investors in the Funds............................................ 17
Addition, Deletion or Substitution of Investments....................... 18
Description of the Contracts.............................................. 18
Issuance of a Contract.................................................. 18
Purchase Payments....................................................... 19
Free Look Period........................................................ 19
Allocation of Purchase Payments......................................... 19
Variable Account Value.................................................. 19
Transfers............................................................... 21
Surrenders and Partial Surrenders....................................... 22
The Guaranteed Account.................................................... 23
Death Benefit............................................................. 24
Suspension or Delay in Payments........................................... 25
Charges and Deductions.................................................... 25
Surrender Charge (Contingent Deferred Sales Charge)..................... 25
Administration Charges.................................................. 26
Transfer Fee............................................................ 26
Mortality and Expense Risk Charge....................................... 27
Contract Maintenance Fee................................................ 27
Fund Expenses........................................................... 27
Premium Taxes........................................................... 27
Other Taxes............................................................. 27
Annuity Options........................................................... 28
Annuity Income Payments................................................. 28
Death of Annuitant or Owner After Annuity Commencement Date............. 29
Yields and Total Returns.................................................. 29
Federal Tax Matters....................................................... 31
Introduction............................................................ 31
The Company's Tax Status................................................ 31
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Taxation of Annuities in General.......................................... 31
Tax Deferral During Accumulation Period................................. 31
Taxation of Partial and Full Surrenders................................. 32
Taxation of Annuity Payments............................................ 33
Taxation of Death Benefit Proceeds...................................... 33
Assignments, Pledges, and Gratuitous Transfers.......................... 34
Penalty Tax on Premature Distributions.................................. 34
Aggregation of Contracts................................................ 34
Qualified Retirement Plans................................................ 35
In General.............................................................. 35
Direct Rollovers........................................................ 37
Federal Income Tax Withholding............................................ 37
General Matters........................................................... 37
Modification............................................................ 37
Reports................................................................. 38
Inquiries............................................................... 38
Distribution of the Contracts............................................. 38
Legal Proceedings......................................................... 38
Voting Rights............................................................. 38
Financial Statements...................................................... 39
Statement of Additional Information Table of Contents..................... 40
</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 (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%. The Calvert Social Small Cap Growth
expenses have been restated to reflect the lower advisory fee and
administrative services fee. "Other Expenses" reflect an indirect fee. Net
fund operating expenses after reductions for fees paid indirectly (again,
restated) would be 0.78% for Calvert Social Balanced, and 0.89% for Calvert
Social Small Cap Growth. 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".)
11
<PAGE>
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.
12
<PAGE>
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.
13
<PAGE>
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.
14
<PAGE>
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.
15
<PAGE>
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
16
<PAGE>
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.
17
<PAGE>
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
18
<PAGE>
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.
19
<PAGE>
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.
20
<PAGE>
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".)
21
<PAGE>
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
22
<PAGE>
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.
23
<PAGE>
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
24
<PAGE>
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.
25
<PAGE>
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.
26
<PAGE>
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.
27
<PAGE>
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.
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
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
28
<PAGE>
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.
29
<PAGE>
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
30
<PAGE>
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
31
<PAGE>
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".)
32
<PAGE>
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.
33
<PAGE>
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.
34
<PAGE>
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.)
35
<PAGE>
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.
36
<PAGE>
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 Protective, 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, 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 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 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 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's efforts will be successful, that
interaction with other service providers with Year 2000 issues will not impair
Protective's operations, or that the Year 2000 issue will not otherwise
adversely affect Protective.
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.
37
<PAGE>
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 , 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 invests in a Fund that has been in operation for less
than 10 years, American Foundation Life may include standard average annual
total return figures measured from the date that such Fund began operations.
When a Sub-Account invests in a Fund that has been in operation for 1, 5, and 10
years, respectively, the Company will provide standard annual total return for
these periods. 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
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part B.
(b) Exhibits
(1) Certified resolution of the board of directors of American Foundation
Life Insurance Company (the "Company") establishing American Foundation
Variable Annuity Separate Account A (the "Account").*
(2) Not Applicable.
(3) (a) Form of underwriting agreement among the Company, the Account and
Investment Distributors, Inc. ("IDI").
(b) Form of distribution agreement between IDI and retail
broker-dealers.
(4) (a) Contract Form.
(b) Qualified Retirement Plan Endorsement.*
(c) Individual Retirement Annuity Endorsements.*
(d) Tax Sheltered Annuity Endorsement.*
(5) Contract Application.
(6) (a) Certificate of Incorporation of the Company.*
(b) By-Laws of the Company.*
(7) Not Applicable.
(8) (a) Form of participation/distribution agreement between Protective
Investment Company and the Company.
(b) Form of service agreement between Protective Life Insurance Company
and the Company.
(c) Participation Agreement with Oppenheimer Variable Account Funds.
(d) Participation Agreement with MFS Variable Insurance Trust.
(e) Participation Agreement with Calvert Variable Series Portfolios.
(9) Opinion and Consent of Steve M. Callaway, Esquire.
(10) (a) Consent of Sutherland, Asbill & Brennan LLP.
(b) Consent of Coopers & Lybrand L.L.P.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Copies of Powers of Attorney.*
* Incorporated herein by reference to the initial filing of the
registrant's Form N-4 Registration Statement on December 5, 1997.
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS* POSITION AND OFFICES WITH DEPOSITOR
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Drayton Nabers, Jr...................................... Director
John D. Johns........................................... Director
Wayne E. Stuenkel....................................... President, Chief Actuary, and Director
R. Stephen Briggs....................................... Executive Vice President, Director
Jim E. Massengale....................................... Executive Vice President, Acquisitions, and Director
A. S. Williams III...................................... Executive Vice President, Investments, Treasurer, and
Director
Danny L. Bentley........................................ Senior Vice President, Group, and Director
Richard J. Bielen....................................... Senior Vice President, Investments, and Director
Carolyn King............................................ Senior Vice President, Investment Products, and Director
Deborah J. Long......................................... Senior Vice President, Secretary, General Counsel, and
Director
Steven A. Schultz....................................... Senior Vice President, Financial Institutions, and
Director
J. Russell Bailey, Jr................................... Vice President, Group
Brent E. Fritz.......................................... Vice President, Individual Life Product Development
Jerry W. DeFoor......................................... Vice President and Controller
James T. Helton III..................................... Vice President and Group Actuary
John M. O'Sullivan...................................... Vice President and Actuary, Investment Products
T. Michael Presley...................................... Vice President and Actuary, Financial Institutions
Charles M. Prior........................................ Vice President, Investments
David C. Stevens........................................ Vice President, Group Operations
Carl S. Thigpen......................................... Vice President, Investments and Assistant Secretary
</TABLE>
- ------------------------
* Unless otherwise indicated, principal business address is 2801 Highway 280
South, Birmingham, Alabama 35223
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. All of the Company's outstanding voting
common stock is owned by Protective Life Insurance Company, which is the chief
operating subsidiary of Protective Life Corporation. Protective Life Corporation
is described more fully in the prospectus included in this registration
statement. Various companies and other entities controlled by Protective Life
Corporation may therefore be considered to be under common control with the
registrant or the Company. Such other companies and entities, together with the
identity of their controlling persons (where applicable), are set forth in
Exhibit 21 to Form 10-K of Protective Life Corporation for the fiscal year ended
December 31, 1997 (File No. 1-12332) filed with the Commission on March 27,
1998.
2
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
Not applicable.
ITEM 28. INDEMNIFICATION
Article XI of the By-laws of the Company provides, in substance, that any of
the Company's directors and officers, who is a party or is threatened to be made
a party to any action, suit or proceeding, other than an action by or in the
right of the Company, by reason of the fact that he is or was an officer or
director, shall be indemnified by the Company against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such claim, action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Company and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. If the claim, action or suit is or was by or in the right
of the Company to procure a judgment in its favor, such person shall be
indemnified by the Company against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company except
that no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper. To the extent
that a director or officer has been successful on the merits or otherwise in
defense of any such action, suit or proceeding, or in defense of any claim,
issue or matter therein, he shall be indemnified by the Company against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith, not withstanding that he has not been successful on any
other claim issue or matter in any such action, suit or proceeding. Unless
ordered by a court, indemnification shall be made by the Company only as
authorized in the specific case upon a determination that indemnification of the
officer or director is proper in the circumstances because he has met the
applicable standard of conduct. Such determination shall be made (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to, or who have been successful on the merits or otherwise with
respect to, such claim action, suit or proceeding, or (b) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or (c) by the
shareholders.
In addition, the executive officers and directors are insured by PLC's
Directors' and Officers' Liability Insurance Policy including Company
Reimbursement and are indemnified by a written contract with PLC which
supplements such coverage.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
3
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITER
(a) IDI is the principal underwriter (as defined in the Act) for the
Contracts and is also the principal underwriter for other variable and
modified guaranteed annuity contracts issued by the Registrant and its
affiliates and for Protective Investment Company.
(b) Incorporated herein by reference to item 29 of post-effective amendment
number 6 to Protective Life Insurance Company's Form N-4 registration
statement (File No. 33-70984) for certain deferred variable annuity
contracts issued by Protective Life filed with the Commission on February
27, 1998.
(c) Not Applicable
ITEM 30. LOCATION BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be kept
by Section 31(a) of the Investment Company Act of 1940 and rules thereunder, are
maintained by the Company at 2801 Highway 280 South, Birmingham, Alabama 35223.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this
registration statement.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
(a) The registrant undertakes that it will file a post-effective amendment
to this registration statement as frequently as is necessary to ensure
that the audited financial statements in the registration statement are
never more than 16 months old for as long as purchase payments under the
contracts offered herein are being accepted.
(b) The registrant undertakes that it will include either (1) as part of any
application to purchase a contract offered by the prospectus, a space
that an applicant can check to request a statement of additional
information, or (2) a post card or similar written communication affixed
to or included in the prospectus that the applicant can remove and send
to the Company for a statement of additional information.
(c) The registrant undertakes to deliver any statement of additional
information and any financial statements required to be made available
under this Form N-4 promptly upon written or oral request to the Company
at the address or phone number listed in the prospectus.
(d) The Company represents that in connection with its offering of the
contracts as funding vehicles for retirement plans meeting the
requirements of Section 403(b) of the Internal Revenue Code of 1986, it
is relying on a no-action letter dated November 28, 1988, to the American
Council of Life Insurance (Ref. No. IP-6-88) regarding Sections 22(e),
27(c)(1), and 27(d) of the Investment Company Act of 1940, and that
paragraphs numbered (1) through (4) of that letter will be complied with.
(e) The Company represents that the fees and charges deducted under the
contracts offered herein are, in the aggregate, reasonable in relation to
the services rendered, the expenses expected to be incurred and the risks
assumed by it under such contracts.
4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the registrant has caused this registration statement to be signed on its
behalf, in the City of Birmingham, and the State of Alabama, on this 13th day of
April, 1998.
ANNUITY ACCOUNT A OF AMERICAN FOUNDATION
(Registrant)
By: /s/ WAYNE E. STUENKEL
-----------------------------------------
Wayne E. Stuenkel, PRESIDENT
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
(Depositor)
By: /s/ WAYNE E. STUENKEL
-----------------------------------------
Wayne E. Stuenkel, PRESIDENT
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the duties
indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ WAYNE E. STUENKEL Principal and Director
- ------------------------------ (Principal Executive April 13, 1998
Wayne E. Stuenkel Officer)
Vice President (Principal
* Financial Officer and
- ------------------------------ Principal Accounting April 13, 1998
Jerry W. DeFoor Officer
*
- ------------------------------ Director April 13, 1998
R. Stephen Briggs
*
- ------------------------------ Director April 13, 1998
Jim E. Massengale
*
- ------------------------------ Director April 13, 1998
A.S. Williams, III
5
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
*
- ------------------------------ Director April 13, 1998
Steven A. Schultz
*
- ------------------------------ Director April 13, 1998
Deborah A. Long
*
- ------------------------------ Director April 13, 1998
Carolyn King
*
- ------------------------------ Director April 13, 1998
Richard J. Bielen
*
- ------------------------------ Director April 13, 1998
Danny L. Bentley
*By: /s/ STEVE M. CALLAWAY
-------------------------
Steve M. Callaway
ATTORNEY-IN-FACT
6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
3.(a) Form of underwriting agreement among the Company, the Account and Investment
Distributors, Inc. ("IDI").
3.(b) Form of distribution agreement between IDI and retail broker-dealers.
4.(a) Contract Form.
5. Contract Application.
8.(a) Form of participation/distribution agreement between Protective Investment
Company and the Company.
8.(b) Form of service agreement between Protective Life Insurance Company and the
Company.
8.(c) Participation Agreement with Oppenheimer Variable Account Funds.
8.(d) Participation Agreement with MFS Variable Insurance Trust.
8.(e) Participation Agreement with Calvert Variable Series Portfolios.
9. Opinion and Consent of Steve M. Callaway, Esquire.
10.(a) Consent of Sutherland, Asbill & Brennan LLP.
10.(b) Consent of Coopers & Lybrand L.L.P.
</TABLE>
<PAGE>
UNDERWRITING AGREEMENT
THIS UNDERWRITING AGREEMENT ("Agreement") is hereby entered into on this
_________day of April, 1998, between AMERICAN FOUNDATION LIFE INSURANCE COMPANY
("AMERICAN FOUNDATION"), a life insurance company organized and existing under
the laws of the State of Alabama, for itself or on behalf of Variable Annuity
Account A of American Foundation, a separate account established by AMERICAN
FOUNDATION in accordance with the laws of the State of Alabama, and INVESTMENT
DISTRIBUTORS, INC. ("IDI"), a broker-dealer organized and existing under the
laws of the State of Tennessee.
WITNESSETH:
WHEREAS, the Board of Directors of AMERICAN FOUNDATION has registered
interests in a variable annuity contract, ("Contracts") with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as
amended;
WHEREAS, IDI is a broker-dealer registered as such under the Securities
Exchange Act of 1934 and is a member of the National Association of Securities
Dealers, Inc. ("NASD");
WHEREAS, IDI has agreed to act as principal underwriter in connection with
offers and sales of the Contracts under the terms and conditions set forth in
this agreement.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and conditions set forth herein, AMERICAN FOUNDATION and IDI agree as
follows:
I.
IDI DUTIES
1. AMERICAN FOUNDATION hereby appoints IDI as its principal underwriter
of the Contracts. AMERICAN FOUNDATION reserves the right to appoint additional
underwriters.
2. IDI hereby accepts such appointment as principal underwriter. IDI
shall offer the Contracts only on the terms set forth in AMERICAN FOUNDATION'S
currently effective registration statements.
3. IDI as principal underwriter for the Contracts will use its best
efforts to effect offers and sales of the Contracts through broker-dealers that
are members of the National Association of Securities Dealers, Inc. and whose
registered representatives are duly licensed as insurance agents of AMERICAN
FOUNDATION. IDI is responsible for compliance with all applicable requirements
of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934,
as amended, the Investment Company Act of 1940, as
<PAGE>
amended, and the rules and regulations thereunder, and all other applicable
laws, rules and regulations relating to the sales and distribution of the
Contracts, the need for which arises out of its duties as principal underwriter
of said Contracts.
4. IDI agrees that it will not use any prospectus, sales literature, or
any other printed matter or material or offer for sale or sell the Contracts if
any of the foregoing in any way represent the duties, obligations, or
liabilities of AMERICAN FOUNDATION as being greater than, or different from,
such duties, obligations and liabilities as are set forth in this Agreement, and
in the Contracts, as it or they may be amended from time to time.
5. IDI agrees that it will only utilize the then currently effective
prospectus relating to the Contracts in connection with its selling efforts.
As to the other types of sales materials, IDI agrees that it will use
only sales materials which conforms to the requirements of federal and state
securities and insurance laws and regulations and which have been filed,
where necessary, with the appropriate regulatory authorities.
6. IDI agrees that it or its duly designated agent shall maintain records
as required by the Securities Exchange Act of 1934, as amended, the Securities
Act of 1933, as amended, and the Investment Company Act of 1940, as amended.
7. IDI's services pursuant to this Agreement shall not be deemed to be
exclusive, and it is understood by the parties hereto that IDI may also render
similar services and act as underwriter, distributor, or dealer for other
companies in the offering of their securities.
8. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of its obligations and duties under the terms of this
Agreement, IDI shall not be subject to liability to any contract owner or party
in interest under the Contracts for any acts or omissions to act in the course
of, or connected with, rendering services hereunder.
9. IDI shall remain fully responsible for its own conduct and that of its
agents, representatives and employees under applicable law.
10. IDI shall at all times, conform with the requirements of any federal
and state laws and regulations and the rules of the NASD, relating to the sales
of the Contracts.
II.
AMERICAN FOUNDATION'S DUTIES
1. AMERICAN FOUNDATION reserves the right at any time to suspend or limit
the offering of the Contracts upon thirty days written notice to IDI, except
where the notice period may be shortened because of legal action taken by any
regulatory agent.
2
<PAGE>
AMERICAN FOUNDATION agrees to advise IDI immediately:
(a) Of any request by the Securities and Exchange Commission for amendment
of its registration for additional information;
(b) Of the issuance by the Securities and Exchange Commission of any stop
order suspending the effectiveness of the registration statements relating to
the Contracts or of the initiation of any proceedings for that purpose;
(c) Of the happening of any material event, if known, which makes untrue
any statement in said registration statements or which requires change therein
in order to make any statement therein not misleading.
3. AMERICAN FOUNDATION will furnish to IDI such information with respect
to the Contracts in such form and signed by such of its officers and directors
as IDI may reasonably request and will warrant that the statements therein
contained when so signed will be true and correct. AMERICAN FOUNDATION will
also furnish, from time to time, such additional Information regarding AMERICAN
FOUNDATION'S financial condition as IDI may reasonably request.
III.
COMPENSATION
For providing the principal underwriting functions on behalf of AMERICAN
FOUNDATION, IDI shall be entitled to receive compensation as agreed upon from
time to time in writing by AMERICAN FOUNDATION and IDI.
IV.
RESIGNATION AND REMOVAL OF
PRINCIPAL UNDERWRITER
ID may resign as Principal Underwriter upon 120 days prior written notice
to AMERICAN FOUNDATION. However, such resignation shall not become effective
until a successor Principal Underwriter has been designated and has accepted its
duties. AMERICAN FOUNDATION may remove IDI as Principal Underwriter at any time
by written notice.
V.
MISCELLANEOUS
1. This Agreement may not be assigned by either of the parties hereto
without the written consent of the other party.
2. All notices and other communications provided for hereunder shall be
in writing and shall be delivered by hand or mailed first class, postage
prepaid, addressed as follows:
3
<PAGE>
(a) If to AMERICAN FOUNDATION -
American Foundation Life Insurance Company
P.O. Box 2606
Birmingham, Alabama 35202
Attention: Wayne Stuenkel
President
(b) If to IDI-
Investment Distributors, Inc.
2801 Highway 280 South
Birmingham, Alabama 35223
Attention: Steve M. Callaway
Counsel
or to such other address as IDI or AMERICAN FOUNDATION shall designate by
written notice to the other.
3. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which shall be deemed one
instrument, and an executed copy of this Agreement and all amendments hereto
shall be kept on file by AMERICAN FOUNDATION and shall be open to inspection at
any time during the business hours of AMERICAN FOUNDATION.
4. This Agreement shall inure to the benefit of and be binding upon the
successor of the parties hereto.
5. This Agreement shall be construed and governed by and according to the
laws of the State of Alabama.
6. This Agreement may be amended from time to time by the mutual
agreement and consent of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed this ______day of April, 1998.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
By:
--------------------------------------------
Title:
--------------------------------------------
INVESTMENT DISTRIBUTORS, INC.
By:
--------------------------------------------
Title:
--------------------------------------------
4
<PAGE>
DISTRIBUTION AGREEMENT
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
REGISTERED ANNUITY CONTRACTS
THIS DISTRIBUTION AGREEMENT ("Agreement") is hereby entered into on this
_____ day of ____________, 19__, between INVESTMENT DISTRIBUTORS, INC. ("IDI"),
a Broker-Dealer organized and existing under the laws of the State of Tennessee
and ___________________ ("Broker-Dealer"), organized and existing under the laws
of the State of ___________________.
WITNESSETH:
WHEREAS, IDI is registered as a broker-dealer under the Securities Exchange
Act of 1934, as amended, and is a member of the National Association of
Securities Dealers, Inc. ("NASD").
WHEREAS, AMERICAN FOUNDATION LIFE INSURANCE COMPANY ("AMERICAN FOUNDATION")
has appointed IDI as the principal underwriter of certain annuity ("Contracts")
set forth on Schedule 1 to this Agreement to be issued by AMERICAN FOUNDATION.
WHEREAS, the parties hereto desire that Broker-Dealer and its registered
representatives who are duly licensed and qualified under applicable securities
and insurance laws, rules and regulations be authorized to offer and sell the
Contracts to the general public subject to the terms and conditions contained in
this Agreement.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants, conditions and terms set forth in this Agreement, the parties hereby
agree as follows:
ARTICLE I
APPOINTMENT
1. IDI, as principal underwriter, hereby appoints Broker-Dealer to
distribute the contracts.
2. Broker-Dealer is an independent contractor and nothing in this or any
other agreement between the parties shall be construed to create the
relationship of employee and employer between Broker-Dealer, IDI and AMERICAN
FOUNDATION. As an independent contractor it is contemplated that Broker-Dealer
may represent other insurance companies.
ARTICLE II
LICENSING
1. Broker-Dealer will at all times be duly registered as a Broker-Dealer
under the Securities Exchange Act of 1934 and in each state or other
jurisdiction in which Broker-Dealer acts hereunder in connection with sales of
the Contracts or the supervision of registered representatives who perform such
activities on behalf of Broker-Dealer.
2. Broker-Dealer will be solely responsible for ensuring that none of its
registered representatives shall offer or sell the Contracts until such
individuals are associated, licensed, and duly registered with the NASD and any
applicable state securities and insurance authorities.
3. Broker-Dealer will assist IDI and AMERICAN FOUNDATION in the
appointment of registered representatives under the applicable insurance laws to
sell the Contracts. IDI and AMERICAN FOUNDATION in its or
1
<PAGE>
their sole discretion, may refuse to appoint and may terminate the appointment
of any registered representative.
ARTICLE III
COMPLIANCE
1. Broker-Dealer shall fully comply with the requirements of the NASD,
the Securities Exchange Act of 1934, the Securities Act of 1933, and the
Investment Company Act of 1940 and all other applicable federal or state laws
governing the activities of Broker-Dealer regarding the Contracts.
2. Broker-Dealer will establish such rules and procedures as required to
ensure diligent supervision of the securities activities of registered
representatives in regards to the Contracts.
3. In the event a registered representative of Broker-Dealer fails to
observe the standards and rules imposed by Broker-Dealer and IDI regarding the
sales of the Contracts. Broker-Dealer shall notify IDI immediately that such
registered representative is no longer authorized to sell the Contracts.
Broker-Dealer shall take whatever action is necessary to terminate the sales
activities of registered representtative regarding the Contracts.
4. Broker-Dealer shall have sole responsibility for the training and
supervision of all registered representatives associated with Broker-Dealer who
are engaged directly or indirectly in the offer or sale of the Contracts.
Broker-Dealer shall supervise all registered representatives' compliance with
applicable federal and state securities laws, applicable state insurance laws
and regulations, and NASD requirements in connection with such solicitation
activities. All such registered representatives shall be subject to the control
of Broker-Dealer with respect to such registered representatives'
securities-regulated activities in connection with the Contracts.
