<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1998
FILE NO. 333-46595
FILE NO. 811-08667
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-4
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. / /
------------------------
FARM BUREAU LIFE ANNUITY ACCOUNT II
(Exact Name of Registrant)
FARM BUREAU LIFE INSURANCE COMPANY
(Name of Depositor)
5400 University Avenue
West Des Moines, Iowa 50266
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: 1-800-247-4170
------------------------
STEPHEN M. MORAIN, ESQUIRE
5400 University Avenue
West Des Moines, Iowa 50266
(Name and Address of Agent for Service of Process)
------------------------
COPY TO:
STEPHEN E. ROTH, ESQUIRE
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
SECURITIES BEING OFFERED: FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
CONTRACTS
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH 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 SAID SECTION 8(a),
MAY 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
PART A
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
- ----------------------------------------------------- ----------------------------------------------------------------------
<C> <S> <C> <C> <C>
1. Cover Page..................................... Cover Page
2. Definitions.................................... Definitions
3. Synopsis....................................... Expense Tables; Summary
4. Condensed Financial Information................ Yields and Total Returns
5. General
(a) Depositor................................. Farm Bureau Life Insurance Company, FBL Financial Group, Inc.
(b) Registrant................................ Farm Bureau Life Annuity Account II
(c) Portfolio Company......................... Investment Options
(d) Fund Prospectus........................... Investment Options
(e) Voting Rights............................. Voting Rights
(f) Administrators............................ N/A
6. Deductions and Expenses
(a) General................................... Charges and Deductions; Summary
(b) Sales Load %.............................. Charges and Deductions; Summary
(c) Special Purchase Plan..................... N/A
(d) Commissions............................... Distribution of the Contracts
(e) Expenses -- Registrant.................... Charges and Deductions; Summary
(f) Fund Expenses............................. Investment Options; Charges and Deductions
(g) Organizational Expenses................... N/A
7. Contracts
(a) Persons with Rights....................... Summary; Addition, Deletion or Substitution of Investments;
Description of Annuity Contract; Payment Options; Voting Rights
(b) (i) Allocation of Purchase
Payments........................... Summary; Premiums; Free-Look Period; Allocation of Premiums
(ii) Transfers.......................... Summary; Transfer Privilege
(iii) Exchanges.......................... Transfers, Assignments or Exchanges of a Contract
(c) Changes................................... Additions, Deletions or Substitutions of Investments; Description of
Annuity Contract; Modification;
(d) Inquiries................................. Cover page; Inquiries
8. Annuity Period................................. Summary; Payment Options
9. Death Benefit.................................. Death Benefit Before the Retirement Date; Death Benefit After the
Retirement Date
10. Purchases and Contract Value
(a) Purchases................................. Summary; Issuance of a Contract; Premiums; Free Look Period;
Allocation of Premiums; Variable Cash Value;
(b) Valuation................................. Definitions; Variable Cash Value;
(c) Daily Calculation......................... Definitions; Variable Cash Value;
(d) Underwriter............................... Issuance of a Contract; Distribution of the Contracts
11. Redemptions
(a) -- By Owners.............................. Summary; Transfer Privilege; Surrenders and Partial Surrenders;
Proceeds on the Retirement Date; Payments; Payment Options; Federal
Tax Matters
-- By Annuitant........................... Summary; Transfer Privilege; Surrenders and Partial Surrenders;
Proceeds on the Retirement Date; Payments; Payment Options; Federal
Tax Matters
(b) Taxes ORP................................. N/A
(c) Check Delay............................... Payments
(d) Lapse..................................... N/A
(e) Free Look................................. Summary; Free Look Period
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
12. Taxes.......................................... Summary; Federal Tax Matters
13. Legal Proceedings.............................. Legal Proceedings
14. Table of Contents for the Statement of
Additional Information......................... Statement of Additional Information
Table of Contents
PART B
<CAPTION>
ITEM OF FORM N-4 PART B CAPTION
- ----------------------------------------------------- ----------------------------------------------------------------------
<C> <S> <C> <C> <C>
15. Cover Page..................................... Cover Page
16. Table of Contents.............................. Table of Contents
17. General Information and History................ N/A
18. Services
(a) Fees and Expenses of Registrant........... N/A
(b) Management Contracts...................... N/A
(c) Custodian................................. N/A
Independent Public Accountant............. Experts
(d) Assets of Registrant...................... N/A
(e) Affiliated Persons........................ N/A
(f) Principal Underwriter..................... Distribution of the Contracts (prospectus)
19. Purchase of Securities
Being Offered................................. Distribution of the Contracts (prospectus)
Offering Sales Load........................... N/A
20. Underwriters................................... Distribution of the Contracts (prospectus)
21. Calculation of Performance Data................ Calculation of Yields and Total Returns; Yields and Total Returns
(prospectus)
22. Annuity Payments............................... Payment Options (prospectus)
23. Financial Statements........................... Financial Statements
PART C -- OTHER INFORMATION
<CAPTION>
ITEM OF FORM N-4 PART C CAPTION
- ----------------------------------------------------- ----------------------------------------------------------------------
<C> <S> <C> <C> <C>
24. Financial Statements and Exhibits.............. Financial Statements and Exhibits
(a) Financial Statements...................... (a) Financial Statements
(b) Exhibits.................................. (b) Exhibits
25. Directors and Officers of the Depositor........ Directors and Officers of Farm Bureau Life Insurance Company
26. Persons Controlled By or Under Common Control
with the Depositor or Registrant............... Persons Controlled By or In Common Control with the Depositor or
Registrant
27. Number of Contractowners....................... Number of owners
28. Indemnification................................ Indemnification
29. Principal Underwriters......................... Principal Underwriter
30. Location of Accounts and Records............... Location of Books and Records
31. Management Services............................ Management Services
32. Undertakings................................... Undertakings and Representations
Signature Page................................. Signatures
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
[Logo]
VARIABLE ANNUITY
July 1, 1998
Prospectus for:
Flexible Premium Deferred Variable
Annuity Contracts
issued by
Farm Bureau Life
Insurance Company
- --------------------
Call Toll-Free
1-800-247-4170
225-5846 (Des Moines)
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Farm Bureau Life Annuity Account II
Individual Flexible Premium Deferred
Variable Annuity Contract
- --------------------------------------------------------------------------------
This Prospectus describes the individual flexible premium deferred variable
annuity contract (the "Contract") being offered by Farm Bureau Life Insurance
Company (the "Company"). The Contract may be sold to or in connection with
retirement plans, including those that qualify for special federal tax treatment
under the Internal Revenue Code.
Premiums and accumulated values are allocated, as designated by the owner, to
one or more of the subaccounts of the Farm Bureau Life Annuity Account II (the
"Account"), the Declared Interest Option, or both. The assets of each Subaccount
will be invested solely in shares of the corresponding Investment Options: Value
Growth Portfolio, High Grade Bond Portfolio, High Yield Bond Portfolio, Money
Market Portfolio and Blue Chip Portfolio of EquiTrust Variable Insurance Series
Fund; Equity Income Portfolio, Mid-Cap Growth Portfolio, New America Growth
Portfolio and Personal Strategy Balanced Portfolio of T. Rowe Price Equity
Series, Inc.; International Stock Portfolio of T. Rowe Price International
Series, Inc.; or Capital Appreciation Portfolio, Disciplined Stock Portfolio,
Growth and Income Portfolio, International Equity Portfolio and Small Cap
Portfolio of Dreyfus Variable Investment Fund. The accompanying prospectus for
each Fund describes the investment objectives and attendant risks of each
Investment Option. The accumulated value of the Contracts prior to the
retirement date, except for amounts in the Declared Interest Option, will vary
according to the investment performance of each Investment Option in which the
selected Subaccounts are invested. THE OWNER BEARS THE ENTIRE INVESTMENT RISK ON
AMOUNTS ALLOCATED TO THE ACCOUNT.
This Prospectus sets forth basic information about the Contract and the Account
that a prospective investor should know before investing. Additional information
about the Contract and the 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 as this Prospectus and
is incorporated herein by reference. The table of contents for the Statement of
Additional Information is on page 31 of this Prospectus. You may obtain a copy
of the Statement of Additional Information free of charge by writing or calling
the Company at the address or phone number shown below.
- --------------------------------------------------------------------------------
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
FUND'S INVESTMENT OPTIONS.
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.
- --------------------------------------------------------------------------------
Issued By
Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
1-800-247-4170
515-225-5846
THE DATE OF THIS PROSPECTUS IS
JULY 1, 1998
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
DEFINITIONS........................................................... 3
- --------------------------------------------------------------------------------
EXPENSE TABLES........................................................ 4
- --------------------------------------------------------------------------------
SUMMARY............................................................... 7
- --------------------------------------------------------------------------------
THE COMPANY, ACCOUNT AND INVESTMENT OPTIONS........................... 8
Farm Bureau Life Insurance Company.............................. 8
Iowa Farm Bureau Federation..................................... 8
Farm Bureau Life Annuity Account II............................. 9
Investment Options.............................................. 9
Addition, Deletion or Substitution of Investments............... 11
- --------------------------------------------------------------------------------
DESCRIPTION OF ANNUITY CONTRACT....................................... 12
Issuance of a Contract.......................................... 12
Premiums........................................................ 12
Free-Look Period................................................ 12
Allocation of Premiums.......................................... 12
Variable Accumulated Value...................................... 13
Transfer Privilege.............................................. 14
Partial Withdrawals and Surrenders.............................. 14
Special Transfer and Withdrawal Options......................... 15
Death Benefit Before the Retirement Date........................ 15
Death Benefit After the Retirement Date......................... 16
Proceeds on the Retirement Date................................. 16
Payments........................................................ 17
Modification.................................................... 17
Reports to Owners............................................... 17
Inquiries....................................................... 17
- --------------------------------------------------------------------------------
THE DECLARED INTEREST OPTION.......................................... 17
Minimum Guaranteed and Current Interest Rates................... 18
Transfers From Declared Interest Option......................... 18
Payment Deferral................................................ 18
- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS................................................ 19
Surrender Charge (Contingent Deferred Sales Charge)............. 19
Annual Administrative Charge.................................... 20
Transfer Processing Fee......................................... 20
Mortality and Expense Risk Charge............................... 20
Investment Option Expenses...................................... 20
Premium Taxes................................................... 20
Other Taxes..................................................... 20
- --------------------------------------------------------------------------------
PAYMENT OPTIONS....................................................... 20
Election of Options............................................. 21
Description of Options.......................................... 21
- --------------------------------------------------------------------------------
YIELDS AND TOTAL RETURNS.............................................. 21
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS................................................... 23
Introduction.................................................... 23
Tax Status of the Contract...................................... 24
Taxation of Annuities........................................... 25
Transfers, Assignments or Exchanges of a Contract............... 26
Withholding..................................................... 27
Multiple Contracts.............................................. 27
Taxation of Qualified Plans..................................... 27
Possible Charge for the Company's Taxes......................... 28
Other Tax Consequences.......................................... 28
- --------------------------------------------------------------------------------
DISTRIBUTION OF THE CONTRACTS......................................... 29
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS..................................................... 29
- --------------------------------------------------------------------------------
VOTING RIGHTS......................................................... 29
- --------------------------------------------------------------------------------
YEAR 2000............................................................. 30
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS.................................................. 30
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS................. 31
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
DEFINITIONS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ACCOUNT.................. Farm Bureau Life Annuity Account II.
ACCUMULATED VALUE........ The total amount invested under the Contract. It
is the sum of the values of the Contract in each
Subaccount of the Account plus the value of the
Contract in the Declared Interest Option.
ANNUITANT................ The person or persons whose life (or lives)
determines the annuity benefits payable under the
Contract and whose death determines the death
benefit.
BENEFICIARY.............. The person to whom the proceeds payable on the
death of the owner/annuitant will be paid.
BUSINESS DAY............. Each day that the New York Stock Exchange is open
for trading, except the day after Thanksgiving,
the day before Christmas (in 1998) and any day on
which the Home Office is closed because of a
weather-related or comparable type of emergency
and is unable to segregate orders and redemption
requests received on that day.
THE CODE................. The Internal Revenue Code of 1986, as amended.
CONTRACT ANNIVERSARY..... Same date in each Contract Year as the Contract
Date.
CONTRACT DATE............ The date on which a properly completed application
is received by the Company at the Home Office. It
is the date set forth on the data page of the
Contract which is used to determine Contract Years
and Contract Anniversaries.
CONTRACT YEAR............ A twelve-month period beginning on the Contract
Date or on a Contract Anniversary.
DECLARED INTEREST An investment option under the Contract funded by
OPTION.................. the Company's General Account. It is not part of,
nor dependent upon, the investment performance of
the Account.
DUE PROOF OF DEATH....... Proof of death satisfactory to the Company. Such
proof may consist of the following if acceptable
to the Company:
(a) a certified copy of the death certificate;
(b) a certified copy of a court decree reciting a
finding of death; or
(c) any other proof satisfactory to the Company.
FUND..................... An open-end diversified management investment
company in which the Account invests.
GENERAL ACCOUNT.......... The assets of the Company other than those
allocated to the Account or any other separate
account of the Company.
HOME OFFICE.............. The principal offices of the Company at 5400
University Avenue, West Des Moines, Iowa 50266.
INVESTMENT OPTION........ A separate investment portfolio of a Fund.
NET ACCUMULATED VALUE.... The accumulated value less any applicable
surrender charge.
NON-QUALIFIED CONTRACT... A Contract that is not a "Qualified Contract."
OWNER.................... The person who owns the Contract and who is
entitled to exercise all rights and privileges
provided in the Contract.
QUALIFIED CONTRACT....... A Contract that is issued in connection with plans
that qualify for special federal income tax
treatment under Sections 401, 403(b) or 408 of the
Code.
RETIREMENT DATE.......... The date when the accumulated value will be
applied under a payment option, if the annuitant
is still living.
SEC...................... U.S. Securities and Exchange Commission.
SUBACCOUNT............... A subdivision of the Account, the assets of which
are invested in a corresponding Investment Option.
VALUATION PERIOD......... The period that starts at the close of business
(3:00 p.m. central time) on one Business Day and
ends at the close of business on the next
succeeding Business Day.
WRITTEN NOTICE........... A written request or notice in a form satisfactory
to the Company which is signed by the owner and
received at the Home Office.
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
EXPENSE TABLES
- --------------------------------------------------------------------------------
The following expense information assumes that the entire accumulated value is
variable accumulated value.
<TABLE>
<S> <C>
OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Premiums................ None
Surrender Charge (contingent deferred sales
charge) as a percentage of the amount
surrendered:
</TABLE>
<TABLE>
<CAPTION>
CONTRACT YEAR* SURRENDER CHARGE
- -------------------- -----------------
<S> <C>
1................... 6%
2................... 5
3................... 4
4................... 3
5................... 2
6................... 1
7 and After......... 0
</TABLE>
* After the first Contract Year, the owner may make partial withdrawals of up
to 10% of the accumulated value on the most recent Contract Anniversary
without incurring a surrender charge. If the Contract is subsequently
surrendered during the Contract Year, a surrender charge will be applied to
the partial withdrawals taken. The amount that may be withdrawn without
incurring a surrender charge is NOT cumulative from Contract Year to
Contract Year.
<TABLE>
<S> <C>
Transfer Processing Fee........................... None*
</TABLE>
* The Company does not charge a fee for the first twelve transfers in a
Contract Year. The Company may charge $25 for each subsequent transfer in a
Contract Year.
<TABLE>
<S> <C>
ANNUAL ADMINISTRATIVE CHARGE...................... $30
ACCOUNT ANNUAL EXPENSES (as a percentage of
average net assets)
Mortality and Expense Risk Charge............... 1.40%
Other Account Expenses.......................... None
Total Account Expenses........................ 1.40%
</TABLE>
ANNUAL INVESTMENT OPTION EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
OTHER TOTAL
EXPENSES EXPENSES
ADVISORY (AFTER WAIVER OR (AFTER WAIVER OR
INVESTMENT OPTION FEE REIMBURSEMENT) REIMBURSEMENT)
- -------------------------------------------------- ------------ ------------------------- --------------------------
<S> <C> <C> <C>
EquiTrust Variable Insurance Series Fund**
Value Growth.................................... 0.45% 0.10% 0.55%(1)
High Grade Bond................................. 0.30% 0.22% 0.52%
High Yield Bond................................. 0.45% 0.12% 0.57%(1)
Money Market.................................... 0.25% 0.23% 0.48%(1)
Blue Chip....................................... 0.20% 0.13% 0.33%
T. Rowe Price Equity Series, Inc.
Equity Income................................... 0.85% 0.00% 0.85%(2)
Mid-Cap Growth.................................. 0.85% 0.00% 0.85%(2)
New America Growth.............................. 0.85% 0.00% 0.85%(2)
Personal Strategy Balanced...................... 0.90% 0.00% 0.90%(2)
T. Rowe Price International Series, Inc.
International Stock............................. 1.05% 0.00% 1.05%(2)
Dreyfus Variable Investment Fund
Capital Appreciation............................ 0.75% 0.05% 0.80%(3)
Disciplined Stock............................... 0.75% 0.27% 1.02%(3)
Growth and Income............................... 0.75% 0.05% 0.80%(3)
International Equity............................ 0.75% 0.31% 1.06%(3)
Small Cap....................................... 0.75% 0.03% 0.78%(3)
</TABLE>
- ------------------------
** The annual investment option expenses for each Investment Option of the Fund
are net of certain reimbursements by the Fund's investment adviser.
Operating expenses (including the investment advisory fee but excluding
4
<PAGE>
brokerage, interest, taxes and extraordinary expenses) of an Investment
Option that exceed 1.50% of the Investment Option's average daily net assets
for any fiscal year are reimbursed by the Fund's investment adviser up to
the amount of the advisory fee. In addition, the investment adviser has
voluntarily agreed to reimburse each Portfolio for expenses that exceed
0.65%. Absent the reimbursements, the total expenses for the Investment
Options for the 1997 fiscal year would have been: Value Growth 0.58%, High
Grade Bond 0.57%, High Yield Bond 0.65% and Money Market 0.55%.
(1) Total annual investment option expenses have been restated for the reduction
in management fees from 0.50% to 0.45% for the Value Growth and High Yield
Bond Investment Options and 0.30% to 0.25% for the Money Market Investment
Option, effective May 1, 1997.
(2) Total annual investment option expenses are an all-inclusive fee and pay for
investment management services and other operating costs.
(3) The investment adviser may waive receipt of its fees and/or voluntarily
assume certain expenses. Total expenses were not reduced for the 1997 fiscal
year.
The above tables are intended to assist the owner of a Contract in understanding
the costs and expenses that he or she will bear directly or indirectly. The
tables reflect the expenses for the Account based on the actual expenses for
each Investment Option for the 1997 fiscal year. For a more complete description
of the various costs and expenses see "Charges and Deductions" and the
prospectus for each Investment Option which accompany this Prospectus.
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 or is annuitized at the end of the
applicable time period:
<TABLE>
<CAPTION>
3 5 10
SUBACCOUNT 1 YEAR YEARS YEARS YEARS
- -------------------------------------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth.................................... $ 111 $ 194 $ 277 $ 524
High Grade Bond................................. 111 193 276 521
High Yield Bond................................. 112 195 278 526
Money Market.................................... 111 192 274 517
Blue Chip....................................... 109 188 266 501
T. Rowe Price Equity Series, Inc.
Equity Income................................... 114 203 292 555
Mid-Cap Growth.................................. 114 203 292 555
New America Growth.............................. 114 203 292 555
Personal Strategy Balanced...................... 115 204 295 560
T. Rowe Price International Series, Inc.
International Stock............................. 116 209 302 574
Dreyfus Variable Investment Fund
Capital Appreciation............................ 116 210 303 577
Disciplined Stock............................... 116 208 300 571
Growth and Income............................... 114 202 290 550
International Equity............................ 116 209 302 575
Small Cap....................................... 114 201 289 548
</TABLE>
2. If the Contract is not surrendered or annuitized at the end of the
applicable time period:
<TABLE>
<CAPTION>
3 5 10
SUBACCOUNT 1 YEAR YEARS YEARS YEARS
- -------------------------------------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth.................................... $ 50 $ 151 $ 254 $ 524
High Grade Bond................................. 49 150 253 521
High Yield Bond................................. 50 152 255 526
Money Market.................................... 49 149 251 517
Blue Chip....................................... 48 144 243 501
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
3 5 10
SUBACCOUNT 1 YEAR YEARS YEARS YEARS
- -------------------------------------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
T. Rowe Price Equity Series, Inc.
Equity Income................................... $ 53 $ 160 $ 270 $ 555
Mid-Cap Growth.................................. 53 160 270 555
New America Growth.............................. 53 160 270 555
Personal Strategy Balanced...................... 53 162 272 560
T. Rowe Price International Series, Inc.
International Stock............................. 55 166 280 574
Dreyfus Variable Investment Fund
Capital Appreciation............................ 55 167 281 577
Disciplined Stock............................... 54 165 278 571
Growth and Income............................... 52 159 267 550
International Equity............................ 55 166 280 575
Small Cap....................................... 52 158 266 548
</TABLE>
The examples provided above assume that no transfer charges or premium taxes
have been assessed. The examples also assume that the annual administrative
charge is $30 and that the accumulated value per contract is $10,000, which
translates the administrative charge into an assumed .30% charge for the
purposes of the examples based on a $1,000 investment.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. THE ASSUMED 5% ANNUAL RATE OF RETURN IS HYPOTHETICAL AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE
GREATER OR LESS THAN THIS ASSUMED RATE.
6
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
- --------------------------------------------------------------------------------
THE CONTRACT ISSUANCE OF A CONTRACT. Contracts may be sold in
connection with retirement plans which may or may not
qualify for special federal tax treatment under the Code.
There is no maximum age for owners on the Contract date.
(See "Issuance of a Contract.")
FREE-LOOK PERIOD. The owner has the right to return the
Contract within 20 days after he or she receives it. The
returned Contract will become void. The Company will
return to the owner an amount equal to the greater of the
premiums paid or the accumulated value on the date the
returned Contract is received at the Home Office plus
administrative charges and charges deducted from the
Account. (See "Free-Look Period.")
PREMIUMS. The minimum amount which the Company will
accept as an initial premium is $1,000. Subsequent
premiums of not less than $50 may be paid under the
Contract. (See "Premiums.")
ALLOCATION OF PREMIUMS. Premiums under a Contract will
be allocated, as designated by the owner, to one or more
Subaccounts, the Declared Interest Option, or both. The
initial premium will be allocated to the Money Market
Subaccount for a 10-day period following the Contract
date. At the end of that period, the amount in the Money
Market Subaccount will be allocated among the Subaccounts
and the Declared Interest Option in accordance with the
owner's percentage allocation in the application. The
assets of each Subaccount will be invested solely in a
corresponding Investment Option. The accumulated value,
except for amounts in the Declared Interest Option, will
vary according to the investment performance of the
Investment Option in which the selected Subaccounts are
invested. Interest will be credited to amounts in the
Declared Interest Option at a guaranteed minimum rate of
3% per year, or a higher current interest rate declared
by the Company. (See "Allocation of Premiums.")
TRANSFERS. On or before the retirement date, the owner
may transfer all or part of the amount in a Subaccount
or the Declared Interest Option to another Subaccount or
the Declared Interest Option subject to certain
restrictions.
The total amount transferred each time must be at least
$100 or the entire amount in the Subaccount, if less.
Transfers out of the Declared Interest Option must be for
no more than 25% of the accumulated value in that option.
No fee is currently charged for the first twelve
transfers during a Contract year, but the Company may
assess a transfer processing fee of $25 for each
subsequent transfer during a Contract year. (See
"Transfer Privilege.")
PARTIAL WITHDRAWAL. Upon written notice at any time
before the retirement date, the owner may withdraw part
of the accumulated surrender value subject to certain
limitations. (See "Partial Withdrawals.")
SURRENDER. Upon written notice received on or before the
retirement date, the owner may surrender the Contract
and receive its net accumulated value. (See "Surrender.")
- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS The following charges and deductions are assessed under
the Contract:
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE). No
charge for sales expense is deducted from premiums at
the time premiums are paid. However, if a Contract has
not been in force for six full Contract years, upon
surrender, partial withdrawal or the application of the
accumulated value to certain payment options under
certain circumstances, a surrender charge is deducted
from the amount surrendered, withdrawn or from the
remaining accumulated value.
For the first Contract year, the charge is 6% of the
amount surrendered. Thereafter, the surrender charge
decreases by 1% each subsequent Contract year. In no
event will the total surrender charge on any Contract
exceed 8.5% of the total premiums paid under the
Contract. (See "Charge for Partial Withdrawal or
Surrender.")
7
<PAGE>
Subject to certain restrictions, for partial withdrawals
in each Contract year after the first Contract year, up
to 10% of the accumulated value on the most recent
Contract Anniversary may be withdrawn without a current
surrender charge. If the Contract is subsequently
surrendered during the Contract Year, a surrender charge
will be applied to partial withdrawals taken. (See
"Amounts Not Subject to Surrender Charge.") The surrender
charge may be waived as provided in the Contracts. (See
"Waiver of Surrender Charge.")
ANNUAL ADMINISTRATIVE CHARGE. On the Contract date and
on each Contract anniversary prior to the retirement
date, the Company deducts an annual administrative charge
of $30 from the accumulated value. (See "Annual
Administrative Charge.")
MORTALITY AND EXPENSE RISK CHARGE. The Company deducts a
daily mortality and expense risk charge to compensate it
for assuming certain mortality and expense risks. The
charge is deducted from the assets of the Account at an
annual rate of 1.40% (approximately 1.01% for mortality
risk and 0.39% for expense risks). (See "Mortality and
Expense Risk Charge.")
INVESTMENT OPTION EXPENSES. Because the Account
purchases shares of the various Investment Options, the
assets of the Account will reflect the investment
advisory fee and other operating expenses incurred by the
Investment Options. A table of each Investment Option's
advisory fee and other expenses can be found in the
Expense Tables at the front of this prospectus. For a
description of each Investment Option's advisory fee and
other expenses, see the prospectuses for the Investment
Options of the Funds.
- --------------------------------------------------------------------------------
ANNUITY PROVISIONS On the retirement date, the accumulated value (less any
applicable surrender charge) will be applied under a
payment option, unless the owner chooses to receive the
net accumulated value in a lump sum. Payments under these
options do not depend upon the Account's performance.
(See "Payment Options.")
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS Generally, a distribution (including a surrender, partial
withdrawal or death benefit payment) may result in
taxable income. In certain circumstances, a 10% penalty
tax may apply. For further discussion of the federal
income status of variable annuity contracts, see "Federal
Tax Matters."
- --------------------------------------------------------------------------------
OTHER CONTRACTS
The Company offers other variable annuity contracts that
invest in the same Investment Options of the Funds. These
contracts may have different charges that could affect
Subaccount performance, and may offer different benefits
more suitable to a person's needs. To obtain more
information about these contracts, contact the Company.
- --------------------------------------------------------------------------------
THE COMPANY, ACCOUNT AND INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
FARM BUREAU LIFE INSURANCE COMPANY
The Company is a stock life insurance company
incorporated in the State of Iowa on October 30, 1944.
One hundred percent of the outstanding voting shares of
the Company are owned by FBL Financial Group, Inc. At
December 31, 1997, Iowa Farm Bureau Federation owned
66.36% of the outstanding voting stock of FBL Financial
Group, Inc. The Company is principally engaged in the
offering of life insurance policies, disability income
insurance policies and annuity contracts and is admitted
to do business in fifteen states--Arizona, Colorado,
Idaho, Iowa, Kansas, Minnesota, Montana, Nebraska, New
Mexico, North Dakota, Oklahoma, South Dakota, Utah,
Wisconsin and Wyoming. The principal offices of the
Company are at 5400 University Avenue, West Des Moines,
Iowa 50266.