5. Broker-Dealer will cause its registered representatives to be trained
in the sale of the Contracts and will cause such representatives to limit
solicitation of applications for the Contracts to jurisdictions where IDI has
authorized such solicitation.
ARTICLE IV
APPLICATIONS: ANNUITY DEPOSITS
1. All applications for the Contracts shall be made on such forms as
authorized by IDI or AMERICAN FOUNDATION.
2. Broker-Dealer shall be responsible for reviewing each application for
completeness and suitability. All applications are subject to rejection or
acceptance by AMERICAN FOUNDATION, in its sole discretion.
3. All checks and/or payments for Annuity Deposits for the Contracts
shall be made payable to AMERICAN FOUNDATION LIFE INSURANCE COMPANY.
4. Broker-Dealer agrees that it and its registered representatives:
i) shall not solicit applications for the Contracts without
delivering to the applicant solicited a current prospectus;
ii) shall recommend the purchase of a Contract only if
reasonable grounds exist that the Contract is suitable for
the applicant in accordance with applicable federal and
state laws, regulations and the rules of the NASD. While
not limited to the following; a determination of suitability
2
<PAGE>
shall be based on a reasonable inquiry concerning the
applicant's insurance and investment objectives and
financial situation and needs and shall entail a review by
Broker-Dealer of all applications for suitability and
completeness and correctness as to form;
iii) shall only accept Annuity Deposits for the Contracts in the
form of a check or money order made payable to "American
Foundation Life Insurance Company" and signed by the
applicant;
iv) shall have no authority to endorse checks or money orders
made payable to AMERICAN FOUNDATION LIFE INSURANCE COMPANY;
v) shall have no authority to alter, modify, waive or change
any of the terms, rates, charges or conditions of the
Contracts; and
vi) shall deliver Contracts only in accordance with AMERICAN
FOUNDATION'S instructions.
ARTICLE V
SALES MATERIALS
IDI shall provide Broker-Dealer, without any expense to Broker-Dealer,
prospectuses and consumer brochures for use with the Contracts. No sales or
promotional materials, advertisements, circulars or documents regarding the
Contracts can be utilized by Broker-Dealer and/or registered representatives
unless approved in writing by IDI and/or AMERICAN FOUNDATION.
ARTICLE VI
COMPENSATION
1. During the term of this Agreement, IDI agrees to pay compensation to
Broker-Dealer as set forth in Schedule 2 to this Agreement. Schedule 2 may be
amended or modified at any time, effective upon written notice to Broker-Dealer.
2. Broker-Dealer shall be solely responsible for the payment of any
commission or consideration of any kind to its registered representatives with
respect to sales of the Contracts.
ARTICLE VII
TERMINATION
1. This Agreement may be determined by IDI or by Broker-Dealer, without
cause, upon thirty days written notice by either party to the other party to the
last known address of such other party.
2. This Agreement may be terminated "for cause" by IDI immediately upon
written notice. IDI's determination of what constitutes termination "for cause"
shall be conclusive between the parties hereto.
3. Termination of this Agreement shall automatically terminate any
supplements, addenda or amendments made a part of this Agreement.
4. Upon termination of this Agreement, Broker-Dealer agrees to return to
IDI all equipment and supplies regarding the Contracts in Broker-Dealers
possession which are the property of IDI.
3
<PAGE>
ARTICLE VIII
GENERAL PROVISIONS
1. NOTICES. All notices or communications shall be sent to the parties
at the addresses indicated herein. Any changes to these addresses must be made
in writing and sent to the other party in accordance with this paragraph.
2. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of Alabama.
3. BINDING EFFECT. This Agreement shall be binding on and shall inure to
the benefit of the parties to it and their respective successors and assigns.
4. CONFIDENTIALITY. Each party to this Agreement shall maintain the
confidentiality of any proprietary information that it may acquire in the
performance of this Agreement and shall not use such proprietary information
without the prior written consent of the other party and AMERICAN FOUNDATION.
5. COMPLAINTS AND INVESTIGATIONS
(i) Broker-Dealer and its registered representatives each shall
cooperate fully in any securities or insurance regulatory
investigation or proceeding or judicial proceeding arising
in connection with the Contracts marketed under this
Agreement. Broker-Dealer will be notified promptly of any
customer complaint or notice of any regulatory investigation
or proceeding or judicial proceeding received by IDI or
AMERICAN FOUNDATION with respect to Broker-Dealer, or any of
its individual registered representatives; and
Broker-Dealer, will promptly notify IDI and AMERICAN
FOUNDATION of any written customer complaint or notice of
any regulatory investigation or proceeding or judicial
proceeding received by Broker-Dealer or any of its
individual registered representatives with respect to
themselves in connection with this Agreement or any
Contract.
(ii) In the case of a customer complaint, IDI, AMERICAN
FOUNDATION and Broker-Dealer will cooperate in investigating
such complaint and any response by Broker-Dealer or any of
its registered representatives to such complaint will be
sent to IDI and AMERICAN FOUNDATION for approval not less
than five business days prior to its being sent to the
customer or regulatory authority, except that if a more
prompt response is required, the proposed response shall be
communicated by telephone or facsimile.
6. MODIFICATION OF AGREEMENT. This Agreement supersedes all prior
agreements, either oral or written, between the parties relating to the
Contracts. Except as provided in Article VI, this Agreement may be modified
only by written agreement signed by all of the parties.
7. INDEMNIFICATION BY BROKER-DEALER. Broker-Dealer agrees to indemnify
and hold IDI and AMERICAN FOUNDATION harmless from any and all losses, claims,
damages or liabilities, joint or several (including but not limited to any
investigative, legal and other expenses reasonably incurred in connection with,
and any amounts paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they or any of them may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon:
(i) violation(s) by Broker-Dealer, its registered
representatives, of federal or state securities law or
regulation(s), insurance law or regulation(s), or any rule
or requirement of the NASD in regards to the Contracts;
4
<PAGE>
(ii) any unauthorized use of promotional, sales or advertising
material, any oral or written misrepresentations, or any
unlawful sales practices concerning the Contracts by
Broker-Dealer or its registered representatives;
(iii) claims by registered representatives of Broker-Dealer for
commissions or other compensation or renumeration of any
type;
(iv) any failure on the part of Broker-Dealer, or its registered
representatives, to submit Annuity Deposits or applications
to AMERICAN FOUNDATION or to submit the correct amount of an
Annuity Deposit, on a timely basis and in accordance with
this Agreement and AMERICAN FOUNDATION'S written procedures,
subject to applicable law;
(v) any failure on the part of Broker-Dealer, or its registered
representatives, to deliver Contracts to purchasers thereof
on a timely basis and in accordance with AMERICAN
FOUNDATION'S procedures;
(vi) any breach by Broker-Dealer or its registered
representatives of any provision of this Agreement;
or
(vii) Broker-Dealer and/or its registered representatives,
unauthorized acts or transactions.
This indemnification will be in addition to any liability that
Broker-Dealer and its registered representatives may otherwise have.
8. ARBITRATION. All disputes, controversies or differences that arise under
or are related to this Agreement shall be determined by arbitration in
accordance with the Code of Arbitration Procedure of the National Association of
Securities Dealers. The cost of arbitration, including the fees of the
arbitrators and attorneys' fees, shall be borne by the losing party unless the
arbitrators decide otherwise.
INVESTMENT DISTRIBUTORS, INC.
By:
--------------------------------
Title:
-----------------------------
Date:
------------------------------
BROKER-DEALER
By:
--------------------------------
5
<PAGE>
SCHEDULE 1
Variable Deferred Annuity Contracts issued by American Foundation Life Insurance
Company
Modified Guaranteed Annuity Contracts issued by American Foundation Life
Insurance Company
6
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY (800) 456-6330
2801 Highway 280 South (A Stock Insurance Company)
Birmingham, Alabama 35223
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED FIXED AND VARIABLE ANNUITY CONTRACT
(NON-PARTICIPATING)
American Foundation Life Insurance Company agrees to provide the benefits
described in this Contract.
THIS IS A VARIABLE ANNUITY CONTRACT
THE VALUE OF THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF THE
SEPARATE ACCOUNT, IS VARIABLE. IT WILL INCREASE AND DECREASE AS A RESULT OF
FLUCTUATIONS IN THE NET INVESTMENT FACTOR. NO MINIMUM VALUE IS GUARANTEED FOR
AMOUNTS ALLOCATED TO THE SEPARATE ACCOUNT.
YOU HAVE THE RIGHT TO RETURN THIS CONTRACT
You may cancel this Contract within thirty days after you receive it by
returning the Contract to our Administrative Office, or to the Agent who sold
the Contract, with a written request for cancellation. Return of this Contract
by mail is effective on being post-marked, properly addressed and postage
pre-paid. We will promptly return the Contract Value plus any charges deducted
from either Purchase Payments or the Contract Value. This amount may be more or
less than the Purchase Payments.
/s/ Wayne E. Stuenkel /s/ Deborah J. Long
Wayne E. Stuenkel Deborah J. Long
President Secretary
THIS IS A LEGAL CONTRACT
READ IT CAREFULLY
AF-2014 12/97
<PAGE>
CONTRACT SPECIFICATIONS
FLEXIBLE PREMIUM DEFERRED FIXED AND VARIABLE ANNUITY CONTRACT
CONTRACT NUMBER EFFECTIVE DATE
OWNER ISSUE AGE OF OWNER
JOINT OWNER ISSUE AGE OF JOINT OWNER
ANNUITANT ISSUE AGE OF ANNUITANT
BENEFICIARY ANNUITY COMMENCEMENT DATE
As contained in our records
INITIAL PURCHASE PAYMENT:
TYPE OF PLAN: [ ] QUALIFIED [X] NON-QUALIFIED
ANNUAL CONTRACT MAINTENANCE FEE: $30
MORTALITY AND EXPENSE RISK CHARGE: 1.25% per annum of the average daily Variable
Account Value in the Variable Account.
ADMINISTRATION CHARGE: 0.15% per annum of the average daily Variable Account
Value in the Variable Account.
TRANSFER FEE: $25 per transfer in excess of 12 in any Contract Year.
SURRENDER CHARGE: Full or partial surrenders may be subject to a Surrender
Charge. We will not apply the Surrender Charge to: (1) Purchase Payments that
are no longer subject to the surrender charge; (2) accumulated earnings credited
to an Allocation Option; or (3) payment of the Death Benefit.
You may withdraw the accumulated earnings without incurring a Surrender Charge.
Surrenders in excess of the accumulated earnings may be subject to the Surrender
Charge. When applicable, the Surrender Charge will be determined according the
table below:
Page -2-
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF FULL YEARS ELAPSED BETWEEN SURRENDER CHARGE AS A PERCENTAGE OF
THE DATE OF RECEIPT OF THE PURCHASE PURCHASE PAYMENT WITHDRAWN
PAYMENT AND THE DATE OF SURRENDER IN A FULL YEAR
<S> <C>
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6+ 0%
</TABLE>
ALLOCATION OPTIONS AVAILABLE ON THE EFFECTIVE DATE:
GOLDMAN SACHS/PIC
Growth and Income
International Equity
Global Income
CORE U.S. Equity
Small Cap Value
Money Market
Capital Growth
CALVERT
Small Cap Growth
Balanced
MFS
Emerging Growth
Research
Growth with Income
Total Return
OPPENHEIMERFUNDS
Aggressive Growth
Growth
Growth & Income
Strategic Bond
AMERICAN FOUNDATION LIFE GUARANTEED ACCOUNTS
Fixed Account
DCA Fixed Account
Page -3-
<PAGE>
INDEX
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
GENERAL PROVISIONS
Entire Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Modification of the Contract . . . . . . . . . . . . . . . . . . . . . . . 8
Incontestability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Error in Age or Sex. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Receipt of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Protection of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Premium Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Non-Participating . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Minimum Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Application of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PARTIES TO THE CONTRACT
Owner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Annuitant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Payee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PURCHASE PAYMENT
Purchase Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Allocation of Purchase Payments. . . . . . . . . . . . . . . . . . . . . . 10
No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
GUARANTEED ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
VARIABLE ACCOUNT
General Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Sub-Accounts of the Variable Account . . . . . . . . . . . . . . . . . . . 11
Variable Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Net Investment Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Page -4-
<PAGE>
FEES AND CHARGES
Mortality and Expense Risk Charge. . . . . . . . . . . . . . . . . . . . . 13
Administration Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Contract Maintenance Fee . . . . . . . . . . . . . . . . . . . . . . . . . 13
TRANSFERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SURRENDERS
Surrenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Suspension or Delay in Payment of Surrender. . . . . . . . . . . . . . . . 15
DEATH OF OWNER OR ANNUITANT
Death of an Owner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Death of the Annuitant . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Death Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Suspension of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ANNUITY OPTIONS
Annuity Commencement Date. . . . . . . . . . . . . . . . . . . . . . . . . 16
Annuity Income Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Annuity Option 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Annuity Option 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Minimum Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Annuity Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Page -5-
<PAGE>
DEFINITIONS
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
of the Variable Account into which amounts may be allocated 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 Owners 80th
birthday; or, (2) the date of the deceased Owner's death.
ANNUITY COMMENCEMENT DATE - The date on which Annuity Income Payments are
determined. 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 PURCHASE VALUE: At any time on or before the Annuity Commencement Date,
the greater of: (1) Surrender Value; or (2) 95% of Contract Value (less
applicable premium tax).
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: American Foundation Life Insurance Company, also referred to as "we",
"us" and "our".
CONTRACT ANNIVERSARY: The same month and day as the Effective Date in each
subsequent year of the Contract.
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 American Foundation Life'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 from other Allocation Options into this account.
AF-2014 Page -6- 12/97
<PAGE>
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.
EFFECTIVE DATE: The date as of which your initial Purchase Payment is credited
under to this Contract and the date this Contract takes effect. Contract Years
are measured from the Effective Date.
FIXED ACCOUNT: The Fixed Account is part of American Foundation Life'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 Allocation Option 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.
NON-QUALIFIED CONTRACTS: Contracts which are not Qualified Contracts.
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 408A of the
Code.
SUB-ACCOUNT: A separate division of the Variable Account. Each Sub-Account
invests in a corresponding Fund.
AF-2014 Page -7- 12/97
<PAGE>
SUB-ACCOUNT VALUE: The Sub-Account Value is the value of an Accumulation Unit of
the Sub-Account for which the value is being determined multiplied by the number
of Accumulation Units of that Sub-Account attributable to this 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.
GENERAL PROVISIONS
ENTIRE CONTRACT - This 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.
MODIFICATION OF THIS CONTRACT - 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, or
to assure continued qualification of the Contract as an annuity contract under
the Code. We will send you a copy of the endorsement which modifies the
contract and where required, we will obtain all necessary approvals, including
that of the Owner.
INCONTESTABILITY - We will not contest the provisions of this Contract.
ASSIGNMENT - You have the right to assign this 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.
NOTICE - All instructions and requests to change or assign this 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.
AF-2014 Page -8- 12/97
<PAGE>
ERROR IN AGE OR SEX - When a benefit of this 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. Where the use of
unisex mortality rates are required, we will not determine or adjust benefits
based upon gender.
If, after proof of age and sex (where applicable) is furnished it is determined
that the information in the Application was not correct, we will adjust any
benefit under this Contract to that which would be payable based upon the
correct information. 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%.
SETTLEMENT - Benefits due under this Contract are payable from our
Administrative Office. The Owner may apply the settlement proceeds to any
payout option we offer for such payments at the time the election is made.
Unless directed otherwise in writing, we will make payments according to the
Owner's instructions as contained in our records at the time the payment is
made. We shall be discharged from all liability to the extent of any partial
or full surrender, or Death Benefit paid, or payments made under any annuity
option.
RECEIPT OF PAYMENT: If any Owner, Annuitant, Beneficiary or Payee is incapable
of giving a valid receipt for any payment, we may make such payment to whomever
has legally assumed his or her care and principal support. Any such payment
shall fully discharge us to the extent of that payment.
PROTECTION OF PROCEEDS: To the extent permitted by law and except as provided by
an assignment, no benefits payable under this Contract will be subject to the
claims of creditors of any payee.
PREMIUM TAXES: Premium taxes will be deducted, if applicable. Premium taxes may
be deducted from the Purchase Payment(s) when received, upon full or partial
surrender, from the Death Benefit, or from the Account Value before Annuity
Income Payments begin.
NON-PARTICIPATING - This Contract does not share in our surplus or profits, or
pay dividends.
MINIMUM VALUES - The values available under the Contract are at least equal to
the minimum values required in the state where the Contract is delivered.
APPLICATION OF LAW - The provisions of the Contract are to be interpreted in
accordance with the laws of the state where the Contract is delivered and with
the Code and applicable regulations.
REPORTS: At least annually, we will send to you at the address contained in our
records a report showing the current Contract Value, Allocation Option values,
your current investment allocation and any other information required by law.
AF-2014 Page -9- 12/97
<PAGE>
PARTIES TO THE CONTRACT
OWNER: The person or persons to whom this Contract is issued, also referred to
as "you" or "your". Two persons may own this Contract together; they are called
Joint Owners. The Owner, or the Joint Owners together, are entitled to exercise
all rights and privileges provided by this Contract.
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 benefits 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 will be 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.
ANNUITANT: Payments under this Contract may depend upon the continued survival
of a living person called an Annuitant. The Annuitant may be changed by written
notice prior to the Annuity Commencement Date. However, if any Owner is not an
individual the Annuitant may not be changed. The Owner is the Annuitant unless
another Annuitant is named.
PAYEE: The person or persons designated by the Owner to receive the Annuity
Income Payments from this Contract. The Annuitant is the Payee unless otherwise
designated.
PURCHASE PAYMENTS
PURCHASE PAYMENTS: Purchase Payments are payable at our Administrative Office.
They may be made by check payable to American Foundation Life Insurance Company
or by any other method we deem acceptable. Your initial Purchase Payment is
shown on the Contract Specifications page.
Subsequent Purchase Payments will be accepted by the Company. The minimum
subsequent Purchase Payment we will accept is $250. The maximum aggregate
Purchase Payment(s) we will accept without prior Administrative Office approval
is $1,000,000.
ALLOCATION OF PURCHASE PAYMENTS: We will allocate your Purchase Payments to the
Allocation Options according to your instructions as contained in our records at
the time the Purchase Payment is received at our Administrative Office. Your
initial allocation instructions are contained in the Application but may be
AF-2014 Page -10- 12/97
<PAGE>
changed at any time by written notice. Allocations are to be made in whole
percentages and you may not allocate any one Purchase Payment to more than 10
Allocation Options.
NO DEFAULT: This Contract will not be in default if subsequent Purchase
Payments are not made.
GUARANTEED ACCOUNT
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 to
an account within the Guaranteed Account earn interest from the date the funds
are credited to the account. 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 allocated to that account.
We, in our sole discretion, establish interest rates from time to time 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%. 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.
VARIABLE ACCOUNT
GENERAL DESCRIPTION: The variable benefits under the Contract are provided
through the Variable Annuity Account A of American Foundation, which is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. The portion of the assets of
Variable Annuity Account A equal to the reserves and other contract liabilities
with respect to the Variable Account are not chargeable with the liabilities
arising out of any other business we may conduct. The income, gains and losses,
both realized and unrealized, from the assets of Variable Annuity Account A
shall be credited to or charged against the Variable Account without regard to
any other income, gains or losses of the Company. We have the right to transfer
to our general account any assets of Variable Annuity Account A which are in
excess of such reserves and other liabilities, subject to all necessary
regulatory approvals.
SUB-ACCOUNTS OF THE VARIABLE ACCOUNT: Variable Annuity Account A of American
Foundation is divided into a series of Sub-Accounts. The Sub-Accounts available
on the effective date of this Contract are listed on the Contract
Specifications page. Each Sub-Account invests exclusively in shares of a
corresponding Fund. The income, dividends, and gains, if any, distributed from
the shares of a Fund will be reinvested by purchasing additional shares of
that Fund at its net asset value.
When permitted by law and subject to all necessary regulatory approvals, we may:
AF-2014 Page -11- 12/97
<PAGE>
(1) create new variable accounts;
(2) combine variable accounts, including Variable Annuity Account A of
American Foundation;
(3) add new Sub-Accounts to or remove existing Sub-Accounts from the
Variable Annuity Account A or combine Sub-Accounts;
(4) make new Sub-Accounts or other Sub-Accounts available to such
classes of the Contracts as we may determine;
(5) add new Funds or remove existing Funds;
(6) if shares of a Fund are no longer available for investment or if we
determine that investment in a Fund is no longer appropriate in
light of the purposes of Variable Annuity Account A, substitute a
different Fund for any existing Fund;
(7) deregister Variable Annuity Account A under the Investment Company
Act of 1940 if such registration is no longer required;
(8) operate Variable Annuity Account A as a management investment
company under the Investment Company Act of 1940 or as any other
form permitted by law; and
(9) make any changes to Variable Annuity Account A or its operations as
may be required by the Investment Company Act of 1940 or other
applicable law or regulations.
The investment policy of Variable Annuity Account A will not be changed without
obtaining all necessary regulatory approvals.
The values and benefits of this Contract provided by the Variable Account depend
on the investment performance of the Funds in which the Sub-Accounts invests.
We do not guarantee the investment performance of the Funds. You bear the full
investment risk for amounts allocated or transferred to the Sub-Accounts.
VARIABLE ACCOUNT VALUE: Purchase Payments may be allocated among, and amounts
may be transferred to the various Sub-Accounts within the Variable Account.
This is done by converting the amount of the Purchase Payment or transfer into
Accumulation Units. The number of Accumulation Units is determined by dividing
the dollar amount directed to each Sub-Account by the value of the Accumulation
Unit for that Sub-Account on the Valuation Day on which the transaction occurs.
Transfers from a Sub-Account will result in the cancellation of the appropriate
number of Accumulation Units of that Sub-Account. The following events will
also result in the cancellation of an appropriate number of Accumulation Units
of a Sub-Account:
(1) a full or partial surrender;
(2) payment of the Death Benefit;
(3) the Annuity Commencement Date; and
(4) the deduction of the Annual Contract Maintenance Fee.
Accumulation Units will be canceled as of the end of the Valuation Period during
which the transaction occurs.
AF-2014 Page -12- 12/97
<PAGE>
NET INVESTMENT FACTOR: The Accumulation Unit value for each Sub-Account on any
Valuation Day is determined by multiplying the Accumulation Unit value on the
prior Valuation Day by the Net Investment Factor for the Valuation Period. The
Net Investment Factor is used to measure the investment performance of a
Sub-Account from one Valuation Period to the next. A Net Investment Factor is
determined for each Sub-Account for each Valuation Period. The Net Investment
Factor may be greater or less than one, so the value of an Accumulation Unit can
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),
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 Funds held in 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.
FEES AND CHARGES
MORTALITY AND EXPENSE RISK CHARGE: We will deduct a Mortality and Expense Risk
Charge to compensate the Company for assuming the mortality and expense risks
under this Contract. The Mortality and Expense Risk Charge is deducted only
from the Variable Account Value and is shown on the Contract Specifications
page.
ADMINISTRATION CHARGE: We will deduct an Administration Charge to reimburse the
Company for expenses incurred in the administration of the Contract and the
Variable Account. The Administration Charge is deducted only from the Variable
Account Value and is shown on the Contract Specifications page.
CONTRACT MAINTENANCE FEE: The Contract Maintenance Fee is shown on the Contract
Specifications page. It is deducted prior to the Annuity Commencement Date on
each Contract Anniversary, and on any day that the Contract is surrendered, if
the surrender occurs on any day other than the Contract Anniversary. The
Contract Maintenance Fee will be deducted from the Allocation Options in the
same proportion as their values are to the Contract Value. The Contract
Maintenance Fee will be waived by the Company in the event the Contract Value or
the aggregate Purchase Payments reduced by surrenders, withdrawals and
associated surrender charges equals or exceeds $50,000 on the date the Contract
Maintenance Fee is to be deducted.