- --------------------------------------------------------------------------------
IOWA FARM BUREAU FEDERATION
Iowa Farm Bureau Federation is an Iowa not-for-profit
corporation, the members of which are county Farm Bureau
organizations and their individual members. Iowa Farm
Bureau Federation is primarily engaged, through various
divisions and subsidiaries, in the formulation, analysis
and promotion of programs (at local, state, national and
international levels) that are designed to foster the
educational, social and economic advancement of its
members. The principal offices of Iowa Farm Bureau
Federation are at 5400 University Avenue, West Des
Moines, Iowa 50266.
8
<PAGE>
- --------------------------------------------------------------------------------
FARM BUREAU LIFE ANNUITY ACCOUNT II
The Account was established by the Company as a separate
account on January 6, 1998. The Account will receive and
invest premiums paid under the Contracts. In addition,
the Account may receive and invest premiums for any other
variable annuity contracts issued in the future by the
Company.
Although the assets in the Account are the property of
the Company, the assets in the Account attributable to
the Contracts are not chargeable with liabilities arising
out of any other business which the Company may conduct.
The assets of the Account are available to cover the
general liabilities of the Company only to the extent
that the Account's assets exceed its liabilities arising
under the Contracts and any other contracts supported by
the Account. The Company has the right to transfer to the
general account any assets of the Account which are in
excess of such reserves and other contract liabilities.
All obligations arising under the Contracts are general
corporate obligations of the Company.
The Account currently is divided into fifteen Subaccounts
but may, in the future, include additional subaccounts.
Each Subaccount invests exclusively in shares of a single
corresponding Investment Option. Income and realized and
unrealized gains or losses from the assets of each
Subaccount are credited to or charged against that
Subaccount without regard to income, gains or losses from
any other Subaccount.
The Account has been registered as a unit investment
trust under the Investment Company Act of 1940 (the "1940
Act") and meets the definition of a separate account
under the federal securities laws. Registration with the
Securities and Exchange Commission does not involve
supervision of the management or investment practices or
policies of the Account or the Company by the SEC. The
Account is also subject to the laws of the State of Iowa
which regulate the operations of insurance companies
domiciled in Iowa.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS The Account invests in shares of the Investment Options.
The Investment Options currently include the Value Growth
Portfolio, High Grade Bond Portfolio, High Yield Bond
Portfolio, Money Market Portfolio and Blue Chip Portfolio
of EquiTrust Variable Insurance Series Fund; the Equity
Income Portfolio, Mid-Cap Growth Portfolio, New America
Portfolio and Personal Strategy Balanced Portfolio of T.
Rowe Price Equity Series, Inc. and International Stock
Portfolio of T. Rowe Price International Series, Inc.;
and the Capital Appreciation Portfolio, Disciplined Stock
Portfolio, Growth and Income Portfolio, International
Equity Portfolio and Small Cap Portfolio of Dreyfus
Variable Investment Fund. The Account may, in the future,
provide for additional investment options. Each
Investment Option has its own investment objectives and
the income and losses for each Investment Option will be
determined separately.
The investment objectives and policies of each Investment
Option are summarized below. There is no assurance that
any Investment Option will achieve its stated objectives.
More detailed information, including a description of
risks and expenses, may be found in the prospectus for
each Investment Option, which must accompany or precede
this Prospectus and which should be read carefully and
retained for future reference.
EQUITRUST VARIABLE INSURANCE SERIES FUND
EquiTrust Investment Management Services, Inc. is the
investment adviser to the Fund. The Fund is comprised of
six portfolios, the following five of which are available
under the Contract:
VALUE GROWTH PORTFOLIO. This Portfolio seeks
long-term capital appreciation. The Portfolio pursues
this objective by investing primarily in equity
securities of companies that the investment adviser
believes have a potential to earn a high return on
capital and/or in equity securities that the
investment adviser believes are undervalued by the
market place. Such equity securities may include
common stock, preferred stock and securities
convertible or exchangeable into common stock.
HIGH GRADE BOND PORTFOLIO. This Portfolio seeks as
high a level of current income as is consistent with
an investment in a high grade portfolio of debt
9
<PAGE>
securities. The Portfolio will pursue this objective
by investing primarily in debt securities rated AAA,
AA or A by Standard & Poor's or Aaa, Aa or A by
Moody's Investors Service, Inc. and in securities
issued or guaranteed by the United States government
or its agencies or instrumentalities.
HIGH YIELD BOND PORTFOLIO. This Portfolio seeks as a
primary objective, as high a level of current income
as is consistent with investment in a portfolio of
fixed-income securities rated in the lower categories
of established rating services. As a secondary
objective, the Portfolio seeks capital appreciation
when consistent with its primary objective. The
Portfolio pursues these objectives by investing
primarily in fixed-income securities rated Baa or
lower by Moody's Investors Service, Inc. and/or BBB
or lower by Standards & Poor's, or in unrated
securities of comparable quality. AN INVESTMENT IN
THIS PORTFOLIO MAY ENTAIL GREATER THAN ORDINARY
FINANCIAL RISK. (See the Fund Prospectus "Principal
Risk Factors--Special Considerations--High Yield
Bonds.")
MONEY MARKET PORTFOLIO. This Portfolio seeks maximum
current income consistent with liquidity and
stability of principal. The Portfolio will pursue
this objective by investing in high quality
short-term money market instruments. AN INVESTMENT IN
THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE U .S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
BLUE CHIP PORTFOLIO. This Portfolio seeks growth of
capital and income. The Portfolio pursues this
objective by investing primarily in common stocks of
well-capitalized, established companies. Because this
Portfolio may be invested heavily in particular
stocks or industries, an investment in this Portfolio
may entail relatively greater risk of loss.
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Associates, Inc. is the investment adviser to the Fund.
EQUITY INCOME PORTFOLIO. This Portfolio seeks to
provide substantial dividend income and long-term
capital appreciation by investing primarily in
established companies considered by the adviser to
have favorable prospects for both increasing
dividends and capital appreciation.
MID-CAP GROWTH PORTFOLIO. This Portfolio seeks
long-term capital appreciation by investing primarily
in common stocks of medium-sized (mid-cap) growth
companies which offer the potential for above-average
earnings growth.
NEW AMERICA GROWTH PORTFOLIO. This Portfolio seeks
long-term capital growth by investing primarily in
common stocks of U.S. growth companies operating in
service industries.
PERSONAL STRATEGY BALANCED PORTFOLIO. This Portfolio
seeks the highest total return over time consistent
with an emphasis on both capital appreciation and
income.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
Rowe Price-Fleming International, Inc. is the investment adviser to the Fund.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO. This
Portfolio seeks to provide capital appreciation
through investments primarily in established
companies based outside the United States.
DREYFUS VARIABLE INVESTMENT FUND
The Dreyfus Corporation serves as the investment adviser to the Fund. Fayez
Sarofim and Co. serves as the sub-investment adviser to the Capital Appreciation
Portfolio. The Fund consists of thirteen portfolios, the following of which are
available under the Contract.
10
<PAGE>
CAPITAL APPRECIATION PORTFOLIO. This Portfolio seeks
long-term capital growth, consistent with the
preservation of capital; current income is a
secondary investment objective. This Portfolio
invests primarily in the common stocks of domestic
and foreign companies.
DISCIPLINED STOCK PORTFOLIO. This Portfolio seeks to
provide investment results that are greater than the
total return performance of publicly-traded common
stocks in the aggregate, as represented by the
Standard & Poor's 500 Composite Stock Price Index.
GROWTH AND INCOME PORTFOLIO. This Portfolio seeks to
provide long-term capital growth, current income and
growth of income, consistent with reasonable
investment risk by investing in stocks, bonds and
money market instruments of domestic and foreign
issuers.
INTERNATIONAL EQUITY PORTFOLIO. This Portfolio seeks
to maximize capital growth through investments in
equity securities of foreign issuers.
SMALL CAP PORTFOLIO. This Portfolio seeks maximum
capital appreciation by investing in companies, both
domestic and foreign, considered by the adviser to be
emerging smaller-sized companies which are believed
to be characterized by new or innovative products,
services or processes which should enhance prospects
for growth in future earnings.
The Funds currently sell shares: (a) to the Account as
well as to separate accounts of insurance companies that
may or may not be affiliated with the Company or each
other; and (b) to separate accounts to serve as the
underlying investment for both variable insurance
policies and variable annuity contracts. The Company
currently does not foresee any disadvantages to owners
arising from the sale of shares to support variable
annuity contracts and variable life insurance policies,
or from shares being sold to separate accounts of
insurance companies that may or may not be affiliated
with the Company. However, the Company will monitor
events in order to identify any material irreconcilable
conflicts that might possibly arise. In the event of such
a conflict, it would determine what action, if any,
should be taken in response to the conflict. In addition,
if the Company believes that a Fund's response to any
such conflicts insufficiently protects owners, it will
take appropriate action on its own, including withdrawing
the Account's investment in that Fund. (See the Fund
prospectuses for more detail.)
The Company may receive compensation from an affiliate(s)
of one or more of the Funds based upon an annual
percentage of the average assets held in the Investment
Options by the Company. These amounts are intended to
compensate the Company for administrative and other
services provided by the Company to the Funds and/or
affiliate(s).
Each Fund is registered with the SEC as an open-end,
diversified management investment company. Such
registration does not involve supervision of the
management or investment practices or policies of the
Fund by the SEC.
- --------------------------------------------------------------------------------
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable
law, to make additions to, deletions from or
substitutions for the shares that are held in the Account
or that the Account may purchase. If the shares of an
Investment Option are no longer available for investment
or if, in the Company's judgment, further investment in
any Investment Option should become inappropriate in view
of the purposes of the Account, the Company may redeem
the shares, if any, of that Investment Option and
substitute shares of another Investment Option. The
Company will not substitute any shares attributable to a
Contract's interest in a Subaccount without notice and
prior approval of the SEC and state insurance
authorities, to the extent required by the 1940 Act or
other applicable law.
The Company also reserves the right to establish
additional subaccounts of the Account, each of which
would invest in shares corresponding to an Investment
Option or in shares of another investment company having
a specified investment
11
<PAGE>
objective. The Company may, in its sole discretion,
establish new subaccounts or eliminate or combine one or
more Subaccounts if marketing needs, tax considerations
or investment conditions warrant. Any new subaccounts may
be made available to existing Contract owners on a basis
to be determined by the Company. Subject to obtaining any
approvals or consents required by applicable law, the
assets of one or more Subaccounts may be transferred to
any other Subaccount if, in the sole discretion of the
Company, marketing, tax or investment conditions warrant.
In the event of any such substitution or change, the
Company may, by appropriate endorsement, change the
Contract to reflect the substitution or change. If the
Company deems it to be in the best interest of Contract
owners and annuitants, and subject to any approvals that
may be required under applicable law, the Account may be
operated as a management investment company under the
1940 Act, it may be deregistered under that Act if
registration is no longer required, it may be combined
with other Company separate accounts or its assets may be
transferred to another separate account of the Company.
In addition, the Company may, when permitted by law,
restrict or eliminate any voting rights of owners or the
persons who have such rights under the Contracts.
- --------------------------------------------------------------------------------
DESCRIPTION OF ANNUITY CONTRACT
- --------------------------------------------------------------------------------
ISSUANCE OF A CONTRACT In order to purchase a Contract, application must be made
to the Company through a licensed representative of the
Company, who is also a registered representative of
EquiTrust Marketing Services, Inc. ("EquiTrust
Marketing") (formerly FBL Marketing Services, Inc.), a
broker-dealer having a selling agreement with EquiTrust
Marketing or a broker-dealer having a selling agreement
with such broker/dealer. The Contract Date will be the
date the properly completed application is received by
the Company at its Home Office. If this date is the 29th,
30th or 31st of any month, the Contract Date will be the
28th of such month. Contracts may be sold to or in
connection with retirement plans that do not qualify for
special tax treatment as well as retirement plans that
qualify for special tax treatment under the Code. There
is no maximum age for owners on the Contract date.
- --------------------------------------------------------------------------------
PREMIUMS The minimum initial premium which the Company will accept
is $1,000. Subsequent premium payments may be paid at any
time during the annuitant's lifetime and before the
retirement date and must be for at least $50.
At the time of application, a premium reminder notice
schedule may be selected based on an annual, semi-annual
or quarterly payment. The owner will receive a premium
reminder notice at the specified interval. The owner may
change the amount and schedule of the premium reminder
notice. Also, under the Automatic Payment Plan, the owner
can select a monthly payment schedule pursuant to which
premium payments will be automatically deducted from a
bank account or other source rather than being "billed."
The Contract will not necessarily lapse even if premiums
are not paid.
- --------------------------------------------------------------------------------
FREE-LOOK PERIOD The Contract provides for an initial "free-look" period.
The owner has the right to return the Contract within 20
days of receiving it. When the Company receives the
returned Contract at its Home Office, it will cancel the
Contract and refund to the owner an amount equal to the
greater of the premiums paid under the Contract or the
sum of the accumulated value as of the date the returned
Contract is received by the Company at its Home Office
plus the amount of the annual administration charge and
any charges deducted from the Account.
- --------------------------------------------------------------------------------
ALLOCATION OF PREMIUMS If the application for a Contract is properly completed
and is accompanied by all the information necessary to
process it, including payment of the initial premium, the
initial premium will be allocated to the Money Market
Subaccount within two business days of receipt of such
premium by the Company at its Home Office. If the
application is not properly completed, the Company
reserves the right to retain the premium for up to five
business days while it attempts to complete the
application. If the application is not complete at the
end of the 5-day period, the Company will
12
<PAGE>
inform the applicant of the reason for the delay and the
initial premium will be returned immediately, unless the
applicant specifically consents to the Company retaining
the premium until the application is complete.
At the time of application, the owner selects how the
initial premium is to be allocated among the Subaccounts
and the Declared Interest Option. Any allocation must be
for at least 10% of a premium payment and be in whole
percentages.
The initial premium will be allocated to the Money Market
Subaccount for a 10-day period following the Contract
date. After the expiration of the 10-day period, the
amount in the Money Market Subaccount will be allocated
among the Subaccounts and the Declared Interest Option in
accordance with the owner's percentage allocation in the
application. Any subsequent premiums will be allocated at
the end of the valuation period in which the subsequent
premium is received by the Company in the same manner,
unless the allocation percentages are changed. Subsequent
premiums will be allocated in accordance with the
allocation schedule in effect at the time the premium
payment is received. However, owners may direct
individual payments to a specific Subaccount or the
Declared Interest Option (or any combination thereof)
without changing the existing allocation schedule.
The allocation schedule may be changed by the owner at
any time by written notice. Changing the allocation
schedule will not change the allocation of existing
accumulated values among the Subaccounts or the Declared
Interest Option.
The accumulated values allocated to a Subaccount will
vary with that Subaccount's investment experience, and
the owner bears the entire investment risk. Owners should
periodically review their premium allocation schedule in
light of market conditions and their overall financial
objectives.
- --------------------------------------------------------------------------------
VARIABLE ACCUMULATED VALUE
The variable accumulated value will reflect the
investment experience of the selected Subaccounts, any
premiums paid, any surrenders or partial withdrawals, any
transfers and any charges assessed in connection with the
Contract. There is no guaranteed minimum variable
accumulated value, and, because a Contract's variable
accumulated value on any future date depends upon a
number of variables, it cannot be predetermined.
CALCULATION OF VARIABLE ACCUMULATED VALUE. The variable
accumulated value is determined at the end of each
valuation period. The value will be the aggregate of the
values attributable to the Contract in each of the
Subaccounts, determined for each Subaccount by
multiplying that Subaccount's unit value for the relevant
valuation period by the number of Subaccount units
allocated to the Contract.
DETERMINATION OF NUMBER OF UNITS. Any amounts allocated
to the Subaccounts will be converted into Subaccount
units. The number of units to be credited to a Contract
is determined by dividing the dollar amount being
allocated to a Subaccount by the unit value for that
Subaccount at the end of the valuation period during
which the amount was allocated. The number of units in
any Subaccount will be increased at the end of the
valuation period by any premiums allocated to the
Subaccount during the current valuation period and by any
amounts transferred to the Subaccount from another
Subaccount or the Declared Interest Option during the
current valuation period. The number of units in any
Subaccount will be decreased at the end of the valuation
period by any amounts transferred from that Subaccount to
another Subaccount or the Declared Interest Option, any
amounts withdrawn during the current valuation period,
any surrender charge assessed upon a partial withdrawal
or surrender and the annual administrative charge, if
assessed during the current valuation period.
DETERMINATION OF UNIT VALUE. The unit value for each
Subaccount's first valuation period is set at $10. The
unit value for a Subaccount is calculated for each
subsequent valuation period by dividing (a) by (b) where:
(a) is the net result of:
1. the value of the net assets in the
Subaccount at the end of the preceding valuation
period; plus
13
<PAGE>
2. the investment income, dividends and
capital gains, realized or unrealized, credited to
the Subaccount during the current valuation
period; minus
3. the capital losses, realized or
unrealized, charged against the Subaccount during
the current valuation period; minus
4. any amount charged for taxes or any amount
set aside during the valuation period as a
provision for taxes attributable to the
Subaccount; minus
5. the daily amount charged for mortality and
expense risks for each day of the current
valuation period; and
(b) the number of units outstanding at the end of
the preceding valuation period.
- --------------------------------------------------------------------------------
TRANSFER PRIVILEGE Before the retirement date, an owner may transfer all or
part of an amount in a Subaccount to another Subaccount
or the Declared Interest Option at any time, or transfer
up to 25% of an amount in the Declared Interest Option to
one or more Subaccounts. However, if a transfer request
would reduce the amount in the Declared Interest Option
below $1,000, the owner may transfer the entire amount
from the Declared Interest Option. The minimum transfer
amount must be the lesser of $100 or the entire amount in
that Subaccount or the Declared Interest Option.
The transfer will be made as of the business day on or
next following the day written notice requesting such
transfer is received at the Home Office. There is no
limit on the number of transfers that can be made among
or between Subaccounts or the Declared Interest Option.
(See "Transfers from Declared Interest Option.")
There is no charge for the first twelve transfers during
a Contract Year. The Company may charge $25 for each
subsequent transfer during a Contract Year. Unless paid
in cash, the transfer processing fee will be deducted on
a pro-rata basis from the Subaccounts or Declared
Interest Option to which the transfer is made.
Transfers may be made based upon instructions given by
telephone, provided the appropriate election has been
made at the time of application or proper authorization
is provided to the Company. The Company reserves the
right to suspend telephone transfer privileges at any
time, for any class of Contracts, for any reason.
- --------------------------------------------------------------------------------
PARTIAL WITHDRAWALS AND SURRENDERS
PARTIAL WITHDRAWALS. At any time before the retirement
date, an owner may make a partial withdrawal of the
accumulated value. The minimum amount which may be
withdrawn is $500; the maximum amount is that which would
leave the remaining accumulated value equal to or less
than $2,000. A partial withdrawal request that would
reduce the accumulated value to $2,000 or less will be
treated as a full surrender of the Contract. The Company
will withdraw the amount requested from the accumulated
value as of the Business Day on or next following the day
written notice requesting the partial withdrawal is
received at the Home Office. Any applicable surrender
charge will, at the election of the owner, be deducted
from the remaining accumulated value or be deducted from
the amount withdrawn. (See "Surrender Charge.")
The owner may specify the amount of the partial
withdrawal to be made from certain Subaccounts or the
Declared Interest Option. If the owner does not so
specify, or if the amount in the designated Subaccount(s)
or Declared Interest Option is inadequate to comply with
the request, the partial withdrawal will be made from
each Subaccount and the Declared Interest Option based on
the proportion that the value in such Subaccount bears to
the total accumulated value on the date the request is
received at the Home Office.
A partial withdrawal may have adverse federal income tax
consequences, including a penalty tax. (See "Taxation of
Annuities.")
14
<PAGE>
SURRENDER. At any time before the retirement date, the
owner may request a surrender of the contract for its
net accumulated value. The net accumulated value will be
determined as of the Business Day on or next following
the date written notice requesting surrender and the
Contract are received at the Home Office. The net
accumulated value will be paid in a lump sum unless the
owner requests payment under a payment option. A
surrender may have adverse federal income tax
consequences. (See "Taxation of Annuities.")
SURRENDER AND PARTIAL WITHDRAWAL RESTRICTIONS. The
owner's right to make surrenders and partial withdrawals
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 withdrawals 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: (i) elective
contributions made in years beginning after December 31,
1988; (ii) earnings on those contributions; and (iii)
earnings in such years on amounts held as of the last
year beginning before January 1, 1989. Distributions of
those amounts may only occur upon the death of the
employee, attainment of age 59 1/2, separation from
service, disability or financial hardship. In addition,
income attributable to elective contributions may not be
distributed in the case of hardship.
- --------------------------------------------------------------------------------
SPECIAL TRANSFER AND WITHDRAWAL OPTIONS
DOLLAR COST AVERAGING. Dollar Cost Averaging is a
special type of automatic transfer. Under this option,
an owner may periodically transfer a specified amount in
a Subaccount or the Declared Interest Option into up to
ten other Subaccounts or the Declared Interest Option.
The use of Dollar Cost Averaging is subject to all the
same provisions and limitations as regular transfers
described above and are considered in the twelve free
transfers during a Contract Year.
SYSTEMATIC WITHDRAWALS. The Systematic Withdrawal option
allows for automatic partial withdrawals. Under this
option, specified amounts may be periodically withdrawn
from the Contract's accumulated value. The owner may
specify the allocation of the withdrawals among the
Subaccounts and Declared Interest Option. The use of the
Systematic Withdrawal option is subject to all the same
provisions and limitations as regular partial withdrawals
described above.
The Company prohibits the use of these two options at the
same time.
- --------------------------------------------------------------------------------
DEATH BENEFIT BEFORE THE RETIREMENT DATE
DEATH OF OWNER. If an owner dies prior to the retirement
date, any surviving owner becomes the sole owner. If
there is no surviving owner, the annuitant becomes the
new owner unless the deceased owner was also the
annuitant. If the sole deceased owner was also the
annuitant, then the provisions relating to the death of
an annuitant (described below) will govern unless the
deceased owner was one of two joint annuitants. (In the
latter event, the surviving annuitant becomes the owner.)
The following options are available to the sole surviving
owners or new owners:
1. If the owner is the spouse of the deceased
owner, he or she may continue the Contract as the new
owner.
2. If the owner is not the spouse of the
deceased owner:
(a) he or she may elect to receive the net
accumulated value in a single sum within 5 years
of the deceased owner's death; or
(b) he or she may elect to receive the net
accumulated value paid out under one of the
annuity payment options, with payments beginning
within one year after the date of the owner's
death and with payments being made over the
lifetime of the owner, or over a period that does
not exceed the life expectancy of the owner.
Under either of these options, sole surviving owners or
new owners may exercise all ownership rights and
privileges from the date of the deceased owner's death
until the date that the net accumulated value is paid.
DEATH OF AN ANNUITANT. If the annuitant dies before the
retirement date, the Company will pay the death benefit
under the Contract to the beneficiary. If there is no
surviving
15
<PAGE>
beneficiary, the Company will pay the death benefit to
the owner or the owner's estate. If the annuitant's age
on the Contract Date was less than 76, the death benefit
is equal to the greater of the sum of the premiums paid
less the sum of all partial withdrawal reductions
(including applicable surrender charges), the accumulated
value on the date the Company receives due proof of the
annuitant's death, or the accumulated value on the most
recent Contract Anniversary (plus subsequent premiums
paid and less subsequent partial withdrawals). If the
annuitant's age on the Contract Date was 76 or older, the
death benefit is equal to the greater of the sum of the
premiums paid less the sum of all partial withdrawal
reductions (including applicable surrender charges) as of
the date the Company receives due proof of death, or the
accumulated value as of the date the Company receives due
proof of death.
A partial withdrawal reduction is defined as a) the death
benefit immediately prior to withdrawal times b) the
amount of the partial withdrawal (including applicable
surrender charges) divided by c) the accumulated value
immediately prior to withdrawal.
There is no death benefit payable if the annuitant dies
after the retirement date. The death benefit will be paid
to the beneficiary in a lump sum unless the owner or
beneficiary elects a payment option.
If the annuitant who is also the the owner dies, the
provisions described immediately above apply except that
the beneficiary may only apply the death benefit payment
to an annuity payment option if:
1. payments under the option begin within 1 year
of the annuitant's death; and
2. payments under the option are payable over
the beneficiary's life or over a period not greater
than the beneficiary's life expectancy.
If the owner's spouse is the designated beneficiary, the
Contract may be continued with such surviving spouse as
the new owner.
- --------------------------------------------------------------------------------
DEATH BENEFIT AFTER THE RETIREMENT DATE
If an owner dies on or after the retirement date, any
surviving owner becomes the sole owner. If there is no
surviving owner, the payee receiving annuity payments
becomes the new owner. Such owners will have the rights
of owners during the annuity period, including the right
to name successor payees if the deceased owner had not
previously done so.
If the annuitant dies before 120 payments have been
received, any remaining payments will be paid to the
beneficiary. There is no death benefit payable if the
annuitant dies after the retirement date.
Other rules may apply to a Qualified Contract.
- --------------------------------------------------------------------------------
PROCEEDS ON THE RETIREMENT DATE
The retirement date is selected by the owner. For
Non-Qualified Contracts, the retirement date may not be
after the later of the annuitant's age 70 or 10 years
after the Contract date. For Qualified Contracts, the
retirement date must be no later than the annuitant's age
70 1/2 or such other date as meets the requirements of
the Code.
On the retirement date, the proceeds will be applied
under the life income annuity payment option with ten
years guaranteed, unless the owner chooses to have the
proceeds paid under another payment option or in a lump
sum. (See "Payment Options.") If a payment option is
elected, the amount that will be applied is the
accumulated value less any applicable surrender charge.
If a lump sum payment is chosen, the amount paid will be
the net accumulated value on the retirement date.
The retirement date may be changed subject to these
limitations: the owner's written notice must be received
at the Home Office at least 30 days before the current
retirement date; the requested retirement date must be a
date that is at least 30 days after receipt of the
written notice; and the requested retirement date must be
no later than the annuitant's 70th birthday or any
earlier date required by law.
16
<PAGE>
- --------------------------------------------------------------------------------
PAYMENTS Any surrender, partial withdrawal or death benefit will
usually be paid within seven days of receipt of a written
request, any information or documentation reasonably
necessary to process the request and, in the case of a
death benefit, receipt and filing of due proof of death.
However, payments may be postponed if:
1. the New York Stock Exchange is closed, other
than customary weekend and holiday closings, or
trading on the exchange is restricted as determined
by the SEC; or
2. the SEC permits by an order the postponement
for the protection of owners; or
3. the SEC determines that an emergency exists
that would make the disposal of securities held in
the Account or the determination of the value of the
Account's net assets not reasonably practicable.
If a recent check or draft has been submitted, the
Company has the right to delay payment until it has
assured itself that the check or draft has been honored.
The Company has the right to defer payment of any
surrender, partial withdrawal or transfer from the
Declared Interest Option for up to six months from the
date of receipt of written notice for such a surrender,
withdrawal or transfer. If payment is not made within 30
days after receipt of documentation necessary to complete
the transaction, or such shorter period as required by a
particular jurisdiction, interest will be added to the
amount paid from the date of receipt of documentation at
3% or such higher rate required for a particular state.
- --------------------------------------------------------------------------------
MODIFICATION Upon notice to the owner, the Company may modify the
Contract if:
1. necessary to make the Contract or the Account
comply with any law or regulation issued by a
governmental agency to which the Company is subject;
or
2. necessary to assure continued qualification
of the Contract under the Code or other federal or
state laws relating to retirement annuities or
variable annuity contracts; or
3. necessary to reflect a change in the
operation of the Account; or
4. the modification provides additional Account
and/or fixed accumulation options.
In the event of most such modifications, the Company will
make appropriate endorsement to the Contract.