AF-2014 Page -13- 12/97
<PAGE>
TRANSFERS
Prior to the Annuity Commencement Date, you may, in a form acceptable to us,
instruct us to transfer amounts 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 amount remaining in any of the
Allocation Options from which the transfer is made is less than $100 we reserve
the right to transfer the entire amount instead of the requested amount. We
also 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 may
charge a Transfer Fee which is indicated on the Contract Specifications page.
The Transfer Fee, if any, will be deducted from the amount being transferred.
Transfers involving a Guaranteed Account are subject to additional restrictions.
The maximum amount which may be transferred from the Fixed Account in any
Contract Year is the greater of (a) $2,500; or (b) 25% of the Fixed Account
Value. Transfers into the DCA Fixed Account are not permitted. The DCA Fixed
Account is available only for dollar cost averaging, which is a systematic
transfer of funds. Any Purchase Payment allocated to the DCA Fixed Account
must include instructions regarding the amount and frequency of the dollar cost
averaging transfers, and the Allocation Option(s) into which the transfers are
to be made. If, for any reason, transfers from the DCA Fixed Account are
terminated, we will transfer any amount remaining in the DCA Fixed Account into
the Fixed Account unless you have otherwise instructed us how to allocate the
remaining amount.
SURRENDERS
SURRENDERS: Full or partial surrenders may be made any time prior to the Annuity
Commencement Date. The Surrender Value is the Contract Value less any surrender
charge, Contract Maintenance Fee, and applicable premium taxes. The surrender
charge is a percentage of Purchase Payments; the surrender charge percentage is
shown on the Contract Specifications page. The surrender charge will not apply
to: (1) Purchase Payments that are no longer subject to the surrender charge;
(2) accumulated earnings credited to an Allocation Option; or (3) payment of the
Death Benefit.
The surrender charge applies to and is calculated separately for each Purchase
Payment. The Company assumes that Purchase Payments are withdrawn on a
"first-in first-out" (FIFO) basis, and that any earnings, (including earnings
attributable to previous Contract Years) are withdrawn before any Purchase
Payments. Surrenders will result in the cancellation of Accumulation Units from
a Sub-Account or a reduction of the Guaranteed Account value, as appropriate.
Surrenders will be made on a pro-rata basis from your Allocation Options unless
you specify, in writing, the amount(s) and Allocation Option(s) from which the
surrender is to be taken.
SUSPENSION OR DELAY IN PAYMENT OF SURRENDER: The Company has the right to
suspend or delay the date of payment of a partial or full surrender from the
Variable Account Value for any period:
AF-2014 Page -14- 12/97
<PAGE>
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 Securities & Exchange
Commission) 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 Securities & Exchange Commission, by order, so permits for
the protection of security holders.
The Company further reserves the right to delay payment of a partial or full
surrender from any Guaranteed Account for up to six months in those states where
permitted.
DEATH OF OWNER OR ANNUITANT
DEATH OF AN OWNER: If any Owner dies before the Annuity Commencement Date and
while this Contract is in force, the guaranteed Death Benefit will be paid to
the Beneficiary.
DEATH OF THE ANNUITANT: If the Annuitant is not an Owner and dies prior to the
Annuity Commencement Date, the Owner first named on the Application will become
the new Annuitant unless the Owner designates otherwise. If any Owner is not an
individual, the death of the Annuitant will be treated as the death of an Owner.
The Contract shall be interpreted to comply with the requirements of Section
72(s) of the Internal Revenue Code. We reserve the right to endorse this
Contract, as necessary, to conform with the requirements of the Code. We will
send you a copy of the endorsement containing the contract modifications.
DEATH BENEFIT: The Death Benefit will be determined as of the end of the
Valuation Period during which due proof of death is received by us and will
depend upon the age of the deceased Owner on the date of death. If the Owner's
death occurs on, or before the deceased Owner's 90th birthday, the Death Benefit
will equal the greater of: (1) the Contract Value; or (2) aggregate Purchase
Payments made under the Contract reduced by any partial surrenders, withdrawals
and any associated surrender charges; or (3) the Maximum Anniversary Value. If
the Owner's death occurs after the deceased Owner's 90th birthday, the Death
Benefit will be equal to 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 and the Contract will
terminate. If the Death Benefit is not taken immediately as a lump sum, then the
entire interest in the Contract must be distributed under one of the following
options:
AF-2014 Page -15- 12/97
<PAGE>
(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 distribution 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, 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 and must then be
distributed to the new Beneficiary in one sum immediately or according to either
paragraph (1) or (2), above.
If there is more than one Beneficiary, the foregoing provisions apply to each
Beneficiary individually.
If any Owner dies on or after the Annuity Commencement Date, the Beneficiary
will become the new Owner and remaining payments must be distributed at least as
rapidly as under the income option in effect at the time of the Owner's death.
SUSPENSION OF PAYMENT: Payment of a Death Benefit prior to the Annuity
Commencement Date may be suspended or delayed under the circumstances described
in the provision "Suspension or Delay in Payment of Surrender".
ANNUITY OPTIONS
ANNUITY COMMENCEMENT DATE: The Annuity Commencement Date may not be later than
the Annuitant's 90th birthday, unless allowed by the state in which this
Contract is delivered and approved by the Company. The Owner may change the
Annuity Commencement Date by written notice. The proposed Annuity Commencement
Date must be at least 30 days beyond the date the written request is received
by the Company.
ANNUITY INCOME PAYMENT: If the Annuitant is alive on the Annuity Commencement
Date and unless directed otherwise, the Company will apply the Annuity Purchase
Value to the annuity option elected. You may elect to have all or part of the
Annuity Purchase Value applied on the Annuity Commencement Date under one of the
annuity options described below. In the absence of an election, the Annuity
Purchase Value will be applied on the Annuity Commencement Date under Annuity
Option 2 - Life Income with Payments for a 10-Year Certain Period. Selection of
an annuity option must be in writing and received by the Company at least 30
days prior to the Annuity Commencement Date. Annuity options must comply with
current Federal and state statutes and Internal Revenue Service Regulations.
This Contract may not be surrendered after the Annuity Commencement Date.
ANNUITY OPTION 1 - PAYMENT FOR A CERTAIN PERIOD: Payments will be made for any
period of not less than 5 nor more than 30 years. The amount of each payment
depends on the total amount applied, the period selected and the monthly payment
rates we are using on the Annuity Commencement Date.
AF-2014 Page -16- 12/97
<PAGE>
ANNUITY OPTION 2 - LIFE INCOME WITH PAYMENTS FOR A CERTAIN PERIOD: Payments are
based on the life of the named Annuitant. Payments will continue for the
lifetime of that person with payments guaranteed for a period of not more than
30 years. Payments stop at the end of the selected certain period or when the
named person dies, whichever is later.
MINIMUM AMOUNTS: We reserve the right to pay the total amount of this Contract
in one lump sum, if less than $2,000. If monthly payments are less than $20, we
may make payments quarterly, semi-annually, or annually at our option.
ANNUITY TABLES
<TABLE>
<CAPTION>
OPTION 1 TABLE OPTION 2 TABLE
Payments for a Payments for Life, and Life Income with
Certain Period Payments for a Certain Period
LIFE WITH 10 YEARS
LIFE ONLY PERIOD CERTAIN
------------- ------------------
MONTHLY AGE OF
YEARS PAYMENT ANNUITANT MALE FEMALE MALE FEMALE
- ----- ------- --------- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
5 17.91 60 4.77 4.25 4.68 4.21
10 9.61 65 5.46 4.78 5.28 4.70
15 6.87 70 6.44 5.53 6.03 5.36
20 5.51 75 7.79 6.63 6.90 6.21
25 4.71 80 9.70 8.26 7.81 7.22
30 4.18 85 & 12.38 10.70 8.60 8.20
over
</TABLE>
These tables illustrate the minimum monthly payment rates for each $1,000
applied. The basis for these calculations is the 1983 Individual Annuitant
Mortality Table A projected 14 years with interest at 3% per annum. Minimum
monthly payment rates for ages and Certain Periods not shown will be calculated
on the same basis and may be obtained from us. To determine future minimum
monthly rates according to these tables, one year will be deducted from the
attained age of the Annuitant for every three completed years beyond the year
1997. Annuity benefits under this certificate will not be less than those
provided by the application of an equivalent amount to the purchase of a single
premium immediate annuity contract offered by American Foundation on the Annuity
Commencement Date to the same class of annuitants.
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED FIXED AND VARIABLE ANNUITY CONTRACT
NON-PARTICIPATING
AF-2014 Page -17- 12/97
<PAGE>
<TABLE>
<CAPTION>
<S><C>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
ANNUITY APPLICATION P.O. BOX 10648 BIRMINGHAM, ALABAMA 35202-0648
- ------------------------------------------------------------------------------------------------------------------------------------
1. OWNER NAME, STREET, CITY, STATE, ZIP CODE
/ / Male Birthdate (MO./DAY/YR.) / /
/ / Female Tax ID/Social Security No.
------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
2. JOINT OWNER (IF ANY) NAME, STREET, CITY, STATE,
ZIP CODE
/ / Male Birthdate (MO./DAY/YR.) / /
/ / Female Tax ID/Social Security No.
------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
3. ANNUITANT (IF OTHER THAN OWNER) NAME, STREET,
CITY, STATE, ZIP CODE
/ / Male Birthdate (MO./DAY/YR.) / /
/ / Female Tax ID/Social Security No.
------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
4. PRIMARY BENEFICIARY NAME, ADDRESS, RELATIONSHIP, 7. PLAN TYPE - CHECK ALL THAT APPLY
SS# & PERCENTAGE / / Non-Qualified / / 1035 Exchange
/ / IRA Transfer / / IRA Rollover
/ / IRA / / IRA Direct Rollover
/ / _____________ / / TSA Direct Rollover
(OTHER)
CONTINGENT BENEFICIARY (IF ANY) If IRA deposit includes deductible contributions, please
complete:
$ Amount Previous Tax Year
------------ ------------
$ Amount Current Tax Year
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
5. TOTAL PURCHASE PAYMENT: $ ____________ 8. DOLLAR COST AVERAGING
6. PURCHASE PAYMENT ALLOCATION: Select the allocation for Transfer the amount indicated below (MINIMUM $100)
your purchase payments. You may change your allocation for / / Monthly / / Quarterly ______ Months (MINIMUM 12 MONTHS)
future purchase payments. (MAXIMUM OF 10 FUND SELECTIONS,
PLEASE.) Day of Month________________ (1ST - 28TH , PLEASE)
TOTAL ALLOCATION MUST EQUAL 100%
GOLDMAN SACHS/PIC MFS FROM SOURCE FUND: __________________ AMT $_______
___% Growth & Income ___% Emerging Growth To Destination Fund Amt To Destination Fund Amt
___% International Equity ___% Research ------------------- --- ------------------- ---
___% Global Income ___% Growth with Income
___% CORE U.S. Equity ___% Total Return $ $
___% Small Cap Value ------------------- ------- ------------------- ------
___% Money Market OPPENHEIMER $ $
___% Capital Growth ___% Aggressive Growth ------------------- ------- ------------------- ------
___% Growth $ $
CALVERT ___% Growth & Income ------------------- ------- ------------------- ------
___% Small Cap Growth ___% Strategic Bond $ $
___% Balanced ------------------- ------- ------------------- ------
$ $
MODEL PORTFOLIOS ------------------- ------- ------------------- ------
___% Growth Portfolio (COUNTS AS 6 FUND SELECTIONS)
___% Balanced Portfolio (COUNTS AS 6 FUND SELECTIONS) -------------------------------------------------------------------
___% Capital Appreciation Portfolio (COUNTS AS 4 FUND 9. OTHER ANNUITIES: Have you purchased other American Foundation
SELECTIONS) Life Insurance Company Annuities this calendar year?
/ / Yes / / No
AMERICAN FOUNDATION LIFE GUARANTEED ACCOUNTS
___% Fixed Account Rate Lock: / / Yes / / No -------------------------------------------------------------------
___% DCA Fixed Account Rate Lock: / / Yes / / No 10. REPLACEMENT: Will this annuity change or replace any
(FOR DOLLAR COST AVERAGING ONLY) existing life insurance or annuity?
/ / Yes / / No
If yes, indicate company name and policy number in
Special Remarks section on reverse side.
- ------------------------------------------------------------------------------------------------------------------------------------
AF-2013 7/97
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
- ------------------------------------------------------------------------------------------------------------------------------------
12. SYSTEMATIC WITHDRAWAL
Please withdraw the amounts indicated below to commence on: ___________________ (A MINIMUM PURCHASE PAYMENT OF $12,000 IS REQUIRED
TO START THE PROGRAM.) (MO./YR.)
$ from the Fund $ from the Fund
---------- -------------------- ---------- --------------------
$ from the Fund $ from the Fund
---------- -------------------- ---------- --------------------
/ / Monthly / / Withhold
/ / Quarterly / / Do not withhold Federal Income taxes
(MINIMUM $100) AMERICAN FOUNDATION LIFE IS REQUIRED TO WITHHOLD FEDERAL INCOME TAXES UNLESS YOU ELECT OTHERWISE.
/ / I wish to utilize DIRECT DEPOSIT (PLEASE ATTACH A VOIDED CHECK WITH COMPLETE BANK NAME AND ADDRESS)
/ / Make check payable to: (IF DIFFERENT FROM OWNER)
------------------------------------
/ / Mail check to: (IF DIFFERENT FROM OWNER'S ADDRESS) STREET CITY STATE ZIP
----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
13. AUTOMATIC PURCHASE
/ / I authorize the Company to collect the amount indicated by initiating automatic deductions from my account.
(PLEASE ATTACH A VOIDED CHECK OR SAVINGS WITHDRAWAL TICKET.)
Billing Mode: / / Monthly / / Quarterly / / Semi-Annual / / Annual
Please make Purchase Payments to my contract in the amount of $_______________ (MINIMUM $100)
to commence during the month of .
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
14. PROSPECTUS SPECIAL REMARKS:
/ / I have received a current prospectus.
/ / I have not received a current prospectus.
- ------------------------------------------------------------------------------------------------------------------------------------
AUTHORIZATION AND ACKNOWLEDGMENT: I (We) declare to the best of my (our) knowledge and belief that all of the answers herein
are complete and true. I (We) agree that this Application shall be part of my (our) Contract issued by the Company. Applicants
utilizing the Systematic Withdrawal or Automatic Purchase Option agree that if any debit/transfer is erroneously received by the
bank indicated on their voided check, or is not honored upon presentation, any accumulation units purchased may be cancelled, and
I (We) agree to hold the Company harmless from any loss due to such debit/transfer. I (WE) UNDERSTAND THAT ANNUITY PAYMENTS,
WHEN BASED UPON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT ARE VARIABLE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.
Signed At: Date:
----------------------------------------------------- -------------------------------------------------------------
Signature of Signature of
Owner: Joint Owner:
--------------------------------------------------------- ------------------------------------------------------
Signature of
Annuitant: (IF OTHER THAN OWNER) Witness:
------------------------------- ----------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
AGENT REPORT: I certify to the best of my knowledge and belief that the annuity being applied for:
/ / does / / does not replace or change any other annuity or insurance.
Agent's Signature: Print Agent's Name:
--------------------------------------------- -----------------------------------------------
Broker/Dealer Name: Agent Number:
-------------------------------------------- -----------------------------------------------------
Branch: Phone No.
-------------------------------------------------------- ---------------------------------------------------------
Client Account No:
---------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
AF-2013 7/97
</TABLE>
<PAGE>
PARTICIPATION/DISTRIBUTION AGREEMENT
THIS AGREEMENT, is hereby entered into on this __ day of April,
1998, between American Foundation Life Insurance Company ("American
Foundation"), a life insurance company organized under the laws of the State
of Alabama, for itself and on behalf of Variable Annuity Account A of
American Foundation (the "Account"), a separate account established by
American Foundation in accordance with the laws of the State of Alabama;
Protective Investment Company (the "Company"), an open-end management
investment company organized under the laws of the State of Maryland and
Investment Distributors, Inc. ("IDI"), a broker-dealer.
WITNESSETH:
WHEREAS, the Account has been established by American Foundation
pursuant to the laws of the State of Alabama in connection with certain
variable annuity contracts ("Contracts") proposed to be issued to the public
by American Foundation; and
WHEREAS, the Account has been registered as a unit investment trust
under the investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, the income, if any, and gains and losses, realized and
unrealized, from assets allocated to the Account are, in accordance with the
applicable contracts, to be credited to or charged against Account without
regard to other income, gains or losses of American Foundation; and
WHEREAS, the Account is subdivided into various subaccounts
("sub-accounts") as to which income, if any, and gains and losses, realized
and unrealized, from assets allocated to each such sub-account are to be
credited to or charged against such sub-accounts without regard to other
income, gains or losses of other sub-accounts; and
WHEREAS, the Company is registered as an open-end management
investment company organized under the laws of the State of Maryland and will
operate in accordance with the 1940 Act; and
WHEREAS, the Company is divided into various investment portfolio's
(each, a "Fund"), each being subject to certain fundamental investment
policies and restrictions that may not be changed without a majority vote of
the shareholders of such Fund; and
WHEREAS, the shares of each Fund will be offered to a corresponding
sub-account; and
WHEREAS, IDI is the principal underwriter for the contracts and is
a broker-dealer registered as such under the Securities Exchange Act of 1934
and is a member of the National Association of Securities Dealers ("NASD");
<PAGE>
NOW THEREFORE, in consideration of the foregoing and of mutual
covenants and conditions set forth herein American Foundation, the Account,
IDI and the Company hereby agree as follows:
1. The Contracts funded through the account will provide for the
allocation of purchase payments among certain sub-accounts for investment in
such shares of the Funds as may be offered from time to time in the
prospectus for the Contracts. The selection of the particular sub-account is
to be made by the contract owner and such selection may be changed or the
cash value may be transferred among or between sub-accounts in accordance
with the terms of the Contracts.
2. No representation is made as to the number or amount of such
Contracts to be sold; however, American Foundation through IDI, will make
reasonable efforts to market such Contracts.
3. The Company hereby appoints IDI as its principal underwriter
and exclusive distributor to sell its shares to the Account. The Company
reserves the right to sell its shares to other persons and to appoint
additional underwriters and distributors.
4. IDI accepts such appointment. IDI shall offer shares of the
Company only on the terms set forth in the Company's currently effective
registration statement.
5. The Company agrees to sell to American Foundation those shares
of the Company which the Account orders, executing such orders on a daily
basis at the net asset value next computed after receipt by the Company or
its designated agent of the order for the shares of the Company. For
purposes of this Section, American Foundation (or its designated agents)
shall be the designated agent of the Company for receipt of such orders from
contract owners and receipt by such designated agent shall constitute receipt
by the Company; provided that the Company's transfer agent receives notice of
such order by 9:30 a.m. New York time on the next following business day.
"Business day" shall mean any day on which the New York Stock Exchange is
open for trading and on which the Company calculates the net asset value of
the Funds as described in its registration statement.
The Company agrees to make shares of each Fund available
indefinitely for purchase at the applicable net asset value per share by the
Account on those days on which the Company calculates its net asset value as
described in its registration statement and the Company shall use reasonable
efforts to calculate such net asset value on each business day as defined
above. Notwithstanding the foregoing, the Board of Directors of the Company
(hereinafter the "Board") may refuse to sell shares of any Fund to American
Foundation, or suspend or terminate the offering of shares of any Fund if
such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board acting in good faith
and in light of their fiduciary duties under federal and any applicable state
laws, necessary in the best interests of the Shareholders of such Fund or
contract owners indirectly invested in such Fund.
2
<PAGE>
American Foundation shall pay for the such shares by 9:30 a.m. New
York time on the next business day after an order to purchase shares is made
in accordance with the provisions of this Section 5. Payment shall be in
federal funds transmitted by wire to the Company's transfer agent or by a
credit for any shares redeemed.
6. The Company agrees to redeem for cash, on American
Foundation's request, any full or fractional shares of the Company held by
American Foundation, executing such requests on a daily basis at the net
asset value next computed after receipt by the Company or its designated
agents of the request for redemption by Contract owners. For purposes of
this Section, (or its designated agents) shall be the designated agent of the
Company for receipt of requests for redemption from Contract owners and
receipt by such designated agent shall constitute receipt by the Company;
provided that the Company receives notice of such request for redemption by
9:30 a.m. New York time on the next following business day.
The Company ordinarily shall make payment to American Foundation
for shares redeemed on the day the Company receives notices from American
Foundation, but the Company may delay payment for up to seven calendar days
after the request is received. Payment shall be in federal funds transmitted
by wire or by a credit for any shares purchased.
7. Transfer of shares will be by book entry. No stock
certificates will be issued to the account. Shares of each Fund will be
recorded in an appropriate title for the corresponding sub-account on the
books of American Foundation. If, however, state law requires transfer other
than by book entry, then the Company agrees to provide the required form of
transfer.
8. The Company shall make the net asset value per share for each
Fund available to American Foundation on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated and shall use
its best efforts to make such net asset value per share available to American
Foundation by 7 p.m. New York time.
9. The Company or its transfer agent shall furnish notice on the
ex-dividend date to American Foundation of any dividend or distribution
payable on any shares. All of such dividends and distributions as are
payable on shares of a Fund shall be automatically reinvested in additional
shares of that Fund. The Company shall notify American Foundation of the
number of shares so issued.
10. The Company shall pay all its expenses incidental to its
performance under this Agreement. The Company shall see to it that all of
its shares are registered and authorized for issue in accordance with
applicable federal and state laws prior to their purchase by American
Foundation for the Account. The Company shall bear the expenses for the cost
of registration of its shares, preparation of its prospectus, proxy materials
and reports, the printing and distribution of such items to each Contract
owner who has allocated net amounts to any sub-account, the preparation of all
statements and notices required by any federal or state law, and taxes
imposed upon the Company on the issue or transfer of the Company's shares
subject to this Agreement. The parties shall cooperate in the printing of
the prospectuses of the Contracts and the Company. The Company shall provide
3
<PAGE>
American Foundation with a reasonable quantity of Company prospectuses and
reports to be sent to existing Contract owners.
11. The Company does not charge a load or redemption fee in
connection with the sale or redemption of its shares and IDI will not charge
any load or redemption fee in connection with the sale of shares to or
redemption of shares from the Account. Notwithstanding this, IDI assumes and
will pay, from its own resources, all expenses related to distribution of the
Company's shares and will bear other costs and expenses attributable to any
activity primarily intended to result in the sale of shares. Such expenses
include, but are not limited to:
a. printing and distribution of the Company's prospectus to
prospective investors;
b. preparation, printing and distribution of advertising and
sales literature for use in the offering of the Company's
shares (in connection with the offering of the Contracts or
otherwise) and printing and distribution of reports to
shareholders used as sales literature; and
c. the qualification of IDI as a distributor or broker or dealer
under any applicable federal or state securities laws;
12. In selling shares of the Company, IDI shall use its best
efforts in all respects duly to conform with the requirements of all federal
and state laws and regulations and the rules of the NASD, relating to the
sales of the Company's shares or the Contracts.
13. IDI shall act as an independent contractor and nothing
contained herein shall be construed to make it, its agents or
representatives, or any employees, employees of the Company. In addition,
IDI shall remain fully responsible for its own conduct and that of its
agents, representatives and employees under applicable law.