- --------------------------------------------------------------------------------
REPORTS TO OWNERS At least annually, the Company will mail to each owner,
at such owner's last known address of record, a report
containing the accumulated value (including the
accumulated value in each Subaccount and the Declared
Interest Option) of the Contract, premiums paid and
charges deducted since the last report, partial
withdrawals made since the last report and any further
information required by any applicable law or regulation.
- --------------------------------------------------------------------------------
INQUIRIES Inquiries regarding a Contract may be made by writing to
the Company at its Home Office.
- --------------------------------------------------------------------------------
THE DECLARED INTEREST OPTION
- --------------------------------------------------------------------------------
An owner may allocate some or all of the premiums and
transfer some or all of the accumulated value to the
Declared Interest Option, which is part of the General
Account and pays interest at declared rates guaranteed
for each Contract year (subject to a minimum guaranteed
interest rate of 3%). The principal, after deductions, is
also guaranteed. The Company's General Account supports
its insurance and annuity obligations.
17
<PAGE>
The Declared Interest Option has not been, and is not
required to be, registered with the SEC under the
Securities Act of 1933 (the "1933 Act"), and neither the
Declared Interest Option nor the Company's General
Account has been registered as an investment company
under the 1940 Act. Therefore, neither the Company's
General Account, the Declared Interest Option, nor any
interests therein are generally subject to regulation
under the 1933 Act or the 1940 Act. The disclosures
relating to these accounts which are included in this
Prospectus are for the 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 laws relating to the accuracy and
completeness of statements made in prospectuses.
The portion of the accumulated value allocated to the
Declared Interest Option (the "Declared Interest Option
accumulated value") will be credited with rates of
interest, as described below. Since the Declared Interest
Option is part of the General Account, the Company
assumes the risk of investment gain or loss on this
amount. All assets in the General Account are subject to
the Company's general liabilities from business
operations.
- --------------------------------------------------------------------------------
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Declared Interest Option cash value is guaranteed to
accumulate at a minimum effective annual interest rate of
3%. The Company intends to credit the Declared Interest
Option accumulated value with current rates in excess of
the minimum guarantee but is not obligated to do so.
These current interest rates are influenced by, but do
not necessarily correspond to, prevailing general market
interest rates. Any interest credited on the amounts in
the Declared Interest Option in excess of the minimum
guaranteed rate of 3% per year will be determined in the
sole discretion of the Company. The owner, therefore,
assumes the risk that interest credited may not exceed
the guaranteed rate.
From time to time, the Company establishes new current
interest rates for the Declared Interest Option under the
Contracts. The rate applicable for a particular Contract
is the rate in effect on the most recent Contract
anniversary. This rate remains unchanged for that
Contract until the next Contract anniversary (i.e., for
the entire Contract year). During each Contract year, the
entire Declared Interest Option accumulated value
(including amounts allocated or transferred to the
Declared Interest Option during that year) is credited
with the interest rate in effect for that Contract year.
Once credited, interest becomes part of the Declared
Interest Option accumulated value.
The Company reserves the right to change the method of
crediting interest from time to time, provided that such
changes do not have the effect of reducing the guaranteed
rate of interest below 3% per annum or shorten the period
for which the current interest rate applies to less than
a Contract year (except for the year in which such amount
is received or transferred).
CALCULATION OF DECLARED INTEREST OPTION ACCUMULATED
VALUE. The Declared Interest Option accumulated value at
any time is equal to amounts allocated and transferred to
it, plus interest credited less amounts deducted,
transferred or withdrawn.
- --------------------------------------------------------------------------------
TRANSFERS FROM DECLARED INTEREST OPTION
An unlimited number of transfers are allowed from the
Declared Interest Option to any or all of the Subaccounts
in each Contract year. The amount transferred from the
Declared Interest Option may not exceed 25% of the
Declared Interest Option accumulated value on the date of
transfer, unless the balance after the transfer would be
less than $1,000, in which case the entire amount may be
transferred.
- --------------------------------------------------------------------------------
PAYMENT DEFERRAL The Company has the right to defer payment of any
surrender, partial withdrawal or transfer from the
Declared Interest Option up to six months from the date
of receipt of the written notice for surrender or
transfer.
18
<PAGE>
- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL. No charge for sales expenses is deducted from
premiums at the time premiums are paid. However, within
certain time limits described below, a surrender charge
(contingent deferred sales charge) is deducted from the
accumulated value if a partial withdrawal or surrender is
made before the retirement date. Also, as described
below, a surrender charge may be deducted from amounts
applied to certain payment options.
In the event surrender charges are not sufficient to
cover sales expenses, the loss will be borne by the
Company; conversely, if the amount of such charges proves
more than enough, the excess will be retained by the
Company.
CHARGE FOR PARTIAL WITHDRAWAL OR SURRENDER. During the
first six Contract years, if a partial withdrawal or
surrender is made, the applicable surrender charge will
be as follows:
CONTRACT YEAR IN CHARGE AS PERCENTAGE
WHICH SURRENDER OCCURS OF AMOUNT SURRENDERED
------------------------- ---------------------
1........................ 6%
2........................ 5
3........................ 4
4........................ 3
5........................ 2
6........................ 1
7 and After.............. 0
No surrender charge is deducted if the partial withdrawal
or surrender occurs after six full Contract years.
In no event will the total surrender charges assessed
under a Contract exceed 8.5% of the total premiums paid
under that Contract.
If the Contract is being surrendered, the surrender
charge is deducted from the accumulated value in
determining the net accumulated value. For a partial
withdrawal, the surrender charge may, at the election of
the owner, be deducted from the accumulated value
remaining after the amount requested is withdrawn or be
deducted from the amount of the withdrawal requested.
AMOUNTS NOT SUBJECT TO SURRENDER CHARGE. For partial
withdrawals in each Contract year after the first
Contract year, up to 10% of the accumulated value on the
most recent Contract Anniversary may be withdrawn without
a current surrender charge. If the Contract is
subsequently surrendered during the Contract Year, a
surrender charge will be applied to partial withdrawals
taken during that Contract Year, as well as to the amount
surrendered.
Any amounts surrendered in excess of 10% of the
accumulated value will be assessed a surrender charge.
This right is not cumulative from Contract year to
Contract year.
SURRENDER CHARGE AT THE RETIREMENT DATE. If any payment
option is selected at the retirement date other than
options 2-5 described below (see "Payment Options"), the
surrender charge is assessed against the accumulated
value applied to that option. If payment options 3 or 5
are selected, no surrender charge is assessed and if
payment options 2 or 4 are selected, the surrender charge
is applied by adding the fixed number of years for which
payments will be made under the option to the number of
Contract years since the Contract date and using this sum
in the surrender charge table.
WAIVER OF SURRENDER CHARGE. Upon written notice from the
owner before the retirement date, the surrender charge
may be waived after the first Policy Year on any partial
withdrawal or surrender if the annuitant is terminally
ill as defined in the Contract, stays in a qualified
nursing center for 90 days, or is required to satisfy
Internal Revenue Code minimum distribution requirements.
19
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL ADMINISTRATIVE CHARGE
On the Contract date and on each Contract anniversary
prior to the retirement date, the Company deducts from
the accumulated value an annual administrative charge of
$30 to reimburse it for administrative expenses relating
to the Contract. (If the Contract date falls on
Thanksgiving, the Friday following Thanksgiving or the
weekend following Thanksgiving; or on the 27th or 28th
day of February, 1999, the annual administrative charge
will be deducted on the preceding Business Day.) The
charge will be deducted from each Subaccount and the
Declared Interest Option based on the proportion that the
value in each such Subaccount bears to the total
accumulated value. No annual administrative charge is
payable during the annuity payment period.
- --------------------------------------------------------------------------------
TRANSFER PROCESSING
FEE There is no charge for the first twelve transfers during
a Contract Year. The Company may charge $25 for each
subsequent transfer during a Contract year. Unless paid
in cash, the transfer processing fee will be deducted on
a pro-rata basis from the Subaccounts or Declared
Interest Option to which the transfer is made.
- --------------------------------------------------------------------------------
MORTALITY AND EXPENSE RISK CHARGE
To compensate the Company for assuming mortality and
expense risks, the Company deducts a daily mortality and
expense risk charge from the assets of the Account. The
charge is at an annual rate of 1.40% (daily rate of
0.0038091%) (approximately 1.01% for mortality risk and
0.39% for expense risk).
The mortality risk the Company assumes is that annuitants
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 longevity
will not have an adverse effect on the annuity payments
received. The mortality risk that the Company assumes
also includes a guarantee to pay a death benefit if the
owner/annuitant dies before the retirement date. The
expense risk that the Company assumes is the risk that
the administrative fees and transfer fees may be
insufficient to cover actual future expenses.
- --------------------------------------------------------------------------------
INVESTMENT OPTION EXPENSES
Because the Account purchases shares of the Investment
Options, the net assets of the Account will reflect the
investment advisory fees and other operating expenses
incurred by each Investment Option. (See the Expense
Tables in this prospectus and the accompanying Investment
Option prospectuses.)
- --------------------------------------------------------------------------------
PREMIUM TAXES Currently, no charge or deduction is made under the
Contracts for premium taxes. The Company reserves the
right, however, to deduct such taxes from accumulated
value. Various states and other governmental entities
levy a premium tax, currently ranging up to 3.5%, on
annuity contracts issued by insurance companies. Premium
tax rates are subject to change, from time to time, by
legislative and other governmental action.
- --------------------------------------------------------------------------------
OTHER TAXES Currently, no charge is made against the Account for any
federal, state or local taxes that the Company incurs or
that may be attributable to the Account or the Contracts.
The Company may, however, make such a charge in the
future for any such tax or economic burden on the Company
resulting from the application of the tax laws that it
determines to be properly attributable to the Account or
Contracts.
- --------------------------------------------------------------------------------
PAYMENT OPTIONS
- --------------------------------------------------------------------------------
The Contract ends on the retirement date, at which time
the accumulated value (or, under certain options, the net
accumulated value) will be applied under a payment
option, unless the owner elects to receive the net
accumulated value in a single sum. If an election of a
payment option has not been filed at the Home Office on
the retirement date, the proceeds will be paid as a life
income annuity with payments for ten years guaranteed.
Prior to the retirement date, the owner can have the
entire net accumulated value applied under a payment
option, or a beneficiary can have the death benefit
applied under a payment option. The Contract must be
surrendered so that the applicable amount can be paid in
a lump sum or a supplemental contract for the applicable
payment option can be issued.
20
<PAGE>
The payment options available are described below. The
term "payee" means a person who is entitled to receive
payment under that option. The payment options are fixed,
which means that each option has a fixed and guaranteed
amount to be paid during the annuity payment period that
is not in any way dependent upon the investment
experience of the Account.
- --------------------------------------------------------------------------------
ELECTION OF OPTIONS An option may be elected, revoked or changed at any time
before the retirement date while the annuitant is living.
If an election is not in effect at the annuitant's death
or if payment is to be made in one sum under an existing
election, the beneficiary may elect one of the options
after the death of the owner/annuitant.
An election of payment options and any revocation or
change must be made by written notice and signed by the
owner or beneficiary, as appropriate.
The Company reserves the right to refuse the election of
a payment option other than paying the proceeds in a lump
sum if: 1) the total payments together would be less than
$2,000; 2) each payment would be less than $20; or 3) the
payee is an assignee, estate, trustee, partnership,
corporation or association.
- --------------------------------------------------------------------------------
DESCRIPTION OF OPTIONS
OPTION 1--INTEREST INCOME. To have the proceeds left
with the Company to earn interest at a rate to be
determined by the Company. Interest will be paid every
month or every 3, 6 or 12 months as the payee selects.
Under this option, the payee may withdraw part or all of
the proceeds at any time.
OPTION 2--INCOME FOR A FIXED TERM. To have the proceeds
paid out in equal installments for a fixed number of
years.
OPTION 3--LIFE INCOME OPTION WITH TERM CERTAIN. To have
the proceeds paid in equal amounts (at intervals elected
by the payee) during the payee's lifetime with the
guarantee that payments will be made for a period of not
less than the specified number of years. Under this
option, at the death of a payee having no beneficiary (or
where the beneficiary died prior to the payee), the
present value of the current dollar amount on the date of
death of any remaining guaranteed payments will be paid
in one sum to the executors or administrators of the
payee's estate. Also under this option, if any
beneficiary dies while receiving payment, the present
value of the current dollar amount on the date of death
of any remaining guaranteed payments will be paid in one
sum to the executors or administrators of the
beneficiary's estate. Calculation of such present value
shall be no less than 3%.
OPTION 4--INCOME FOR FIXED AMOUNT. To have the proceeds
paid out in equal installments (at intervals elected by
the payee) of a specific amount. The payments will
continue until all the proceeds plus interest have been
paid out.
OPTION 5--JOINT AND TWO-THIRDS TO SURVIVOR MONTHLY LIFE
INCOME. To have proceeds paid out in equal installments
for as long as two joint payees live. When one payee
dies, installments of two-thirds of the first installment
will be paid to the surviving payee until he or she dies.
The amount of each payment will be determined from the
tables in the Contract which apply to the particular
option using the payee's age and sex. Age will be
determined from the last birthday at the due date of the
first payment.
ALTERNATE PAYMENT OPTION. In lieu of one of the above
options, the cash value, cash surrender value or death
benefit, as applicable, may be settled under any other
payment option made available by the Company or requested
and agreed to by the Company.
- --------------------------------------------------------------------------------
YIELDS AND TOTAL RETURNS
- --------------------------------------------------------------------------------
From time to time, the Company may advertise or include
in sales literature yields, effective yields and total
returns for the Subaccounts. THESE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND DO NOT INDICATE OR PROJECT
FUTURE PERFORMANCE. Each Subaccount may, from time to
time, advertise or include in sales literature
performance relative to
21
<PAGE>
certain performance rankings and indices compiled by
independent organizations. More detailed information as
to the calculation of performance, as well as comparisons
with unmanaged market indices, appears in the Statement
of Additional Information.
Effective yields and total returns for the Subaccounts
are based on the investment performance of the
corresponding Investment Option. Each Investment Option's
performance in part reflects the Investment Option's
expenses. (See the accompanying Investment Option
Prospectuses.)
The yield of the Money Market Subaccount refers to the
annualized income generated by an investment in the
Subaccount 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 Subaccount 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 Subaccount (except the Money Market
Subaccount) refers to the annualized income generated by
an investment in the Subaccount 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 Subaccount refers to return
quotations assuming an investment under a Contract has
been held in the Subaccount for various periods of time.
When a Subaccount has been in operation for one, five and
ten years, respectively, the total return for these
periods will be provided. For periods prior to the date
the Account commenced operations, performance information
will be calculated based on the performance of the
Investment Options and the assumption that the
Subaccounts were in existence for the same periods as
those indicated for the Investment Options, with the
level of Contract charges that were in effect at the
inception of the Subaccounts for the Contracts.
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 total return
quotations are provided. Average annual total return
information shows the average percentage change in the
value of an investment in the Subaccount 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 Subaccount
(including any surrender charge that would apply if an
owner terminated the Contract at the end of each period
indicated, but excluding any deductions for premium
taxes).
In addition to the standard version 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 described above, except deductions will not
include the surrender charge. In addition, the Company
may, from time to time, disclose cumulative total return
for Contracts funded by Subaccounts.
From time to time, yields, standard average annual total
returns and non-standard total returns for the Fund's
Investment Options may be disclosed, including such
disclosures for periods prior to the date the Account
commenced operations.
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.
22
<PAGE>
In advertising and sales literature, the performance of
each Subaccount 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 Subaccounts. Lipper Analytical Services, Inc.
("Lipper") and the Variable Annuity Research Data Service
("VARDS") 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's 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 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 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 Subaccount 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.
The Company may also report other information including
the effect of tax-deferred compounding on a Subaccount's
investment returns, or returns in general, which may be
illustrated by tables, graphs or charts. All income and
capital gains derived from Subaccount investments are
reinvested and can lead to substantial long-term
accumulation of assets, provided that the underlying
Portfolio's investment experience is positive.
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED
AS TAX ADVICE
- --------------------------------------------------------------------------------
INTRODUCTION This discussion is not intended to address the tax
consequences resulting from all of the situations in
which a person may be entitled to or may receive a
distribution under the annuity contract issued by the
Company. Any person concerned about these tax
implications should consult a competent tax adviser
before initiating any transaction. This discussion is
based upon the Company's understanding of the present
Federal income tax laws, as they are currently
interpreted by the Internal Revenue Service. No
representation is made as to the likelihood of the
continuation of the present federal income tax laws or of
the current interpretation by the Internal Revenue
Service. Moreover, no attempt has been made to consider
any applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis
("Non-Qualified Contract") or purchased and used in
connection with plans qualifying for favorable tax
treatment ("Qualified Contract"). The Qualified Contract
is designed for use by individuals whose premium payments
are comprised solely of proceeds from and/or
contributions under retirement plans which are intended
to qualify as plans entitled to special income tax
treatment under Sections 401(a), 403(b), or 408 of the
Internal Revenue Code of 1986, as amended (the "Code").
The ultimate effect of federal income taxes on the
amounts held under a Contract, or annuity payments, and
on the economic benefit to the owner, the annuitant or
the beneficiary depends on the type of retirement plan,
on the tax and employment status of the individual
concerned, and on the Company's tax status. In addition,
certain requirements must be satisfied in purchasing a
Qualified Contract with proceeds from a tax-qualified
plan and receiving distributions from a Qualified
Contract in order to continue receiving
23
<PAGE>
favorable tax treatment. Therefore, purchasers of
Qualified Contracts should seek competent legal and tax
advice regarding the suitability of a Contract for their
situation, the applicable requirements and the tax
treatment of the rights and benefits of a Contract. The
following discussion assumes that Qualified Contracts are
purchased with proceeds from and/or contributions under
retirement plans that qualify for the intended special
federal income tax treatment.
- --------------------------------------------------------------------------------
TAX STATUS OF THE CONTRACT
DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Code
provides that separate account investments underlying a
contract must be "adequately diversified" in accordance
with Treasury regulations in order for the contract to
qualify as an annuity contract under Section 72 of the
Code. The Account, through each Portfolio of the Fund,
intends to comply with the diversification requirements
prescribed in regulations under Section 817(h) of the
Code, which affect how the assets in the various
Subaccounts may be invested. Although the Company does
not have control over the Fund in which the Account
invests, we believe that each Portfolio in which the
Account owns shares will meet the diversification
requirements, and therefore, the Contract will be treated
as an annuity contract under the Code.
In certain circumstances, owners of variable annuity
contracts may be considered the owners, for federal
income tax purposes, of the assets of the separate
account used to support their contracts. In those
circumstances, income and gains from the separate account
assets would be includible in the variable annuity
contract owner's gross income. Several years ago, the IRS
stated in published rulings that a variable contract
owner will be considered the owner of separate account
assets if the contract owner possesses incident of
ownership in those assets, such as the ability to
exercise investment control over the assets. More
recently, the Treasury 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 (I.E., the contract
owner), rather than the insurance company, to be treated
as the owner of the assets in the account." This
announcement also states that guidance would be issued by
way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular
subaccounts without being treated as owners of the
underlying assets."
The ownership rights under the Contracts are similar to,
but different in certain respects from, those described
by the Service in rulings in which it was determined that
contract owners were not owners of separate account
assets. For example, the owner of a Contract has the
choice of one or more Subaccounts in which to allocate
premiums and Contract values, and may be able to transfer
among Subaccounts more frequently than in such rulings.
These differences could result in the contract owner
being treated as the owner of the assets of the Account.
In addition, the Company does not know what standards
will be set forth, if any, in the regulations or rulings
which the Treasury Department has stated it expects to
issue. The Company therefore reserves the right to modify
the Contract as necessary to attempt to prevent the
contract owner from being considered the owner of the
assets of the Account.
REQUIRED DISTRIBUTIONS. In order to be treated as an
annuity contract for federal income tax purposes,
Section 72(s) of the Code requires any Non-Qualified
Contract to provide that: (a) if any owner dies on or
after the retirement date but prior to the time the
entire interest in the contract has been distributed, the
remaining portion of such interest will be distributed at
least as rapidly as under the method of distribution
being used as of the date of that owner's death; and (b)
if any owner dies prior to the annuity commencement date,
the entire interest in the Contract will be distributed
within five years after the date of the owner's death.
These requirements will be considered satisfied as to any
portion of the owner's interest which is payable to or
for the benefit of a "designated beneficiary" and which
is distributed over the life of such beneficiary or over
a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin
within one year of that owner's death. The owner's
"designated beneficiary" is the person designated by such
owner
24
<PAGE>
as a beneficiary and to whom ownership of the contract
passes by reason of death and must be a natural person.
However, if the owner's "designated beneficiary" is the
surviving spouse of the owner, the Contract may be
continued with the surviving spouse as the new owner.
The Non-Qualified Contracts contain provisions which are
intended to comply with the requirements of Section 72(s)
of the Code, although no regulations interpreting these
requirements have yet been issued. The Company intends to
review such provisions and modify them if necessary to
assure that they comply with the requirements of Code
Section 72(s) when clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will
qualify as annuity contracts for federal income tax
purposes.
- --------------------------------------------------------------------------------
TAXATION OF ANNUITIES
IN GENERAL. Section 72 of the Code governs taxation of
annuities in general. The Company believes that an owner
who is a natural person is not taxed on increases in the
value of a Contract until distribution occurs by
withdrawing all or part of the cash value (e.g., partial
surrenders and surrenders) or as annuity payments under
the payment option elected. For this purpose, the
assignment, pledge, or agreement to assign or pledge any
portion of the cash value (and in the case of a Qualified
Contract, any portion of an interest in the qualified
plan) generally will be treated as a distribution. The
taxable portion of a distribution (in the form of a
single sum payment or payment option) is taxable as
ordinary income.
The owner of any annuity contract who is not a natural
person generally must include in income any increase in
the excess of the cash value over the "investment in the
contract" during the taxable year. There are some
exceptions to this rule, and a prospective owner that is
not a natural person may wish to discuss these with a
competent tax adviser.
The following discussion generally applies to Contracts
owned by natural persons.
PARTIAL WITHDRAWALS. In the case of a partial withdrawal
from a Qualified Contract, under Section 72(e) of the
Code, a ratable portion of the amount received is
taxable, generally based on the ratio of the "investment
in the contract" to the participant's total accrued
benefit or balance under the retirement plan. The
"investment in the contract" generally equals the
portion, if any, of any premium payments paid by or on
behalf of the individual under a Contract which was not
excluded from the individual's gross income. For
Contracts issued in connection with qualified plans, the
"investment in the contract" can be zero. Special tax
rules may be available for certain distributions from
Qualified Contracts.
In the case of a partial withdrawal from a Non-Qualified
Contract, under Section 72(e) amounts received are
generally first treated as taxable income to the extent
that the cash value immediately before the partial
withdrawal exceeds the "investment in the contract" at
that time. Any additional amount withdrawn is not
taxable.
In the case of a surrender under a Qualified or
Non-Qualified Contract, the amount received generally
will be taxable only to the extent it exceeds the
"investment in the contract."
Section 1035 of the Code provides that no gain or loss
shall be recognized on the exchange of one annuity
contract for another. If the surrendered contract was
issued prior to August 14, 1982, the tax rules formerly
provided that the surrender was taxable only to the
extent the amount received exceeds the owner's investment
in the contract will continue to apply to amounts
allocable to investments in that contract prior to August
14, 1982. In contrast, contracts issued after January 19,
1985 in a Code Section 1035 exchange are treated as new
contracts for purposes of the penalty and
distribution-at-death rules. Special rules and procedures
apply to Section 1035 transactions. Prospective owners
wishing to take advantage of Section 1035 should consult
their tax adviser.
25
<PAGE>
ANNUITY PAYMENTS. Although tax consequences may vary
depending on the payment option elected under an annuity
contract, under Code Section 72(b), generally (prior to
recovery of the investment in the contract) gross income
does not include that part of any amount received as an
annuity under an annuity contract that bears the same
ratio to such amount as the investment in the contract
bears to the expected return at the annuity starting
date. Stated differently, prior to recovery of the
investment in the contract, generally, there is no tax on
the amount of each payment which represents the same
ratio that the "investment in the contract" bears to the
total expected value of the annuity payments for the term
of the payment; however, the remainder of each income
payment is taxable. After the "investment in the
contract" is recovered, the full amount of any additional
annuity payments is taxable.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be
distributed from a Contract because of the death of the
owner. Generally, such amounts are includible in the
income of the recipient as follows: (i) if distributed in
a lump sum, they are taxed in the same manner as a
surrender of the contract or (ii) if distributed under a
payment option, they are taxed in the same way as annuity
payments. For these purposes, the investment in the
Contract is not affected by the owner's death. That is,
the investment in the Contract remains the amount of any
purchase payments which were not excluded from gross
income.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a
distribution pursuant to a Non-Qualified Contract, there
may be imposed a federal penalty tax equal to 10% of the
amount treated as taxable income. In general, however,
there is no penalty on distributions:
1. made on or after the taxpayer reaches age
59 1/2;
2. made on or after the death of the holder (or
if the holder is not an individual, the death of the
primary annuitant);
3. attributable to the taxpayer becoming
disabled;
4. as part of a series of substantially equal
periodic payments (not less frequently than annually)
for the life (or life expectancy) of the taxpayer or
the joint lives (or joint life expectancies) of the
taxpayer and his or her designated beneficiary;
5. made under certain annuities issued in
connection with structured settlement agreements;
6. made under an annuity contract that is
purchased with a single premium when the retirement
date is no later than a year from purchase of the
annuity and substantially equal periodic payments are
made, not less frequently than annually, during the
annuity payment period; and
7. any payment allocable to an investment
(including earnings thereon) made before August 14,
1982 in a contract issued before that date.
Other tax penalties may apply to certain distributions
under a Qualified Contract.
POSSIBLE CHANGES IN TAXATION. In past years, legislation
has been proposed that would have adversely modified the
federal taxation of certain annuities. For example, one
such proposal would have changed the tax treatment of
non-qualified annuities that did not have "substantial
life contingencies" by taxing income as it is credited to
the annuity. Although as of the date of this prospectus
Congress is not considering any legislation regarding
taxation of annuities, there is always the possibility
that the tax treatment of annuities could change by
legislation or other means (such as IRS regulations,
revenue rulings, judicial decisions, etc.). Moreover, it
is also possible that any change could be retroactive
(that is, effective prior to the date of the change).
- --------------------------------------------------------------------------------
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of ownership of a Contract, the designation of
an annuitant, payee or other beneficiary who is not also
the owner, the selection of certain retirement dates or
the exchange of a Contract may result in certain tax
consequences to the owner that are
26
<PAGE>
not discussed herein. An owner contemplating any such
transfer, assignment, selection or exchange of a Contract
should contact a competent tax adviser with respect to
the potential tax effects of such a transaction.
- --------------------------------------------------------------------------------
WITHHOLDING Pension and annuity distributions generally are subject
to withholding for the recipient's federal income tax
liability at rates that vary according to the type of
distribution and the recipient's tax status. Recipients,
however, generally are provided the opportunity to elect
not to have tax withheld from distributions. Effective
January 1, 1993, distributions from certain qualified
plans are generally subject to mandatory withholding.
Certain states also require withholding of state income
tax whenever federal income tax is withheld.
- --------------------------------------------------------------------------------
MULTIPLE CONTRACTS All non-qualified deferred annuity contracts entered into
after October 21, 1988 that are issued by the Company (or
its affiliates) to the same owner during any calendar
year are treated as one annuity Contract for purposes of
determining the amount includible in gross income under
Section 72(e). This rule could affect the time when
income is taxable and the amount that might be subject to
the 10% penalty tax described above. In addition, the
Treasury Department has specific authority to issue
regulations that prevent the avoidance of Section 72(e)
through the serial purchase of annuity contracts or
otherwise. There may also be other situations in which
the Treasury may conclude that it would be appropriate to
aggregate two or more annuity contracts purchased by the
same owner. Accordingly, a Contract owner should consult
a competent tax adviser before purchasing more than one
annuity contract.