14. American Foundation and IDI shall make no representations
concerning the Company or its shares except those contained in the
then-current prospectus of the Company and in printed information
subsequently issued on behalf of the Company and approved in writing by the
Company as supplemental to such prospectus, or otherwise approved by the
Company in writing.
15. The Company represents that each Fund of the Company shall
comply with Section 817(h) of the Internal Revenue Code of 1986, as amended,
(the "Code") and the regulations issued thereunder (Reg. Section 1.817-5),
relating to the diversification requirements for variable annuity, endowment,
and life insurance contracts, and any amendments or other modifications to
such Section or regulations.
The Company represents that each Fund of the Company is currently
qualified or will be qualified as a Regulated Investment Company under
Subchapter M of the Code and that every effort will be made to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that the Company will notify American Foundation orally (followed by written
notice) or by wire immediately upon having a reasonable basis for believing
that any Fund might not so qualify in the future.
4
<PAGE>
16. It is understood among the parties to this Agreement that
subject to obtaining any applicable regulatory approvals which may be
conditioned on the parties complying with certain requirements, shares of the
Funds may be offered to the separate accounts of various insurance companies
in addition to American Foundation and in connection with variable life
insurance contracts or variable annuity contracts other than the Contracts.
It is also understood among the parties that shares of the Funds only may be
offered to the other persons identified in paragraph (f) of Regulation
Section 1.817-5, in order that the account can rely on the "look-through"
provisions of that paragraph.
17. The Company represents and warrants that all of its officers,
employees, investment advisers, and other individuals or entities having
access to the assets of the Company are and shall continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Company in an amount not less than the minimal coverage as required currently
by Section 17(g) of the 1940 Act and Rule 17g-I or related provisions as may
be promulgated from time to time.
18. This Agreement shall terminate:
(a) at any time on six months' written notice by the Company
to American Foundation and IDI or on six months' written notice by American
Foundation to the Company and IDI or on six months written notice by IDI to
American Foundation and the Company without the payment of any penalty
(provided, however, that if American Foundation is not able, acting in good
faith, to obtain suitable substitute investment media within six months, this
Agreement shall terminate one year from the date of the notice of
termination); or
(b) at the option of any party hereto upon institution of
formal enforcement proceedings against the Company, the Company's investment
manager, American Foundation or IDI by the Securities and Exchange
Commission, or if American Foundation or the Company is determined by the
other to have failed to perform its obligations under this Agreement in a
satisfactory manner; or
(c) upon a vote of the holders of a majority of the votes
attributed to the shares supporting the Contracts having an interest in a
particular sub-account to substitute the shares of another investment company
or Fund for the Company shares then being held by that sub-account in
accordance with the terms of the Contracts. American Foundation will give 60
days' prior written notice to the Company upon becoming aware of a proposed
Contract owner vote; or
(d) in the event the shares of the Company are not
registered, issued, or sold in accordance with applicable state and/or
federal law or such law prohibits the use of such shares as an underlying
investment for the Contracts issued or to be issued by American Foundation.
Prompt notice of such an event shall be given by each party to the other in
the event the conditions of this provision occur, or
(e) upon assignment of this Agreement, at the option of any
party not assigning this Agreement.
19. Each notice required by this Agreement shall be given in
writing to:
5
<PAGE>
Wayne Stuenkel
American Foundation Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Carolyn King
Protective Investment Company
2801 Highway 280 South
Birmingham, Alabama 35223
20. Each party hereto shall cooperate with each other party and
all appropriate government authorities and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
The Company agrees that all records and other data pertaining to
the Contracts are the exclusive property of American Foundation and that any
such records and other data shall be furnished to American Foundation by the
Company upon termination of this Agreement for any reason whatsoever.
American Foundation shall have the right to inspect, audit and copy all
pertinent records pertaining to the Contracts. This shall not preclude the
Company from keeping copies of such data or records for its own files subject
to the provisions of this section.
21. American Foundation, the Account and IDI agree to look solely
to the assets of the Company for the satisfaction of any liability of the
Company with respect to this agreement, and will not seek recourse against
the members of the Board or its officers, employees, agents, or shareholders,
or any of them, or any of their personal assets for such satisfaction.
22. The Company agrees to indemnify and hold harmless American
Foundation, each member of its Board of Directors, each of its officers, and
any person that controls American Foundation within the meaning of section 15
of the Securities Act of 1933 against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or litigation (including legal and other expenses) to which
American Foundation may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) or settlements arise as a result of American
Foundation's reliance on any information contained in a then current
prospectus, statement of additional information, or report of the Company; or
any current information communicated to American Foundation in writing by the
Company.
The Company shall, at all times, have the right, but not the
obligation, to take over and conduct, in the name of American Foundation, the
Account, and/or IDI, the investigation and defense of any claim by a third
party for which indemnification may be sought. In such event, American
Foundation, the Account and/or IDI shall cooperate in every way with the
Company.
6
<PAGE>
24. The Company agrees to indemnify and hold harmless IDI, each
member of its Board of Directors, each of its officers, and any person that
controls IDI within the meaning of section 15 of the Securities Act of 1933
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses) to which IDI may become subject under
any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or
settlements arise as a result of IDI's reliance on any information contained
in a then current prospectus, statement of additional information, or report
of the Company; or any current information communicated to IDI in writing by
the Company.
The Company shall, at all times, have the right, but not the
obligation, to take over and conduct, in the name of IDI, or any controlling
person of IDI, the investigation and defense of any claim by a third party
for which indemnification may be sought. In such event, IDI shall cooperate
in every way with the Company.
25. American Foundation agrees to indemnify and hold harmless the
Company, each member of its Board, each of its officer, and each person that
controls the Company within the meaning of the Securities Act of 1933 against
any and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of American Foundation) or litigation
(including legal and other expenses) to which the Company may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements arise as a result of the Company's reliance on any information
contained in the then current prospectus, statement of additional
information, or contract of the Account; or any information communicated to
the Company in writing by American Foundation.
American Foundation shall, at all times, have the right, but not
the obligation, to take over and conduct, in the name of the Company, the
investigation and defense of any claim by a third party for which
indemnification may be sought. In such event, the Company shall cooperate in
every way with American Foundation.
26. IDI agrees to indemnify and hold harmless the Company, each
member of its Board, each of its officers, and each person that controls the
Company within the meaning of the Securities Act of 1933 against any and all
losses, claims, damages, liabilities (including amounts paid in settlement
with the written consent of IDI) or litigation (including legal and other
expenses) to which the Company may become subject under any statute, at
common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements arise as a result
of the Company's reliance on any information communicated to the Company in
writing by IDI (for inclusion in the Company's registration statement or
otherwise), as a result of any misrepresentation or omission to state a
material fact by IDI (or any agent or employee of IDI) unless such
misrepresentation or omission was made in reliance on written information
furnished by the Company, or as a result of IDI's willful misconduct or
failure to exercise reasonable care and diligence (including supervision of
its agents, representatives and employees) in providing the services the
Company specified herein.
7
<PAGE>
IDI shall, at all times, have the right, but not the obligation, to
take over and conduct, in the name of the Company, the investigation and
defense of any claim by a third party for which indemnification may be
sought. In such event, the Company shall cooperate in every way with IDI.
27. This Agreement shall be construed in accordance with the laws
of the State of Maryland.
28. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant and the terms hereof shall be
interpreted and construed in accordance therewith.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and attested as of the date shown on the First page.
AMERICAN FOUNDATION LIFE
INSURANCE COMPANY ON BEHALF OF
ITSELF AND VARIABLE ANNUITY
ACCOUNT A OF AMERICAN
FOUNDATION
By:
------------------------------------
------------------------------------
PROTECTIVE INVESTMENT COMPANY
By:
------------------------------------
------------------------------------
INVESTMENT DISTRIBUTORS, INC.
By:
------------------------------------
------------------------------------
8
<PAGE>
AGREEMENT FOR ADMINISTRATIVE SERVICES
This Agreement for administrative services is made and entered into by and
between Protective Life Corporation (herein "PLC"), a Delaware business
corporation with its principal place of business at 2801 Highway 280 South,
Birmingham, Alabama, and members of the PLC holding company system as set forth
in Exhibit A attached hereto and incorporated herein as fully as if set forth at
this point.
WHEREAS, PLC's principal business is that of an insurance holding company and it
makes available certain administrative and other services for members of its
holding company system; and
WHEREAS, the companies set forth on Exhibit A are members of the PLC holding
company system; and
WHEREAS, the members of the PLC holding company system set forth on Exhibit A
from time to time, require administrative services which services can be
provided by PLC; and
WHEREAS, the management of PLC, and the managements of the members of the PLC
holding company system set forth on Exhibit A have determined that it is
desirable and in the best interest of PLC, and the members of the PLC holding
company system set forth on Exhibit A and their respective shareholders to enter
into a contractual agreement for administrative services, subject to the terms
and conditions hereinbelow set forth.
NOW THEREFORE, in consideration of the covenants and agreements herein
contained, and in order to prescribe the terms and conditions of the
administrative services to be provided by PLC, the parties hereto mutually agree
as follows:
ARTICLE I
All administrative services to be performed under this Agreement shall be for an
initial term of twelve (12) months, beginning on October 1, 1988, and shall
automatically renew on each anniversary for a like period under the terms and
conditions hereof, unless either party hereto gives the other written notice at
least sixty (60) days prior to the end of any term of its intent not to renew
this Agreement for another term.
ARTICLE II
Costs of administrative services not otherwise specifically provided for by
separate agreements between PLC and members of the PLC holding company system
set forth on Exhibit A which are provided by one member company of the PLC
holding company system to another company within said holding company system
shall be shared by PLC and the members of the PLC holding company system set
forth on Exhibit A in accordance with generally accepted accounting principles.
Such costs shall be accumulated and settled monthly.
ARTICLE III
Exhibit A may be amended from time to time by the parties.
IN WITNESS WHEREOF, PLC and the members of the PLC holding company system set
forth on Exhibit A have caused this instrument to be executed by their duly
authorized officers and their seals to be affixed hereto.
PROTECTIVE LIFE CORPORATION
BY: /s/ Louis Henderson, Jr.
-----------------------------------
TITLE: Senior Vice President, Operations
-----------------------------------
ATTEST:
/s/ Ryburn H. Bailey
- ------------------------------
<PAGE>
HOTEL DEVELOPMENT COMPANY, INC.
BY: /s/ David Whitehurst
-----------------------------------
TITLE: Treasurer
-----------------------------------
ATTEST:
/s/ Laurie Ellen Shumaker
- ------------------------------
PROTECTIVE EQUITY SERVICES, INC.
BY: /s/ David Whitehurst
-----------------------------------
TITLE: Treasurer
-----------------------------------
ATTEST:
/s/ John K. Wright
- ------------------------------
FIRST PROTECTIVE INSURANCE GROUP, INC.
BY: /s/ David Whitehurst
--------------------------------------
TITLE: Vice President
--------------------------------------
ATTEST:
/s/ Ryburn H. Bailey
- ------------------------------
PROTECTIVE FINANCIAL CORPORATION
BY: /s/ David Whitehurst
--------------------------------------
TITLE: Vice President
--------------------------------------
ATTEST:
/s/ Ryburn H. Bailey
- ------------------------------
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
BY: /s/ Louis Henderson, Jr.
--------------------------------------
TITLE: Senior Vice President, Operations
--------------------------------------
ATTEST:
/s/ Natalie R. Reid
- ------------------------------
UNITED FOUNDERS LIFE INSURANCE COMPANY
BY: /s/ Louis Henderson, Jr.
--------------------------------------
TITLE: President
--------------------------------------
ATTEST:
/s/ Natalie R. Reid
- ------------------------------
AMERICAN FOUNDATION LIFE INSURANCE
COMPANY
BY: /s/ Louis Henderson, Jr.
--------------------------------------
TITLE: Senior Vice President, Operations
--------------------------------------
ATTEST:
/s/ Natalie R. Reid
- ------------------------------
PROTECTIVE BENEFITS COMMUNICATIONS,
INC.
BY: /s/ David Whitehurst
--------------------------------------
TITLE: Vice President
--------------------------------------
ATTEST:
/s/ Lizabeth Reynolds
- ------------------------------
R.L. HERNDON & ASSOCIATES, INC.
BY: /s/ A. S. Williams, III
--------------------------------------
TITLE: Treasurer
--------------------------------------
ATTEST:
/s/ Laurie Ellen Shumaker
- ------------------------------
CENTRAL SECURITY LIFE INSURANCE COMPANY
BY: /s/ Louis Henderson, Jr.
--------------------------------------
TITLE: Senior Vice President, Operations
--------------------------------------
ATTEST:
/s/ Ryburn H. Bailey
- ------------------------------
PROTELCOM, INC.
BY: /s/ David Whitehurst
--------------------------------------
TITLE: Treasurer
--------------------------------------
ATTEST:
/s/ Laurie Ellen Shumaker
- ------------------------------
<PAGE>
EXHIBIT A
(to Agreement for Administrative Services between
Protective Life Corporation and subsidiaries)
As of January 21, 1998
Protective Life Insurance Company (October 1, 1988)
(merged out of existence September 29, 1990)
American Foundation Life Insurance Company (October 1, 1988)
(sold to Champion Life Insurance Company, effective November 3, 1988)
Protective Benefits Communications, Inc. (October 1, 1988)
(October 1, 1988) (renamed Financial Protection Marketing, Inc. as of May 3,
1990)
ProTelcom, Inc. (October 1, 1988)
Hotel Development Company, Inc. (October 1, 1988)
(October 1, 1988) (renamed ProEquities, Inc. as of March 2, 1995)
First Protective Insurance Group, Inc. (October 1, 1988)
(October 1, 1988) (renamed Voluntary Benefits International, Inc. as of
October 2, 1991)
(March 1, 1992) (dissolved February 27, 1996)
Empire General Life Assurance Corporation (June 19, 1992)
Capital Investors Life Insurance Company (January 1, 1993)
Product Resource Group, Inc. (February 12, 1993)
Protective Life Insurance Corporation of Alabama (March 8, 1993)
(April 20, 1993) (merged into Financial Services Investment Affiliate, Inc.
as of December 29, 1993)
(April 20, 1993) (merged into Protective Equity Services, Inc. as of June 1,
1994)
Specialty Asset Management Corporation (July 21, 1993)
Wisconsin National Life Insurance Company (July 30, 1993)
Protective Equity Services of Ohio, Inc. (September 1, 1993)
Protective Equity Services of Maryland, Inc. (September 1, 1993)
Investment Distributors, Inc. (September 1, 1993)
Investment Distributors Advisory Services, Inc. (September 1, 1993)
National Health Care Systems of Florida, Inc. (March 20, 1995)
Protective Finance Corporation (March 5, 1996)
Protective Life Insurance Company of Kentucky (May 1, 1996)
Protective Real Estate Holdings, Inc. (June 28, 1996)
Community National Assurance Company (December 31, 1996)
Protective Marketing Enterprises, Inc. (June 4, 1997)
Protective Life Insurance Company of Ohio (December 22, 1997)
Western Diversified Life Insurance Company (September 30, 1997)
Western Diversified Capital Funding Corporation (September 30, 1997)
<PAGE>
EXHIBIT A (CONTINUED)
Citizen's Accident & Health Insurance Company (September 30, 1997)
Western Diversified Casualty Insurance Company (September 30, 1997)
Western Diversified Services, Inc. (September 30, 1997)
<PAGE>
PARTICIPATION AGREEMENT
By and Among
OPPENHEIMER VARIABLE ACCOUNT FUNDS,
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
and
OPPENHEIMERFUNDS, INC.
THIS AGREEMENT, made and entered into as of the 1st day of
May, 1997 by and among American Foundation Life Insurance Company, an Alabama
corporation (hereinafter the "Company") on its own behalf and on behalf of each
separate account of the Company named in Schedule 1 to this Agreement, as may be
amended from time to time by mutual consent (each account referred to as the
"Account"), Oppenheimer Variable Account Funds, an open-end diversified
management investment company organized under the laws of the State of
Massachusetts (hereinafter the "Fund") and OppenheimerFunds, Inc., a Colorado
Corporation (hereinafter the "Adviser").
WHEREAS, the Fund engages in business as an open-end
management investment company and was established for the purpose of serving as
the investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by insurance
companies (hereinafter "Participating Insurance Companies"); and
WHEREAS, beneficial interests in the Fund are divided into
several series of shares, each representing the interest in a particular managed
portfolio (collectively the "Portfolios") of securities and other assets (the
Portfolios covered by this Agreement are specified in Schedule 2 attached hereto
as may be amended from time to time by mutual consent); and
WHEREAS, the Fund has obtained an order from the
Securities and Exchange Commission (alternatively referred to as the "SEC" or
the "Commission"), dated July 16, 1986 (File No. 812-6234), granting
Participating Insurance Companies and variable annuity and variable life
insurance
<PAGE>
separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a),
and 15(b) of the Investment Company Act of 1940, as amended, (hereinafter the
"1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Mixed and Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management
investment company under the 1940 Act and its shares are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is registered as an investment
adviser under the Investment Advisers Act of 1940 and serves as the investment
adviser to the Fund;
WHEREAS, the Company has registered or will register
certain variable annuity and/or life insurance contracts (hereinafter
"Contracts") under the 1933 Act (unless an exemption from registration is
available); and
WHEREAS, the Account is a duly organized, validly existing
segregated asset account, established by resolution of the Board of Directors of
the Company under the insurance laws of the State of Alabama, to set aside and
invest assets attributable to the Contracts. (The Contract(s) and the
Account(s) covered by the Agreement are specified in Schedule 2 attached hereto,
as may be amended from time to time by mutual consent); and
WHEREAS, the Company has registered the Account as a unit
investment trust under the 1940 Act (unless an exemption from registration is
available); and
WHEREAS, to the extent permitted by applicable insurance
laws and regulations, the Company intends to purchase shares in the Portfolios
named in Schedule 2 on behalf of the Account to fund the Contracts named in
Schedule 3 and the Fund is authorized to sell such shares to unit investment
trusts such as the Account at net asset value;
-2-
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises,
the Fund, the Adviser and the Company agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund agrees to sell to the Company those shares
of the Fund which the Company orders on behalf of the Account, executing such
orders on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the order for the shares of the Fund. For purposes
of this Section 1.1, the Company shall be the designee of the Fund for receipt
of such orders from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives written (or facsimile)
notice of such order on the next following Business Day by no later than 10:00
A.M. New York time; however, the Company undertakes to use its best efforts to
provide such notice to the Fund by no later than 9:30 A.M. New York time.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which the Fund calculates its net asset value pursuant to the
rules of the SEC.
1.2. The Company shall pay for Fund shares on the next
Business Day after an order to purchase Fund shares is made in accordance with
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire
pursuant to instructions of the Fund's Treasurer or by a credit for any shares
redeemed.
1.3. The Fund agrees to make an indefinite number of Fund
shares available for purchase at the applicable net asset value per share by the
Company for their separate Accounts listed in Schedule 2, on those days on which
the Fund calculates its net asset value pursuant to rules of the SEC; provided,
however, that the Board of Trustees of the Fund (hereinafter the "Trustees") may
refuse to sell shares of any Portfolio to any person, or suspend or terminate
the offering of shares of any Portfolio if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of the
Trustees, acting in good faith and in light of their fiduciary duties under
federal and any applicable state laws, in the best interests of the shareholders
of any Portfolio.
-3-
<PAGE>
1.4. The Fund agrees that shares of the Fund will be sold
only to Participating Insurance Companies and their separate accounts, qualified
pension and retirement plans or such other persons as are permitted under
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"), and regulations promulgated thereunder, the sale of
which will not impair the tax treatment currently afforded the contracts.
1.5. The Fund shall not sell Fund shares to any insurance
company or separate account unless a contractual obligation is in effect with
respect to such sales to abide by the conditions of the Mixed and Shared Funding
Exemptive Order that are addressed in Section 3.4 and Article VII of this
Agreement.
1.6. The Fund agrees to redeem for cash, upon the
Company's request, any full or fractional shares of the Fund held by the
Company, executing such requests on a daily basis at the net asset value next
computed after receipt by the Fund or its designee of the request for
redemption. For purposes of this Section 1.6, the Company shall be the designee
of the Fund for receipt of requests for redemption and receipt by such designee
shall constitute receipt by the Fund; provided that the Fund receives written
(or facsimile) notice of such request for redemption on the next following
Business Day by no later than 10:00 A.M. New York time; however the Company
undertakes to use its best efforts to provide such notice to the Fund by no
later than 9:30 A.M. New York time.
1.7. The Fund shall pay for the Fund shares that are
redeemed within the time period specified in the Fund's prospectus or statement
of additional information, provided, however, that if the Fund does not pay for
the Fund shares that are redeemed on the next Business Day after a request to
redeem shares is made, then the Fund shall apply any such delay in redemptions
uniformly to all holders of shares of that Portfolio. Payment shall be in
federal funds transmitted by wire pursuant to the instructions of the Company or
by a credit toward any shares purchased on the Business Day on which the
redemption payment is made.
-4-
<PAGE>
1.8. The Company agrees to purchase and redeem the shares
of the Portfolios named in Schedule 2 offered by the then current prospectus and
statement of additional information of the Fund in accordance with the
provisions of such prospectus and statement of additional information. The
Company shall not permit any person other than a Contract owner to give
instructions to the Company which would require the Company to redeem or
exchange shares of the Fund.
1.9. Issuance and transfer of the Funds' shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Purchase and redemption orders for Fund shares will be recorded in an
appropriate title for each Account or the appropriate subaccount of each
Account.
1.10. The Fund shall furnish notice as soon as
reasonably practicable to the Company of any income, dividends or capital gain
distributions payable on the Portfolio's shares. The Company hereby elects to
receive all such dividends and distributions as are payable on the Portfolio
shares in additional shares of that Portfolio. The Company reserves the right
to revoke this election on 10 business days notice and thereafter to receive all
such dividends and distributions in cash. The Fund shall notify the Company of
the number of shares so issued as payment of such dividends and distributions.
1.11. The Fund shall make the net asset value per
share for each Portfolio available to the Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 6:30
p.m. New York time. If the Fund provides materially incorrect share net asset
value information, the Fund shall make an adjustment to the number of shares
purchased or redeemed for the Accounts to reflect the correct net asset value
per share. Any material error in the calculation or reporting of net asset value
per share, dividend or capital gains information shall be reported promptly upon
discovery to the Company.
-5-
<PAGE>
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the
Contracts are or will be registered under the 1933 Act (unless an exemption from
registration is available) and, that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable state law and that it has registered the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts, and that it will maintain such
registration for so long as any Contracts are outstanding or until registration
is no longer required under federal and state securities laws. The Company
shall amend the registration statement under the 1933 Act for the Contracts and
the registration statement under the 1940 Act for the Account from time to time
as required in order to effect the continuous offering of the Contracts or as
may otherwise be required by applicable law. The Company shall register and
qualify the Contracts for sale in accordance with the securities laws of the
various states only if and to the extent deemed necessary by the Company.
2.2. Subject to Article VI hereof, the Company represents
that it believes that the Contracts are currently and at the time of issuance
will be treated as life insurance or annuity contracts under applicable
provisions of the Internal Revenue Code and that it will make every effort to
maintain such treatment and that it will notify the Fund and the Adviser
immediately upon having a reasonable basis for believing that the Contracts have
ceased to be so treated or that they might not be so treated in the future.
2.3. The Fund represents and warrants that Fund shares
sold pursuant to this Agreement shall be registered under the 1933 Act and duly
authorized for issuance in accordance with applicable law and that the Fund is
and shall take all reasonable steps to remain, registered under the 1940
-6-
<PAGE>
Act for as long as the Fund shares are sold. The Fund shall amend the
registration statement for its shares under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of its
shares. The Fund shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Fund.