- --------------------------------------------------------------------------------
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of
qualified plans. The tax rules applicable to participants
in these qualified plans vary according to the type of
plan and the terms and conditions of the plan itself.
Special favorable tax treatment may be available for
certain types of contributions and distributions. Adverse
tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do
not conform to specified commencement and minimum
distribution rules; aggregate distributions in excess of
a specified annual amount; and in other specified
circumstances. Therefore, no attempt is made to provide
more than general information about the use of the
Contracts with the various types of qualified retirement
plans. Contract owners, the annuitants, and beneficiaries
are cautioned that the rights of any person to any
benefits under these qualified retirement plans may be
subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the
Contract, but the Company shall not be bound by the terms
and conditions of such plans to the extent such terms
contradict the Contract, unless the Company consents.
Some retirement plans are subject to distribution and
other requirements that are not incorporated into our
Contract administration procedures. Owners, participants
and beneficiaries are responsible for determining that
contributions, distributions and other transactions with
respect to the Contracts comply with applicable law.
Brief descriptions follow of the various types of
qualified retirement plans available in connection with a
Contract. The Company will amend the Contract as
necessary to conform it to the requirements of the Code.
CORPORATE PENSION AND PROFIT SHARING PLANS AND H.R. 10
PLANS. Section 401(a) of the Code permits corporate
employers to establish various types of retirement plans
for employees, and permits self-employed individuals to
establish these plans for themselves and their employees.
These retirement plans may permit the purchase of the
Contracts to accumulate retirement savings under the
plans. Adverse tax or other legal consequences to the
plan, to the participant or both may result if this
Contract is assigned or transferred to any individual as
a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such
benefits prior to transfer of the Contract. Employers
intending to use the Contract with such plans should seek
competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code
permits eligible individuals to contribute to an
individual retirement program known as an "Individual
Retirement Annuity" or "IRA". These IRAs are subject to
limits on the amount that
27
<PAGE>
may be contributed, the persons who may be eligible and
on the time when distributions may commence. Also,
distributions from certain other types of qualified
retirement plans may be "rolled over" on a tax-deferred
basis into an IRA. Sales of the Contract for use with
IRAs may be subject to special requirements of the
Internal Revenue Service. Employers may establish
Simplified Employee Pension (SEP) Plans to provide IRA
contributions on behalf of their employees.
SIMPLE RETIREMENT ACCOUNTS. Beginning January 1, 1997,
certain small employers may establish Simple Retirement
Accounts as provided by Section 408(p) of the Code, under
which employees may elect to defer up to $6,000 (as
increased for cost of living adjustments) as a percentage
of compensation. The sponsoring employer is required to
make a matching contribution on behalf of contributing
employees. Distributions from a Simple Retirement Account
are subject to the same restrictions that apply to IRA
distributions and are taxed as ordinary income. Subject
to certain exceptions, premature distributions prior to
age 59 1/2 are subject to a 10% penalty tax, which is
increased to 25% if the distribution occurs within the
first two years after the commencement of the employee's
participation in the plan. The failure of the Simple
Retirement Account to meet Code requirements may result
in adverse tax consequences.
ROTH IRAS. Effective January 1, 1998, section 408A of
the Code permits certain eligible individuals to
contribute to a Roth IRA. Contributions to a Roth IRA,
which are subject to certain limitations, are not
deductible and must be made in cash or as a rollover or
transfer from another Roth IRA or other IRA. A rollover
from or conversion of an IRA to a Roth IRA may be subject
to tax and other special rules may apply. You should
consult a tax adviser before combining any converted
amounts with any other Roth IRA contributions, including
any other conversion amounts from other tax years.
Distributions from a Roth IRA generally are not taxed,
except that, once aggregate distributions exceed
contributions to the Roth IRA, income tax and a 10%
penalty tax may apply to distributions made (1) before
age 59 1/2 (subject to certain exceptions) or (2) during
the five taxable years starting with the year in which
the first contribution is made to the Roth IRA.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code
allows employees of certain Section 501(c)(3)
organizations and public schools to exclude from their
gross income the premiums paid, within certain limits, on
a Contract that will provide an annuity for the
employee's retirement. These premiums may be subject to
FICA (social security) tax. Code section 403(b)(11)
restricts the distribution under Code section 403(b)
annuity contracts of: (1) elective contributions made in
years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings in such years on
amounts held as of the last year beginning before January
1, 1989. Distribution of those amounts may only occur
upon death of the employee, attainment of age 59 1/2,
separation from service, disability, or financial
hardship. In addition, income attributable to elective
contributions may not be distributed in the case of
hardship.
RESTRICTIONS UNDER QUALIFIED CONTRACTS. Other
restrictions with respect to the election, commencement
or distribution of benefits may apply under Qualified
Contracts or under the terms of the plans in respect of
which Qualified Contracts are issued.
- --------------------------------------------------------------------------------
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge to the
Subaccounts for any Federal, state or local taxes that
the Company incurs which may be attributable to such
Subaccounts or the Contracts. The Company, however,
reserves the right in the future to make a charge for any
such tax or other economic burden resulting from the
application of the tax laws that it determines to be
properly attributable to the Subaccounts or to the
Contracts.
- --------------------------------------------------------------------------------
OTHER TAX CONSEQUENCES As noted above, the foregoing comments about the Federal
tax consequences under these Contracts are not
exhaustive, and special rules are provided with respect
to other tax situations not discussed in the Prospectus.
Further, the Federal income tax consequences discussed
herein reflect the Company's understanding of current law
28
<PAGE>
and the law may change. Federal estate and state and
local estate, inheritance and other tax consequences of
ownership or receipt of distributions under a Contract
depend on the individual circumstances of each owner or
recipient of the distribution. A competent tax adviser
should be consulted for further information.
- --------------------------------------------------------------------------------
DISTRIBUTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
The Contracts will be offered to the public on a
continuous basis. The Company does not anticipate
discontinuing the offering of the Contracts, but reserves
the right to discontinue the offering. Applications for
Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell the
Company's variable annuity contracts and who are also
registered representatives of EquiTrust Marketing,
broker/dealers having selling agreements with EquiTrust
Marketing or broker/dealers having selling agreements
with such broker/dealers. EquiTrust Marketing (formerly
FBL Marketing Services, Inc.) is registered with the SEC
under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association
of Securities Dealers, Inc.
EquiTrust Marketing acts as the Principal Underwriter, as
defined in the 1940 Act, of the Contracts for the Account
pursuant to an Underwriting Agreement between the Company
and EquiTrust Marketing. EquiTrust Marketing is not
obligated to sell any specific number of Contracts.
EquiTrust Marketing's principal business address is the
same as that of the Company.
The Company may pay sales representatives commissions up
to an amount equal to 4% of the premiums paid under a
Contract during the first six Contract years and 1% of
the premiums paid in the seventh and subsequent Contract
years. Managers of sales representatives may also receive
commission overrides of up to 30% of the sales
representative's commissions. The Company also may pay
other distribution expenses such as production incentive
bonuses, agent's insurance and pension benefits, and
agency expense allowances. These distribution expenses do
not result in any additional charges against the
Contracts that are not described under "Charges and
Deductions."
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company, like other life insurance companies, is
involved in lawsuits. Currently, there are no class
action lawsuits naming the Company as a defendant or
involving the Account. In some lawsuits involving other
insurers, substantial damages have been sought and/or
material settlement payments have been made. Although the
outcome of any 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 impact on
the Account or the Company.
- --------------------------------------------------------------------------------
VOTING RIGHTS
- --------------------------------------------------------------------------------
In accordance with its view of current applicable law,
the Company will vote the Fund shares held in the Account
at regular and special shareholder meetings of the Funds,
in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts.
If, however, the 1940 Act or any regulation thereunder
should be amended, or if the present interpretation
thereof should change, or the Company otherwise
determines that it is allowed to vote the shares in its
own right, it may elect to do so.
The number of votes that an owner has the right to
instruct will be calculated separately for each
Subaccount, and may include fractional votes. An owner
holds a voting interest in each Subaccount to which the
accumulated value is allocated. The owner only has voting
interest prior to the retirement date. For each owner,
the number of votes attributable to a Subaccount will be
determined by dividing the accumulated value attributable
to that owner's Contract in that Subaccount by the net
asset value per share of the Investment Option in which
that Subaccount invests.
29
<PAGE>
The number of votes of an Investment Option which are
available to the owner will be determined as of the date
coincident with the date established by that Investment
Option for determining shareholders eligible to vote at
the relevant meeting for that Fund. Voting instructions
will be solicited by written communication prior to such
meeting in accordance with procedures established by each
Fund. Each owner having a voting interest in a Subaccount
will receive proxy materials and reports relating to any
meeting of shareholders of the Investment Option in which
that Subaccount invests.
Fund shares as to which no timely instructions are
received and shares held by the Company in a Subaccount
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 Subaccount. Voting instructions to abstain on any
item to be voted upon will be applied to reduce the total
number of votes eligible to be cast on a matter.
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
Like other investment funds, financial and business
organizations and individuals around the world, the
Account could be adversely affected if the computer
systems used by the Company and other service providers
do not properly process and calculate date-related
information and data from and after January 1, 2000. In
1997, the Company completed a comprehensive assessment of
the Year 2000 issue and developed a plan to address the
issue in a timely manner. The Company has and will
utilize both internal and external resources to
reprogram, or replace, and test the software for Year
2000 modifications. The Company anticipates completing
the Year 2000 project no later than December 31, 1998,
and prior to any anticipated impact on its operating
systems.
The date on which the Company believes it will complete
the Year 2000 modifications is based on management's best
estimates, which were derived utilizing numerous
assumptions of future events. The Company also recognizes
there are outside influences and dependencies relative to
its Year 2000 effort, over which is has little or no
control. However, the Company is putting effort into
ensuring these considerations will have minimal impact.
These would include the continued availability of certain
resources, third party modification plans and many other
factors. However, there can be no guarantee that these
estimates will be achieved and actual results could
differ from those anticipated.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The consolidated balance sheets of the Company at
December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholder's equity and
cash flows for each of the three years in the period
ended December 31, 1997, as well as the related Report of
Independent Auditors are contained in the Statement of
Additional Information. The unaudited consolidated
balance sheet of the Company at March 31, 1998, the
related unaudited consolidated statements of changes in
stockholder's equity for the three months then ended, and
the related unaudited consolidated statements of income
and cash flows for the three months ended March 31, 1998
and 1997 are also contained in the Statement of
Additional Information.
It is anticipated that the Variable Account will commence
operations in 1998; accordingly, no financial statements
currently exist.
30
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
ADDITIONAL CONTRACT PROVISIONS........................................ 1
The Contract.................................................... 1
Incontestability................................................ 1
Misstatement of Age or Sex...................................... 1
Non-Participation............................................... 1
- --------------------------------------------------------------------------------
CALCULATION OF YIELDS AND TOTAL RETURNS............................... 1
Money Market Subaccount Yields.................................. 1
Other Subaccount Yields......................................... 3
Average Annual Total Returns.................................... 4
Other Total Returns............................................. 6
Effect of the Administrative Charge on Performance Data......... 6
- --------------------------------------------------------------------------------
LEGAL MATTERS......................................................... 6
- --------------------------------------------------------------------------------
EXPERTS............................................................... 7
- --------------------------------------------------------------------------------
OTHER INFORMATION..................................................... 7
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS.................................................. 7
- --------------------------------------------------------------------------------
31
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
32
<PAGE>
- -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
TEAR AT PERFORATION
If you would like a copy of the Statement of Additional Information, please
complete the information below and detach and mail this card to the Company at
the address shown on the cover of this prospectus.
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City, State, Zip
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
FARM BUREAU
FINANCIAL SERVICES
LIVING BESIDE YOU. WORKING FOR YOU.
FARM BUREAU LIFE INSURANCE COMPANY
FARM BUREAU MUTUAL FUNDS
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266
737
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FARM BUREAU LIFE INSURANCE COMPANY
5400 University Avenue
West Des Moines, Iowa 50266
1-800-247-4170
FARM BUREAU LIFE ANNUITY ACCOUNT II
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
This Statement of Additional Information contains information in addition to the
information described in the Prospectus for the flexible premium deferred
variable annuity contract (the "Contract") offered by Farm Bureau Life Insurance
Company (the "Company"). This Statement of Additional Information is not a
Prospectus, and it should be read only in conjunction with the Prospectuses for
the Contract, and the selected Investment Options of EquiTrust Variable
Insurance Series Fund, T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc. and Dreyfus Variable Investment Fund. The Prospectus
for the Contract is dated the same as this Statement of Additional information.
You may obtain a copy of the Prospectuses by writing or calling us at our
address or phone number shown above.
July 1, 1998
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
ADDITIONAL CONTRACT PROVISIONS............................................ 1
The Contract............................................................ 1
Incontestability........................................................ 1
Misstatement of Age or Sex.............................................. 1
Non-Participation....................................................... 1
CALCULATION OF YIELDS AND TOTAL RETURNS................................... 1
Money Market Subaccount Yields.......................................... 1
Other Subaccount Yields................................................. 3
Average Annual Total Returns............................................ 4
Other Total Returns..................................................... 6
Effect of the Administrative Fee On Performance Data.................... 6
LEGAL MATTERS............................................................. 6
EXPERTS................................................................... 7
OTHER INFORMATION......................................................... 7
FINANCIAL STATEMENTS...................................................... 7
</TABLE>
<PAGE>
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
The application and all other attached papers are part of the Contract. The
statements made in the application are deemed representations and not
warranties. The Company will not use any statement in defense of a claim or to
void the Contract unless it is contained in the application.
INCONTESTABILITY
The Company will not contest the Contract from its Contract date.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the annuitant has been misstated, the amount which will
be paid is that which the proceeds would have purchased at the correct age and
sex.
NON-PARTICIPATION
The Contracts are not eligible for dividends and will not participate in the
Company's divisible surplus.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, the Company may disclose yields, total returns and other
performance data pertaining to the contracts for a Subaccount. Such performance
data will be computed, or accompanied by performance data computed, in
accordance with the standards defined by the SEC.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, advertisements and sales literature may quote the current
annualized yield of the Money Market Subaccount for a seven-day period in a
manner which does not take into consideration any realized or unrealized gains
or losses or income other than investment income on shares of the Money Market
Investment Option or on its portfolio securities.
This current annualized yield is computed by determining the net change
(exclusive or realized gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment income) at the
end of the seven-day period in the value of a hypothetical account under a
Contract having a balance of 1 unit of the Money Market Subaccount 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.
1
<PAGE>
The net change in account value reflects: 1) net income from the Investment
Option attributable to the hypothetical account; and 2) charges and deductions
imposed under the Contract which are attributable to the hypothetical account.
The charges and deductions include the per unit charges for the hypothetical
account for: 1) the annual administrative fee and 2) the mortality and expense
risk charge. For purposes of calculating current yields for a Contract, an
average per unit administrative fee is used based on the $30 administrative fee
deducted at the beginning of each Contract Year. Current Yield will be
calculated according to the following formula:
<TABLE>
<S> <C> <C>
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Investment Option (exclusive or realized gains
or losses on the sale of securities and unrealized appreciation and depreciation
and income other than investment income) for the seven-day period attributable to a
hypothetical account having a balance of 1 subaccount unit.
ES = per unit expenses attributable to the hypothetical account for the seven-day
period.
UV = the unit value for the first day of the seven-day period.
Effective Yield = (1 + ((NCS-ES)/UV)) TO THE POWER OF 365/7 - 1
Where:
NCS = the net change in the value of the Investment Option (exclusive of realized gains
or losses on the sale of securities and unrealized appreciation and depreciation
and income other than investment income) for the seven-day period attributable to a
hypothetical account having a balance of 1 subaccount unit.
ES = per unit expenses attributable to the hypothetical account for the seven-day
period.
UV = the unit value for the first day of the seven-day period.
</TABLE>
Because of the charges and deductions imposed under the Contract, the yield for
the Money Market Subaccount will be lower than the yield for the Money Market
Investment Option.
2
<PAGE>
The current and effective yields on amounts held in the Money Market Subaccount
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 Money Market Subaccount's actual yield is affected by
changes in interest rates on money market securities, average portfolio maturity
of the Money Market Investment Option, the types of quality of portfolio
securities held by the Money Market Investment Option and the Money Market
Investment Option operating expenses. Yields on amounts held in the Money Market
Subaccount may also be presented for periods other than a seven-day period.
OTHER SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the subaccounts (except the Money Market
Subaccount) for a Contract for 30-day or one month periods. The annualized yield
or a subaccount refers to income generated by the subaccount 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 net investment income of the Investment
Option attributable to the subaccount units less subaccount expenses for the
period; by 2) the maximum offering price per 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 subaccount include the annual administrative
fee and the mortality and expense risk charge. The yield calculation assumes an
administrative fee of $30 per year per Contract deducted at the beginning of
each Contract year. For purposes of calculating the 30-day or one-month yield,
an average administrative fee per dollar of Contract value in the Account issued
to determine the amount of the charge attributable to the subaccount for the
30-day or one-month period. The 30-day or one-month yield is calculated
according to the following formula:
<TABLE>
<S> <C> <C>
Yield = 2 X ((NI - ES)/(U X UV)) + 1) TO THE POWER OF 6 - 1
Where:
NI = net income of the Investment Option for the 30-day or one-month period attributable
to the subaccount's units.
ES = expenses of the subaccount for the 30-day or one-month period.
U = the average number of units outstanding.
UV = the unit value at the close of the last day in the 30-day one-month period.
</TABLE>
3
<PAGE>
Because of the charges and deductions imposed under the Contracts, the yield for
the subaccount will be lower that the yield for the corresponding Investment
Option.
The yield on the amounts held in the subaccounts 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. A subaccount's
actual yield is affected by the types and quality of Investment Option
securities held by the corresponding Investment Option and its operating
expenses.
Yield calculations do not take into account the Surrender Charge under the
Contract equal to 1% to 6% of the amount withdrawn or surrendered during the
first six Contract years. For partial withdrawals in each Contract year after
the first Contract year, up to 10% of the accumulated value on the most recent
Contract Anniversary may be withdrawn without a current surrender charge.
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 subaccounts for various periods of
time.
When a subaccount has been in operation for 1, 5 and 10 years, respectively, the
average annual total return for these periods will be provided. Average annual
total returns for other periods of time may, from time to time, also be
disclosed.
Standard 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 redemption value of that investment as of the last day of each
of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent month-end practicable,
considering the type and media of the communication that will be stated in the
communication.
4
<PAGE>
Standard average annual total returns will be calculated using subaccount unit
values which the Company calculates on each valuation day based on the
performance of the subaccount's underlying portfolio, the deductions for the
mortality and expense risk charge, and the annual administrative fee. The
calculation assumes that the administrative fee is $30 per year per Contract
deducted at the beginning of each Contract year. For purposes of calculating
average annual total return, an average per dollar administrative fee
attributable to the hypothetical account for the period is used. The calculation
also assumes surrender of the Contract at the end of the period for the return
quotation. Total returns will therefore reflect a deduction of the surrender
charge for any period less than seven years. The total return will then be
calculated according to the following formula:
<TABLE>
<S> <C> <C>
TR = ((ERV/P)/N)-1
Where:
TR = the average annual total return net of subaccount recurring charges.
EHV = the ending redeemable value (net of any applicable surrender charge) of the
hypothetical account at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
</TABLE>
From time to time, sales literature or advertisements may also quote average
annual total returns for periods prior to the date the Account commenced
operations. Such performance information for the subaccounts will be calculated
based on the performance of the Investment Option and the assumption that the
subaccounts were in existence for the same periods as those indicated for the
Investment Option, with the level of Contract charges that were in effect at the
inception of the subaccounts.
Such average annual total return information for the Subaccounts is as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE PERIOD
1-YEAR 5-YEAR 10-YEAR FROM DATE OF
PERIOD PERIOD PERIOD INCEPTION OF
ENDED ENDED ENDED INVESTMENT OPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 TO 12/31/97
- ----------------------------------------------------------------- ----------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth................................................... (1.25)% 11.91% 10.78% 7.66%
High Grade Bond................................................ 2.69 5.73 7.60 8.07
High Yield Bond................................................ 4.52 8.84 9.83 10.04
Money Market (1)............................................... (2.48) 2.41 -- 3.19
Blue Chip (2).................................................. 19.86 17.30 -- 18.02
T. Rowe Price Equity Series, Inc.
Equity Income (3).............................................. 28.85 -- -- 23.73
Mid-Cap Growth (4)............................................. 18.80 -- -- 18.80
New America Growth (3)......................................... 21.12 -- -- 23.66
Personal Strategy Balanced (5)................................. 18.04 -- -- 20.13
T. Rowe Price International Series, Inc.
International Stock (3)........................................ 3.09 -- -- 8.07
Dreyfus Variable Investment Fund
Capital Appreciation (6)....................................... 28.05 -- -- 19.87
Disciplined Stock (7).......................................... 31.51 -- -- 30.67
Growth and Income (8).......................................... 16.21 -- -- 24.64
International Equity (8)....................................... 9.61 -- -- 7.13
Small Cap (9).................................................. 16.75 26.14 -- 43.96
</TABLE>
- ------------------------------
(1) The Money Market Portfolio commenced operations on February 20, 1990.
(2) The Blue Chip Portfolio commenced operations on October 15, 1990.
(3) The Equity Income, New America Growth and International Stock Portfolios
commenced operations on March 31, 1994.
(4) The Mid-Cap Growth Portfolio commenced operations on December 31, 1996.
(5) The Personal Strategy Balanced Portfolio commenced operations on December
30, 1994.
(6) The Capital Appreciation Portfolio commenced operations on April 5, 1993.
(7) The Disciplined Stock Investment Portfolio commenced operations on May 1,
1996.
(8) The Growth and Income and International Equity Portfolios commenced
operations on May 2, 1994.
(9) The Small Cap Portfolio commenced operations on August 31, 1990.
5
<PAGE>
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. These are
calculated in exactly the same way as average annual total returns described
above, except that the ending redeemable 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 or withdrawn.
The Company may disclose cumulative total returns in conjunction with the
standard formats described above. The cumulative total returns will be
calculated using the following formula:
<TABLE>
<S> <C> <C>
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of subaccount recurring charges for the period.
ERV = The ending redeemable value of the hypothetical investment at the end of the
period.
P = A hypothetical single payment of $1,000.
</TABLE>
EFFECT OF THE ADMINISTRATIVE FEE ON PERFORMANCE DATA
The Contract provides for a $30 annual administrative fee to be deducted
annually at the beginning of each Contract Year, from the subaccounts and the
Declared Interest Option based, on the proportion that the value of each such
account bears to the total cash value. For purposes of reflecting the
administrative fee in yield and total return quotations, the annual charge is
converted into a per-dollar per-day charge based on the average contract value
in the Account of all Contracts on the last day of the period for which
quotations are provided. The per-dollar per-day average charge will then be
adjusted to reflect the basis upon which the particular quotation is calculated.
LEGAL MATTERS
All matters relating to Iowa law pertaining to the Contracts, including the
validity of the Contracts and the Company's authority to issue the Contracts,
have been passed upon by Stephen M. Morain, Esquire, Senior Vice President and
General Counsel of the Company. Sutherland, Asbill & Brennan LLP, Washington
D.C. has provided advice on certain matters relating to the federal securities
laws.
6
<PAGE>
EXPERTS
The consolidated financial statements of the Company at December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997,
appearing herein, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such reports given upon 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.
FINANCIAL STATEMENTS
The Company's financial statements included in this Statement of Additional
Information should be considered only as bearing on the Company's ability to
meet its obligations under the Contracts. They should not be considered as
bearing on the investment performance of the assets held in the Account.
7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Farm Bureau Life Insurance Company
We have audited the accompanying consolidated balance sheets of Farm Bureau Life
Insurance Company as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Farm
Bureau Life Insurance Company at December 31, 1997 and 1996, and the
consolidated 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.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 16, 1998
2
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
MARCH 31, ------------- -------------
--------------
1998
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 1998--$524,539;
1997--$541,332; 1996--$574,338) $ 506,703 $ 522,411 $ 562,283
Available for sale, at market (amortized cost: 1998--$1,271,422;
1997--$1,218,469; 1996--$1,096,179) 1,341,321 1,286,169 1,128,587
Equity securities, at market (cost: 1998--$48,420; 1997--$54,861; 1996--$69,915) 47,598 51,268 79,786
Mortgage loans on real estate 248,058 253,093 235,331
Investment real estate, less allowances for depreciation of $3,023 in 1998,
$2,507 in 1997 and $1,741 in 1996 39,845 38,774 26,384
Policy loans 89,888 90,052 88,940
Other long-term investments 9,986 9,989 22,157
Short-term investments 8,288 23,853 62,025
-------------- ------------- -------------
Total investments 2,291,687 2,275,609 2,205,493
Cash and cash equivalents 1,196 1,678 1,802
Securities and indebtedness of related parties 62,614 63,394 39,244
Accrued investment income 25,385 25,340 24,298
Accounts and notes receivable 662 703 1,526
Amounts receivable from affiliates 11,092 6,686 7,095
Reinsurance recoverable 3,582 3,934 5,552
Deferred policy acquisition costs 161,269 157,096 145,614
Property and equipment, less allowances for depreciation of $4,293 in 1998, $18,330
in 1997 and $17,313 in 1996 7,783 32,518 36,182
Current income taxes recoverable 4,203 10,349 --
Goodwill, less accumulated amortization of $2,961 in 1998, $2,792 in 1997 and
$2,172 in 1996 10,471 10,640 9,726
Other assets 7,828 7,443 5,388
Assets held in separate accounts 163,075 138,409 79,043
-------------- ------------- -------------
Total assets $ 2,750,847 $ 2,733,799 $ 2,560,963
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
MARCH 31, ------------- -------------
--------------
1998
--------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products $ 1,176,127 $ 1,172,881 $ 1,132,491
Traditional life insurance and accident and health products 578,884 576,405 555,664
Unearned revenue reserve 23,787 23,341 22,182
Other policy claims and benefits 5,348 7,091 7,313
-------------- ------------- -------------
1,784,146 1,779,718 1,717,650
Other policyholders' funds:
Supplementary contracts without life contingencies 132,608 129,389 120,649
Advance premiums and other deposits 66,695 66,626 66,572
Accrued dividends 12,365 12,107 12,796
-------------- ------------- -------------
211,668 208,122 200,017
Long-term debt 75 77 81
Amounts payable to affiliates 63 -- 1,700
Current income taxes payable -- -- 56
Deferred income taxes 46,383 45,123 43,810
Other liabilities 40,516 29,639 27,602
Liabilities related to separate accounts 163,075 138,409 79,043
-------------- ------------- -------------
Total liabilities 2,245,926 2,201,088 2,069,959
Commitments and contingencies
Stockholder's equity:
Preferred stock, 7 1/2% cumulative, par value $50.00 per share-- authorized 6,000
shares -- -- --
Common stock, par value $50.00 per share--authorized 994,000 shares, issued and
outstanding 50,000 shares 2,500 2,500 2,500
Additional paid-in capital 55,285 55,285 55,285
Accumulated other comprehensive income--Net unrealized investment gains 42,314 38,719 26,327
Retained earnings 404,822 436,207 406,892
-------------- ------------- -------------
Total stockholder's equity 504,921 532,711 491,004
-------------- ------------- -------------
Total liabilities and stockholder's equity $ 2,750,847 $ 2,733,799 $ 2,560,963
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------------- ----------------------------------------------------
1998 1997 1997 1996 1995
----------------- ---------------- ---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest sensitive product charges $ 9,878 $ 8,712 $ 37,802 $ 33,755 $ 33,343
Traditional life insurance and
accident and health premiums 14,799 14,801 61,675 61,611 57,907
Property-casualty premiums -- -- -- -- 18,709
Net investment income 44,260 42,839 174,763 166,422 184,348
Realized gains on investments 1,206 19,622 38,639 54,454 5,902
Realized gain on dividend of home
office properties 8,346 -- -- -- --
Other income 1,364 1,002 4,968 11,887 28,011
----------------- ---------------- ---------------- ---------------- ----------------
Total revenues 79,853 86,976 317,847 328,129 328,220
Benefits and expenses:
Interest sensitive product benefits 24,800 23,682 95,052 90,720 88,147
Traditional life insurance and
accident and health benefits 10,369 10,764 42,121 42,370 37,710
Increase in traditional life and
accident and health future policy
benefits 2,481 3,185 15,107 13,679 15,310
Distributions to participating
policyholders 5,660 6,028 22,784 23,725 23,838
Property-casualty losses and loss
adjustment expenses -- -- -- -- 13,621
Underwriting, acquisition and
insurance expenses 12,008 11,580 48,380 45,714 54,336
Interest expense 2 43 9 425 1,007
Other expenses 326 181 1,149 7,814 17,776
----------------- ---------------- ---------------- ---------------- ----------------
Total benefits and expenses 55,646 55,463 224,602 224,447 251,745
----------------- ---------------- ---------------- ---------------- ----------------
24,207 31,513 93,245 103,682 76,475
Income taxes (5,582) (10,578) (31,579) (34,156) (27,291)
Minority interest in earnings of
subsidiaries -- -- -- -- (12)
Equity income (loss), net of related
income taxes (360) 566 1,908 4,138 1,488
----------------- ---------------- ---------------- ---------------- ----------------
Net income $ 18,265 $ 21,501 $ 63,574 $ 73,664 $ 50,660
----------------- ---------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL INVESTMENT TOTAL
COMMON PAID-IN GAINS RETAINED STOCKHOLDER'S
STOCK CAPITAL (LOSSES) EARNINGS EQUITY
------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $1,194 $51,732 $(10,768) $313,314 $355,472
Comprehensive income:
Net income for 1995 -- -- -- 50,660 50,660
Change in net unrealized investment gains/
losses -- -- 45,375 -- 45,375
--------
Total comprehensive income 96,035
Issuance of 26,119.72 shares pursuant to stock
dividend 1,306 (1,306) -- -- --
Dividend of Utah Farm Bureau Insurance Company
to parent -- -- (461) (10,650) (11,111)
------ -------- -------- -------- --------
Balance at December 31, 1995 2,500 50,426 34,146 353,324 440,396
Comprehensive income:
Net income for 1996 -- -- -- 73,664 73,664
Change in net unrealized investment gains/
losses -- -- (7,819) -- (7,819)
--------
Total comprehensive income 65,845
Adjustment resulting from capital transaction
of equity investee -- 4,859 -- -- 4,859
Dividend of FBL Financial Services, Inc. to
parent -- -- -- (15,096) (15,096)
Cash dividend paid to parent -- -- -- (5,000) (5,000)
------ -------- -------- -------- --------
Balance at December 31, 1996 2,500 55,285 26,327 406,892 491,004
Comprehensive income:
Net income for 1997 -- -- -- 63,574 63,574
Change in net unrealized investment gains/
losses -- -- 12,392 -- 12,392
--------
Total comprehensive income 75,966
Cash dividends paid to parent -- -- -- (33,000) (33,000)
Other -- -- -- (1,259) (1,259)
------ -------- -------- -------- --------
Balance at December 31, 1997 2,500 55,285 38,719 436,207 532,711
Comprehensive income:
Net income for three months ended March
31, 1998 -- -- -- 18,265 18,265
Change in net unrealized investment gains/
losses -- -- 3,595 -- 3,595
--------
Total comprehensive income 21,860
Cash dividends paid to parent -- -- -- (4,000) (4,000)
Dividend of home office properties -- -- -- (45,650) (45,650)
------ -------- -------- -------- --------
Balance at March 31, 1998 $2,500 $55,285 $42,314 $404,822 $504,921
------ -------- -------- -------- --------
------ -------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
--------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,265 $ 21,501 $ 63,574 $ 73,664 $ 50,660
Adjustments to reconcile net income to net cash provided
by operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances 20,806 20,617 82,821 80,867 80,132
Charges for mortality and administration (9,948) (9,080) (38,134) (35,050) (34,083)
Deferral of unearned revenues 605 516 2,266 1,825 1,696
Amortization of unearned revenue reserve (144) (147) (779) (530) (956)
Provision for depreciation and amortization (915) 943 3,088 5,906 10,034
Net gains and losses related to investments held by
broker-dealer and investment company subsidiaries -- (614) (1,223) (3,125) (25,801)
Realized gains on investments (1,206) (19,622) (38,639) (54,454) (5,902)
Realized gain on dividend of home office properties (8,346) -- -- -- --
Increase in traditional life, accident and health and
property-casualty benefit accruals 2,479 3,234 15,198 13,646 16,144
Policy acquisition costs deferred (5,165) (4,817) (22,334) (18,561) (18,995)
Amortization of deferred policy acquisition costs 1,507 1,802 7,760 7,271 10,181
Provision for deferred income taxes (675) (8,393) (5,172) 6,310 15,026
Other (678) 5,214 (12,545) 8,635 (19,895)
------------- ------------ ------------ ------------ ------------
Net cash provided by operating activities 16,585 11,154 55,881 86,404 78,241
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities--held for investment 16,358 8,593 40,460 33,212 16,529
Fixed maturities--available for sale 69,249 79,654 250,842 222,093 208,189
Equity securities 7,434 49,827 109,641 101,937 29,766
Mortgage loans on real estate 8,107 6,673 38,725 21,977 18,646
Investment real estate 3 3 6 4,829 927
Policy loans 5,203 5,202 21,002 20,092 19,701
Other long-term investments 3 7,222 52 10,404 11,609
Short-term investments--net 15,564 -- 41,061 -- 68,799
------------- ------------ ------------ ------------ ------------
121,921 157,174 501,789 414,544 374,166
</TABLE>
7
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
--------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Acquisition of investments:
Fixed maturities--held for investment $ -- $ -- $ -- $ (38,472) $ (120,885)
Fixed maturities--available for sale (120,479) (120,087) (363,560) (374,808) (282,657)
Equity securities (688) (26,836) (45,520) (28,824) (30,380)
Mortgage loans on real estate (3,081) (11,372) (56,571) (40,601) (17,110)
Investment real estate (1,389) (118) (10,142) (4,988) (8,034)
Policy loans (5,039) (5,584) (22,114) (20,506) (20,275)
Other long-term investments -- -- (1,936) (535) (13,632)
Short-term investments--net -- (8,875) -- (30,249) --
------------- ------------ ------------ ------------ ------------
(130,676) (172,872) (499,843) (538,983) (492,973)
Proceeds from disposal, repayments of advances and other
distributions from equity investees 1,240 1,517 16,084 36,265 31,986
Investments in and advances to equity investees (936) (673) (41,018) (10,396) (21,463)
Net cash paid for acquisitions -- -- (9,694) -- --
Net purchases of property and equipment and other (221) (2,139) (28) (7,062) (7,664)
------------- ------------ ------------ ------------ ------------
Net cash used in investing activities (8,672) (16,993) (32,710) (105,632) (115,948)
FINANCING ACTIVITIES
Receipts from interest sensitive products credited to
policyholder account balances 60,275 61,293 220,437 181,148 169,207
Return of policyholder account balances on interest
sensitive products (64,668) (52,541) (210,728) (153,784) (124,802)
Proceeds from short-term borrowings -- -- -- -- 8
Repayments of short-term borrowings -- -- -- -- (6,396)
Repayments of long-term debt (2) -- (4) (1,199) (5,915)
Dividends paid (4,000) (3,200) (33,000) (5,135) (248)
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (8,395) 5,552 (23,295) 21,030 31,854
------------- ------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (482) (287) (124) 1,802 (5,853)
Cash and cash equivalents at beginning of year 1,678 1,802 1,802 -- 5,853
------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,196 $ 1,515 $ 1,678 $ 1,802 $ --
------------- ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2 $ 2 $ 8 $ 415 $ 1,086
Income taxes (232) 11,041 48,876 17,694 16,833
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Farm Bureau Life Insurance Company (the Company), a wholly-owned subsidiary of
FBL Financial Group, Inc., operates predominantly in the life insurance
industry. The Company currently markets its products, which consist primarily of
individual life insurance policies and annuity contracts, to Farm Bureau members
and other individuals and businesses in 15 midwestern and western states.
Prior to May 31, 1996, the Company owned 100% of the outstanding common stock of
FBL Financial Services, Inc., a holding company which, through its subsidiaries,
provided investment advisory, marketing and distribution, and leasing services.
On May 31, 1996, the common stock of FBL Financial Services, Inc. was
transferred to FBL Financial Group, Inc. in the form of a dividend. FBL
Financial Services, Inc. had investments of $6.1 million, property and equipment
of $26.1 million, other assets of $3.3 million, long-term debt of $11.3 million
and other liabilities of $8.8 million on the date of the dividend.
Prior to December 31, 1995, the Company owned approximately 99% of the
outstanding common stock of Utah Farm Bureau Insurance Company, a
property-casualty insurance company providing individual and small business
coverages. On December 31, 1995, the common stock of Utah Farm Bureau Insurance
Company was transferred to FBL Financial Group, Inc. in the form of a dividend.
Utah Farm Bureau Insurance Company had investments of $26.0 million, reinsurance
recoverable of $26.7 million, other assets of $7.6 million, reserves on
property-casualty policies of $30.0 million and other liabilities of $19.1
million on the date of the dividend.
CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its direct and indirect subsidiaries. All significant intercompany
transactions have been eliminated.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of March 31, 1998 and for the
three-month periods ended March 31, 1998 and 1997 and related notes have not
been audited. The interim financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
Fixed maturity securities, comprised of bonds and redeemable preferred stocks,
that the Company has the positive intent and ability to hold to maturity are
designated as "held for investment". Held for investment securities are reported
at cost adjusted for amortization of premiums and discounts. Changes in the
market value of these securities, except for declines that are other than
temporary, are not reflected in the Company's financial statements. Fixed
maturity securities which may be sold are designated as "available for sale".
Available for sale securities are reported at market value and unrealized gains
and losses on these securities are included directly in stockholder's equity,
net of certain adjustments (see Note 2). Premiums and discounts are
amortized/accrued using methods which result in a constant yield over the
securities' expected lives. Amortization/accrual of premiums and discounts on
mortgage and asset-backed securities incorporates prepayment assumptions to
estimate the securities' expected lives.
Equity securities, comprised of common and non-redeemable preferred stocks, are
reported at market value. The change in unrealized appreciation and depreciation
of equity securities is included directly in stockholder's equity, net of any
related deferred income taxes.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate are reported at cost adjusted for amortization of
premiums and accrual of discounts. If the value of any mortgage loan is
determined to be impaired (i.e., when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the
9
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
mortgage loan is reduced to its fair value, which may be based upon the present
value of expected future cash flows from the loan (discounted at the loan's
effective interest rate), or the fair value of the underlying collateral. The
carrying value of impaired loans is reduced by the establishment of a valuation
allowance, changes to which are recognized as realized gains or losses on
investments. Interest income on impaired loans is recorded on a cash basis.
OTHER INVESTMENTS
Investment real estate is reported at cost less allowances for depreciation.
Policy loans are reported at unpaid principal balance. Short-term investments
are reported at cost adjusted for amortization of premiums and accrual of
discounts.
Other long-term investments include certain nontraditional investments and
securities held by a subsidiary engaged in the venture capital investment
company industry. Nontraditional investments include a debt-related instrument
and investment deposits which are reported at cost. In accordance with
accounting practices for the investment company industry, marketable securities
held by subsidiaries in this industry are valued at market value if readily
marketable or at fair value, as determined by the Board of Directors of the
subsidiary holding the security, if not readily marketable. The resulting
difference between cost and market is included in the statements of income as
net investment income. Realized gains and losses are also reported as a
component of net investment income. The Company recorded transfers from its
venture capital subsidiary, which was dissolved during 1997, at fair value on
the date of transfer, re-establishing a new cost basis for the security.
Securities and indebtedness of related parties include investments in
partnerships and corporations over which the Company may exercise significant
influence. Such investments are accounted for using the equity method. Changes
in the value of the Company's investment in equity investees attributable to
capital transactions of the investee, such as a public offering of stock, are
recorded directly to stockholder's equity. Securities and indebtedness of
related parties also includes advances and loans to the partnerships and
corporations which are principally reported at cost.
REALIZED GAINS AND LOSSES ON INVESTMENTS
The carrying values of all the Company's investments are reviewed on an ongoing
basis for credit deterioration, and if this review indicates a decline in market
value that is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value (the sum of the
estimated nondiscounted cash flows for securities or fair value for mortgage
loans on real estate) and a specific writedown is taken. Such reductions in
carrying value are recognized as realized losses on investments. Realized gains
and losses on sales are determined on the basis of specific identification of
investments. If the Company expects that an issuer of a security will modify its
payment pattern from contractual terms but no writedown is required, future
investment income is recognized at the rate implicit in the calculation of net
realizable value under the expected payment pattern.
MARKET VALUES
Market values of fixed maturity securities are reported based on quoted market
prices, where available. Market values of fixed maturity securities not actively
traded in a liquid market are estimated using a matrix calculation assuming a
spread (based on interest rates and a risk assessment of the bonds) over U. S.
Treasury bonds. Market values of redeemable preferred stock and equity
securities are based on the latest quoted market prices, or for those not
readily marketable, generally at values which are representative of the market
values of comparable issues.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
DEFERRED POLICY ACQUISITION COSTS
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions and other
expenses related to the production of new business, have been deferred. For
participating traditional life insurance and interest sensitive products
(principally universal life insurance policies and annuity contracts), these
costs are being amortized generally in proportion to expected gross profits
(after dividends to policyholders, if applicable) from surrender charges and
investment, mortality, and expense margins. That amortization is adjusted
retrospectively when estimates of current or future gross profits/margins
(including the impact of investment gains and losses) to be realized from a
group of products are revised. For nonparticipating traditional life and
accident and health insurance products, these costs are amortized over the
premium paying period
10
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the related policies, in proportion to the ratio of annual premium revenues
to total anticipated premium revenues. Such anticipated premium revenues are
estimated using the same assumptions used for computing liabilities for future
policy benefits. The deferred policy acquisition costs for property-casualty
insurance are amortized over the effective period of the related insurance
policies; deferred policy acquisition costs for these policies are charged to
expense when such costs are deemed not to be recoverable from the related
unearned premiums and any related investment income.
PROPERTY AND EQUIPMENT
Property and equipment, comprised primarily of home office properties, furniture
and equipment, are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily using the straight-line method over
the estimated useful lives of the assets. Depreciation expense for the years
ended December 31, 1997, 1996 and 1995 was $2.3 million, $5.1 million and $9.3
million, respectively.
On March 30, 1998, the Company transferred its home office properties to its
parent in the form of a dividend. The fair value of the properties, which served
as the basis for the transaction, was $45.7 million and the book value was $24.7
million. The Company will lease a portion of the properties back from its parent
under a sublease arrangement. Of the $21.0 million gain on the transaction, $8.3
million was recognized in the income statement and $12.7 million was deferred
and will be amortized over the term of the operating lease.
GOODWILL
Goodwill represents the excess of the fair value of assets exchanged over the
net assets acquired. Goodwill is generally being amortized on a straight-line
basis over a period of 20 years. The carrying value of goodwill is regularly
reviewed for indicators of impairment in value, which in the view of management
are other than temporary. If facts and circumstances suggest that goodwill is
impaired, the Company assesses the fair value of the underlying business and
reduces goodwill to an amount that results in the book value of the underlying
business approximating fair value. The Company has not recorded any such
writedowns during the years ended December 31, 1997, 1996 or 1995.
FUTURE POLICY BENEFITS
The liability for future policy benefits for participating traditional life
insurance is based on net level premium reserves, including assumptions as to
interest, mortality, and other assumptions underlying the guaranteed policy cash
values. Reserve interest assumptions are level and range from 2.5% to 6.0%. The
average rate of assumed investment yields used in estimating gross margins was
8.15% in 1997, 8.34% in 1996 and 8.14% in 1995. Accrued dividends for
participating business are established for anticipated amounts earned to date
for the period through the policy's next anniversary and are provided for as a
separate liability. The declaration of future dividends for participating
business is at the discretion of the Board of Directors. Participating life
insurance business accounted for 42% of receipts from policyholders during the
year ended December 31, 1997 and represented 19% of life insurance inforce at
December 31, 1997.
The liabilities for future policy benefits for accident and health insurance are
computed using a net level or two-year preliminary term method, including
assumptions as to morbidity, mortality and interest and to include provisions
for possible unfavorable deviations. Policy benefit claims are charged to
expense in the period that the claims are incurred.
Future policy benefit reserves for interest sensitive products are computed
under a retrospective deposit method and represent policy account balances
before applicable surrender charges. Policy benefits and claims that are charged
to expense include benefit claims incurred in the period in excess of related
policy account balances.
Interest crediting rates for interest sensitive products ranged from 5.25% to
6.90% in 1997, 5.75% to 7.50% in 1996 and 5.50% to 7.50% in 1995.
The unearned revenue reserve reflects the unamortized balance of the excess of
first year administration charges over renewal period administration charges
(policy initiation fees) on interest sensitive products. These excess charges
have been deferred and are being recognized in income over the period benefited
using the same assumptions and factors used to amortize deferred policy
acquisition costs.
11
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESERVES AND UNEARNED PREMIUMS ON PROPERTY-CASUALTY POLICIES
Unpaid property-casualty losses and loss adjustment expenses represent the
estimated liability for reported claims plus those incurred but not yet reported
and the related estimated adjustment expenses. The reserve for unpaid claims and
related adjustment expenses was determined using case-basis evaluations and
statistical analyses and represented estimates of the ultimate cost of all
unpaid losses incurred through December 31 of each year. Salvage and subrogation
recoverables were offset against reserves on property-casualty policies and were
estimated using statistical analysis.
Property-casualty insurance unearned premiums were calculated on a pro rata
basis.
GUARANTEE FUND ASSESSMENTS
From time to time assessments are levied on the Company by guaranty associations
in most states in which the Company is licensed. These assessments are to cover
losses of policyholders of insolvent or rehabilitated companies. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. During 1997, the Company adopted Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", which requires the accrual of such assessments. Prior to 1997, the
Company recognized its obligation for guarantee fund assessments when such
assessments were received and an asset was recorded for future premium tax
offsets on assessments paid. The impact of adopting SOP 97-3 was not separately
reported as a change in accounting principle because the impact of adoption was
not material to the Company.
At December 31, 1997, the Company had an undiscounted reserve of $1.8 million to
cover estimated future assessments on known insolvencies and had an asset
totaling $2.3 million representing estimated premium tax offsets on paid and
future assessments. Expenses incurred for guaranty fund assessments, net of
related premium tax offsets, totaled $1.1 million (including $0.9 million
related to the adoption of SOP 97-3) during the year ended December 31, 1997,
and $0.1 million during each of the years ended December 31, 1996 and 1995. It
is estimated future guarantee fund assessments on known insolvencies will be
paid during the three year period ended December 31, 2000 and substantially all
the related future premium tax offsets will be realized during the six year
period ended December 31, 2003. The Company believes the reserve for guarantee
fund assessments is sufficient to provide for future assessments based upon
known insolvencies and projected premium levels.
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred income tax expenses or credits are based on
the changes in the asset or liability from period to period.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying
consolidated balance sheets represent funds that are separately administered,
principally for the benefit of certain policyholders who bear the underlying
investment risk. The separate account assets and liabilities are carried at fair
value. Revenues and expenses related to the separate account assets and
liabilities, to the extent of benefits paid or provided to the separate account
policyholders, are excluded from the amounts reported in the accompanying
consolidated statements of income.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for interest sensitive products consist of policy charges for the cost
of insurance, administration charges, amortization of policy initiation fees and
surrender charges assessed against policyholder account balances. Expenses
related to these products include interest credited to policyholder account
balances and benefit claims incurred in excess of policyholder account balances.
Traditional life insurance premiums are recognized as revenues over the
premium-paying period. Future policy benefits and policy acquisition costs are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits and amortization of deferred policy acquisition costs.
Property-casualty insurance premiums were recognized using a daily or monthly
pro rata method over the terms of the policies.
All insurance-related revenues, benefits, losses and expenses are reported net
of reinsurance ceded.
12
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REINSURANCE
The Company uses reinsurance to manage certain risks associated with its
insurance operations. These reinsurance arrangements provide for greater
diversification of business, allow management to control exposure to potential
risks arising from large losses and provide additional capacity for growth.
The Company's life insurance operations cede reinsurance to various reinsurers.
The cost of reinsurance is generally amortized over the contract periods of the
reinsurance agreements.
The Company's property-casualty operations assumed and ceded reinsurance,
principally as a participant in a reinsurance pooling agreement with two
affiliates. The Company's contracts were prospective and the cost of insurance
was amortized over the contract periods in proportion to the amount of insurance
protection provided.
OTHER INCOME AND OTHER EXPENSES
Other income and other expenses include revenue and expenses generated by the
Company's various non-insurance subsidiaries for investment advisory, marketing
and distribution, and leasing services. A portion of these activities are
performed on behalf of affiliates of the Company. In addition, certain revenue
generated by the insurance companies have been classified as other income.
During the years ended December 31, 1997, 1996 and 1995, revenues of the
insurance companies included as other income aggregated $3.7 million, $2.7
million and $8.4 million, respectively.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified to conform to the 1997 financial statement presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. For
example, significant estimates and assumptions are utilized in the calculation
of deferred policy acquisition costs, policyholder liabilities and accruals and
valuation allowances on investments. It is reasonably possible that actual
experience could differ from the estimates and assumptions utilized which could
have a material impact on the consolidated financial statements.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income". Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or stockholder's
equity. Statement No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities to be included in other comprehensive income.
During the three months ended March 31, 1998 and 1997, comprehensive income
totaled $21.9 million and $4.4 million, respectively.
2. INVESTMENT OPERATIONS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
--------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
--------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
Corporate securities $ 5,008 $ 814 $ (8) $ 5,814
Mortgage-backed securities 517,403 19,575 (1,460) 535,518
--------------------------------------------------------
Total fixed maturities $ 522,411 $ 20,389 $ (1,468) $ 541,332
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
13
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
--------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
--------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 14,406 $ 18 $ (19) $ 14,405
State, municipal and other governments 37,986 1,012 (126) 38,872
Public utilities 80,071 4,637 (390) 84,318
Corporate securities 688,362 55,095 (6,089) 737,368
Mortgage and asset-backed securities 372,482 13,418 (1,283) 384,617
Redeemable preferred stock 25,162 1,533 (106) 26,589
--------------------------------------------------------
Total fixed maturities $ 1,218,469 $ 75,713 $ (8,013) $ 1,286,169
--------------------------------------------------------
--------------------------------------------------------
Equity securities $ 54,861 $ 3,635 $ (7,228) $ 51,268
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
Corporate securities $ 5,009 $ 649 $ (9) $ 5,649
Mortgage-backed securities 557,274 16,577 (5,162) 568,689
------------------------------------------------------
Total fixed maturities $ 562,283 $ 17,226 $ (5,171) $ 574,338
------------------------------------------------------
------------------------------------------------------
<CAPTION>
AVAILABLE FOR SALE
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and agencies $ 44,440 $ 237 $ (281) $ 44,396
State, municipal and other governments 11,530 383 (53) 11,860
Public utilities 119,619 4,995 (836) 123,778
Corporate securities 611,021 32,078 (9,989) 633,110
Mortgage and asset-backed securities 278,308 7,391 (2,793) 282,906
Redeemable preferred stock 31,261 1,369 (93) 32,537
------------------------------------------------------
Total fixed maturities $ 1,096,179 $ 46,453 $ (14,045) $ 1,128,587
------------------------------------------------------
------------------------------------------------------
Equity securities $ 69,915 $ 28,671 $ (18,800) $ 79,786
------------------------------------------------------
------------------------------------------------------
</TABLE>
14
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
Amortized cost of securities held by a subsidiary engaged in the investment
company industry was $8.7 million at December 31, 1996. Gross unrealized
appreciation and depreciation on these securities totaled $5.4 million and $0.3
million, respectively. Short-term investments have been excluded from the above
schedules as amortized cost approximates market value for these securities.
The carrying value and estimated market value of the Company's portfolio of
fixed maturity securities at December 31, 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
-------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 19,224 $ 19,274
Due after one year through five years -- -- 133,569 139,424
Due after five years through ten years 5,008 5,814 207,167 222,249
Due after ten years -- -- 460,865 494,016
----------------------------------------------------------
5,008 5,814 820,825 874,963
Mortgage and asset-backed securities 517,403 535,518 372,482 384,617
Redeemable preferred stocks -- -- 25,162 26,589
----------------------------------------------------------
$ 522,411 $ 541,332 $ 1,218,469 $ 1,286,169
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
The unrealized appreciation or depreciation on fixed maturity and equity
securities available for sale is reported as a separate component of
stockholder's equity, reduced by adjustments to deferred policy acquisition
costs, value of insurance in force acquired and unearned revenue reserve that
would have been required as a charge or credit to income had such amounts been
realized, and a provision for deferred income taxes. Net unrealized investment
gains as reported were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unrealized appreciation on fixed maturity and equity securities available for sale $ 64,107 $ 42,279
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs (5,251) (2,159)
Unearned revenue reserve 711 383
Provision for deferred income taxes (20,848) (14,176)
-----------------------
Net unrealized investment gains $ 38,719 $ 26,327
-----------------------
-----------------------
</TABLE>
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loan portfolio consists principally of commercial
mortgage loans. The Company's lending policies require that the loans be
collateralized by the value of the related property, establish limits on the
amount that can be loaned to one borrower and require diversification by
geographic location and collateral type. Regions in which at least 20% of the
Company's mortgage loan portfolio is invested during the years presented
include; Pacific (26% in 1997 and 28% in 1996), which includes California,
Oregon and Washington; West South Central (22% in 1997 and 12% in 1996), which
includes Oklahoma and Texas; and Mountain (15% in 1997 and 20% in 1996), which
includes Arizona, Colorado, Idaho, New Mexico, Utah and Wyoming. Mortgage loans
on real estate have also been analyzed during the years presented by collateral
types with office buildings (44% in 1997 and 46% in 1996) and retail facilities
(36% in 1997 and 34% in 1996), representing the largest holdings.
15
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
The Company has also provided an allowance for possible losses against its
mortgage loan portfolio. An analysis of this allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 600 $ 600 $ 600
Realized losses -- 2,527 --
Uncollectible amounts written off, net of recoveries (77) (2,527) --
-------------------------------
Balance at end of year $ 523 $ 600 $ 600
-------------------------------
-------------------------------
</TABLE>
Impaired loans (those loans in which the Company does not believe it will
collect all amounts due according to the contractual terms of the respective
loan agreements) totaled $3.1 million at December 31, 1996. There were no
impaired loans at December 31, 1997. No valuation allowance was established on
the impaired loans at December 31, 1996.