2.4. The Fund represents that it is currently qualified as
a Regulated Investment Company under Subchapter M of the Internal Revenue Code
and that it will make every effort to maintain such qualification (under
Subchapter M or any successor or similar provision) and that it will notify the
Company immediately upon having a reasonable basis for believing that it has
ceased to so qualify or that it might not so qualify in the future.
2.5. If the Fund considers the adoption of one or more
plans under Rule 12b-1 under the 1940 Act to finance distribution expenses (a
"12b-1 Plan"), the Company agrees to provide the Trustees any information as may
be reasonably necessary for the Trustees to determine whether to adopt a 12b-1
Plan or Plans. The Fund shall notify the Company upon commencing to finance
distribution expenses pursuant to Rule 12b-1.
2.6. The Fund represents that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that it
does and intends to continue to comply with applicable provisions of the 1940
Act.
2.7. The Adviser represents and warrants that it is and
intends to remain duly registered under all applicable federal and state
securities laws and that it shall perform its obligations for the Fund in
compliance with any applicable state and federal securities laws.
2.8. The Fund and Adviser each represent and warrant that
all of its respective Directors, Trustees, officers, employees, investment
advisers, and transfer agent of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond (which may, at the Fund's election, be
in the form of a joint insured bond) or similar coverage for the benefit of the
Fund in an amount not less than the
-7-
<PAGE>
minimal coverage as required currently by Section 17(g) and Rule 17g-1 of the
1940 Act or related provisions as may be promulgated from time to time. The
aforesaid Bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable insurance company.
2.9. The Company represents and warrants that all of its
directors, officers, employees, agents, investment advisers, and other
individuals and entities dealing with the money and/or securities of the Fund
are covered by a blanket fidelity bond or similar coverage in an amount not less
than $3 million. The aforesaid includes coverage for larceny and embezzlement
and is issued by a reputable insurance company. The Company agrees that any
amount received under such bond in connection with claims that derive from
arrangements described in this Agreement will be paid by the Company for the
benefit of the Fund. The Company agrees to make all reasonable efforts to see
that this bond or another bond containing these provisions is always in effect,
and agrees to notify the Fund and the Adviser in the event that such coverage no
longer applies.
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. The Fund or the Adviser, at its expense, shall
provide a typewritten copy of the Fund's current prospectus and other assistance
as is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus for the Fund is supplemented or amended) to have
the prospectus for the Contracts and the Fund's prospectus printed together in
one document. Upon request, the Adviser shall be permitted to review and
approve the typeset form of the Fund's prospectus prior to such printing.
3.2. The Fund's prospectus shall state that the statement
of additional information for the Fund is available from the Fund (or its
transfer agent) and shall print and provide such Statement to the Company and to
any owner of a Contract or prospective owner who requests such Statement at the
Fund's expense.
-8-
<PAGE>
3.3. The Fund or the Adviser, at its expense, shall
provide the Company with a typewritten copy of the Fund's communications to
shareholders for printing and distributing to Contract owners and with copies of
the Fund's proxy material and semi-annual and annual reports to shareholders (or
may, at the Fund or the Adviser's option, reimburse the Company for the pro rata
cost of printing such reports) in such quantities as the Company shall
reasonably require, for distributing to Contract owners at the Company's
expense. Upon request, the Adviser shall be permitted to review and approve the
typeset form of such proxy material, communications and shareholder reports
prior to such printing.
3.4. If and to the extent required by law (or the Mixed
and Shared Funding Exemptive Order) the Company shall:
(i) solicit voting instructions from Contract
owners;
(ii) vote the Fund shares in accordance with
instructions received from Contract owners
or participants; and
(iii) vote Fund shares for which no instructions
have been received in the same proportion
as Fund shares of such Portfolio for which
instructions have been received from the
Company's Contract owners;
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable Contract owners. The
Company reserves the right to vote Fund shares held in any Account in its own
right, to the extent permitted by law.
3.5. The Fund will comply with all applicable provisions
of the 1940 Act requiring voting by shareholders.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be
furnished, to the Fund or its designee, each piece of sales literature or other
promotional material in which the Fund or the Adviser is
-9-
<PAGE>
named, at least fifteen business days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects in writing to such use
within fifteen business days after receipt of such material.
4.2. The Company shall not give any information or make
any representations or statements on behalf of the Fund or the Adviser
concerning either of them in connection with the sale of the Contracts other
than the information or representations contained in the registration statement
or prospectus for the Fund shares, as such registration statement and prospectus
may be amended or supplemented from time to time, or in reports or proxy
statements for the Fund, or in sales literature or other promotional material
approved by the Fund or its designee, except with the permission of the Fund.
The Fund agrees to respond to any request for approval in a prompt and timely
basis.
4.3. The Adviser or Fund shall furnish or cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material which the Adviser or Fund prepared or caused to be
prepared, in which the Company or its separate account is named, at least
fifteen business days prior to its use. No such material shall be used if the
Company or its designee reasonably objects in writing to such use within fifteen
business days after receipt of such material.
4.4. The Adviser and the Fund shall not give any
information or make any representations on behalf of the Company or concerning
the Company, each Account, or the Contracts, other than information or
representations contained in (i) the registration statement or prospectus for
the Contracts, as such registration statement and prospectus may be amended or
supplemented from time to time, (ii) reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners or
participants, or (iii) sales literature or other promotional material approved
by the Company or its designee, except with the permission of the Company. The
Company agrees to respond to any request for approval on a prompt and timely
basis.
4.5. The Fund will provide to the Company at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, proxy statements, sales
-10-
<PAGE>
literature and other promotional materials in which the Company or its separate
account is named, applications for exemptions, requests for no-action letters,
and all amendments to any of the above, that relate to any Portfolio or its
shares, contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6. The Company will provide to the Fund at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, solicitations for voting instructions, sales
literature and other promotional materials, applications for exemptions,
requests for no action letters, and all amendments to any of the above, that
relate to the Contracts or each Account, contemporaneously with the filing of
such document with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales
literature or other promotional material" includes, but is not limited to,
advertisements (such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, electronic media, or
other public media), sales literature (I.E., any written communication
distributed or made generally available to customers or the public, including
brochures, circulars, research reports, market letters, form letters, seminar
texts, reprints or excerpts of any other advertisement, sales literature, or
published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees of
the Adviser, registration statements, prospectuses, statements of additional
information, shareholder reports, and proxy materials and any other material
constituting sales literature or advertising under NASD rules, the 1940 Act or
the 1933 Act.
4.8. The Company agrees and acknowledges that the Adviser
is the sole owner of the OppenheimerFunds, Inc. clasped hands mark and that all
use of any designation comprised in whole or part of such mark under this
Agreement shall inure to the benefit of the Adviser or the Fund. The Company
shall not use such mark on its own behalf or on behalf of each Account in
connection with
-11-
<PAGE>
marketing the Contracts without prior written consent of the Adviser, which
consent shall not be unreasonably withheld, delayed or conditioned. Upon
termination of this Agreement for any reason, the Company shall cease all use of
any such mark.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Adviser shall pay no fee or other
compensation to the Company under this Agreement, and the Company shall pay no
fee or other compensation to the Fund or Adviser, except as provided herein or
in any other written agreement.
5.2. All expenses incident to performance by each party of
its respective duties under this Agreement shall be paid by that party. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
advisable by the Fund, in accordance with applicable state laws prior to their
sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, the
preparation of all statements and notices required by any federal or state law,
and all applicable taxes on the issuance and transfer of the Fund's shares to
the Company.
5.3. The Company shall bear the expenses of distributing
the Fund's prospectus to Contract owners and prospective Contract owners and of
distributing the Fund's proxy materials, communications and reports to such
Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the
Contracts in such a manner as to ensure that the Contracts will be treated as
variable contracts under the Internal Revenue Code and the regulations issued
thereunder. Without limiting the scope of the foregoing, the Fund will comply
with Section 817(h) of the Internal Revenue Code and Treasury Regulation
1.817-5, relating to the diversification requirements for variable annuity,
endowment, or life insurance contracts and any
-12-
<PAGE>
amendments or other modifications to such Section or Regulations. In the event
of a breach of this Article VI by the Fund, it will take all reasonable steps
(a) to notify the Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance within the grace period afforded by Treasury
Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board of Trustees of the Fund (the "Board") will
monitor the Fund for the existence of any material irreconcilable conflict
between the interests of the Contract owners of all separate accounts investing
in the Fund. An irreconcilable material conflict may arise for a variety of
reasons, including: (a) an action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by
Participating Insurance Companies or by variable annuity contract and variable
life insurance Contract owners; or (f) a decision by an insurer to disregard the
voting instructions of Contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company has reviewed a copy of the Mixed and
Shared Funding Exemptive Order, and in particular, has reviewed the conditions
to the requested relief set forth therein. The Company agrees to be bound by
the responsibilities of a participating insurance company as set forth in the
Mixed and Shared Funding Exemptive Order, including without limitation the
requirement that the Company report any potential or existing conflicts of which
it is aware to the Board. The Company agrees to assist the Board in carrying
out its responsibilities in monitoring such conflicts under the Mixed and Shared
Funding Exemptive Order, by providing the Board in a timely manner with all
information
-13-
<PAGE>
reasonably necessary for the Board to consider any issues raised. This
includes, but is not limited to, an obligation by the Company to inform the
Board whenever Contract owner voting instructions are disregarded and by
confirming in writing, at the Fund's request, that the Company is unaware of any
such potential or existing material irreconcilable conflicts.
7.3. If it is determined by a majority of the Board, or a
majority of its disinterested Trustees, that a material irreconcilable conflict
exists, the Company and the relevant Participating Insurance Companies shall, at
their expense and to the extent reasonably practicable (as determined by a
majority of the disinterested Trustees), take whatever steps are necessary to
remedy or eliminate the irreconcilable material conflict, up to and including:
(1) withdrawing the assets allocable to some or all of the separate accounts
from the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the Fund,
or submitting the question whether such segregation should be implemented to a
vote of all affected Contract owners and, as appropriate, segregating the assets
of any appropriate group (I.E., variable annuity Contract owners or life
insurance Contract owners, of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected Contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
7.4. If the Company's disregard of voting instructions
could conflict with the majority of Contract owners voting instructions, and if
the Company and/or the Fund and the Adviser reasonably determine that a material
irreconcilable conflict (as set forth in the Mixed and Shared Funding Exemptive
Order) may arise as a result, then the Company may be required, at the Fund's
election, to withdraw the Account's investment in the Fund and terminate this
Agreement. Any such withdrawal and termination must take place within six (6)
months after the Fund gives written notice that this provision is being
implemented. Until such withdrawal and termination is implemented, the Fund
shall continue to accept and implement orders by the Company for the purchase
and redemption of shares of the Fund. Such
-14-
<PAGE>
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.5. If a material irreconcilable conflict arises because
a particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the Account's investment in the Fund and terminate this Agreement
within six (6) months after the Fund informs the Company in writing that it has
determined that such decision has created an irreconcilable material conflict.
Until such withdrawal and termination is implemented, the Fund shall continue to
accept and implement orders by the Company for the purchase and redemption of
shares of the Fund, subject to applicable regulatory limitation. Such withdrawal
and termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.6. For purposes of Sections 7.3 through 7.6 of this
Agreement, a majority of the disinterested members of the Board shall determine
whether any proposed action adequately remedies any irreconcilable material
conflict, but in no event will the Fund be required to establish a new funding
medium for the Contracts. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Contracts if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely affected
by the irreconcilable material conflict. In the event that the Board determines
that any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. Upon request, the Company shall at least annually
submit to the Board such reports, materials or data as the Board may reasonably
request so that the Board may fully carry out the
-15-
<PAGE>
duties imposed upon it as delineated in the Mixed and Shared Funding Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Board.
7.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T)
are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the Act or the rules promulgated thereunder with respect to mixed
or shared funding (as defined in the Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the Mixed
and Shared Funding Exemptive Order, the (a) the Fund and/or the Participating
Insurance Companies (including the Company), as appropriate, shall take such
reasonable steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and
(b) Sections 3.4, 7.1, 7.2, 7.3, 7.4 and 7.5 of this Agreement shall continue in
effect only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
(a). The Company agrees to indemnify and hold
harmless the Fund and the Adviser, each member of their Board of Trustees or
Board of Directors, each of their officers and each person, if any, who controls
the Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including reasonable legal
and other expenses), to which the Indemnified Parties may become subject under
any statute, regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
-16-
<PAGE>
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of
any material fact contained in the
registration statement, prospectus or
statement of additional information for the
Contracts or contained in the Contracts or
sales literature or other promotional
material for the Contracts (or any
amendment or supplement to any of the
foregoing), or arise out of or are based
upon the omission or the alleged omission
to state therein a material fact required
to be stated therein or necessary to make
the statements therein not misleading in
light of the circumstances which they were
made; provided that this agreement to
indemnify shall not apply as to any
Indemnified Party if such statement or
omission or such alleged statement or
omission was made in reliance upon and in
conformity with information furnished to
the Company by or on behalf of the Fund or
the Adviser for use in the registration
statement, prospectus or statement of
additional information for the Contracts or
in the Contracts or sales literature (or
any amendment or supplement) or otherwise
for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements
or representations by or on behalf of the
Company (other than statements or
representations contained in the Fund
registration statement, Fund prospectus or
sales literature or other promotional
material of the Fund not supplied by the
Company or persons under its control) or
wrongful conduct of the Company or persons
under its control, with respect to the sale
or distribution of the Contracts or Fund
shares, provided any such statement or
representation or such wrongful conduct was
not made in reliance upon and in conformity
with information furnished to the Company
by or on behalf of the Advisor or the Fund;
or
(iii) arise out of any untrue statement or
alleged untrue statement of a material fact
contained in the Fund registration
statement, Fund prospectus, statement of
additional information or sales literature
or other promotional material of the Fund
or any amendment thereof or supplement
thereto or the omission or alleged omission
to state therein a material fact required
to be stated therein or necessary to make
the statements therein not misleading in
light of the circumstances in which they
were made, if such statement or omission
was made in reliance upon information
furnished to the Fund or the Adviser by or
on behalf of the Company or persons under
its control; or
-17-
<PAGE>
(iv) arise out of or result from any material
breach of any representation and/or
warranty made by the Company in this
Agreement or arise out of or result from
any other material breach of this Agreement
by the Company.
except to the extent provided in Sections 8.1(b) and 8.3 hereof. This
indemnification shall be in addition to any liability which the Company may
otherwise have.
(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2. INDEMNIFICATION BY ADVISER AND FUND
8.2(a)(1). The Adviser agrees to indemnify and hold
harmless the Company and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Adviser) or litigation (including
reasonable legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of
any material fact contained in the
registration statement, prospectus,
statement of additional information or
sales literature of the Fund (or any
amendment or supplement to any of the
foregoing), or arise out of or are based
upon the omission or the alleged omission
to state therein a material fact required
to be stated therein or necessary to make
the statements therein not misleading in
light of the circumstances in which they
were made; provided that this agreement to
indemnify shall not apply as to any
-18-
<PAGE>
Indemnified Party if such statement or
omission or such alleged statement or
omission was made in reliance upon and in
conformity with information furnished to
the Adviser or the Fund by or on behalf of
the Company for use in the Contracts, the
Contract or Fund registration statement,
prospectus or statement of additional
information, or sales literature or other
promotional material for the Contracts or
of the Fund; or
(ii) arise out of or as a result of statements
or representations (other than statements
or representations contained in the
Contracts or in the Contract or Fund
registration statement, the Contract or
Fund prospectus, statement of additional
information, or sales literature or other
promotional material for the Contracts or
of the Fund not supplied by the Adviser or
the Fund or persons under the control of
the Adviser or the Fund respectively) or
wrongful conduct of the Adviser or persons
under its control, with respect to the sale
or distribution of the Contracts, provided
any such statement or representation or
such wrongful conduct was not made in
reliance upon and in conformity with
information furnished to the Adviser or the
Fund by or on behalf of the Company; or
(iii) arise out of any untrue statement or
allegedly untrue statement of a material
fact contained in a registration statement,
prospectus, statement of additional
information or sales literature covering
the Contracts (or any amendment thereof
or supplement thereto), or the omission or
alleged omission to state therein a
material fact required to be stated therein
or necessary to make the statement or
statements therein not misleading in light
of the circumstances in which they were
made, if such statement or omission was
made in reliance upon information furnished
to the Company by or on behalf of the Fund
or persons under the control of the
Adviser; or
(iv) arise out of or result from any material
breach of any representation and/or
warranty made by the Adviser in this
Agreement or arise out of or result from
any other material breach of this Agreement
by the Adviser;
(v) arise out of or result from the materially
incorrect or untimely calculation or
reporting of the daily net asset value per
share or dividend or capital gain
distribution rate;
except to the extent provided in Sections 8.2(b) and 8.3 hereof. This
indemnification shall be in addition to any liability which the Adviser may
otherwise have.
-19-
<PAGE>
8.2(a)(2) The Fund agrees to indemnify and hold harmless
the Indemnified Parties [as defined in Section 8.2(a)(1)] against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including reasonable legal and
other expenses) to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the operations of the Fund and:
(i) arise out of or are based upon (a) any untrue
statement or alleged untrue statement of any
material fact or (b) the omission or the alleged
omission to state therein a material fact
required to be stated therein or necessary to
make the statements made therein, in light of
the circumstances in which they were made, not
misleading, if such fact, statement or omission
is contained in the Contracts, or in the
registration statement for the Fund or the
Contracts, or in the prospectus or statement of
additional information for the Contracts or the
Fund, or in any amendment to any of the
foregoing, or in sales literature or other
promotional material for the Contracts or of the
Fund, provided, however, that this agreement to
indemnify shall not apply as to any Indemnified
Party if such statement, fact or omission or
such alleged statement, fact or omission was
made in reliance upon and in conformity with
information furnished to the Adviser or the Fund
by or on behalf of the Indemnified Party; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the Contracts or in
the Contract or Fund registration statement, the
Contract or Fund prospectus, statement of
additional information, or sales literature or
other promotional material for the Contracts or
of the Fund not supplied by the Adviser or the
Fund or persons under the control of the Adviser
or the Fund respectively) or wrongful conduct
of the Fund or persons under its control with
respect to the sale or distribution of
Contracts, provided any such statement or
representation or such wrongful conduct was not
made in reliance upon and in conformity with
information furnished to the Adviser or the Fund
by or on behalf of the Company; or
(iii) arise out of or result from any material
breach of any representation and/or warranty
made by the Fund in this Agreement or arise out
of or result from any other material breach of
this Agreement by the Fund (including a
failure, whether unintentional or in good faith
or otherwise, to comply with the
diversification requirements specified in
Article VI of this Agreement);
-20-
<PAGE>
(iv) arise out of or result from the materially
incorrect or untimely calculation or reporting
of the daily net asset value per share or
dividend or capital gain distribution rate;
except to the extent provided in Section 8.2(b) and 8.3 hereof. This
indemnification shall be in addition to any liability which the Fund may
otherwise have.
(b). The Fund and Adviser shall not be liable under
this indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement.
8.3 INDEMNIFICATION PROCEDURE
Any person obligated to provide indemnification under this
Article VIII ("indemnifying party" for the purpose of this Section 8.3) shall
not be liable under the indemnification provisions of this Article VIII with
respect to any claim made against a party entitled to indemnification under this
Article VIII ("indemnified party" for the purpose of this Section 8.3) unless
such indemnified party shall have notified the indemnifying party in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
indemnified party (or after such party shall have received notice of such
service on any designated agent), but failure to notify the indemnifying party
of any such claim shall not relieve the indemnifying party from any liability
which it may have to the indemnified party against whom such action is brought
under the indemnification provisions of this Article VIII, except to the extent
that the failure to notify results in the failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a result of
failure to give such notice. In case any such action is brought against the
indemnified party, the indemnifying party will be entitled to participate, at
its own expense, in the defense thereof. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After
-21-
<PAGE>
notice from the indemnifying party to the indemnified party of the indemnifying
party's election to assume the defense thereof, the indemnified party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (ii) the named parties
to any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
A successor by law of the parties to this Agreement shall
be entitled to the benefits of the indemnification contained in this Article
VIII. The indemnification provisions contained in this Article VIII shall
survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions
hereof interpreted under and in accordance with the laws of the State of New
York.
9.2. This Agreement shall be subject to the provisions of
the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and regulations
as the SEC may grant (including, but not limited to, the Mixed and Shared
Funding Exemptive Order) and the terms hereof shall be interpreted and construed
in accordance therewith.
-22-
<PAGE>
ARTICLE X. TERMINATION
10.1 This Agreement shall terminate:
(a) at the option of any party upon six month's
advance written notice to the other parties unless otherwise agreed in a
separate written agreement among the parties; or
(b) at the option of the Company to the extent that
shares of Portfolios are not reasonably available to meet the requirements of
the Contracts as determined by the Company reasonably and in good faith; or
(c) at the option of the Fund or the Adviser upon
institution of formal proceedings against the Company by the NASD, the SEC, the
insurance commission of any state or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of the Contracts,
the administration of the Contracts, the operation of the Account, or the
purchase of the Fund shares, which would have a material adverse effect on the
Company's ability to perform its obligations under this Agreement; or
(d) at the option of the Company upon institution of
formal proceedings against the Fund or the Adviser by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body, which
would have a material adverse effect on the Adviser's or the Fund's ability to
perform its obligations under this Agreement; or
(e) at the option of the Company or the Fund upon
receipt of any necessary regulatory approvals or the vote of the Contract owners
having an interest in the Account (or any subaccount) to substitute the shares
of another investment company for the corresponding Portfolio shares of the Fund
in accordance with the terms of the Contracts for which those Portfolio shares
had been selected to serve as the underlying investment media. The Company will
give 45 days prior written notice to the Fund of the date of any proposed vote
or other action taken to replace the Fund's shares; or
-23-
<PAGE>
(f) at the option of the Company or the Fund upon a
determination by a majority of the Board, or a majority of the disinterested
Board members, that an irreconcilable material conflict exists among the
interests of (i) all Contract owners of variable insurance products of all
separate accounts or (ii) the interests of the Participating Insurance Companies
investing in the Fund as delineated in Article VII of this Agreement; or
(g) at the option of the Company if the Fund ceases
to qualify as a Regulated Investment Company under Subchapter M of the Internal
Revenue Code, or under any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
(h) at the option of the Company if the Fund fails
to meet the diversification requirements specified in Article VI hereof or if
the Company reasonably believes that the Fund will fail to meet such
requirements; or
(i) at the option of any party to this Agreement,
upon another party's material breach of any provision of this Agreement; or
(j) at the option of the Company, if the Company
determines in its sole judgment exercised in good faith, that either the Fund
or the Adviser has suffered a material adverse change in its business,
operations or financial condition since the date of this Agreement or is the
subject of material adverse publicity which is likely to have a material adverse
impact upon the business and operations of the Company; or
(k) at the option of the Fund or the Adviser, if the
Fund or Adviser respectively, shall determine in its sole judgment exercised in
good faith, that the Company has suffered a material adverse change in its
business, operations or financial condition since the date of this Agreement or
is the subject of material adverse publicity which is likely to have a material
adverse impact upon the business and operations of the Fund or the Adviser; or
-24-
<PAGE>
(l) subject to the Fund's compliance with Article VI
hereof, at the option of the Fund in the event any of the Contracts are not
issued or sold in accordance with applicable requirements of federal and/or
state law. Termination shall be effective immediately upon notice by the Fund
to terminate the Agreement.