NET INVESTMENT INCOME
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
--------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 43,648 $ 45,744 $ 42,016
Available for sale 97,044 85,722 83,490
Equity securities 1,259 1,345 1,098
Mortgage loans on real estate 21,027 20,297 19,544
Investment real estate 4,457 4,495 4,191
Policy loans 5,692 5,653 5,567
Other long-term investments 2,921 3,698 26,249
Short-term investments 3,691 3,166 2,671
Other 4,105 3,485 5,581
--------------------------------------
183,844 173,605 190,407
Less investment expenses (9,081) (7,183) (6,059)
--------------------------------------
Net investment income $ 174,763 $ 166,422 $ 184,348
--------------------------------------
--------------------------------------
</TABLE>
Investment income from other long-term investments, which includes investments
held by subsidiaries engaged in the broker-dealer and investment company
industries, is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Dividends, interest and other income $ 1,698 $ 613 $ 519
Net realized gain (loss) from investment transactions 6,288 (1,811) 25,810
Change in unrealized appreciation/depreciation of investments (5,065) 4,896 (80)
--------------------------------
$ 2,921 $ 3,698 $ 26,249
--------------------------------
--------------------------------
</TABLE>
During the year ended December 31, 1997, 13 securities with a total fair value
of $15.0 million were transferred to the Company from its venture capital
subsidiary, upon its dissolution. During the year ended December 31, 1995, two
securities with a total fair value of $27.6 million were transferred out of the
subsidiary. Realized gains (recognized in net investment income) of $6.3 million
and $24.6 million were recognized on the 1997 and 1995 transfers, respectively,
although neither transfer had an impact on net income (as unrealized
appreciation had been reported prior to the transfer).
16
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
REALIZED AND UNREALIZED GAINS AND LOSSES
Realized gains (losses) and the change in unrealized appreciation/depreciation
on investments, excluding amounts attributed to investments held by subsidiaries
engaged in the broker-dealer and investment company industries discussed above,
are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REALIZED
Fixed maturities--available for sale $ 4,300 $ 2,199 $ 5,526
Equity securities 35,120 56,522 (763)
Mortgage loans on real estate -- (2,527) --
Investment real estate 6 619 123
Other long-term investments (300) (154) (158)
Securities and indebtedness of related parties (487) (1,438) 1,182
Notes receivable and other -- (767) (8)
------------------------------------
Realized gains on investments $ 38,639 $ 54,454 $ 5,902
------------------------------------
------------------------------------
UNREALIZED
Fixed maturities:
Held for investment $ 6,866 $ (12,225) $ 50,905
Available for sale 35,292 (25,675) 75,590
Equity securities (13,464) 4,429 9,209
------------------------------------
Change in unrealized appreciation/depreciation of investments $ 28,694 $ (33,471) $ 135,704
------------------------------------
------------------------------------
</TABLE>
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio for the years ended December 31, 1997, 1996, and 1995 is as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED
COST GAINS LOSSES PROCEEDS
-------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Scheduled principal repayments and calls:
Available for sale $ 154,939 $ -- $ -- $ 154,939
Held for investment 40,460 -- -- 40,460
Sales--available for sale 91,603 6,313 (2,013) 95,903
-------------------------------------------------
Total $ 287,002 $ 6,313 $ (2,013) $ 291,302
-------------------------------------------------
-------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Scheduled principal repayments and calls:
Available for sale $ 148,299 $ -- $ -- $ 148,299
Held for investment 33,212 -- -- 33,212
Sales--available for sale 71,095 5,197 (2,498) 73,794
-------------------------------------------------
Total $ 252,606 $ 5,197 $ (2,498) $ 255,305
-------------------------------------------------
-------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
Scheduled principal repayments and calls:
Available for sale $ 74,710 $ -- $ -- $ 74,710
Held for investment 16,529 -- -- 16,529
Sales--available for sale 127,738 7,186 (1,445) 133,479
-------------------------------------------------
Total $ 218,977 $ 7,186 $ (1,445) $ 224,718
-------------------------------------------------
-------------------------------------------------
</TABLE>
Realized losses totaling $0.5 million and $0.2 million were incurred during the
years ended December 31, 1996 and 1995, respectively, as a result of writedowns
for other than temporary impairment of fixed maturity securities. No such
writedowns were recorded during the year ended December 31, 1997.
17
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
OTHER
In December 1997, the Company acquired a 35% interest (with 20% voting control)
in an unaffiliated life insurance company for $25.0 million. The excess
(approximately $5.1 million) of the carrying amount of the investment, which is
classified as securities and indebtedness of related parties on the consolidated
balance sheet, over the amount of underlying equity in net assets is
attributable to goodwill and is being amortized over a 20 year period. The
investment is being accounted for using the equity method. The insurance company
underwrites and markets life insurance and annuity products throughout the
United States.
Also in December 1997, the Company acquired all of the common stock of EquiTrust
Life Insurance Company for $9.7 million. EquiTrust Life Insurance Company is a
shell life insurance company licensed in 38 states. Goodwill totaling $1.5
million was recorded in connection with the acquisition and is being amortized
over 20 years.
In February 1996, an equity investee of the Company completed an initial public
offering which resulted in an increase of $4.9 million, net of $2.6 million in
taxes, in the Company's share of the investee's stockholders' equity. This
increase was credited directly to additional paid-in capital. Subsequent to the
public offering, the Company reclassified the investment to equity securities.
The Company has sold the majority of its holdings in this investment and
realized gains of $24.3 million during the year ended December 31, 1997 and
$50.4 million during the year ended December 31, 1996.
At December 31, 1997, affidavits of deposits covering investments with a
carrying value totaling $2,081.4 million were on deposit with state agencies to
meet regulatory requirements.
At December 31, 1997, the Company had committed to provide additional funding
for mortgage loans on real estate aggregating $6.5 million. These commitments
arose in the normal course of business at terms which are comparable to similar
investments.
The carrying value of investments which have been non-income producing for the
twelve months preceding December 31, 1997, include fixed maturities of $3.2
million and other long-term investments of $1.6 million.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States Government) exceeded ten percent of stockholder's
equity at December 31, 1997.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 also excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements and allows companies to forego the disclosures when
those estimates can only be made at excessive cost. Accordingly, the aggregate
fair value amounts presented herein are limited by each of these factors and do
not purport to represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using a matrix calculation assuming a
spread (based on interest rates and a risk assessment of the bonds) over U. S.
Treasury bonds.
EQUITY SECURITIES: The fair values for equity securities are based on quoted
market prices, where available. For equity securities that are not actively
traded, estimated fair values are based on values of comparable issues.
MORTGAGE LOANS ON REAL ESTATE AND POLICY LOANS: Fair values are estimated by
discounting expected cash flows using interest rates currently being offered for
similar loans.
18
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER LONG-TERM INVESTMENTS: The fair values for nontraditional debt
instruments and investment deposits are estimated by discounting expected cash
flows using interest rates currently being offered for similar investments. The
fair values for investments held by a subsidiary in the investment company
industry are based on quoted market prices, where available. For holdings that
are not actively traded, fair values are determined in good faith by the Board
of Directors of the subsidiary holding the security.
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate their fair values.
SECURITIES AND INDEBTEDNESS OF RELATED PARTIES: Fair values for loans and
advances are estimated by discounting expected cash flows using interest rates
currently being offered for similar investments. As allowed by Statement No.
107, fair values are not assigned to investments accounted for using the equity
method.
ASSETS AND LIABILITIES OF SEPARATE ACCOUNTS: Separate account assets and
liabilities are reported at estimated fair value in the Company's consolidated
balance sheet.
FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' FUNDS: Fair values of the
Company's liabilities under contracts not involving significant mortality or
morbidity risks (principally deferred annuities, deposit administration funds
and supplementary contracts) are stated at cash surrender value, the cost the
Company would incur to extinguish the liability. The Company is not required to
estimate the fair value of its liabilities under other contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement No.
107:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1997 1996
------------------------------ ----------------------------
CARRYING FAIR CARRYING
VALUE VALUE VALUE FAIR VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Held for investment $ 522,411 $ 541,332 $ 562,283 $ 574,338
Available for sale 1,286,169 1,286,169 1,128,587 1,128,587
Equity securities 51,268 51,268 79,786 79,786
Mortgage loans on real estate 253,093 265,059 235,331 245,125
Policy loans 90,052 97,712 88,940 88,940
Other long-term investments 9,989 9,587 22,157 21,671
Cash and short-term investments 25,531 25,531 63,827 63,827
Securities and indebtedness of related parties 5,451 5,829 11,658 12,292
Assets held in separate accounts 138,409 138,409 79,043 79,043
LIABILITIES
Future policy benefits $ 782,933 $ 767,030 $ 744,369 $ 730,272
Other policyholders' funds 195,330 195,330 186,535 186,535
Liabilities related to separate accounts 138,409 138,409 79,043 79,043
</TABLE>
4. REINSURANCE AND POLICY PROVISIONS
LIFE INSURANCE OPERATIONS
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages
for life insurance vary according to the age and risk classification of the
insured with retention limits ranging up to $0.5 million of coverage per
individual life. The Company does not use financial or surplus relief
reinsurance. Life insurance in force ceded totaled $663.4 million (5.1% of total
life insurance in force) at December 31, 1997 and $594.9 million (4.9% of total
life insurance in force) at December 31, 1996.
19
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE AND POLICY PROVISIONS (CONTINUED)
Reinsurance contracts do not relieve the Company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, the Company's life insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the Company. To limit the possibility of
such losses, the Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk.
No allowance for uncollectible amounts has been established against the
Company's asset for reinsurance recoverable since none of the receivables are
deemed to be uncollectible. Insurance premiums and product charges have been
reduced by $3.7 million, $3.4 million and $3.3 million and insurance benefits
have been reduced by $2.9 million, $4.0 million and $1.7 million during the
years ended December 31, 1997, 1996 and 1995, respectively, as a result of
cession agreements. The amount of reinsurance assumed is not significant.
Unpaid claims on accident and health policies (entirely disability income
products) include amounts for losses and related adjustment expense and are
estimates of the ultimate net costs of all losses, reported and unreported.
These estimates are subject to the impact of future changes in claim severity,
frequency and other factors. The activity in the liability for unpaid claims and
related adjustment expense, net of reinsurance, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unpaid claims liability, net of related
reinsurance, at beginning of year $ 13,812 $ 13,899 $ 10,494
Add:
Provision for claims occurring in the current
year 5,829 4,737 5,011
Increase (decrease) in estimated expense for
claims occurring in the prior years 2,236 (371) 2,357
--------------------------------
Incurred claim expense during the current year 8,065 4,366 7,368
Deduct expense payments for claims occurring
during:
Current year 1,692 1,681 2,109
Prior years 2,564 2,772 1,854
--------------------------------
4,256 4,453 3,963
--------------------------------
Unpaid claims liability, net of related
reinsurance, at end of year 17,621 13,812 13,899
Active life reserve 15,832 15,376 14,614
--------------------------------
Net accident and health reserves 33,453 29,188 28,513
Reinsurance ceded 1,721 1,483 934
--------------------------------
Gross accident and health reserves $ 35,174 $ 30,671 $ 29,447
--------------------------------
--------------------------------
</TABLE>
Reserves for unpaid claims are developed using industry mortality and morbidity
data. One year development on prior year reserves represents Company experience
being more or less favorable than that of the industry. Over time, the Company
expects its experience with respect to disability income business to be
comparable to that of the industry. A certain level of volatility in development
is inherent in these reserves since the underlying block of business is
relatively small.
PROPERTY-CASUALTY OPERATIONS
Utah Insurance is a participant with Farm Bureau Mutual Insurance Company and
South Dakota Farm Bureau Mutual Insurance Company, another affiliate, in a
reinsurance pooling agreement (the Farm Bureau Mutual pool). Under the terms of
the agreement, Utah Insurance and South Dakota Farm Bureau Mutual Insurance
Company cede to Farm Bureau Mutual Insurance Company all of their insurance
business and assume back from Farm Bureau Mutual Insurance Company an amount
equal to their participation in the pooling agreement. Also, losses, loss
adjustment expenses, and other underwriting and administrative expenses are
prorated among the companies on the basis of their participation in the pooling
agreement. For the year ended December 31, 1995, Utah Insurance's participation
in the reinsurance pool was 8%.
20
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE AND POLICY PROVISIONS (CONTINUED)
Property-casualty premiums earned and losses and loss adjustment expenses
incurred, reflect the following reinsurance amounts during the year ended
December 31, 1995 (dollars in thousands):
<TABLE>
<S> <C>
PREMIUMS EARNED
Direct premiums written $ 26,244
Assumed from non-affiliates 5
Ceded to non-affiliates (615)
Assumed from Farm Bureau Mutual pool 18,851
Ceded to Farm Bureau Mutual pool (25,634)
---------
Net premiums written 18,851
Increase in reserve for unearned premiums, net of
reinsurance (150)
Increase in accrued retrospective premiums 8
---------
Total premiums earned $ 18,709
---------
---------
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED
Direct losses and loss adjustment expenses paid $ 18,532
Net ceded to non-affiliates 91
Assumed from Farm Bureau Mutual pool 13,030
Ceded to Farm Bureau Mutual pool (18,623)
---------
Net losses and loss adjustment expenses paid 13,030
Increase in losses and loss adjustment expense
reserves, net of reinsurance 591
---------
Total losses and loss adjustment expenses incurred $ 13,621
---------
---------
</TABLE>
The difference between premiums on a written and on an earned basis is not
significant.
The activity in the reserves on property-casualty policies, net of reinsurance
and salvage and subrogation recoverables, is summarized as follows during the
year ended December 31, 1995 (dollars in thousands):
<TABLE>
<S> <C>
Reserves on property-casualty policies (gross),
beginning of year $ 28,828
Less reinsurance recoverable on unpaid losses and
loss adjustment expenses, beginning of year (16,646)
---------
Reserve for losses and loss adjustment expenses,
net of related reinsurance, beginning of year 12,182
Add:
Provision for losses and loss adjustment
expenses for claims occurring in the current
year 14,529
Decrease in estimated losses and loss adjustment
expenses for claims occurring in the prior
years (908)
---------
Incurred losses and loss adjustment expenses
during the current year 13,621
Deduct loss and loss adjustment expense payments
for claims occurring during:
Current year (7,678)
Prior years (5,351)
---------
(13,029)
---------
Reserve for losses and loss adjustment expenses,
net of related reinsurance, end of year 12,774
Reinsurance recoverables on unpaid losses and loss
adjustment expenses, end of year 17,210
Transfer to parent as part of dividend of Utah
Farm Bureau Insurance Company (29,984)
---------
Reserves on property-casualty policies (gross),
end of year $ --
---------
---------
</TABLE>
5. INCOME TAXES
The Company files a consolidated federal income tax return with FBL Financial
Group, Inc. and a majority of its subsidiaries. FBL Financial Group, Inc. and
its direct and indirect subsidiaries included in the consolidated federal income
tax return each report current income tax expense as allocated under a
consolidated tax allocation agreement.
21
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Generally, this allocation results in profitable companies recognizing a tax
provision as if the individual company filed a separate return and loss
companies recognizing benefits to the extent their losses contribute to reduce
consolidated taxes. The companies file separate state income tax returns.
Deferred income taxes have been established based upon the temporary differences
between the financial statement and income tax bases of assets and liabilities
within each entity. The reversal of the temporary differences will result in
taxable or deductible amounts in future years when the related asset or
liability is recovered or settled.
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Taxes provided in consolidated statements of
income on:
Income before minority interest in earnings of
subsidiaries and equity income:
Current $ 36,828 $ 28,400 $ 13,278
Deferred (5,249) 5,756 14,013
--------------------------------
31,579 34,156 27,291
Equity income:
Current 951 1,674 (212)
Deferred 77 554 1,013
--------------------------------
1,028 2,228 801
Taxes provided in consolidated statement of
changes in stockholder's equity:
Change in net unrealized investment
gains/losses--deferred 6,672 (4,211) 24,435
Adjustment resulting from capital transaction of
equity investee-- deferred -- 2,617 --
--------------------------------
6,672 (1,594) 24,435
--------------------------------
$ 39,279 $ 34,790 $ 52,527
--------------------------------
--------------------------------
</TABLE>
The effective tax rate on income before income taxes, minority interest in
earnings of subsidiaries and equity income is different from the prevailing
federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
----------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes, minority interest in
earnings of subsidiaries and equity income $ 93,245 $ 103,682 $ 76,475
----------------------------------
----------------------------------
Income tax at federal statutory rate (35%) $ 32,636 $ 36,289 $ 26,766
Tax effect (decrease) of:
Tax-exempt interest income (323) (383) (574)
Tax-exempt dividend income (1,148) (1,246) (798)
State income taxes 39 242 1,337
Other items 375 (746) 560
----------------------------------
Income tax expense $ 31,579 $ 34,156 $ 27,291
----------------------------------
----------------------------------
</TABLE>
The Internal Revenue Service (IRS) has examined the federal income tax returns
of FBL Financial Group, Inc. for the tax years through 1994 and FBL Financial
Group, Inc. has reached a tentative settlement with the IRS's Appeals Division
for tax years 1988 through 1994. The settlement is subject to approval of the
Joint Committee on Taxation. Management believes that any settlement will not
have a material impact on the Company's financial statements.
22
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Fixed maturity and equity securities $ 25,247 $ 17,265
Deferred policy acquisition costs 46,944 44,307
Deferred investment gains -- 10,551
Other 14,236 13,437
-----------------------
86,427 85,560
Deferred income tax assets:
Future policy benefits (21,320) (22,304)
Accrued dividends (3,273) (2,997)
Accrued pension costs (9,092) (10,082)
Other (7,619) (6,367)
-----------------------
(41,304) (41,750)
-----------------------
Deferred income tax liability $ 45,123 $ 43,810
-----------------------
-----------------------
</TABLE>
Prior to 1984, a portion of current income of the Company was not subject to
current income taxation, but was accumulated, for tax purposes, in a memorandum
account designated as "policyholders' surplus account". The aggregate
accumulation in this account at December 31, 1997 was $11.1 million. Should the
policyholders' surplus account of the Company exceed the limitation prescribed
by federal income tax law, or should distributions be made by the Company to its
stockholder in excess of $445.3 million, such excess would be subject to federal
income taxes at rates then effective. Deferred income taxes of $3.9 million have
not been provided on amounts included in this memorandum account since the
Company contemplates no action and can foresee no events that would create such
a tax.
Deferred income taxes were also reported on equity income. These taxes arise
from the recognition of income and losses differently for purposes of filing
federal income tax returns than for financial reporting purposes.
6. CREDIT ARRANGEMENT
As an investor in the Federal Home Loan Bank (FHLB), the Company has the right
to borrow up to $54.0 million and $43.9 million from the FHLB as of March 31,
1998 and December 31, 1997, respectively. As of December 31, 1997, the Company
had no outstanding debt under this credit arrangement.
7. RETIREMENT AND COMPENSATION PLANS
The Company participates with several affiliates in various defined benefit
plans covering substantially all employees. The benefits of these plans are
based primarily on years of service and employees' compensation. The Company and
affiliates have adopted a policy of allocating the net periodic pension cost of
the plans between themselves generally on a basis of time incurred by the
respective employees for each employer. Such allocations are reviewed annually.
Pension expense aggregated $4.2 million, $5.9 million and $7.9 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
Prior to January 1, 1996, the Company provided benefits to agents of the Company
and certain of its affiliates through the Agents' Career Incentive Plan. Company
contributions to the plan were based upon the individual agent's earned
commissions and varied based upon the overall production level and the number of
years of service. Company contributions charged to expense with respect to this
plan during the year ended December 31, 1995 were $1.4 million. During 1996, in
conjunction with a restructuring of the agents' compensation program,
contributions to this plan were discontinued.
23
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
The Company has established deferred compensation plans for certain key current
and former employees and has certain other benefit plans which provide for
retirement and other benefits. These plans have been accrued or funded as deemed
appropriate by management of the Company.
Certain of the assets related to these plans are on deposit with the Company and
amounts relating to these plans are included in the financial statements herein.
In addition, certain amounts included in the policy liabilities for interest
sensitive products relate to deposit administration funds maintained by the
Company on behalf of affiliates offering substantially the same benefit programs
as the Company.
In addition to benefits offered under the aforementioned benefit plans, the
Company and several other affiliates sponsor a plan that provides group term
life insurance benefits to retired full-time employees who have worked ten years
and attained age 55 while in service with the Company. Postretirement benefit
expense is allocated in a manner consistent with pension expense discussed
above. Postretirement pension expense aggregated $0.1 million for each of the
years ended December 31, 1997, 1996 and 1995, respectively.
8. STATUTORY INFORMATION
STATUTORY LIMITATIONS ON DIVIDENDS
The ability of the Company to pay dividends to the parent company is restricted
because prior approval of insurance regulatory authorities is required for
payment of dividends to the stockholder which exceed an annual limitation.
During 1998 the Company could pay dividends to the parent company of
approximately $37.8 million without prior approval of insurance regulatory
authorities.
STATUTORY ACCOUNTING POLICIES
The financial statements of the Company included herein differ from related
statutory-basis financial statements principally as follows: (a) the bond
portfolio is segregated into held-for-investment (carried at amortized cost) and
available-for-sale (carried at fair value) classifications rather than generally
being carried at amortized cost; (b) future policy benefit reserves for
participating traditional life insurance products are based on net level premium
methods and guaranteed cash value assumptions which may differ from statutory
reserves; (c) future policy benefit reserves on certain interest sensitive
products are based on full account values, rather than discounting methodologies
utilizing statutory interest rates; (d) deferred income taxes are provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (e) net realized gains or losses attributed to changes in the
level of interest rates in the market are recognized as gains or losses in the
statement of income when the sale is completed rather than deferred and
amortized over the remaining life of the fixed maturity security or mortgage
loan; (f) declines in the estimated realizable value of investments are charged
to the statement of income when such declines are judged to be other than
temporary rather than through the establishment of a formula-determined
statutory investment reserve (carried as a liability), changes in which are
charged directly to surplus; (g) agents' balances and certain other assets
designated as "non-admitted assets" for statutory purposes are reported as
assets rather than being charged to surplus; (h) revenues for interest sensitive
products consist of policy charges for the cost of insurance, policy
administration charges, amortization of policy initiation fees and surrender
charges assessed rather than premiums received; (i) pension income or expense is
recognized in accordance with Statement No. 87, "Employers' Accounting for
Pensions" rather than in accordance with rules and regulations permitted by the
Employee Retirement Income Security Act of 1974; (j) the financial statements of
subsidiaries are consolidated with those of the Company; and (k) assets and
liabilities are restated to fair values when a change in ownership occurs that
is accounted for as a purchase, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
Total statutory capital and surplus of the Company was $291.3 million at
December 31, 1997 and $280.6 million at December 31, 1996. Net income for the
Company determined in accordance with statutory accounting practices was $73.5
million in 1997, $75.0 million in 1996 and $47.4 million in 1995.
24
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STATUTORY INFORMATION (CONTINUED)
The Company's insurance subsidiaries reported the following statutory amounts to
regulatory agencies, after appropriate elimination of intercompany accounts:
<TABLE>
<CAPTION>
CAPITAL AND NET INCOME
SURPLUS YEAR ENDED DECEMBER
DECEMBER 31, 31,
-------------- ----------------------
1997 1996 1997 1996 1995
--------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Life insurance companies $13,111 $3,352 $ 56 $ 151 $ 92
Property-casualty insurance subsidiary -- -- -- -- 1,454
--------------------------------------
Total $13,111 $3,352 $ 56 $ 151 $1,546
--------------------------------------
--------------------------------------
</TABLE>
The National Association of Insurance Commissioners (NAIC) is in the process of
codifying statutory accounting practices (Codification). Codification will
likely change, to some extent, prescribed statutory accounting practices and may
result in changes to the accounting practices that the Company's insurance
subsidiaries use to prepare their statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will require
adoption by the various state insurance departments before it becomes the
prescribed statutory basis of accounting for insurance companies domesticated
within those states. Accordingly, before Codification becomes effective the
state of domicile must adopt Codification as the prescribed basis of accounting
on which domestic insurers must report their statutory-basis results. At this
time it is unclear whether the state of Iowa will adopt Codification.
9. MANAGEMENT AND OTHER AGREEMENTS
The Company shares certain office facilities and services with the Iowa Farm
Bureau Federation and its affiliated companies. These expenses are allocated by
the Company on the basis of cost and time studies that are updated annually and
consist primarily of salaries and related expenses, travel, and occupancy costs.
In addition, prior to January 1, 1996, the Company participated in a management
agreement with Farm Bureau Management Corporation, a wholly-owned subsidiary of
the Iowa Farm Bureau Federation. Under this agreement, Farm Bureau Management
Corporation provided general business, administration and management services to
the Company. During 1996, the Company's parent assumed responsibility for
providing a majority of these services for itself as well as Farm Bureau
Management Corporation and other affiliates. During the years ended December 31,
1997, 1996 and 1995, the Company incurred expenses under these contracts of $0.8
million, $2.4 million and $3.7 million, respectively.
The Company has equipment and auto lease agreements with FBL Leasing Services,
Inc., a wholly-owned subsidiary of FBL Financial Services, Inc. The Company
incurred expenses totaling $1.7 million during 1997 and $0.7 million during the
seven month period ended December 31, 1996 (period in 1996 subsequent to the
dividend of FBL Financial Services, Inc. to FBL Financial Group, Inc.) under
these agreements.
FBL Investment Advisory Services, Inc., a wholly-owned subsidiary of FBL
Financial Services, Inc., provides investment advisory services to the Company.
The related fees are based on the level of assets under management plus certain
out-of-pocket expenses. The Company incurred expenses totaling $4.1 million
during 1997 and $1.6 million during the seven month period ended December 31,
1996 relating to these services.
Effective January 1, 1996, the Company entered into marketing agreements with
the property-casualty companies operating within its marketing territory,
including Farm Bureau Mutual Insurance Company and other affiliates. Under the
marketing agreements, the property-casualty companies assumed responsibility for
development and management of the Company's agency force for a fee equal to a
percentage of commissions on first year life insurance premiums and annuity
deposits. During the years ended December 31, 1997 and 1996, the Company paid
$3.3 million and $2.8 million, respectively, to the property-casualty companies
under these arrangements.
The Company is licensed by the Iowa Farm Bureau Federation to use the "Farm
Bureau" and "FB" designations in Iowa. In connection with this license,
royalties of $0.5 million, $0.4 million and $0.3 million were paid to the Iowa
Farm Bureau Federation for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company has
25
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. MANAGEMENT AND OTHER AGREEMENTS (CONTINUED)
similar arrangements with Farm Bureau organizations in other states in its
market territory. Total royalties paid to Farm Bureau organizations other than
the Iowa Farm Bureau Federation were $0.4 million in 1997 and $0.3 million in
1996 and 1995.
10. COMMITMENTS AND CONTINGENCIES
IMPACT OF YEAR 2000 (UNAUDITED)
Many of the Company's computer programs were originally written using two digits
rather than four to define a particular year. As a result, these computer
programs have time-sensitive software that may recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions to operations, including, but not limited
to, a temporary inability to process transactions, send premium notices and
calculate policy reserves and accruals.
During 1997, the Company completed a comprehensive assessment of the Year 2000
issue and developed a plan to address the issue in a timely manner. The Company
is currently in the process of modifying or replacing portions of its software
to help ensure that its computer systems will function properly when using
date-sensitive information. The testing of these modifications is also currently
being performed. Furthermore, the Company has initiated formal communications
with all of its significant vendors to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues.
The Company has and will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company anticipates completing the Year 2000 project no later than December 31,
1998, and prior to any anticipated impact on its operating systems. The total
incremental cost of the Year 2000 project (those costs which the Company would
not have incurred had the Year 2000 issue not existed) is estimated to be $1.4
million and is being funded through operating cash flows. Year 2000 modification
costs incurred and charged to expense during the three month period ended March
31, 1998 and the year ended December 31, 1997 totaled $0.4 million and $0.6
million, respectively. It is anticipated the project costs to be charged to
expense during the remainder of 1998 will total approximately $0.4 million.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantees that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
OTHER
In the normal course of business, the Company may be involved in litigation
where amounts are alleged that are substantially in excess of contractual policy
benefits or certain other agreements. At March 31, 1998 and December 31, 1997,
management is not aware of any claims for which a material loss is reasonably
possible.
The Company has extended a line of credit in the amount of $15.0 million to FBL
Leasing Services, Inc., a wholly-owned subsidiary of FBL Financial Group, Inc.