10.2 NOTICE REQUIREMENT.
(a) In the event that any termination of this
Agreement is based upon the provisions of Article VII, such prior written notice
shall be given in advance of the effective date of termination as required by
such provisions.
(b) In the event that any termination of this
Agreement is based upon the provisions of Sections 10.1(b) - (d) or 10.1(g) -
(i), prompt written notice of the election to terminate this Agreement for cause
shall be furnished by the party terminating the Agreement to the non-terminating
parties, with said termination to be effective upon receipt of such notice by
the non-terminating parties.
(c) In the event that any termination of this
Agreement is based upon the provisions of Sections 10.1(j) or 10.1(k), prior
written notice of the election to terminate this Agreement for cause shall be
furnished by the party terminating this Agreement to the non-terminating
parties. Such prior written notice shall be given by the party terminating this
Agreement to the non-terminating parties at least 30 days before the effective
date of termination.
10.3 It is understood and agreed that the right to
terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.4. EFFECT OF TERMINATION.
(a) Notwithstanding any termination of this
Agreement pursuant to Section 10.1 of this Agreement and subject to Section 1.3
of this Agreement, the Company may require the Fund to continue to make
available additional shares of the Fund pursuant to the terms and conditions of
this Agreement as provided in paragraph (b) below, for all Contracts in effect
on the effective date of
-25-
<PAGE>
termination of this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, the owners of the Existing Contracts shall be
permitted to reallocate investments in the Fund, redeem investments in the Fund
and/or invest in the Fund upon the making of additional purchase payments under
the Existing Contracts. The parties agree that this Section 10.4 shall not
apply to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
(b) If shares of the Fund continue to be made
available after termination of this Agreement pursuant to this Section 10.4, the
provisions of this Agreement shall remain in effect except for Section 10.1(a)
and thereafter the Fund, the Adviser, or the Company may terminate the
Agreement, as so continued pursuant to this Section 10.4, upon written notice to
the other party, such notice to be for a period that is reasonable under the
circumstances but need not be for more than 90 days.
10.5 Except as necessary to implement Contract owner
initiated or approved transactions, or as required by state insurance laws or
regulations, the Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account), and the Company shall not prevent Contract owners from
allocating payments to a Portfolio that was otherwise available under the
Contracts, until 90 days after the Company shall have notified the Fund or the
Adviser of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be deemed duly given only if sent by
hand, evidenced by written receipt or by certified mail, return receipt
requested, to the other party at the address of such party set forth below or at
such other address as such party may from time to time specify in writing to the
other party. All notices shall be deemed given on the date received or rejected
by the addressee.
If to the Fund:
Oppenheimer Variable Account Funds
-26-
<PAGE>
6801 Tucson Way
Englewood, CO 80112
Attn: George Bowen, Vice President, Secretary &
Treasurer
If to the Adviser:
OppenheimerFunds, Inc.
2 World Trade Center
New York, NY 10048-0669
Attn: Andrew J. Donohue, Esq.
Executive Vice President and General Counsel
If to the Company:
American Foundation Life Insurance Company
2801 Highway 280 South
Birmingham, AL 35223
Attn: Steven M. Callaway, Esq.
With a copy to:
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Attn: David S. Goldstein, Esq.
ARTICLE XII. MISCELLANEOUS
12.1. The Company and the Adviser each understand and
agree that the obligations of the Fund under this Agreement are not binding upon
any shareholder or Trustee of the Fund personally, but bind only the Fund and
the Fund's property; the Company and the Adviser each represent that it has
notice of the provisions of the Declaration of Trust of the Fund disclaiming
shareholder and Trustee liability for acts or obligations of the Fund.
12.2. Subject to the requirements of legal process and
regulatory authority, each party hereto shall treat as confidential and all
information reasonably identified as confidential in writing by any other party
hereto (including without limitation the names and addresses of the owners of
the Contracts) and, except as contemplated by this Agreement, shall not
disclose, disseminate or utilize such confidential
-27-
<PAGE>
information until such time as it may come into the public domain without the
express written consent of the affected party.
12.3. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in
two or more counterparts, each of which taken together shall constitute one and
the same instrument.
12.5. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of the Agreement shall not be affected thereby.
12.6. This Agreement shall not be assigned by any
party hereto without the prior written consent of all the parties.
12.7. Each party hereto shall cooperate with each
other party and all appropriate governmental authorities (including without
limitation the SEC, the NASD and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
12.8. Each party represents that the execution and
delivery of this Agreement and the consummation of the transactions contemplated
herein have been duly authorized by all necessary corporate or trust action, as
applicable, by such party and when so executed and delivered this Agreement will
be the valid and binding obligation of such party enforceable in accordance with
its terms.
12.9. Except as may otherwise be required under
Article VII, the rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.10. It is understood by the parties that this
Agreement is not an exclusive arrangement in any respect.
-28-
<PAGE>
12.11. The foregoing constitutes the entire Agreement
between the parties hereto, and shall not be modified, amended or assigned
except by an Agreement in writing signed by an authorized representative of each
such party.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed as of the date specified
below.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
By its authorized officer,
By:
-----------------------------------
Title: Senior Vice President
--------------------------------
Date: April , 1998
---------------------------------
OPPENHEIMER VARIABLE ACCOUNT FUNDS
By its authorized officer,
By: ANDREW J. DONOHUE
----------------------------------
Title: Secretary
-------------------------------
Date: April , 1998
--------------------------------
OPPENHEIMERFUNDS, INC.
By its authorized officer,
By: ANDREW J. DONOHUE
----------------------------------
Title: Executive Vice President
-------------------------------
Date: April , 1998
--------------------------------
-29-
<PAGE>
SCHEDULE 1
Variable Annuity Account A of American Foundation
-30-
<PAGE>
SCHEDULE 2
Portfolios of Oppenheimer Variable Account Funds:
Oppenheimer Aggressive Growth Fund (formerly Oppenheimer
Capital Appreciation Fund)
Oppenheimer Growth Fund
Oppenheimer Growth & Income Fund
Oppenheimer Strategic Bond Fund
-31-
<PAGE>
SCHEDULE 3
Individual flexible premium deferred variable and fixed annuity contract
legag\protect.3
-32-
<PAGE>
PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this -- day of April 1998, by and
among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), AMERICAN FOUNDATION LIFE INSURANCE COMPANY, an Alabama corporation
(the "Company") on its own behalf and on behalf of each of the segregated
asset accounts of the Company set forth in Schedule A hereto, as may be
amended from time to time (the "Accounts"), and MASSACHUSETTS FINANCIAL
SERVICES COMPANY, a Delaware corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, the series of shares of the Trust offered by the Trust to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and, collectively, the "Portfolios");
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies") which, if required by applicable law, will be registered under the
1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated asset
accounts, established by resolution of the Board of Directors of the Company, to
set aside and invest assets attributable to the aforesaid variable annuity
and/or variable life insurance contracts that are allocated to the Accounts (the
Policies and the Accounts covered by this Agreement, and each corresponding
Portfolio covered by this Agreement in which the Accounts invest, is specified
in Schedule A attached hereto as may be modified from time to time);
WHEREAS, the Company has registered or will register the Accounts as unit
investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered as a
broker-dealer with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), and is
a member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD");
WHEREAS, Investment Distributors, Inc., the underwriter for the individual
variable annuity and the variable life policies, is registered as a broker-
dealer with the SEC under the 1934 Act and is a member in good standing of the
NASD; and
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Accounts to fund the Policies, and the Trust intends to sell such Shares to
the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust, MFS,
and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that Business
Day, as defined below) and which are available for purchase by such
Accounts, executing such orders on a daily basis at the net asset value
next computed after receipt by the Trust or its designee of the order for
the Shares. For purposes of this Section 1.1, the Company shall be the
designee of the Trust for receipt of such orders from Policy owners and
receipt by such designee shall constitute receipt by the Trust; PROVIDED
that the Trust receives notice of such orders by 10:00 a.m. New York time
on the next following Business Day and that the Company uses its best
efforts to provide the Trust with such notice by 9:30 a.m. New York time on
the next following Business Day. "Business Day" shall mean any day on
which the New York Stock Exchange, Inc. (the "NYSE") is open for trading
and on which the Trust calculates its net asset value pursuant to the rules
of the SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which the Trust calculates its net asset value
pursuant to rules of the SEC and the Trust shall calculate such net asset
value on each day which the NYSE is open for trading. Notwithstanding the
foregoing, the Board of Trustees of the Trust (the "Board") may refuse to
sell any Shares to the Company and the Accounts, or suspend or terminate
the offering of the Shares if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of
the Board acting in good faith and in light of its fiduciary duties under
federal and any applicable state laws, necessary in the best interest of
the Shareholders of such Portfolio.
1.3. The Trust and MFS agree that the Shares will be sold only to
insurance companies which have entered into participation agreements with
the Trust and MFS (the "Participating Insurance Companies") and their
separate accounts, qualified pension and retirement plans and MFS or its
affiliates. The Trust and MFS will not sell Trust shares to any insurance
company or separate account unless an agreement containing provisions
substantially the same as Articles III and VII of this Agreement is in
effect to govern such sales. The Company will not resell the Shares except
to the Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed by
Policy owners on that Business Day), executing such requests on a daily
basis at the net asset value next computed after receipt by the Trust or
its designee of the request for redemption. For purposes of this Section
1.4., the Company shall be the designee of the Trust for receipt of
requests for redemption from Policy owners and receipt by such designee
shall constitute receipt by the Trust; provided that the Trust receives
notice of such request for redemption by 10:00 a.m. New York time on the
next following Business Day and that the Company uses its best efforts to
provide the Trust with such notice by 9:30 a.m. New York time on the next
following Business Day.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted with
respect to any Portfolio. However, with respect to payment of the purchase
price by the Company and of redemption proceeds by the Trust, the Company
and the Trust shall net purchase and redemption orders with respect to each
Portfolio and shall transmit one net payment for all of the Portfolios in
accordance with Section 1.6 hereof.
- 2 -
<PAGE>
1.6. In the event of net purchases, the Company shall pay for the Shares
by 2:00 p.m. New York time on the next Business Day after an order to
purchase the Shares is made in accordance with the provisions of Section
1.1. hereof. In the event of net redemptions, the Trust shall pay the
redemption proceeds by 2:00 p.m. New York time on the next Business Day
after an order to redeem the shares is made in accordance with the
provisions of Section 1.4. hereof. All such payments shall be in federal
funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts. The
Shares ordered from the Trust will be recorded in an appropriate title for
the Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any dividends or
capital gain distributions payable on the Shares. The Company hereby
elects to receive all such dividends and distributions as are payable on a
Portfolio's Shares in additional Shares of that Portfolio. The Trust shall
notify the Company of the number of Shares so issued as payment of such
dividends and distributions.
1.9. The Trust or its custodian shall make the net asset value per share
for each Portfolio available to the Company on each Business Day as soon as
reasonably practical after the net asset value per share is calculated and
shall use its best efforts to make such net asset value per share available
by 6:30 p.m. New York time. In the event that the Trust is unable to meet
the 6:30 p.m. time stated herein, it shall provide additional time for the
Company to place orders for the purchase and redemption of Shares. Such
additional time shall be equal to the additional time which the Trust takes
to make the net asset value available to the Company. If the Trust
provides materially incorrect share net asset value information, the Trust
shall make an adjustment to the number of shares purchased or redeemed for
the Accounts to reflect the correct net asset value per share. Any
material error in the calculation or reporting of net asset value per
share, dividend or capital gains information shall be reported promptly
upon discovery to the Company.
ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will be
registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold, and
distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940
Act. The Company further represents and warrants that it is an insurance
company duly organized and in good standing under applicable law and that
it has legally and validly established the Account as a segregated asset
account under applicable law and has registered or, prior to any issuance
or sale of the Policies, will register the Accounts as unit investment
trusts in accordance with the provisions of the 1940 Act (unless exempt
therefrom) to serve as segregated investment accounts for the Policies, and
that it will maintain such registration for so long as any Policies are
outstanding. The Company shall amend the registration statements under the
1933 Act for the Policies and the registration statements under the 1940
Act for the Accounts from time to time as required in order to effect the
continuous offering of the Policies or as may otherwise be required by
applicable law. The Company shall register and qualify the Policies for
sales in accordance with the securities laws of the various states only if
and to the extent deemed necessary by the Company.
2.2. Subject to Article VI hereof, the Company represents and warrants
that the Policies are currently and at the time of issuance will be treated
as life insurance, endowment or annuity contract under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
that it will maintain such treatment and that it will notify the Trust or
MFS immediately upon having a reasonable basis for believing that the
Policies have ceased to be so treated or that they might not be so treated
in the future.
2.3. The Company represents and warrants that Investment Distributors,
Inc., the underwriter for the individual variable annuity and the variable
life policies, is a member in good standing of the NASD and is a
-3 -
<PAGE>
registered broker-dealer with the SEC. The Company represents and warrants
that the Company and Investment Distributors, Inc. will sell and distribute
such policies in accordance in all material respects with all applicable
state and federal securities laws, including without limitation the 1933
Act, the 1934 Act, and the 1940 Act.
2.4. The Trust and MFS represent and warrant that the Shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of The
Commonwealth of Massachusetts and all applicable federal and state
securities laws and that the Trust is and shall remain registered under the
1940 Act. The Trust shall amend the registration statement for its Shares
under the 1933 Act and the 1940 Act from time to time as required in order
to effect the continuous offering of its Shares. The Trust shall register
and qualify the Shares for sale in accordance with the laws of the various
states only if and to the extent deemed necessary by the Trust.
2.5. MFS represents and warrants that the Underwriter is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC.
The Trust and MFS represent that the Trust and the Underwriter will sell
and distribute the Shares in accordance in all material respects with all
applicable state and federal securities laws, including without limitation
the 1933 Act, the 1934 Act, and the 1940 Act.
2.6. The Trust represents that it is lawfully organized and validly
existing under the laws of The Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and any
applicable regulations thereunder.
2.7. MFS represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it shall
perform its obligations for the Trust in compliance in all material
respects with any applicable federal securities laws and with the
securities laws of The Commonwealth of Massachusetts. MFS represents and
warrants that it is not subject to state securities laws other than the
securities laws of The Commonwealth of Massachusetts and that it is exempt
from registration as an investment adviser under the securities laws of The
Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably request so
that it may carry out fully the obligations imposed upon it by the
conditions contained in the exemptive application pursuant to which the SEC
has granted exemptive relief to permit mixed and shared funding (the "Mixed
and Shared Funding Exemptive Order").
2.9. The Trust and MFS represent that they have used their best efforts
to maintain the Trust's investment policies, fees and expenses in
compliance with the insurance laws and regulations of the state of
California; and the Trust and MFS further represent and warrant that they
shall use their best efforts to comply in all material respects with the
insurance laws and regulations of the state of Tennessee and any additional
state, to the extent that such laws or regulations are specifically
provided to the Trust or MFS in writing by the Company.
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the Shares
as the Company may reasonably request for distribution to existing Policy
owners whose Policies are funded by such Shares. The Trust or its designee
shall provide the Company, at the Company's expense, with as many copies of
the current prospectus for the Shares as the Company may reasonably request
for distribution to prospective purchasers of Policies. If requested by
the Company in lieu thereof, the Trust or its designee shall provide such
documentation (including a "camera ready" copy of the new prospectus as set
in type or, at the request of the Company, as a diskette in the form sent
to the financial printer) and other assistance as is reasonably necessary
in order for the parties hereto once each year (or more frequently if the
prospectus for
- 4 -
<PAGE>
the Shares is supplemented or amended) to have the prospectus for the
Policies and the prospectus for the Shares printed together in one
document; the expenses of such printing to be apportioned between (a) the
Company and (b) the Trust or its designee in proportion to the number of
pages of the Policy and Shares' prospectuses, taking account of other
relevant factors affecting the expense of printing, such as covers,
columns, graphs and charts; the Trust or its designee to bear the cost of
printing the Shares' prospectus portion of such document for distribution
to owners of existing Policies funded by the Shares and the Company to bear
the expenses of printing the portion of such document relating to the
Accounts; PROVIDED, however, that the Company shall bear all printing
expenses of such combined documents where used for distribution to
prospective purchasers or to owners of existing Policies not funded by the
Shares. In the event that the Company requests that the Trust or its
designee provides the Trust's prospectus in a "camera ready" or diskette
format, the Trust shall be responsible for providing the prospectus in the
format in which it or MFS is accustomed to formatting prospectuses and
shall bear the expense of providing the prospectus in such format (E.G.,
typesetting expenses), and the Company shall bear the expense of adjusting
or changing the format to conform with any of its prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or its
designee. The Trust or its designee, at its expense, shall print and
provide such statement of additional information to the Company (or a
master of such statement suitable for duplication by the Company) for
distribution to any owner of a Policy funded by the Shares. The Trust or
its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser who
requests such statement or to an owner of a Policy not funded by the
Shares.
3.3. The Trust or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Trust's proxy
materials, reports to Shareholders and other communications to Shareholders
in such quantity as the Company shall reasonably require for distribution
to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above,
or of Article V below, the Company shall pay the expense of printing or
providing documents to the extent such cost is considered a distribution
expense. Distribution expenses would include by way of illustration, but
are not limited to, the printing of the Shares' prospectus or prospectuses
for distribution to prospective purchasers or to owners of existing
Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate to
include in the prospectus pursuant to which a Policy is offered disclosure
regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received
from Policy owners; and
(c) vote the Shares for which no instructions have been received
in the same proportion as the Shares of such Portfolio for
which instructions have been received from Policy owners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass through voting privileges for variable contract owners.
Subject to applicable law, the Company will in no way recommend action in
connection with or oppose or interfere with the solicitation of proxies for
the Shares held for such Policy owners. The Company reserves the right to
vote shares held in any segregated asset account in its own right, to the
extent permitted by law. Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts holding
Shares calculates voting privileges in the manner required by the Mixed and
Shared Funding Exemptive Order. The Trust and MFS will notify the Company
of any changes of interpretations or amendments to the Mixed and Shared
Funding Exemptive Order.
- 5 -
<PAGE>
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other promotional
material in which the Trust, MFS, any other investment adviser to the
Trust, or any affiliate of MFS are named, at least three (3) Business Days
prior to its use. No such material shall be used if the Trust, MFS, or
their respective designees reasonably objects to such use within three (3)
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statement on behalf of the Trust, MFS, any other
investment adviser to the Trust, or any affiliate of MFS or concerning the
Trust or any other such entity in connection with the sale of the Policies
other than the information or representations contained in the registration
statement, prospectus or statement of additional information for the
Shares, as such registration statement, prospectus and statement of
additional information may be amended or supplemented from time to time, or
in reports or proxy statements for the Trust, or in sales literature or
other promotional material approved by the Trust, MFS or their respective
designees, except with the permission of the Trust, MFS or their respective
designees. The Trust, MFS or their respective designees each agrees to
respond to any request for approval on a prompt and timely basis. The
Company shall adopt and implement procedures reasonably designed to ensure
that information concerning the Trust, MFS or any of their affiliates which
is intended for use only by brokers or agents selling the Policies (I.E.,
information that is not intended for distribution to Policy owners or
prospective Policy owners) is so used, and neither the Trust, MFS nor any
of their affiliates shall be liable for any losses, damages or expenses
relating to the improper use of such broker only materials. The parties
hereto agree that this Section 4.2 is not intended to designate nor
otherwise imply that the Company is an underwriter or distributor of the
Trust's shares.
4.3. The Trust or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or the Accounts is
named, at least three (3) Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within three (3) Business Days after receipt of such material.
4.4. The Trust and MFS shall not give, and agree that the Underwriter
shall not give, any information or make any representations on behalf of
the Company or concerning the Company, the Accounts, or the Policies in
connection with the sale of the Policies other than the information or
representations contained in a registration statement, prospectus, or
statement of additional information for the Policies, as such registration
statement, prospectus and statement of additional information may be
amended or supplemented from time to time, or in reports for the Accounts,
or in sales literature or other promotional material approved by the
Company or its designee, except with the permission of the Company. The
Company or its designee agrees to respond to any request for approval on a
prompt and timely basis. To the extent representatives of the Trust or MFS
interact with brokers and agents selling the Policies, the Trust and MFS
shall adopt and implement procedures reasonably designed to ensure that
information concerning the Trust, MFS or any of their affiliates that is
intended for use only by such brokers or agents (I.E., information that is
not intended for distribution to owners of the Policies or prospective
owners of the Policies) is so used, and neither the Company, its affiliates
nor the Accounts shall be liable for any losses, damages or expenses
relating to the improper use of such broker only materials. The parties
hereto agree that this Section 4.4. is neither intended to designate nor
otherwise imply that MFS is an underwriter or distributor of the Policies.
4.5. The Company and the Trust (or its designee in lieu of the Company or
the Trust, as appropriate) will each provide to the other at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, proxy statements, sales literature and
other promotional materials, applications for exemptions, requests for no-
action letters, and all amendments to any of the above, that relate to the
Policies, or to the Trust or its Shares, prior to or contemporaneously with
the filing of such document
- 6 -
<PAGE>
with the SEC or other regulatory authorities. The Company and the Trust
shall also each promptly inform the other of the results of any examination
by the SEC (or other regulatory authorities) that relates to the Policies,
the Trust or its Shares, and the party that was the subject of the
examination shall provide the other party with a copy of relevant portions
of any "deficiency letter" or other correspondence or written report
regarding any such examination.
4.6. The Trust and MFS will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio, and of
any material change in the Trust's registration statement, particularly any
change resulting in change to the registration statement or prospectus or
statement of additional information for any Account. The Trust and MFS
will cooperate with the Company so as to enable the Company to solicit
proxies from Policy owners or to make changes to its prospectus, statement
of additional information or registration statement, in an orderly manner.
The Trust and MFS will make reasonable efforts to attempt to have changes
affecting Policy prospectuses become effective simultaneously with the
annual updates for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase "sales
literature or other promotional material" includes but is not limited to
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures, or
other public media), and sales literature (such as brochures, circulars,
reprints or excerpts or any other advertisement, sales literature, or
published articles), distributed or made generally available to customers
or the public, educational or training materials or communications
distributed or made generally available to some or all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company
under this Agreement, and the Company shall pay no fee or other
compensation to the Trust, except that if the Trust or any Portfolio adopts
and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution and Shareholder servicing expenses, then, subject to obtaining
any required exemptive orders or regulatory approvals, the Trust may make
payments to the Company or to the underwriter for the Policies if and in
amounts agreed to by the Trust in writing. Each party, however, shall, in
accordance with the allocation of expenses specified in Articles III and V
hereof, reimburse other parties for expenses initially paid by one party
but allocated to another party. In addition, nothing herein shall prevent
the parties hereto from otherwise agreeing to perform, and arranging for
appropriate compensation for, other services relating to the Trust and/or
to the Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable federal
and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration fees;
preparation and filing of the Trust's proxy materials and reports to
Shareholders; setting in type and printing its prospectus and statement of
additional information (to the extent provided by and as determined in
accordance with Article III above); setting in type and printing the proxy
materials and reports to Shareholders (to the extent provided by and as
determined in accordance with Article III above); the preparation of all
statements and notices required of the Trust by any federal or state law
with respect to its Shares; all taxes on the issuance or transfer of the
Shares; and the costs of distributing the Trust's prospectuses and proxy
materials to owners of Policies funded by the Shares and any expenses
permitted to be paid or assumed by the Trust pursuant to a plan, if any,
under Rule 12b-1 under the 1940 Act. The Trust shall not bear any expenses
of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares'
prospectus or prospectuses in connection with new sales of the Policies and
of distributing the Trust's Shareholder reports to Policy owners. The
Company shall bear all expenses associated with the registration,
qualification, and filing of the Policies under applicable federal
securities and state insurance laws; the cost of preparing, printing and
distributing
- 7 -
<PAGE>
the Policy prospectus and statement of additional information; and the cost
of preparing, printing and distributing annual individual account
statements for Policy owners as required by state insurance laws.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. The Trust and MFS represent and warrant that each Portfolio of the
Trust will meet the diversification requirements of Section 817 (h) (1) of
the Code and Treas. Reg. 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts,
as they may be amended from time to time (and any revenue rulings, revenue
procedures, notices, and other published announcements of the Internal
Revenue Service interpreting these sections), as if those requirements
applied directly to each such Portfolio. In the event that any Portfolio
is not so diversified at the end of any applicable quarter, the Trust and
MFS will make every effort to: (a) adequately diversify the Portfolio so
as to achieve compliance within the grace period afforded by Treas. Reg.
1.817.5, and (b) notify the Company.
6.2. The Trust and MFS represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the Code
and that they will maintain such qualification (under Subchapter M or any
successor or similar provision).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for the
existence of any material irreconcilable conflict between the interests of
the variable annuity contract owners and the variable life insurance policy
owners of the Company and/or affiliated companies ("contract owners")
investing in the Trust. The Board shall have the sole authority to
determine if a material irreconcilable conflict exists, and such
determination shall be binding on the Company only if approved in the form
of a resolution by a majority of the Board, or a majority of the
disinterested trustees of the Board. The Board will give prompt notice of
any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set forth
in the Trust's exemptive application pursuant to which the SEC has granted
the Mixed and Shared Funding Exemptive Order by providing the Board, as it
may reasonably request, with all information necessary for the Board to
consider any issues raised and agrees that it will be responsible for
promptly reporting any potential or existing conflicts of which it is aware
to the Board including, but not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are
disregarded. The Company also agrees that, if a material irreconcilable
conflict arises, it will at its own cost remedy such conflict up to and
including (a) withdrawing the assets allocable to some or all of the
Accounts from the Trust or any Portfolio and reinvesting such assets in a
different investment medium, including (but not limited to) another
Portfolio of the Trust, or submitting to a vote of all affected contract
owners whether to withdraw assets from the Trust or any Portfolio and
reinvesting such assets in a different investment medium and, as
appropriate, segregating the assets attributable to any appropriate group
of contract owners that votes in favor of such segregation, or offering to
any of the affected contract owners the option of segregating the assets
attributable to their contracts or policies, and (b) establishing a new
registered management investment company and segregating the assets
underlying the Policies, unless a majority of Policy owners materially
adversely affected by the conflict have voted to decline the offer to
establish a new registered management investment company.
7.3. A majority of the disinterested trustees of the Board shall
determine whether any proposed action by the Company adequately remedies
any material irreconcilable conflict. In the event that the Board
determines that any proposed action does not adequately remedy any material
irreconcilable conflict, the Company will withdraw from investment in the
Trust each of the Accounts designated by the disinterested trustees and
terminate this Agreement within six (6) months after the Board informs the
Company in writing of the
- 8 -
<PAGE>
foregoing determination; PROVIDED, HOWEVER, that such withdrawal and
termination shall be limited to the extent required to remedy any such
material irreconcilable conflict as determined by a majority of the
disinterested trustees of the Board.
7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the
Mixed and Shared Funding Exemptive Order, then (a) the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as
may be necessary to comply with Rule 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 of this Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless the Trust, MFS,
any affiliates of MFS, and each of their respective directors/trustees,
officers and each person, if any, who controls the Trust or MFS within the
meaning of Section 15 of the 1933 Act, and any agents or employees of the
foregoing (each an "Indemnified Party," or collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of the Company) or expenses (including reasonable counsel
fees) to which any Indemnified Party may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus or statement of
additional information for the Policies or contained in the
Policies or sales literature or other promotional material
for the Policies (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading PROVIDED that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reasonable reliance upon
and in conformity with information furnished to the Company
or its designee by or on behalf of the Trust or MFS or the
Underwriter for use in the registration statement,
prospectus or statement of additional information for the
Policies or in the Policies or sales literature or other
promotional material (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material of the Trust not supplied by the Company or its
designee, or persons under its control and on which the
Company has reasonably relied) or wrongful conduct of the
Company or persons under its control, with respect to the
sale or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Trust, or any amendment thereof or
- 9 -
<PAGE>
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
(e) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.2. INDEMNIFICATION BY THE TRUST
The Trust agrees to indemnify and hold harmless the Company and each
of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act, and any agents or
employees of the foregoing (each an "Indemnified Party," or collectively,
the "Indemnified Parties" for purposes of this Section 8.2) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Trust) or expenses (including
reasonable counsel fees) to which any Indemnified Party may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus, statement of
additional information or sales literature or other
promotional material of the Trust (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement therein not misleading,
PROVIDED that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished
to the Trust, MFS, the Underwriter or their respective
designees by or on behalf of the Company for use in the
registration statement, prospectus or statement of
additional information for the Trust or in sales literature
or other promotional material for the Trust (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material for the Policies not supplied by the Trust, MFS,
the Underwriter or any of their respective designees or
persons under their respective control and on which any such
entity has reasonably relied) or wrongful conduct of the
Trust or persons under its control, with respect to the sale
or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Accounts or relating to the Policies, or any amendment
thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
- 10 -
<PAGE>
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Trust, MFS or the
Underwriter; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement) or
arise out of or result from any other material breach of
this Agreement by the Trust; or
(e) arise out of or result from the materially incorrect or
untimely calculation or reporting of the daily net asset
value per share or dividend or capital gain distribution
rate; or
(f) arise as a result of any failure by the Trust to provide the
services and furnish the materials under the terms of the
Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating Insurance
Company or any Policy holder, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of
any representation, warranty, and/or covenant made by the Company hereunder
or by any Participating Insurance Company under an agreement containing
substantially similar representations, warranties and covenants; (ii) the
failure by the Company or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Portfolio) as a legally
and validly established segregated asset account under applicable state law
and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) subject to the Trust's
compliance with the diversification requirements specified in Article VI,
the failure by the Company or any Participating Insurance Company to
maintain its variable annuity and/or variable life insurance contracts
(with respect to which any Portfolio serves as an underlying funding
vehicle) as life insurance, endowment or annuity contracts under applicable
provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to any
losses, claims, damages, liabilities or expenses to which an Indemnified
Party would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, willful misconduct, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of notice of commencement of any action, such Indemnified Party will,
if a claim in respect thereof is to be made against the indemnifying party
under this section, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any Indemnified Party
otherwise than under this section. In case any such action is brought
against any Indemnified Party, and it notified the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, assume the defense
thereof, with counsel satisfactory to such Indemnified Party. After notice
from the indemnifying party of its intention to assume the defense of an
action, the Indemnified Party shall bear the expenses of any additional
counsel obtained by it, and the indemnifying party shall not be liable to
such Indemnified Party under this section for any legal or other expenses
subsequently incurred by such Indemnified Party in connection with the
defense thereof other than reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of
the commencement of any litigation or proceeding against it or any of its
respective officers, directors, trustees, employees or 1933 Act control
- 11 -
<PAGE>
persons in connection with the Agreement, the issuance or sale of the
Policies, the operation of the Accounts, or the sale or acquisition of
Shares.
8.7. A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this Article
VIII. The indemnification provisions contained in this Article VIII shall
survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the purchase of the Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts, or one,
some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance
written notice to the other parties; or
(b) at the option of the Company to the extent that the Shares
of Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate funding
vehicles" for the Policies, as reasonably determined by the
Company. Without limiting the generality of the foregoing,
the Shares of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet the
diversification or other requirements referred to in Article
VI hereof; or if the Company would be permitted to disregard
Policy owner voting instructions pursuant to Rule 6e-2 or
6e-3(T) under the 1940 Act. Prompt notice of the election
to terminate for such cause and an explanation of such cause
shall be furnished to the Trust by the Company; or
(c) at the option of the Trust or MFS upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding
the Company's duties under this Agreement or related to the
sale of the Policies, the operation of the Accounts, or the
purchase of the Shares; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body regarding the Trust's or MFS' duties under
this Agreement or related to the sale of the Shares; or
- 12 -
<PAGE>
(e) at the option of the Company, the Trust or MFS upon receipt
of any necessary regulatory approvals and/or the vote of the
Policy owners having an interest in the Accounts (or any
subaccounts) to substitute the shares of another investment
company for the corresponding Portfolio Shares in accordance
with the terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying
investment media. The Company will give thirty (30) days'
prior written notice to the Trust of the Date of any
proposed vote or other action taken to replace the Shares;
or
(f) termination by either the Trust or MFS by written notice to
the Company, if either one or both of the Trust or MFS
respectively, shall determine, in their sole judgment
exercised in good faith, that the Company has suffered a
material adverse change in its business, operations,
financial condition, or prospects since the date of this
Agreement or is the subject of material adverse publicity
that is likely to have a material adverse impact on the
business and operations of the Company; or
(g) termination by the Company by written notice to the Trust
and MFS, if the Company shall determine, in its sole
judgment exercised in good faith, that the Trust or MFS has
suffered a material adverse change in this business,
operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse
publicity that is likely to have a material adverse impact
on the business and operations of the Trust or MFS; or
(h) at the option of any party to this Agreement, upon another
party's failure to cure a material breach of any provision
of this Agreement within 30 days notice thereof; or
(i) upon assignment of this Agreement, unless made with the
written consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies and,
if applicable, the Accounts as to which the Agreement is to be terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised for
cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem the Shares attributable to the Policies (as
opposed to the Shares attributable to the Company's assets held in the
Accounts), and the Company shall not prevent Policy owners from allocating
payments to a Portfolio that was otherwise available under the Policies,
until thirty (30) days after the Company shall have notified the Trust of
its intention to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and MFS
shall, at the option of the Company, continue to make available additional
shares of the Portfolios pursuant to the terms and conditions of this
Agreement, for all Policies in effect on the effective date of termination
of this Agreement (the "Existing Policies"), except as otherwise provided
under Article VII of this Agreement. Specifically, without limitation, the
owners of the Existing Policies shall be permitted to transfer or
reallocate investment under the Policies, redeem investments in any
Portfolio and/or invest in the Trust upon the making of additional purchase
payments under the Existing Policies.
- 13 -
<PAGE>
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail, overnight courier or facsimile to the other party at the address
of such party set forth below or at such other address as such party may from
time to time specify in writing to the other party.
If to the Trust:
MFS VARIABLE INSURANCE TRUST
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, Secretary
If to the Company:
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
2801 Highway 280 South
Birmingham, Alabama 35223
Facsimile No.: (205) 868-3597
Attn: Steve M. Callaway, Senior Associate Counsel
If to MFS:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and, except
as permitted by this Agreement or as otherwise required by applicable law
or regulation, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written
consent of the affected party until such time as it may come into the
public domain.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
13.4. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
- 14 -
<PAGE>
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby.
13.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Company
acknowledges that the obligations of or arising out of this instrument are
not binding upon any of the Trust's trustees, officers, employees, agents
or shareholders individually, but are binding solely upon the assets and
property of the Trust in accordance with its proportionate interest
hereunder. The Company further acknowledges that the assets and
liabilities of each Portfolio are separate and distinct and that the
obligations of or arising out of this instrument are binding solely upon
the assets or property of the Portfolio on whose behalf the Trust has
executed this instrument. The Company also agrees that the obligations of
each Portfolio hereunder shall be several and not joint, in accordance with
its proportionate interest hereunder, and the Company agrees not to proceed
against any Portfolio for the obligations of another Portfolio.
13.9 Except as otherwise expressly provided in this Agreement, neither
the Trust nor MFS nor any affiliate thereof shall use any trademark, trade
name, service mark or logo of the Company or any of its affiliates, or any
variation of any such trademark, trade name, service mark or logo, without
the Company's prior written consent, the granting of which shall be at the
Company's sole option. Except as otherwise expressly provided in this
Agreement, neither the Company nor any affiliate thereof shall use any
trademark, trade name, service mark or logo of the Trust or of MFS, or any
variation of any such trademark, trade name, service mark or logo, without
the prior written consent of the Trust or MFS, as appropriate, the granting
of which shall be at the sole option of the Trust or of MFS, as applicable.
- 15 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified above.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
By its authorized officer,
By:
--------------------------------------
Title:
-----------------------------------
MFS VARIABLE INSURANCE TRUST, ON BEHALF OF
THE PORTFOLIOS
By its authorized officer,
By:
---------------------------------------
James R. Bordonick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By:
----------------------------------------
Jeffery L. Shames
Chairman and Chief Executive Officer
<PAGE>
As of _________________
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED PORTFOLIOS
ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT APPLICABLE TO POLICIES
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Variable Annuity Account A of Individual flexible premium deferred MFS Emerging Growth Series
American Foundation (12/1/97) variable annuity contract MFS Research Series
MFS Growth with Income Series
MFS Total Return Series
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PARTICIPATION AGREEMENT
AMONG
CALVERT VARIABLE SERIES, INC.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
AND
CALVERT ASSET MANAGEMENT COMPANY, INC.
THIS AGREEMENT, made and entered into this -- day of April 1998, by
and among Calvert Variable Series, Inc., a management investment company
organized under the laws of the State of Maryland ("Calvert"), American
Foundation Life Insurance Company, an Alabama corporation (the "Company") on
its own behalf and on behalf of each of the segregated asset accounts of the
Company set forth in Schedule A hereto, as may be amended from time to time
(the "Accounts", and CALVERT ASSET MANAGEMENT COMPANY, INC. ("CAMCO"), a
Delaware corporation.
WHEREAS, Calvert is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"), and its shares are registered or will be registered under the
Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of Calvert are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, the series of shares of Calvert offered by Calvert to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and. collectively, the "Portfolios");
WHEREAS, CAMCO is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state
securities law, and is the Calvert's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies') which, if required by applicable law will be registered under the
1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated
asset accounts, established by resolution of the Board of Directors of the
Company, to set aside and invest assets attributable to the aforesaid
variable annuity and/or variable life insurance contracts that are allocated
to the Accounts (the Policies and the Accounts covered by this Agreement, and
each corresponding Portfolio covered by this Agreement in which the Accounts
invest, is specified in Schedule A attached hereto as may be modified from
time to time);
WHEREAS, the Company has registered or will register the Accounts as
unit investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, CALVERT DISTRIBUTORS, (the "Underwriter") is registered as a
broker-dealer with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"),
and is a member in good standing of the National Association of Securities
Dealers. Inc. (the"NASD");
WHEREAS, INVESTMENT DISTRIBUTORS, INC., the underwriter for the
individual variable annuity and the variable life policies, is registered as
a broker-dealer with the SEC under the 1934 Act and is a member in good
standing of the NASD; and
1
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf
of the Accounts to fund the Policies, and Calvert intends to sell such Shares
to the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, Calvert,
CAMCO, and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1 Calvert agrees to sell to the Company those Shares that the Accounts
order (based on orders placed by Policy holders on that Business Day, as
defined below) and that are available for purchase by such Accounts,
executing such orders on a daily basis at the net asset value next computed
after receipt by Calvert or its designee of the order for the Shares. For
purposes of this Section 1.1, the Company shall be the designee of Calvert
for receipt of such orders from Policy owners and receipt by such designee
shall constitute receipt by Calvert; PROVIDED that Calvert receives written
or facsimile notice of such orders by 10:30 a.m. Eastern time on the next
following Business Day. "Business Day" shall mean any day on which the New
York Stock Exchange, Inc. (the "NYSE") is open for trading and on which
Calvert calculates its net asset value pursuant to the rules of the SEC.
Calvert shall furnish to the Company same day written or facsimile
confirmation of each order under this paragraph 1.1. Written or facsimile
notices under Article I of this agreement shall be delivered to the address
or facsimile number designated from time to time by Calvert, CAMCO and the
Company.
1.2. Calvert agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which Calvert calculates its net asset value
pursuant to rules of the SEC and Calvert shall calculate such net asset
value on each day which the NYSE is open for trading. Notwithstanding
the foregoing, the Board of Directors of Calvert (the "Board") may refuse
to sell any Shares to the Company and the Accounts, or suspend or terminate
the offering of the Shares if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of
the Board acting in good faith and in light of its fiduciary duties
under federal and any applicable state laws, necessary in the best interest
of the Shareholders of such Portfolio.
1.3. Calvert and CAMCO agree that (1) the Shares will be sold only to
insurance companies that have entered into participation agreements with
Calvert and CAMCO (the "Participating Insurance Companies") and their
separate accounts, qualified pension and retirement plans and CAMCO or its
affiliates; and (2) all such sales will comply with applicable federal and
state securities laws and with Calvert's Exemptive Order regarding Shared
Funding. The Company will not resell the Shares except to Calvert or its
agents.
1.4. Calvert agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed by
Policy owners on that Business Day), executing such requests on a daily
basis at the net asset value next computed after receipt by Calvert or its
designee of the request for redemption. For purposes of this Section 1.4.
the Company shall be the designee of Calvert for receipt of requests for
redemption from Policy owners and receipt by such designee shall constitute
receipt by Calvert; provided that Calvert receives written or facsimile
notice of such request for redemption by 10:30 a.m. Eastern time on the
next following Business Day. Calvert shall furnish to the Company same day
written or facsimile confirmation of each request for redemption under this
paragraph 1.4. Written or facsimile notice under Article I of this
agreement shall be delivered to the address or facsimile number designated
from time to time by Calvert, CAMCO and the Company.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted with
respect to any Portfolio. However, with respect to payment of the purchase
price by the Company and of redemption proceeds by Calvert, the Company and
Calvert shall net purchase and redemption orders with respect to each
Portfolio and shall transmit one net payment for all of the Portfolios in
accordance with Section 1.6 hereof.
2
<PAGE>
1.6. In the event of net purchases, the Company shall pay for the Shares
on the next Business Day after an order to purchase the Shares is made in
accordance with the provisions of Section 1.1. hereof. In the event of net
redemptions, Calvert shall pay the redemption proceeds on the next Business
Day after an order to redeem the shares is made in accordance with the
provisions of Section 1.4. hereof. All such payments shall be in federal
funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts. The
Shares ordered from Calvert will be recorded in an appropriate title for
the Accounts or the appropriate subaccounts of the Accounts.
1.8. Calvert shall furnish same day notice (by wire or telephone followed
by written confirmation) to the Company of any dividends or capital gain
distributions payable on the Shares. The Company hereby elects to receive
all such dividends and distributions as are payable on a Portfolio's Shares
in additional Shares of that Portfolio. Calvert shall notify the Company
of the number of Shares so issued as payment of such dividends and
distributions.
1.9. Calvert or its custodian shall make the net asset value per share
for each Portfolio available to the Company on each Business Day as soon as
reasonably practical after the net asset value per share is calculated and
shall use its best efforts to make such net asset value per share available
by 6:30 p.m. Eastern time. If Calvert provides materially incorrect share
net asset value information, Calvert shall make an adjustment to the number
of shares purchased or redeemed for the Accounts to reflect the correct net
asset value per share. Any material error in the calculation or reporting
of net asset value per share, dividend or capital gains information shall
be reported promptly upon discovery to the Company.
ARTICLE II, CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will be
registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold, and
distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940
Act. The Company further represents and warrants that it is an insurance
company duly organized and in good standing under applicable law and that
it has legally and validly established the Accounts as segregated asset
accounts under applicable law and has registered or, prior to any issuance
or sale of the Policies, will register the Accounts as unit investment
trusts in accordance with the provisions of the 1940 Act (unless exempt
therefrom) to serve as segregated investment accounts for the Policies, and
that it will maintain such registration for so long as any Policies are
outstanding. The Company shall amend the registration statements under the
1933 Act for the Policies and the registration statements under the 1940
Act for the Accounts from time to time as required in order to effect the
continuous offering of the Policies or as may otherwise be required by
applicable law. The Company shall register and qualify the Policies for
sales in accordance with the securities laws of the various states only if
and to the extent deemed necessary by the Company.
2.2. Subject to Article VI hereof, the Company represents and warrants
that the Policies are currently and at the time of issuance will be treated
as life insurance, endowment or annuity contracts under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
that it will maintain such treatment and that it will notify Calvert or
CAMCO immediately upon having a reasonable basis for believing that the
Policies have ceased to be so treated or that they might not be so treated
in the future.
2.3. The Company represents and warrants that Investment Distributors,
Inc., the underwriter for the individual variable annuity and the variable
life policies, is a member in good standing of the NASD and is a registered
broker-dealer with the SEC. The Company represents and warrants that the
Company and Investment Distributors, Inc. will sell and distribute such
policies in accordance in all material respects with all applicable state
and federal securities laws including without limitation the 1933 Act, the
1934 Act and the 1940 Act.
3
<PAGE>
2.4. Calvert and CAMCO represent and warrant that the Shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of the State
of Maryland and all applicable federal and state securities laws and that
Calvert is and shall remain registered under the 1940 Act. Calvert shall
amend the registration statement for its Shares under the 1933 Act and the
1940 Act from time to time as required in order to effect the continuous
offering of its Shares. Calvert shall register and qualify the Shares for
sale in accordance with the laws of the various states only if and to the
extent deemed necessary by Calvert.
2.5. CAMCO represents and warrants that the Underwriter is a member in
good standing of the NASD and is registered as a broker-dealer with the
SEC. Calvert and CAMCO represent that Calvert and the Underwriter will
sell and distribute the Shares in accordance in all material respects with
all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.6. Calvert represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and
will comply in all material respects with the 1940 Act and any applicable
regulations thereunder and Subchapter M of the Code.
2.7. CAMCO represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it shall
perform its obligations for Calvert in compliance in all material respects
with any applicable federal and state securities laws.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably request so
that it may carry out fully the obligations imposed upon it by the
conditions contained in the exemptive application pursuant to which the SEC
has granted exemptive relief to permit mixed and shared funding (the "Mixed
and Shared Funding Exemptive Order").
2.9. Calvert and CAMCO represent that Calvert's investment policies, fees
and expenses are and shall at all times remain in compliance with
applicable state securities laws, if any, and with the insurance laws of
the State of Tennessee and any other states as may be identified by the
Company from time to time. Calvert and CAMCO represent that their
respective operations are and shall at all times remain in material
compliance with applicable state securities laws and with the insurance
laws of the State of Tennessee and any other state as may be identified by
the Company from time to time to the extent required to perform this
Agreement.
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, Calvert or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the Shares
as the Company may reasonably request for distribution to existing Policy
owners whose Policies are funded by such Shares. Calvert or its designee
shall provide the Company, at the Company's expense, with as many copies of
the current prospectus for the Shares as the Company may reasonably request
for distribution to prospective purchasers of Policies. If requested by
the Company in lieu thereof, Calvert or its designee shall provide such
documentation (including a "camera ready" copy of the new prospectus as set
in type or, at the request of the Company, as a diskette in the form sent
to the financial printer) and other assistance as is reasonably necessary
in order for the parties hereto once each year (or more frequently if the
prospectus for the Shares is supplemented or amended) to have the
prospectus for the Policies and the prospectus for the Shares printed
together in one document; the expenses of such printing to be apportioned
between (a) the Company and (b) Calvert or its designee in proportion to
the number of pages of the Policy and Shares' prospectuses taking account
of other relevant factors affecting the expense of printing, such as
covers, columns, graphs and charts; Calvert or its designee to bear the
cost of printing the Shares' prospectus portion of such document for
distribution to owners of existing Policies funded by Shares and the
Company to bear the expenses of printing the portion of such document
relating to the Accounts; PROVIDED, however, that the Company shall bear
all printing expenses of such combined documents where used for
distribution to prospective purchasers. In the event that the Company
requests that Calvert or its designee provides Calvert's prospectus in a
"camera ready" or diskette format, Calvert shall be responsible for
providing the prospectus in the format in which it or CAMCO is accustomed
to formatting prospectuses and shall bear the expense of providing the
prospectus in such format (E.G., typesetting expenses), and the Company
shall bear the expense of adjusting or changing the format to conform with
any of its prospectuses.