Interest on this agreement is equal to the prime rate of a national bank and
payable monthly. At December 31, 1997, there was $4.8 million outstanding on the
line of credit. No amounts were outstanding at March 31, 1998 or December 31,
1996.
The Company has extended a line of credit in the amount of $0.5 million to
Western Computer Services, Inc., an affiliate. Interest on this agreement is
equal to the prime rate of a national bank and payable monthly. At March 31,
1998 and December 31, 1997, there was $0.1 million outstanding on the line of
credit. No amounts were outstanding at December 31, 1996.
The Company has guaranteed the payment of principal and interest on notes
totaling $24.5 million payable by FBL Leasing Services, Inc. to a bank. The
notes are due August 1999 and are collateralized by lease agreements primarily
with affiliates. The Company believes no losses will be recognized in connection
with this guarantee due to the credit worthiness of the lessees and the value of
the underlying collateral.
26
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During the first quarter of 1998, the Company entered into a 15-year operating
lease with the Iowa Farm Bureau Federation for the lease of its home office
properties. Future minimum lease payments under this lease are as follows: 1998
- -$0.7 million; 1999 - $1.0 million; 2000 - $1.2 million; 2001 - $1.2 million;
2002 - $1.2 million; and thereafter, through 2013 - $14.8 million.
In connection with an investment in a limited real estate partnership in 1996,
the Company has agreed to pay any cash flow deficiencies of a medium-sized
shopping center owned by the partnership through January 1, 2001. At March 31,
1998, the Company assessed the probability and amount of future cash flows from
the property and determined that no accrual was necessary. The limited
partnership had a $5.4 million mortgage loan, secured by the shopping center,
with Farm Bureau Mutual Insurance Company.
27
<PAGE>
PART C
OTHER INFORMATION
<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
<TABLE>
<C> <C> <S>
(1) Certified resolution of the board of directors of Farm
Bureau Life Insurance Company (the "Company")
establishing Farm Bureau Life Annuity Account II (the
"Account"). (1)
(2) Not Applicable.
(3) *Form of Underwriting agreement among the Company, the
Account and EquiTrust Marketing Services, Inc.
("EquiTrust Marketing").
(4) Contract Form (1)
(5) *Form of Contract Application.
(6) (a) Articles of Incorporation of the Company. (1)
(b) By-Laws of the Company. (1)
(7) Not Applicable.
(8) *(a)Participation agreement relating to EquiTrust
Variable Insurance Series Fund.
*(b)Participation agreement relating to Dreyfus
Variable Investment Fund.
*(c)Participation agreement relating to T. Rowe Price
Equity Series, Inc. and T. Rowe Price International
Series, Inc.
(9) * Opinion and Consent of Stephen M. Morain, Esquire.
(10) *(a) Consent of Sutherland, Asbill & Brennan, LLP.
*(b) Consent of Ernst & Young LLP.
*(c) Opinion and Consent of Christopher G. Daniels,
FSA, MSAA, Life Product Development and Pricing Vice
President.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Powers of Attorney. (1)
</TABLE>
- ------------------------
* Attached as an exhibit.
(1) Incorporated herein by reference to the initial filing of this Registration
Statement (File No. 333-46595) on February 19, 1998.
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
Incorporated herein by reference to the prospectus in the Form S-6 registration
statement (File No. 333-45815) for certain variable life insurance contracts
issued by the Company filed with the Commission on February 6, 1998.
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 FBL Financial Group, Inc. This Company and its
affiliates are described more fully in the prospectus included in this
registration statement. Various companies and other entities controlled by FBL
Financial Group, Inc., 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 the owners of their common stock (where applicable), are
set forth on the following diagram.
SEE ORGANIZATION CHART ON FOLLOWING PAGE
1
<PAGE>
FBL FINANCIAL GROUP, INC.
OWNERSHIP CHART
01-01-98
[CHART]
2
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of the date of the prospectus included in this registration statement, no
Contracts have been sold.
ITEM 28. INDEMNIFICATION
Article XII of the Company's By-Laws provides for the indemnification by the
Company of any person who is a party or who is threatened to be made a party to
any threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or in the
right of the Company) by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or enterprise, against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Article
XII also provides for the indemnification by the Company of any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or another enterprise 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 will 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 determines 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.
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.
ITEM 29. PRINCIPAL UNDERWRITER
(a) EquiTrust Marketing Services, Inc. is the registrant's principal
underwriter and also serves as the principal underwriter of certain variable
annuity contracts and variable life insurance policies issued by other separate
accounts of the Company or its life insurance company affiliates supporting
other variable products, or to variable annuity and variable life insurance
separate accounts of insurance companies not affiliated with the Company.
(b) Officers and Directors of EquiTrust Marketing Services, Inc.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS* POSITIONS AND OFFICES WITH THE COMPANY
- ------------------------------------------------------ ------------------------------------------------------------------------
<S> <C>
Stephen M. Morain General Counsel and Assistant Secretary, Iowa Farm Bureau Federation;
Senior Vice President, General Counsel and Director General Counsel, Secretary and Director, Farm Bureau Management
Corporation; Senior Vice President, General Counsel and Director, FBL
Financial Group, Inc.; Senior Vice President and General Counsel, Farm
Bureau Life Insurance Company and other affiliates of the foregoing.
Holds various positions with affiliates of the foregoing. Director,
Computer Aided Design Software, Inc., and Iowa Business Development
Finance Corporation Chairman, Edge Technologies, Inc.
William J. Oddy Chief Operating Officer, FBL Financial Group, Inc., Farm Bureau Life
Chief Operating Officer and Director Insurance Company, Western Farm Bureau Life Insurance Company and other
affiliates of the foregoing. Holds various positions with affiliates of
the foregoing.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS* POSITIONS AND OFFICES WITH THE COMPANY
- ------------------------------------------------------ ------------------------------------------------------------------------
<S> <C>
Dennis M. Marker Investment Vice President, Administration, FBL Financial Group, Inc.
Investment Vice President, Administration, Secretary Holds various positions with affiliates of the foregoing.
and Director
Thomas R. Gibson Chief Executive Officer and Director, FBL Financial Group, Inc.; Chief
Chief Executive Officer and Director Executive Officer, Farm Bureau Life Insurance Company, Western Farm
Bureau Life Insurance Company and other affiliates of the foregoing.
Holds various positions with affiliates of the foregoing.
Timothy J. Hoffman Chief Property/Casualty Officer, FBL Financial Group, Inc.; Vice
Vice President and Director President, Farm Bureau Life Insurance Company, Western Farm Bureau Life
Insurance Company and other affiliates of the foregoing. Holds various
positions with affiliates of the foregoing.
James W. Noyce Chief Financial Officer, Farm Bureau Life Insurance Company, FBL
Chief Financial Officer, Treasurer and Director Financial Group, Inc., Western Farm Bureau Life Insurance Company and
other affiliates of the foregoing. Holds various positions with
affiliates of the foregoing.
Thomas E. Burlingame Vice President - Associate General Counsel, FBL Financial Group, Inc.
Director Holds various positions with affiliates of the foregoing.
F. Walter Tomenga Vice President - Corporate Affairs and Marketing Services, FBL Financial
Director Group, Inc. Holds various positions with affiliates of the foregoing.
Lynn E. Wilson Vice President - Life Sales, FBL Financial Group, Inc. Holds various
President and Director positions with affiliates of the foregoing.
Lou Ann Sandburg Vice President - Investments and Assistant Treasurer, FBL Financial
Vice President, Investments and Director Group, Inc., Farm Bureau Life Insurance Company, Western Farm Bureau
Life Insurance Company and other affiliates of the foregoing. Holds
various positions with affiliates of the foregoing.
James P. Brannen Tax and Investment Accounting Vice President, FBL Financial Group, Inc.
Tax and Investment Accounting Vice President Holds various positions with affiliates of the foregoing.
Sue A. Cornick Market Conduct and Mutual Funds Vice President and Assistant Secretary,
Market Conduct and Mutual Funds Vice President and EquiTrust Investment Management Services, Inc., EquiTrust Money Market
Assistant Secretary Fund, Inc., EquiTrust Series Fund, Inc. and EquiTrust Variable
Insurance Series Fund.
Kristi Rojohn Assistant Mutual Funds Manager and Assistant Secretary, EquiTrust
Assistant Mutual Funds Manager and Assistant Secretary Investment Management Services, Inc.; Assistant Secretary, EquiTrust
Money Market Fund, Inc., EquiTrust Series Fund, Inc. and EquiTrust
Variable Insurance SeriesFund.
Elaine A. Followwill Compliance Assistant and Assistant Secretary, EquiTrust Investment
Compliance Assistant and Assistant Secretary Management Services, Inc.; Assistant Secretary, EquiTrust Money Market
Fund, Inc., EquiTrust Series Fund, Inc. and EquiTrust Variable
Insurance Series Fund
Roger F. Grefe Investment Management Vice President, FBL Financial Group, Inc. and
Investment Management Vice President EquiTrust Investment Management Services, Inc.
Robert Rummelhart Fixed Income Vice President, FBL Financial Group, Inc. and EquiTrust
Fixed Income Vice President Investment Management Services, Inc.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS* POSITIONS AND OFFICES WITH THE COMPANY
- ------------------------------------------------------ ------------------------------------------------------------------------
<S> <C>
Charles T. Happel Portfolio Manager, EquiTrust Investment Management Services, Inc.
Portfolio Manager
Laura Kellen Beebe Portfolio Manager, EquiTrust Investment Management Services, Inc.
Portfolio Manager
</TABLE>
- ------------------------
* The principal business address of all of the persons listed above is 5400
University Avenue, West Des Moines, Iowa 50266.
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 5400 University Avenue, West Des Moines, Iowa
50266.
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 aggregate charges under the Contracts
are reasonable in relation to the services rendered, the expenses expected to be
incurred and the risks assumed by the Company.
5
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, Farm Bureau Life Annuity Account II has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized in the City of West Des Moines, State of Iowa, on the 20th day
of May, 1998.
Farm Bureau Life Insurance Company
Farm Bureau Life Annuity Account II
By: /s/ EDWARD M. WIEDERSTEIN
-------------------------------------
Edward M. Wiederstein
PRESIDENT
Farm Bureau Life Insurance Company
Attest: /s/ RICHARD D. HARRIS
-------------------------------------
Richard D. Harris
SENIOR VICE PRESIDENT AND
SECRETARY-TREASURER
Farm Bureau Life Insurance Company
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on the dates set
forth below.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ EDWARD M. WIEDERSTEIN President and Director
- ----------------------------------- [Principal Executive May 20, 1998
Edward M. Wiederstein Officer]
Senior Vice President and
/s/ RICHARD D. HARRIS Secretary-Treasurer
- ----------------------------------- [Principal Financial May 20, 1998
Richard D. Harris Officer]
/s/ JAMES W. NOYCE Chief Financial Officer
- ----------------------------------- [Principal Accounting May 20, 1998
James W. Noyce Officer]
- ----------------------------------- Vice President and May 20, 1998
Craig A. Lang* Director
- ----------------------------------- Director May 20, 1998
Kenneth R. Ashby*
- ----------------------------------- Director May 20, 1998
Al Christopherson*
- ----------------------------------- Director May 20, 1998
Ernest A. Glienke*
- ----------------------------------- Director May 20, 1998
Philip A. Hemesath*
- ----------------------------------- Director May 20, 1998
Craig D. Hill*
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
<C> <S> <C>
- ----------------------------------- Director May 20, 1998
Daniel L. Johnson*
- ----------------------------------- Director May 20, 1998
Richard G. Kjerstad*
- ----------------------------------- Director May 20, 1998
Lindsey D. Larson*
- ----------------------------------- Director May 20, 1998
David R. Machacek*
- ----------------------------------- Director May 20, 1998
Donald O. Narigon*
- ----------------------------------- Director May 20, 1998
Bryce P. Neidig*
- ----------------------------------- Director May 20, 1998
Charles E. Norris*
- ----------------------------------- Director May 20, 1998
Keith R. Olsen*
- ----------------------------------- Director May 20, 1998
Bennett M. Osmonson*
- ----------------------------------- Director May 20, 1998
Howard D. Poulson*
- ----------------------------------- Director May 20, 1998
Sally A. Puttmann*
- ----------------------------------- Director May 20, 1998
Beverly L. Schnepel*
- ----------------------------------- Director
F. Gary Steiner*
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Farm Bureau Life
Annuity Account II, has duly caused this Registration Statement to be signed on
its behalf by the undersigned thereunto duly authorized in the City of West Des
Moines, State of Iowa, on the 20th day of May, 1998.
Farm Bureau Life Annuity Account II
(Registrant)
By: Farm Bureau Life Insurance Company
(Depositor)
By: /s/ EDWARD M. WIEDERSTEIN
-------------------------------------
Edward M. Wiederstein
PRESIDENT
Farm Bureau Life Insurance Company
/s/ STEPHEN M. MORAIN Attorney-In-Fact, Pursuant to
* -----------------------------------, Power of Attorney.
Stephen M. Morain
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
3 Form of Underwriting agreement among the Company, the
Account and EquiTrust Marketing Services, Inc.
5 Form of Contract Application.
8(a ) Participation agreement relating to EquiTrust Variable
Insurance Series Fund.
8(b ) Participation agreement relating to Dreyfus Variable
Investment Fund.
8(c ) Participation agreement relating to T. Rowe Price
Equity Series, Inc. and T. Rowe Price International
Series, Inc.
9 Opinion and Consent of Stephen M. Morain, Esquire.
10(a ) Consent of Sutherland, Asbill & Brennan LLP.
10(b ) Consent of Ernst & Young LLP.
10(c ) Opinion and Consent of Christopher G. Daniels, FSA,
MSAA, Life Product Development and Pricing Vice
President.
</TABLE>
<PAGE>
UNDERWRITING AGREEMENT
UNDERWRITING AGREEMENT made this ___ day of ____________ ____, by and
between Farm Bureau Life Insurance Company ("Farm Bureau"), an Iowa
corporation, on its own behalf and on behalf of Farm Bureau Life Annuity
Account II ("Annuity Account") and EquiTrust Marketing Services, Inc.
("EquiTrust Marketing"), a Delaware corporation.
WITNESSETH:
WHEREAS, Farm Bureau has established and maintains the Annuity Account,
a segregated investment account, pursuant to the laws of the State of Iowa
for the purpose of selling flexible premium deferred variable annuity
contracts (the "Contracts"), to commence after the effectiveness of the
registration statement for the Contracts as filed with Securities and
Exchange Commission (the "SEC") on Form N-4 pursuant to the Securities Act of
1933, as amended (the "1933 Act"); and
WHEREAS, the Annuity Account is registeed as a unit investment trust
under the Investment Company Act of 1940, as amended (the "1940 Act:"); and
WHEREAS, the EquiTrust Marketing is registered as a broker-dealer with
the SEC under the Securities Exchange Act of 1934, as amended (the "1934
Act"), and is a member of the National Association of Securities Dealers,
Inc. (the "NASD"); and
WHEREAS, the parties desire to have EquiTrust Marketing act as principal
underwriter for the Account and assume such supervisory responsibility as is
required by federal and state securities law and applicable requirements of
the NASD for the securities activities of any "person associated" (as that
term is defined in Section 3(a)(18) of the 1934 Act) with EquiTrust
Marketing, including Farm Bureau personnel, and engaged directly or
indirectly in Farm Bureau's variable annuity operations (the "associated
persons"); and
WHEREAS, Farm Bureau and the Annuity Account desire to have the
Contracts sold and distributed through EquiTrust Marketing, and EquiTrust
Marketing is willing to sell and distribute such Contracts, under the terms
stated herein.
NOW THEREFORE, the parties hereto agree as follows:
1. DISTRIBUTOR AND PRINCIPAL UNDERWRITER
Farm Bureau grants to EquiTrust Marketing the right to be, and EquiTrust
Marketing agrees to serve as, distributor and principal underwriter of the
Contracts during the term of this Agreement. EquiTrust Marketing agrees to
use its best efforts to solicit applications for the Contracts, and to
undertake to provide sales services relative to the Contracts and otherwise
to perform all duties and functions which are necessary and proper for the
distribution of the Contracts.
<PAGE>
2. PREMIUM PAYMENTS
All premium payments or other monies payable for the Contracts shall be
paid or remitted in full by or on behalf of contractowners directly to Farm
Bureau or its designated servicing agent together with such applications,
forms and other documentation as may be required by Farm Bureau. Checks or
money orders in payment of premiums or other monies payable shall be drawn to
the order of "Farm Bureau Life Insurance Company." Farm Bureau will retain
all such payments except to the extent such payments are allocated to the
Annuity Account.
3. SALES IN ACCORDANCE WITH CURRENT PROSPECTUS
EquiTrust Marketing agrees to offer the Contracts for sale in accordance
with the current prospectus therefor. EquiTrust Marketing is not authorized
to give any information or to make any representations concerning the
Contracts other than those contained in the current prospectus therefor filed
with the SEC or in such sales literature as may be developed and authorized
by Farm Bureau.
4. PROSPECTUSES AND PROMOTIONAL MATERIALS
On behalf of the Annuity Account, Farm Bureau shall furnish EquiTrust
Marketing with copies of all prospectuses, financial statements, and other
documents which EquiTrust Marketing reasonably requests for use in
connection with the distribution of the Contracts. Farm Bureau shall have
responsibility for preparing, filing and printing all required prospectuses
and/ or registration statements in connection with the Contracts and the
payment of all related expenses. EquiTrust Marketing and Farm Bureau shall
cooperate fully in the design, draft, and review of sales promotion materials
and the preparation of individual sales proposals related to the sale of the
Contracts. EquiTrust Marketing shall not use any such materials not provided
or approved by Farm Bureau.
5. COMPLIANCE WITH APPLICABLE LAWS
EquiTrust Marketing represents that it is duly registered as a
broker-dealer under the 1934 Act and is a member in good standing of the NASD
and, to the extent necessary to offer the Contracts, shall be duly registered
or otherwise qualified under the securities laws of any state or other
jurisdiction. EquiTrust Marketing shall be responsible for carrying out its
sales and underwriting obligation hereunder in continued compliance with the
NASD Rules of Fair Practice and federal and state securities laws and
regulations. Without limiting the generality of the foregoing, EquiTrust
Marketing agrees that it shall be fully responsible for:
(a) ensuring that no person shall offer or sell the Contracts on its behalf
until such person is duly registered as a representative of EquiTrust
Marketing, duly licensed and appointed by Farm Bureau under applicable state
insurance law, and appropriately licensed, registered or otherwise qualified
to offer and sell such Contracts under the federal securities laws and any
applicable securities laws of each state or other jurisdiction in which such
Contracts may be
<PAGE>
lawfully sold, in which Farm Bureau is licensed to sell the Contracts and
in which such persons shall offer or sell the Contracts; and
(b) training, supervision, and control of all such persons for purposes of
complying on a continuous basis with the NASD Rules of Fair Practice and
with federal and state securities laws requirements applicable in connection
with the offering and sale of the Contracts. In this connection EquiTrust
Marketing shall:
(i) conduct such training (including the preparation and utilization of
training materials) as in the opinion of EquiTrust Marketing is
necessary to accomplish the purposes of this Agreement;
(ii) establish and implement reasonable written procedures for supervision
of sales practices of associated persons or brokers selling the
Contracts;
(iii) establish branch offices and offices of supervisory jurisdiction, as
necessary or appropriate; and
(iv) take reasonable steps to ensure that the various sales representatives
associated with it shall not make recommendations to an applicant to
purchase a Contract in the absence of reasonable grounds to believe
that the purchase of the Contract is suitable for such applicant.
While not limited to the following, a determination of suitability
shall be based on information furnished to a sales representative
after reasonable inquiry of such applicant concerning the applicant's
insurance and investment objectives, financial situation and needs,
and the likelihood of whether the applicant will persist with the
Contract for such a period of time that Farm Bureau's acquisition
costs are amortized over a reasonable period of time.
6. SALES AGREEMENTS
EquiTrust Marketing is hereby authorized to enter into separate written
agreements, on such terms and conditions as EquiTrust Marketing may determine
not inconsistent with this Agreement, with broker-dealers which agree to
participate in the distribution of the Contracts and to use their best
efforts to solicit applications for the Contracts. All such sales agreements
shall provide that each independent broker-dealer will assume full
responsibility for continued compliance by itself and its representatives
with applicable federal and state securities laws. Such broker-dealers and
their agents or representatives soliciting applications for the Contracts
shall be duly and appropriately licensed, registered or otherwise qualified
for the sale of such Contracts under the federal securities laws, the state
insurance laws and any applicable state securities laws of each state or
other jurisdiction in which such Contracts may be lawfully sold and in which
Farm Bureau is licensed to sell the Contracts. Each such organization shall
be both registered as a broker-dealer under the 1934 Act and a member of the
NASD.
Applications for the Contracts solicited by such organizations through
their representatives shall be forwarded to Farm Bureau. All payments for
the Contracts shall be made by check payable to "Farm Bureau Life Insurance
Company" and remitted promptly by such organizations to Farm Bureau as agent
for EquiTrust Marketing. All broker-dealers who agree to participate in the
distribution of the Contracts shall act as independent contractors and nothing
<PAGE>
herein contained shall constitute such broker-dealers or their agents or
employees as employees of Farm Bureau in connection with the sale of the
Contracts.
7. INSURANCE LICENSES
Farm Bureau shall apply for the proper insurance licenses in the
appropriate states or jurisdictions for the designated persons associated
with EquiTrust Marketing or with other independent broker-dealers which have
entered into agreements with EquiTrust Marketing for the sale of the
Contracts, provided that Farm Bureau reserves the right to refuse to appoint
any proposed registered representatives as an agent or broker, and to
terminate an agent or broker once appointed.
8. MAINTENANCE OF BOOKS, RECORDS AND ACCOUNTS
Farm Bureau and EquiTrust Marketing shall cause to be maintained and
preserved, for the periods prescribed, such accounts, books and other
documents as are required of them by the 1940 Act, the 1934 Act and any other
applicable laws and regulations. The books, accounts and records of Farm
Bureau, the Annuity Account, and EquiTrust Marketing as to all transactions
hereunder shall be maintained so as to disclose clearly and accurately the
nature and details of the transactions.
As agent for and on behalf of EquiTrust Marketing, Farm Bureau shall
maintain such books and records of EquiTrust Marketing pertaining to the sale
of the Contracts and required by the 1934 Act as may be mutually agreed upon
from time to time by Farm Bureau and EquiTrust Marketing; provided that such
books and records shall be the property of EquiTrust Marketing and shall at
all times be subject to such reasonable periodic, special or other
examination by the SEC and all other regulatory bodies having jurisdiction.
In addition, Farm Bureau will maintain records of all sales commissions paid
to associated persons of EquiTrust Marketing in connection with the sale of
the Contract. Farm Bureau, as agent for EquiTrust Marketing, shall be
responsible for sending all required confirmations on customer transactions
in compliance with applicable regulations, as modified by an exemption or
other relief obtained by Farm Bureau and EquiTrust Marketing.
EquiTrust Marketing shall have the responsibility for maintaining the
records of associated persons of EquiTrust Marketing who are licensed,
registered, and otherwise qualified to sell the Contracts, and for furnishing
periodic reports thereto to Farm Bureau. EquiTrust Marketing shall cause
Farm Bureau to be furnished with such other reports as Farm Bureau may
reasonable request for the purpose of meeting its reporting and recordkeeping
requirements under the insurance laws of the State of Iowa and any other
applicable states or jurisdictions.
9. COSTS AND EXPENSES BORNE BY EQUITRUST MARKETING
EquiTrust Marketing shall bear the costs and expenses of: (a) services,
materials, and supplies required to be supplied by EquiTrust Marketing
pursuant to the terms of this Agreement; (b) registration, licensing or other
qualification of associated persons of EquiTrust Marketing under federal and
state securities laws and with the NASD; and (c) training and supervision of
associated persons.
<PAGE>
10. COMPENSATION
As compensation for EquiTrust Marketing's assumption of the costs and
expenses set forth in Section 9 hereof, the sales services rendered by
EquiTrust Marketing and the associated persons of EquiTrust Marketing, and
the continuing obligations spelled out herein, Farm Bureau shall pay
EquiTrust Marketing an annual fee, payable monthly, at a rate equal to $100
multiplied by the number of associated persons of EquiTrust Marketing, and
shall, on behalf of and as agent for EquiTrust Marketing, pay associated
persons of EquiTrust Marketing all commissions or other fees which are due
for the sale of the Contracts. No associated person shall have an interest
in any fees payable to EquiTrust Marketing pursuant to this Agreement.
For Contracts sold under dealer sales agreements that EquiTrust
Marketing enters into with other broker-dealers pursuant to Section 6 hereof,
Farm Bureau shall pay to the parties specified in any such agreements such
compensation as is due under the terms of such sales agreements.
11. INDEMNIFICATION
Farm Bureau agrees to indemnify EquiTrust Marketing for any losses
incurred as a result of any action taken or omitted by EquiTrust Marketing or
any of its officers, agents, or employees in performing their
responsibilities under this Agreement in good faith and without willful
misfeasance, gross negligence, or reckless disregard of such obligations.
12. INVESTIGATIONS AND PROCEEDINGS
EquiTrust Marketing and Farm Bureau agree to cooperate fully in any
insurance regulatory investigation or proceeding or judicial proceeding
arising in connection with the Contracts distributed under this Agreement.
EquiTrust Marketing and Farm Bureau further agree to cooperate fully in any
securities regulatory inspection, inquiry, investigation or proceeding or any
judicial proceeding with respect to Farm Bureau, EquiTrust Marketing, their
affiliates, or the associated persons to the extent that such inspection,
inquiry, investigation or proceeding is in connection with the Contracts
distributed under this Agreement. Without limiting the foregoing:
(a) EquiTrust Marketing will be notified promptly of any customer
complaint or notice of any regulatory inspection, inquiry,
investigation or proceeding or judicial proceeding received by Farm
Bureau with respect to EquiTrust Marketing or any associated person
or which may affect Farm Bureau's issuance of any Contract marketed
under this Agreement; and
(b) EquiTrust Marketing will promptly notify Farm Bureau of any customer
complaint or notice of any regulatory inspection, inquiry,
investigation or proceeding received by EquiTrust Marketing or its
affiliates with respect to EquiTrust Marketing or any associated
person in connection with any Contract distributed under this
Agreement or any activity in connection with any such Contract.
<PAGE>
In the case of a customer complaint, EquiTrust Marketing and Farm Bureau
will cooperate in investigating such complaint and arrive at a mutually
satisfactory response.
13. TERMINATION
This Agreement may be terminated by either party hereto upon 60 days'
written notice to the other party without the payment of any penalty. This
Agreement may be terminated upon written notice of one party to the other
party hereto in the event of bankruptcy or insolvency of such party to which
notice is given. This Agreement may be terminated at any time upon the
mutual written consent of the parties hereto. This Agreement shall terminate
automatically if it shall be assigned.
Upon termination of this Agreement, all authorizations, rights and
obligations hereunder shall cease except (a) the obligation to settle
accounts hereunder, including commissions on premiums subsequently received
for Contracts in effect at the time of termination or issued pursuant to
applications received by Farm Bureau prior to termination, and (b) the
agreements contained in 12 hereof.
1. EXCLUSIVITY
The services of EquiTrust Marketing hereunder are not to be deemed
exclusive and EquiTrust Marketing shall be free to render similar services to
others so long as its services hereunder are not impaired or interfered with
hereby.
15. REGULATION
This Agreement shall be subject to the provisions of the 1940 Act and
the 1934 Act and the rules, regulations, and rulings thereunder and of the
NASD, from time to time in effect, including such exemptions from the 1940
Act as the SEC may grant and the terms hereof shall be interpreted and
construed in accordance therewith.