4
<PAGE>
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from Calvert or its
designee. Calvert or its designee, at its expense, shall print and provide
such statement of additional information to the Company (or a master of
such statement suitable for duplication by the Company) for distribution to
any owner of a Policy. Calvert or its designee, at the Company's expense,
shall print and provide such statement to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to a
prospective purchaser who requests such statement.
3.3. Calvert or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of Calvert's proxy
materials, reports to Shareholders and other communications to Shareholders
in such quantity as the Company shall reasonably require for
distribution to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above,
or of Article V below, Calvert shall not pay the expense of printing or
providing documents to the extent such cost is considered a distribution
expense.
3.5. Calvert hereby notifies the Company that it may be appropriate to
include in the prospectus pursuant to which a Policy is offered disclosure
regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received
from Policy owners; and
(c) vote the Shares for which no instructions have been received
in the same proportion as the Shares of such Portfolio for
which instructions have been received from Policy owners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass through voting privileges for variable contract owners.
Subject to applicable law, the Company will in no way recommend action in
connection with or oppose or interfere with the solicitation of proxies for
the Shares held for such Policy owners. The Company reserves the right to
vote shares held in any segregated asset account in its own right, to the
extent permitted by law. Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts holding
Shares calculates voting privileges in the manner required by the Mixed and
Shared Funding Exemptive Order. Calvert and CAMCO will notify the Company
of any changes of interpretations or amendments to the Mixed and Shared
Funding Exemptive Order.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to
Calvert or its designee, each piece of sales literature or other
promotional material in which Calvert, CAMCO, any other investment adviser
to Calvert, or any affiliate of CAMCO are named, at least three (3)
Business Days prior to its use. No such material shall be used if Calvert,
CAMCO or their respective designees reasonably objects to such use within
three (3) Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statement on behalf of Calvert, CAMCO, any other
investment adviser to Calvert, or any affiliate of CAMCO or concerning
Calvert or any other such entity in connection with the sale of the
Policies other than the information or representations contained in the
registration statement, prospectus or statement of additional information
for the Shares, as such registration statement, prospectus and statement of
additional information may be amended or supplemented from time to time, or
in reports or proxy statements for Calvert, or in sales literature or other
promotional material approved by Calvert, CAMCO or their respective
designees, except with the permission of Calvert, CAMCO or their respective
designees. Calvert, CAMCO or their respective designees each agrees to
respond to any request for approval on a prompt and timely basis. The
Company shall adopt and implement procedures reasonably designed to ensure
that information concerning Calvert, CAMCO or any of their affiliates which
is intended for use only by brokers or agents selling the Policies (i.e.,
information that is not intended for distribution to Policy owners or
prospective Policy owners) is so used, and neither Calvert, CAMCO nor any
of their affiliates shall be liable for any losses, damages or expenses
5
<PAGE>
relating to the improper use of such broker-only materials. The parties
hereto agree that this Section 4.2 is not intended to designate or
otherwise imply that the Company is an underwriter of Calvert's shares.
4.3. Calvert or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or the Accounts is
named at least three (3) Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within three (3) Business Days after receipt of such material.
4.4. Calvert and CAMCO shall not give, and agree that the Underwriter
shall not give, any information or make any representations on behalf of
the Company or concerning the Company, the Accounts, or the Policies in
connection with the sale of the Policies other than the information or
representations contained in a registration statement, prospectus, or
statement of additional information for the Policies, as such
registration statement, prospectus and statement of additional information
may be amended or supplemented from time to time, or in reports for the
Accounts, or in sales literature or other promotional material approved by
the Company or its designee, except with the permission of the Company.
The Company or its designee agrees to respond to any request for approval
on a prompt and timely basis. Calvert and CAMCO shall adopt and implement
procedures reasonably designed to ensure that information concerning the
Company or any of its affiliates and the Accounts that is intended for use
only by brokers or agents (I.E. information that is not intended for
distribution to owners of the Shares or prospective owners of the Share) is
so used, and neither the Company, its affiliates nor the Accounts shall be
liable for any losses, damages or expenses relating to the improper use of
such broker only materials. The parties hereto agree that this Section
4.4. is neither intended to designate nor otherwise imply that CAMCO is an
underwriter or distributor of the Policies.
4.5. The Company and Calvert (or its designee in lieu of the Company or
Calvert, as appropriate) will each provide to the other at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, proxy statements, sales literature and
other promotional materials, applications for exemptions, requests for no-
action letters, and all amendments to any of the above, that relate to the
Policies, or to Calvert or its Shares, prior to or contemporaneously with
the filing of such document with the SEC or other regulatory authorities.
The Company and Calvert shall also each promptly inform the other of the
results of any examination by the SEC (or other regulatory authorities)
that relates to the Policies, Calvert or its Shares, and the party that
was the subject of the examination shall provide the other party with a
copy of relevant portions of any "deficiency letter" or other
correspondence or written report regarding any such examination.
4.6. Calvert and CAMCO will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio, and of
any material change in Calvert's registration statement, particularly any
change resulting in change to the registration statement or prospectus or
statement of additional information for any Account. Calvert and CAMCO
will cooperate with the Company so as to enable the Company to solicit
proxies from Policy owners or to make changes to its prospectus, statement
of additional information or registration statement in an orderly manner.
Calvert and CAMCO will make reasonable efforts to attempt to have changes
affecting Policy prospectuses become effective simultaneously with the
annual updates for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase "sales
literature or other promotional material" includes but is not limited to
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures, or
other public media), and sales literature (such as brochures, circulars,
reprints or excerpts or any other advertisement, sales literature, or
published articles), distributed or made generally available to customers
or the public, educational or training materials or communications
distributed or made generally available to some or all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. Calvert shall pay no fee or other compensation to the Company under
this Agreement, and the Company shall pay no fee or other compensation to
Calvert, except that if Calvert or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution and
Shareholder servicing expenses, then, subject to obtaining any required
exemptive orders or regulatory approvals, Calvert may make payments to the
6
<PAGE>
Company or to the underwriter for the Policies if and in amounts agreed to
by Calvert in writing. Each party, however, shall, in accordance with the
allocation of expenses specified in Articles III and V hereof, reimburse
other parties for expenses initially paid by one party but allocated to
another party. In addition, nothing herein shall prevent the parties hereto
from otherwise agreeing to perform, and arranging for appropriate
compensation for, other services relating to Calvert and/or to the
Accounts.
5.2. Calvert or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable federal
and state laws, including preparation and filing of Calvert's registration
statement, and payment of filing fees and registration fees; preparation
and filing of Calvert's proxy materials and reports to Shareholders;
setting in type and printing its prospectus and statement of additional
information (to the extent provided by and as determined in accordance with
Article III above); setting in type and printing the proxy materials and
reports to Shareholders (to the extent provided by and as determined in
accordance with Article III above); the preparation of all statements and
notices required of Calvert by any federal or state law with respect to its
Shares; all taxes on the issuance or transfer of the Shares; and the costs
of distributing Calvert's prospectuses and proxy materials to owners of
Policies funded by the Shares and any expenses permitted to be paid or
assumed by Calvert pursuant to a plan, if any, under Rule 12b-1 under the
1940 Act. Calvert shall not bear any expenses of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares
prospectus or prospectuses in connection with new sales of the Policies and
of distributing Calvert's Shareholder reports to Policy owners. The Company
shall bear all expenses associated with the registration, qualification,
and filing of the Policies under applicable federal securities and state
insurance laws; the cost of preparing, printing and distributing the Policy
prospectus and statement of additional information; and the cost of
preparing, printing and distributing annual individual account statements
for Policy owners as required by state insurance laws.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. Calvert and CAMCO represent and warrant that each Portfolio of
Calvert will meet the diversification requirements of Section 817 (h) (1) of
the Code and Treas. Reg. 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts,
as they may be amended from time to time (and any revenue rulings, revenue
procedures, notices, and other published announcements of the Internal
Revenue Service interpreting these sections), as if those requirements
applied directly to each such Portfolio. In the event that any Portfolio is
not so diversified at the end of any applicable quarter, Calvert and CAMCO
will make every effort to: (a) adequately diversify the Portfolio so as to
achieve compliance within the grace period afforded by Treas. Reg. 1.817.5,
and (b) notify the Company.
6.2. Calvert and CAMCO represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the Code
and that they will maintain such qualification (under Subchapter M or any
successor or similar provision).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. Calvert agrees that the Board, constituted with a majority of
disinterested directors, will monitor each Portfolio of Calvert for the
existence of any material irreconcilable conflict between the interests of
the variable annuity contract owners and the variable life insurance policy
owners of the Company and/or affiliated companies ("contract owners")
investing in Calvert. The Board shall have the sole authority to determine
if a material irreconcilable conflict exists, and such determination shall
be binding on the Company only if approved in the form of a resolution by a
majority of the Board, or a majority of the disinterested directors of the
Board. The Board will give prompt notice of any such determination to the
Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set forth
in Calvert's exemptive application pursuant to which the SEC has granted
the Mixed and Shared Funding Exemptive Order by providing the Board, as it
may reasonably request, with all information necessary for the Board to
consider any issues raised and agrees that it will be responsible for
promptly reporting
7
<PAGE>
any potential or existing conflicts of which it is aware to the Board
including, but not limited to, an obligation by the Company to inform the
Board whenever contract owner voting instructions are disregarded. The
Company also agrees that, if a material irreconcilable conflict arises, it
will at its own cost remedy such conflict up to and including (a)
withdrawing the assets allocable to some or all of the Accounts from
Calvert or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of
Calvert, or submitting to a vote of all affected contract owners whether to
withdraw assets from Calvert or any Portfolio and reinvesting such assets
in a different investment medium and, as appropriate, segregating the
assets attributable to any appropriate group of contract owners that votes
in favor of such segregation, or offering to any of the affected contract
owners the option of segregating the assets attributable to their contracts
or policies, and (b) establishing a new registered management investment
company and segregating the assets underlying the Policies, unless a
majority of Policy owners materially adversely affected by the conflict
have voted to decline the offer to establish a new registered management
investment company.
7.3. A majority of the disinterested directors of the Board shall
determine whether any proposed action by the Company adequately remedies
any material irreconcilable conflict. In the event that the Board
determines that any proposed action does not adequately remedy any material
irreconcilable conflict, the Company will withdraw from investment in
Calvert each of the Accounts designated by the disinterested directors and
terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination; PROVIDED, HOWEVER, that
such withdrawal and termination shall be limited to the extent required to
remedy any such material irreconcilable conflict as determined by a
majority of the disinterested directors of the Board.
7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the
Mixed and Shared Funding Exemptive Order, then (a) Calvert and/or the
Participating Insurance Companies, as appropriate, shall take such steps as
may be necessary to comply with Rule 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 of this Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless Calvert, CAMCO,
any affiliates of CAMCO, and each of their respective directors/trustees,
officers and each person, if any, who controls Calvert or CAMCO within the
meaning of Section 15 of the 1933 Act, and any agents or employees of the
foregoing (each an "Indemnified Party," or collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of the Company) or expenses (including reasonable counsel
fees) to which any Indemnified Party may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus or statement of
additional information for the Policies or contained in or
sales literature or other promotional material for the
Policies (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading PROVIDED that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reasonable reliance upon
and in conformity with information furnished to the Company
or its designee by or on behalf of Calvert or CAMCO or the
Underwriter for use in the registration statement,
prospectus or statement of additional information for the
Policies or in the Policies or sales literature or other
promotional material (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Policies or Shares; or
8
<PAGE>
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material of Calvert not supplied by the Company or its
designee, or persons under its control and on which the
Company has reasonably relied) or wrongful conduct of the
Company or persons under its control, with respect to the
sale or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information
or sales literature or other promotional literature of
Calvert, or any amendment thereof or supplement thereto or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to Calvert by or on behalf of the Company; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
(e) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement;
as limited by and in accordance with the provisions of this Article
VIII.
8.2. INDEMNIFICATION BY CAMCO
CAMCO agrees to indemnify and hold harmless the Company and each of
its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act, and any agents or
employees of the foregoing (each an "Indemnified Party," or collectively,
the "Indemnified Parties" for purposes of this Section 8.2) against any and
all losses, claims, damages, liabilities (including, but not limited to,
amounts paid in settlement with the written consent of CAMCO) or expenses
(including, but not limited to, reasonable counsel fees) to which any
Indemnified Party may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Shares or the Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus, statement of
additional information or sales literature or other
promotional material of Calvert (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement therein not misleading,
PROVIDED that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished
to Calvert, CAMCO, the Underwriter or their respective
designees by or on behalf of the Company for use in the
registration statement, prospectus or statement of
additional information for Calvert or in sales literature or
other promotional material for Calvert (or any amendment or
supplement) or otherwise for use in connection with the sale
of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material for the Policies not supplied by Calvert, CAMCO,
the Underwriter or any of their respective designees or
persons under their respective control and on which any
such entity has reasonably relied) or wrongful conduct of
Calvert or persons under its control, with respect to the
sale or distribution of the Policies or Shares; or
9
<PAGE>
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Accounts or relating to the Policies, or any amendment
thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of Calvert, CAMCO or the
Underwriter; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by Calvert in this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement) or
arise out of or result from any other material breach of
this Agreement by Calvert; or
(e) arise out of or result from the materially incorrect or
untimely calculation or reporting of the daily net asset
value per share or dividend or capital gain distribution
rate; or
(f) arise as a result of any failure by Calvert to provide the
services and furnish the materials under the terms of the
Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.3. In no event shall CAMCO be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating Insurance
Company or any Policy holder, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of
any representation, warranty, and/or covenant made by the Company hereunder
or by any Participating Insurance Company under an agreement containing
substantially similar representations, warranties and covenants; (ii) the
failure by the Company or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Portfolio) as a legally
and validly established segregated asset account under applicable state law
and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) subject to Calvert's
compliance with the diversification requirements specified in Article VI,
the failure by the Company or any Participating Insurance Company to
maintain its variable annuity and/or variable life insurance contracts
(with respect to which any Portfolio serves as an underlying funding
vehicle) as life insurance, endowment or annuity contracts under applicable
provisions of the Code.
8.4. Neither the Company nor CAMCO shall be liable under the
indemnification provisions contained in this Agreement with respect to any
losses, claims, damages, liabilities or expenses to which an Indemnified
Party would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, willful misconduct, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of notice of commencement of any action, such Indemnified Party will,
if a claim in respect thereof is to be made against the indemnifying party
under this section, notify the indemnifying party of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any Indemnified Party
otherwise than under this section. In case any such action is brought
against any Indemnified Party, and it notified the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, assume the defense
thereof, with counsel satisfactory to such Indemnified Party. After
notice from the indemnifying party of its intention to assume the defense
of an action, the Indemnified Party shall bear the expenses of any
additional counsel obtained by it, and the indemnifying party shall not be
liable to such Indemnified Party under this section for any legal or other
expenses subsequently incurred by such Indemnified Party in connection with
the defense thereof other than reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of
the commencement of any litigation or proceeding against it or any of its
respective officers, directors, trustees, employees or 1933 Act control
persons in connection with the Agreement, the issuance or sale of the
Policies, the operation of the Accounts, or the sale or acquisition of
Shares.
10
<PAGE>
8.7. A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this Article
VIII. The indemnification provisions contained in this Article VIII shall
survive any termination of this Agreement.
ARTICLE IX:. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
Calvert, CAMCO, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the sale or purchase of the Shares.
ARTICLE XI. TERMINATION
11.1 This Agreement shall terminate with respect to the Accounts, or one,
some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance
written notice to the other parties; or
(b) at the option of the Company to the extent that the Shares
of Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate funding
vehicles" for the Policies, as reasonably determined by the
Company. Without limiting the generality of the foregoing,
the Shares of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet the
diversification or other requirements referred to in Article
VI hereof; or if the Company would be permitted to disregard
Policy owner voting instructions pursuant to Rule 6e-2 or
6e-3(T) under the 1940 Act. Prompt notice of the election to
terminate for such cause and an explanation of such cause
shall be furnished to Calvert by the Company; or
(c) at the option of Calvert or CAMCO upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding
the Company's duties under this Agreement or related to the
sale of the Policies, the operation of the Accounts, or the
purchase of the Shares; or
(d) at the option of the Company upon institution of formal
proceedings against Calvert by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body regarding Calvert's or CAMCO' duties under
this Agreement or related to the sale of the Shares; or
(e) at the option of the Company, Calvert or CAMCO upon receipt
of any necessary regulatory approvals and/or the vote of the
Policy owners having an interest in the Accounts (or any
subaccounts) to substitute the shares of another investment
company for the corresponding Portfolio Shares in accordance
with the terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying
investment medium. The Company will give thirty (30) days
prior written notice to Calvert of the Date of any proposed
vote or other action taken to replace the Shares; or
11
<PAGE>
(f) termination by either Calvert or CAMCO by written notice to
the Company, if either one or both of Calvert or CAMCO
respectively, shall determine, in their sole judgment
exercised in good faith, that the Company has suffered a
material adverse change in its business, operations,
financial condition, or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(g) termination by the Company by written notice to Calvert and
CAMCO, if the Company shall determine, in its sole judgment
exercised in good faith, that Calvert or CAMCO has suffered
a material adverse change in this business, operations,
financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(h) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement;
or
(i) upon assignment of this Agreement, unless made with the
written consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies and,
if applicable, the Accounts as to which the Agreement is to be terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised for
cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem the Shares attributable to the Policies (as
opposed to the Shares attributable to the Company's assets held in the
Accounts), and the Company shall not prevent Policy owners from allocating
payments to a Portfolio that was otherwise available under the Policies,
until thirty (30) days after the Company shall have notified Calvert of its
intention to do so.
11.5. Notwithstanding any termination of this Agreement, so long as the
Company shall have a balance of at least $1 million invested in any
Portfolio of Calvert, then Calvert and CAMCO shall, at the option of the
Company, continue to make available additional shares of that Portfolio
pursuant to the terms and conditions of this Agreement, for all Policies in
effect on the effective date of termination of this Agreement (the
"Existing Policies"), except as otherwise provided under Article VII of
this Agreement. Specifically, without limitation, the owners of the
Existing Policies shall be permitted to transfer or reallocate investment
under the Policies, redeem investments in any Portfolio and/or invest in
Calvert upon the making of additional purchase payments under the Existing
Policies.
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail, overnight courier or facsimile to the other party at the address of such
party set forth below or at such other address as such party may from time to
time specify in writing to the other party.
If to Calvert:
Calvert Variable Series, Inc.
c/o Calvert Group Legal Department
4550 Montgomery Avenue, 10th Floor
Bethesda, MD 20814
Facsimile No.: (301)
Attn: William M. Tartikoff, Vice President
12
<PAGE>
If to the Company:
American Foundation Life Insurance Company
2801 Highway 280 South
Birmingham, AL 35223
Facsimile No.: (205)868-3597
Attn: Legal Dept., Steve M. Callaway, Sr. Associate Counsel
If to CAMCO:
Calvert Asset Management Company, Inc.
c/o Calvert Group Legal Department
4550 Montgomery Avenue, 10th Floor
Bethesda, MD 20814
Facsimile No.: (301)
Attn: William M. Tartikoff, Vice President
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and, except
as permitted by this Agreement or as otherwise required by applicable law
or regulation, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written
consent of the affected party until such time as it may come into the
public domain.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
13.4. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby.
13.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
13.8. Except as otherwise expressly provided in this Agreement, neither
Calvert nor CAMCO nor any affiliate thereof shall use any trademark, trade
name, service mark or logo of the Company or any of its affiliates, or any
variation of any such trademark, trade name, service mark or logo, without
the Company's prior written consent, the granting of which shall be at the
Company's sole discretion. Except as otherwise expressly provided in this
Agreement, neither the Company nor any affiliate thereof shall use any
trademark, trade name, service mark or logo of Calvert or of CAMCO, or any
variation of any such trademark, trade name, service mark or logo, without
the prior written consent of Calvert or of CAMCO, as appropriate, the
granting of which shall be at the sole discretion of Calvert or of CAMCO,
as applicable.
13
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
as of the date specified above.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
By its authorized officer,
By:
-------------------------------------
Carolyn King, Senior Vice President
CALVERT VARIABLE SERIES, INC.
By its authorized officer,
By:
--------------------------------------
William M. Tartikoff, Vice President
CALVERT ASSET MANAGEMENT COMPANY, INC.
By its authorized officer,
By:
--------------------------------------
William M. Tartikoff, Vice President
14
<PAGE>
SCHEDULE A
American Foundation Life Insurance Company segregated asset accounts:
Variable Annity Account A of American Foundation
Calvert Variable Series
Social Small Cap Growth Portfolio
Social Balanced Portfolio
15
<PAGE>
[LETTERHEAD]
EXHIBIT 9
April 13, 1998
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Gentlemen:
With respect to the Pre-Effective Amendment No. 1 to the Form N-4
Registration Statement to be filed by American Foundation Life Insurance
Company (the "Company") and Variable Annuity Account A of American Foundation
(the "Account") with the Securities and Exchange Commission for the purpose
of registering under the Securities Act of 1933, as amended, deferred
variable annuity contracts (the "Contracts"), I have examined such documents
and such law as I considered necessary and appropriate, and on the basis of
such examination, it is my opinion that:
1. The Company is a corporation duly organized and validly existing
as a stock life insurance company under the laws of the State of
Alabama and is duly authorized by the Department of Insurance of
the State of Alabama to issue the Contracts.
2. The Account is a duly authorized and existing separate account
established pursuant to the provisions of Section 27-38-1 of the
Alabama Code.
3. To the extent so provided under the Contracts, that portion of
the assets of the account equal to the reserves and other
contract liabilities with respect to the Account will not be
chargeable with liabilities arising out of any other business
that the Company may conduct.
4. The Contracts, when issued as contemplated by the Form N-4
registration statement, will constitute legal, validly issued and
binding obligations of the Company.
I hereby consent to the filing of this opinion as an exhibit to the
Form N-4 registration statement for the Contracts and the Account.
Very truly yours,
Steve M. Callaway
Senior Associate Counsel
<PAGE>
SUTHERLAND, ASBILL & BRENNAN LLP
ATLANTA - AUSTIN - NEW YORK - TALLAHASSEE - WASHINGTON
1275 PENNSYLVANIA AVENUE, N.W. TEL: (202) 383-0100
WASHINGTON, D.C. 20004-2415 FAX: (202) 637-3593
April 10, 1998
Board of Directors
American Foundation Life Insurance Company
2801 Highway 201 South
Birmingham, Alabama 35223
Directors:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the statement of additional information filed as part of
pre-effective amendment number 1 to the Registration Statement on Form N-4
filed by American Foundation Life Insurance Company and Variable Annuity
Account A of American Foundation with the Securities and Exchange Commission.
In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of
1993.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ STEPHEN E. ROTH
-------------------------------------
Stephen E. Roth
<PAGE>
Exhibit 10(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion, in this Registration Statement under the
Investment Company Act of 1940 filed on Form N-4, of our report dated
February 11, 1998, on our audits of the financial statements and financial
statement schedules of American Foundation Life Insurance Company. We also
consent to the reference to our Firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
April 13, 1998