EquiTrust Marketing shall submit to all regulatory and administrative
bodies having jurisdiction over the operations of Farm Bureau or the Annuity
Account, present or future, and will provide any information, reports or
other material which any such body by reason of this Agreement may request or
require pursuant to applicable laws or regulations. Without limiting the
generality of the foregoing, EquiTrust Marketing shall furnish the Iowa
Department of Insurance with any information or reports which the Department
may request in order to ascertain whether the variable Annuity operations of
Farm Bureau are being conducted in a manner consistent with the Department's
variable annuity insurance regulations and any other applicable law or
regulations.
16. SEVERABILITY
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.
<PAGE>
17. APPLICABLE LAW
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Iowa.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day
and year first above written.
Attest:
FARM BUREAU LIFE INSURANCE COMPANY
[signature]
Edward M. Wiederstein
President
Attest:
EQUITRUST MARKETING SERVICES, INC.
[signature]
Lynn E. Wilson
President
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[LOGO] FLEXIBLE PREMIUM DEFERRED ANNUITY APPLICATION
FARM BUREAU FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY APPLICATION
FINANCIAL SERVICES
/ / FARM BUREAU LIFE
INSURANCE COMPANY
/ / WESTERN FARM BUREAU
LIFE INSURANCE COMPANY
ACCOUNT NO.____________________
APPLICATION FOR______________________________________________Policy Number______________________
PROPOSED ANNUITANT (HOME OFFICE USE ONLY)
ADDRESS________________________________________ ______________________________________________
STREET CITY-TOWN STATE ZIP ANNUITANT'S STATE-COUNTY CODE
/ / MALE
/ / FEMALE Date of Birth____________ Age______________ State of Birth_______Social Security No.______________
MONTH/DAY/YEAR (nearest birthday)
AGENT CREDIT__________________________________________________________________________________________________
Name State-County Agent No.
- ---------------------------------------------------------------------------------------------------------------------------
SECTION A ANNUITY
1. A birth certificate is attached (A birth certificate Yes No
must be submitted as proof of age
before annuity payments can begin) / / / /
2. As a condition precedent to receiving annuity
payments will you furnish satisfactory evidence
of life and identity as each payment falls due? / / / /
3. It is agreed that the money consideration for
the policy shall upon payment be nonrefundable
and the Company's obligation limited
to the terms of the annuity policy applied for. / / / /
4. Is the policy applied for replacing or likely to
replace any existing annuity or life insurance
policy? (If "YES", give details in Section C,
including name, insurer, and policy numbers. / / / /
5. Occupation________________For____Years
6. Annuity Plan: / / FPDA / / FPDVA
7. Check the appropriate box for the type of plan:
/ / Keogh / / IRA / / TDA / / SEP / / Non-Qualified
/ / Other_____________________
8. Premium / / Annual / / Semi-Annual / / Quarterly
Payable / / COM / / Other___________________
9. Company to begin payment on policy anniversary nearest
age 70 or ____________________________________________
10. If the name of a female proposed Annuitant is different
than her maiden name, give her maiden name:
____________________________________________________
11. Submitted Transfer
Premium: $ of Funds: $
- ---------------------------------------------------------------------------------------------------
SECTION B OWNER AND BENEFICIARY (IF REQUIRED)
1. BENEFICIARY as to proceeds at death of the Annuitant;
Survivors within a class (Primary or Secondary) entitled
to the proceeds shall share equally unless otherwise
specified.
NAME & ADDRESS SSN RELATIONSHIP
1. Primary______________________________________
_____________________________________________
2. Secondary, if primary beneficiary is not living:
NAME & ADDRESS SSN RELATIONSHIP
_____________________________________________
_____________________________________________
/ / Children born to or adopted by the Proposed
Annuitant and ____________________________
(including any named above). The Beneficiary
as to proceeds at death of any person other than
the annuitant shall be as stated in the applicable
benefit provision.
3. / / Directions for settlement attached.
II. OWNER: (If other than Proposed Annuitant.)
1. OWNERSHIP TO BE VESTED IN
OWNER EMPLOYER TIN:
_____________________________________________
Address:
- ---------------------------------------------------------------------------------------
SECTION C SPECIAL REQUESTS, REMARKS AND CORRECTIONS OR ENDORSEMENT
- ----------------------------------------------------------------------------------------
SECTION D REPRESENTATIONS, AUTHORIZATION AND ACKNOWLEDGEMENT STATEMENT
I have paid $__________ as payment of the first premium on the policy herein applied for, subject to and in accordance with the
provisions of the conditional receipt for such payment. I, the Applicant, agree that: (1) Acceptance of any Annuity Contract issued
on this application shall constitute ratification of any corrections, additions, or changes made by the Company and recorded in the
space "Special Requests, Remarks and Corrections or Endorsement" except that no change shall be made as to amount, classification,
plan or annuity, or benefits unless agreed to in writing. (2) This application and any continuations thereof or additions or
amendments thereto, and the policy herein applied for shall constitute the entire contract between the parties hereto. The Applicant
and the Proposed Annuitant (if other than Applicant) agree that to the best of their knowledge and belief all statements herein are
full, complete and true, and that the Applicant will be the owner until the retirement date of any policy issued on the basis of
this application unless otherwise agreed to in writing between the parties. It is understood that no agent, agency manager or other
unauthorized person except an Executive Officer or an Assistant Secretary of the company is authorized to waive forfeitures, to make
or alter contracts, or to waive any of the Company's rights or requirements.
I represent that the statements and answers on this application and supplements thereto are true and complete to the best of my
knowledge and belief.
Dated at________________________ Date signed_______________________________________________
City and State
________________________________ ___________________________________________________________
Signature of Witness Signature of Proposed Annuitant
________________________________ ____________________________________________________________
Agent's Signature Signature of Owner-Employer if other than Proposed Annuitant
- -----------------------------------------------------------------------------------------------------------------
432-121 (0396)
CONDITIONAL RECEIPT ______________________________________________ Plan________________________
FOR ADVANCE PAYMENT Name of Proposed Annuitant Annuity applied for
OF PREMIUM
RECEIVED OF________________________________________________________________
Name of Applicant
the sum of $___________ as the first premium for the annuity applied for in the application to the FARM BUREAU
LIFE INSURANCE COMPANY OR WESTERN FARM BUREAU LIFE INSURANCE COMPANY bearing the same date as the conditional
receipt. The annuity contract, subject to the terms and conditions thereof, shall take effect as of the date of
this receipt, provided the person upon whose life the annuity is based is eligible for same according to the
Company's rules and regulations, otherwise the payment evidenced by this receipt shall be returned upon
surrender of the receipt. Any remittance not in cash is received subject to actual cash payment.
____________________________, 19_____ ____________________________________Agent
When premium is paid at the time of application, complete this receipt and give to the applicant. No other receipt will be
recognized by the Company.
If premium is not paid -- do not detach.
<PAGE>
Under penalties of perjury, I certify that the Social Security Number provided on this Annuity Application is true, correct and
complete.
Dated at_______________________________ Date signed________________________________________________
City and State
_______________________________________ ___________________________________________________________
Signature of Witness Signature of Proposed Annuitant
_______________________________________ ____________________________________________________________
Agent's Signature Signature of Owner-Employer if other than Proposed Annuitant
- -------------------------------------------------------------------------------------------------------------------
AGENT'S CERTIFICATE
Yes No
1. Will this plan replace any other plan? / / / /
2. If yes, have replacement forms been submitted? / / / /
3. Did you give "Notice to applicant" form to applicant? / / / /
4. Did you see the proposed annuitant? (If no - explain below.) / / / /
The answers to each question of this application were recorded in my presence exactly as given. I know nothing detrimental to the
risk that is not recorded in these papers. I have rechecked all answers and calculations for correctness.
Dated at_____________ ____________________________ __________________________________
City State Signature of Agent
</TABLE>
<PAGE>
PARTICIPATION AGREEMENT
-----------------------
AMONG
EQUITRUST VARIABLE INSURANCE SERIES FUND,
EQUITRUST INVESTMENT MANAGEMENT SERVICES, INC.,
AND
FARM BUREAU LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this 5th day of June, 1998
by and among Farm Bureau Life Insurance Company (hereinafter, the "Company"),
an Iowa insurance company, on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A hereto as may be amended
from time to time (each account hereinafter referred to as the "Account"),
and the undersigned fund, a business trust organized under the laws of the
Commonwealth of Massachusetts (hereinafter referred to as the "Fund") and
EquiTrust Investment Management Services, Inc. (hereinafter the
"Underwriter"), a Delaware corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is or will be available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance 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 "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933,
<PAGE>
as amended (hereinafter the "1933 Act"); and
WHEREAS, EquiTrust Investment Management Services, Inc. (hereinafter
referred to as the "Adviser") is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, the Company has registered or will register certain variable life
insurance or variable annuity contracts supported wholly or partially by the
Account (the "Contracts") under the 1933 Act, and said Contracts are listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid Contracts; and
WHEREAS, the Company has registered or will register the Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with 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. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios which the Account orders, 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 Designated Portfolios.
1.2 The Fund agrees to make shares of the Designated Portfolios available
for purchase at the applicable net asset value per share by the Company and the
Account on those days on which the Fund calculates its net asset value pursuant
to rules of the SEC, and the Fund shall use its best efforts to calculate such
net asset value on each day which the New York Stock Exchange is open for
trading. Notwithstanding the foregoing, the Board of Trustees of the Fund
(hereinafter the "Board") may refuse to sell shares of any Designated Portfolio
to any person, or
<PAGE>
suspend or terminate the offering of shares of any Designated Portfolio 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 Designated Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be sold
only to Participating Insurance Companies and their separate accounts. No shares
of any Designated Portfolios will be sold to the general public. The Fund and
the Underwriter will not sell Fund shares to any insurance company or separate
account unless an agreement containing provisions substantially the same as
Articles I, III and VII of this Agreement is in effect to govern such sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios 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, except that
the Fund reserves the right to suspend the right of redemption or postpone the
date of payment or satisfaction upon redemption consistent with Section 22(e) of
the 1940 Act and any sales thereunder, and in accordance with the procedures and
policies of the Fund as described in the then current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the designee
of the Fund for receipt of purchase and redemption orders from the Account, and
receipt by such designee shall constitute receipt by the Fund; provided that the
Company receives the order by 3:00 p.m. central time and the Fund receives
notice of such order by 9:30 a.m. central 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 Fund calculates its net asset value pursuant
to the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each Designated
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus.
1.7 The Company shall pay for Fund shares one Business Day after receipt of
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.5 hereof. Payment shall be in federal funds transmitted by wire by
3:00 p.m. central time. If payment in Federal Funds for any purchase is not
received or is received by the Fund after 3:00 p.m. central time on such
Business Day, the Company shall promptly, upon the Fund's request, reimburse the
Fund for any charges, costs, fees, interest or other expenses incurred by the
Fund in connection with any advances to, or borrowings or overdrafts by, the
Fund, or any similar expenses incurred by the Fund, as a result of portfolio
transactions effected by the Fund based upon such purchase request. For purposes
of Section 2.8 and 2.9 hereof, upon receipt by the Fund of the federal funds so
wired, such funds shall cease to be the responsibility of the Company and shall
become the responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry only.
Stock
<PAGE>
certificates will not be issued to the Company or any Account. Shares ordered
from the Fund will be recorded in an appropriate title for each Account or the
appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Designated Portfolios' shares. The Company hereby
elects to receive all such income, dividends, and capital gain distributions as
are payable on Designated Portfolio shares in additional shares of that
Portfolio. The Company reserves the right to revoke this election and to receive
all such income dividends and capital gain distributions in cash. The Fund shall
notify the Company of the number of shares so issued as payment of such
dividends and distributions.
1.10 The Fund shall make the net asset value per share for each
Designated Portfolio available to the Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated
(normally by 5:30 p.m. central time) and shall use its best efforts to make
such net asset value per share available by 6:00 p.m. central time. If the
net asset value is materially incorrect through no fault of the Company, the
Company on behalf of each Account, shall be entitled to an adjustment to the
number of shares purchased or redeemed to reflect the correct net asset value
in accordance with Fund procedures. Any material error in the net asset value
shall be reported to the Company promptly upon discovery. Any administrative
or other costs or losses incurred for correcting underlying Contract owner
accounts shall be at Company's expense.
1.11 The Parties hereto acknowledge that the arrangement contemplated by
this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the cash
value of the Contracts may be invested in other investment companies.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; 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 law and that it has legally and validly established the Account
prior to any issuance or sale thereof as a segregated asset account under the
Iowa insurance laws and has registered or, prior to any issuance or sale of the
Contracts, will register 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.
2.2 The Fund represents and warrants that Fund 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 Iowa and all applicable
federal and state securities laws and that the Fund is and shall remain
registered under the 1940 Act. The Fund shall amend the Registration
<PAGE>
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 or the
Underwriter.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it may
make such payments in the future. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund will undertake to have
the Board, a majority of whom are not interested persons of the Fund, formulate
and approve any plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses.
2.4 The Fund makes no representations as to whether any aspect of its
operations, including but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the various
states, except that the Fund represents that the Fund's investment policies,
fees and expenses are and shall at all times remain in compliance with the laws
of the state of Iowa to the extent required to perform this Agreement.
2.5 The Fund 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.
2.6 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Iowa and any applicable state and
federal securities laws.
2.7 The Underwriter represents and warrants that the Adviser is and shall
remain duly registered under all applicable federal and state securities laws
and that the Adviser shall perform its obligations for the Fund in compliance in
all material respects with the laws of the State of Iowa and any applicable
state and federal securities laws.
2.8 The Fund and the Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other individuals or
entities dealing with the money and/or securities of the Fund are and shall
continue to be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund in an amount not less than the minimum
coverage as required currently by 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
bonding company.
2.9 The Company represents and warrants that all of its directors,
officers, employees, and other individuals/entities employed or controlled by
the Company 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 $2.5
million. The aforesaid bond includes coverage for larceny and embezzlement and
is issued by a reputable bonding company. The Company agrees that any
<PAGE>
amounts received under such bond in connection with claims that arise from the
arrangements described in this Agreement will be held by the Company for the
benefit of the Fund if, and when, applicable. 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
Underwriter in the event that such coverage no longer applies. The Company
agrees to exercise its best efforts to ensure that other individuals/entities
not employed or controlled by the Company and dealing with the money and/or
securities of the Fund maintain a similar bond or coverage in a reasonable
amount.
ARTICLE III. PROSPECTUSES. STATEMENTS OF ADDITIONAL INFORMATION. AND PROXY
STATEMENTS: VOTING
3.1 The Underwriter shall provide the Company (at the Company's expense)
with as many copies of the Fund's current prospectus (describing only the
Designated Portfolios listed on Schedule A) as the Company may reasonably
request. If requested by the Company in lieu thereof, the Fund shall provide
such documentation (including a final copy of the new prospectus as set in type
or on a diskette, at the Fund's expense) and other assistance as is reasonably
necessary in order for the Company (at the Company's expense) once each year (or
more frequently if the prospectus for the Fund is amended) to have the
prospectus for the Contracts and the Fund's prospectus printed together in one
document (such printing to be at the Company's expense).
3.2 The Fund's prospectus shall state that the current Statement of
Additional Information ("SAI") for the Fund is available from the Company (or,
in the Fund's discretion, from the Fund), and the Underwriter (or the Fund), at
its expense, shall print, or otherwise reproduce, and provide a copy of such SAI
free of charge to the Company for itself and for any owner of a Contract who
requests such SAI.
3.3 The Fund, at its expense, shall provide the Company with copies of its
proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners in the Fund. The Underwriter (at the Company's
expense) shall provide the Company with copies of the Fund's annual and semi-
annual reports to shareholders in such quantity as the Company shall reasonably
request for use in connection with offering the Variable Contracts issued by the
Company. If requested by the Company in lieu thereof, the Underwriter shall
provide such documentation (which may include a final copy of the Fund's annual
and semi-annual reports as set in type or on diskette) and other assistance as
is reasonably necessary in order for the Company (at the Company's expense) to
print such shareholder communications for distribution to Contract owners.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received
from
<PAGE>
Contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Designated
Portfolio for which instructions have been received,
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 or to the
extent otherwise required by law. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law.
3.5 Participating Insurance Companies shall be responsible for assuring
that each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive Order
and consistent with any reasonable standards that the Fund may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the SEC's interpretation of the requirements of Section 16(a)
with respect to periodic elections of directors or trustees and with whatever
rules the SEC may promulgate with respect thereto.
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
that the Company develops or uses and in which the Fund (or a Portfolio thereof)
or the Adviser or the Underwriter is named, at least ten calendar days prior to
its use. No such material shall be used if the Fund or its designee reasonably
object to such use within ten calendar days after receipt of such material. The
Fund or its designee reserves the right to reasonably object to the continued
use of such material, and no such material shall be used if the Fund or its
designee so object.
4.2 The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Contracts other than the information or representations
contained in the registration statement or prospectus or SAI for the Fund
shares, as such registration statement and prospectus or SAI 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 or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall cause to
be furnished, to the Company, each piece of sales literature or other
promotional material in which the Company, and/or its Account, is named at least
ten calendar days prior to its use. No such material shall be
<PAGE>
used if the Company reasonably objects to such use within ten calendar days
after receipt of such material. The Company reserves the right to reasonably
object to the continued use of such material and no such material shall be used
if the Company so objects.
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or SAI for the Contracts, as
such registration statement, prospectus or SAI may be amended or supplemented
from time to time, or in published reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5 The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, SAIs, 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 Fund or its shares, within a reasonable time after the filing of
such document(s) 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, SAIs, 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 the Account, within a reasonable time
after the filing of such document(s) with the SEC or other regulatory
authorities.
4.7 For purposes of this Article IV, the phrase "sales literature and other
promotional materials" includes, but is not limited to, any of the following
that refer to the Fund or any affiliate of the Fund: advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media), sales literature
(I.E., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, 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, and registration statements, prospectuses,
SAIs, shareholder reports, proxy materials, and any other communications
distributed or made generally available with regard to the Funds.
ARTICLE V. FEES AND EXPENSES
5.1 The Fund and the Underwriter shall pay no fee or other compensation to
the Company under this Agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing, and such payments will be made out of existing fees otherwise
<PAGE>
payable to the Underwriter, past profits of the Underwriter, or other resources
available to the Underwriter. No such payments shall be made directly by the
Fund. Currently, no such payments are contemplated.
5.2 All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, except as otherwise provided herein. 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 deemed
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, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
5.3 The Company shall bear the expenses of printing the Fund's prospectus
(in accordance with 3.1) and of distributing the Fund's prospectus, proxy
materials, and reports to Contract owners and prospective Contract owners.
ARTICLE VI. DIVERSIFICATION AND QUALIFICATION
6.1 The Fund will invest the assets of each Designated Portfolio in such a
manner as to ensure that the Contracts will be treated as annuity, endowment, or
life insurance contracts, whichever is appropriate, under the Internal Revenue
Code of 1986, as amended (the "Code") and the regulations issued thereunder (or
any successor provisions). Without limiting the scope of the foregoing, each
Designated Portfolio of the Fund will comply with Section 817(h) of the Code and
Treasury Regulation Section 1.817-5, and any Treasury interpretations thereof,
relating to the diversification requirements for variable annuity, endowment, or
life insurance contracts, and any amendments or other modifications or successor
provisions 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 Regulation 817.5.
6.2 The Fund represents that each Designated Portfolio is or will be
qualified as a Regulated Investment Company under Subchapter M of the Code, and
that it will make every effort to maintain such qualification (under Subchapter
M or any successor or similar provisions) 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.
6.3 The Company represents that the Contracts are currently, and at the
time of issuance shall be, treated as life insurance, endowment contracts, or
annuity insurance contracts, under applicable provisions of the Code, and that
it will make every effort to maintain such treatment, and that it will notify
the Fund and the Underwriter immediately upon having a reasonable basis for
believing the Contracts have ceased to be so treated or that they might not be
so treated in the future. The Company agrees that any prospectus offering a
contract that is a "modified
<PAGE>
endowment contract" as that term is defined in Section 7702A of the Code (or any
successor or similar provision), shall identify such contract as a modified
endowment contract.
ARTICLE VII. POTENTIAL CONFLICTS.
7.1 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 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 will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information 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.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), 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., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
provided, however, that such withdrawal and termination shall be
<PAGE>
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Fund shall continue to accept and implement orders
by the Company for the purchase (and redemption) of shares of the Fund.
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 affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account within six months after the Board informs the Company in writing
that it has determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Until the
end of the foregoing six month period, the Fund shall continue to accept and
implement orders by the company for the purchase (and redemption) of shares of
the Fund.
7.6 For purposes of Section 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 Contract 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 If and to the extent 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 Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such 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, 3.5, 3.6, 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.
<PAGE>
ARTICLE VIII. INDEMNIFICATION
8.1 INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund and the
Underwriter and each of their officers and directors and each person, if any,
who controls the Fund or the Underwriter 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 legal and other expenses), to which the Indemnified Parties may
become subject under any statute or 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 statements or
alleged untrue statements of any material fact contained in
the Registration Statement, prospectus, or statement of
additional information ("SAI") 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, 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 for use in the Registration Statement, prospectus or SAI
for the Contracts or in the Contracts or sales literature or
other promotional material (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
(other than statements or representations contained in the
Registration Statement, 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 authorization or control,
with respect to the sale or distribution of the Contracts or
Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement,
prospectus, SAI, 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 if such a statement
or omission was made in reliance upon information furnished to
the Fund by or on behalf
<PAGE>
of the Company; or
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
qualification requirements specified in Article VI of this
Agreement); or
(v) 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,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(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 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 its obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company 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 Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, the Company shall be entitled to participate, at
its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense; provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulation referring to the Indemnified Parties or
their conduct. After notice from the Company to such party of the Company'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 Company 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.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
<PAGE>
8.2 INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the Company
and each of it 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 Underwriter) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute
or 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 or prospectus or SAI or sales
literature or other promotional material 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,
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 Underwriter or
Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in sales
literature or other promotional material (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
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature or
other promotional material for the Contracts not supplied by
the Underwriter or persons under its control) or wrongful
conduct of the Fund or Underwriter or persons under their
control, with respect to the sale or distribution of the
Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement,
prospectus, SAI, or sales literature or other promotional
material of 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, if such statement or omission
<PAGE>
was made in reliance upon information furnished to the Company
by or on behalf of the Fund; or
(iv) arise as a result of any material failure by the Fund to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
diversification and other qualification requirements specified
in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter 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 or such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter 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 Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Party, the Underwriter will be entitled to participate,
at its own expense, in the defense thereof. The Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense; provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulation referring to the Indemnified Parties or
their conduct. After notice from the Underwriter to such party of the
Underwriter'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 Underwriter 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.
8.2(d). The Company agrees promptly to notify the Underwriter of the
<PAGE>
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3 INDEMNIFICATION BY THE FUND
8.3(a). The Fund 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 8.3) against any and all losses, claims,
expenses, damages, liabilities (including amounts paid in settlement with the
written consent of the Fund) or litigation (including legal and other expenses)
to which the Indemnified Parties may be required to pay or may become subject
under any statute or regulation, at common law or otherwise, insofar as such
losses, claims, expenses, damages, liabilities or expenses (or actions in
respect thereof) or settlements, are related to the operations of the Fund and:
(i) arise as a result of any material failure by the Fund to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
diversification and other qualification requirements specified
in Article VI of this Agreement); or
(ii) 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;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund 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 or to the
Company, the Fund, the Underwriter or the Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund 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 indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
<PAGE>
expense, in the defense thereof. The Fund also shall be entitled to assume the
expense thereof, with counsel satisfactory to the party named in the action and
to settle the claim at its own expense; provided, however, that no such
settlement shall, without the Indemnified Parties' written consent, include any
factual stipulation referring to the Indemnified Parties or their conduct. After
notice from the Fund to such party of the Fund'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 Fund 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.
8.3(d). The Company and the Underwriter agree promptly to notify the Fund
of the commencement of any litigation or proceeding against it or any of its
respective officers or directors in connection with the Agreement, the issuance
or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund.
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 Iowa.
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, any Shared Funding Exemptive Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X. TERMINATION
10.1 This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party, for any reason with respect to some
or all Designated Portfolios, by six (6) months' advance
written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Designated Portfolio based
upon the Company's determination that shares of the Fund are
not reasonably available to meet the requirements of the
Contracts; provided that such termination shall apply only to
the Designated Portfolio not reasonably available; or
(c) termination by the Company by written notice to the Fund and
the Underwriter in the event any of the Designated Portfolio's
shares are not registered, issued or sold in accordance with
applicable state and/or federal law or such law precludes the
use of such shares as the underlying
<PAGE>
investment media of the Contracts issued or to be issued by
the Company; or
(d) termination by the Fund or Underwriter in the event that
formal administrative proceedings are instituted against the
Company by the NASD, the SEC, the Insurance Commissioner or
like official of any state or any other regulatory body
regarding the Company's duties under this Agreement or related
to the sale of the Contracts, the operation of any Account, or
the purchase of the Fund shares; provided, however, that the
Fund or Underwriter determines in its sole judgment exercised
in good faith, that any such administrative proceedings will
have a material adverse effect upon the ability of the Company
to perform its obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body; provided,
however, that the Company determines in its sole judgment
exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the
ability of the Fund or Underwriter to perform its obligations
under this Agreement; or
(f) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Designated Portfolio in
the event that such Designated Portfolio ceases to qualify as
a Regulated Investment Company under Subchapter M or fails to
comply with the Section 817(h) diversification requirements
specified in Article VI hereof, or if the Company reasonably
believes that such Designated Portfolio may fail to so qualify
or comply; or
(g) termination by the Fund or Underwriter by written notice to
the Company in the event that the Contracts fail to meet the
qualifications specified in Section 6.3 hereof; or if the Fund
or Underwriter reasonably believes that such Contracts may
fail to so qualify; or
(h) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or
the Underwriter 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
(i) termination by the Company by written notice to the Fund and
the Underwriter, if the Company shall determine, in its sole
judgment exercised in good faith, that the Fund or the
Underwriter has suffered a
<PAGE>
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.
10.2 EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, the owners of the Existing Contracts may 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 10.2 shall not apply to
any termination under Article VII and the effect of such Article VII termination
shall be governed by Article VII of this Agreement. The parties further agree
that this Section 10.2 shall not apply to any termination under Section 10.1(g)
of this Agreement.
10.3 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) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) pursuant
to the terms of a substitution order issued by the SEC pursuant to Section 26(b)
of the 1940 Act. Upon request, the Company will promptly furnish to the Fund and
the Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
10.4 Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
EquiTrust Variable Insurance Series Fund
Attn: Sue Cornick
5400 University Avenue
West Des Moines, IA 50266
<PAGE>
If to the Company:
Farm Bureau Life Insurance Company
Attn: Sue Cornick
5400 University Avenue
West Des Moines, IA 50266
If to Underwriter:
EquiTrust Investment Management Services, Inc.
Attn: Sue Cornick
5400 University Avenue
West Des Moines, IA 50266
ARTICLE XII. MISCELLANEOUS
12.1 All references herein to the Adviser relate solely to the Adviser of
such individual Fund, as appropriate. All persons dealing with a Fund must look
solely to the property of such Fund, and in the case of a series company, the
respective Designated Portfolio listed on Schedule A hereto as though such
Designated Portfolio had separately contracted with the Company and the
Underwriter for the enforcement of any claims against the Fund. The parties
agree that neither the Board, officers, agents or shareholders assume any
personal liability or responsibility for obligations entered into by or on
behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, 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 such information may come into the
public domain.
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.
<PAGE>
12.6 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.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Iowa Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with Iowa
variable annuity laws and regulations and any other applicable law or
regulations.
12.7 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.
12.8 This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto.
12.9 The Company shall furnish or cause to be furnished, to the Fund or
its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory accounting
principles) and annual report (prepared under generally accepted
accounting principles ("GAAP"), if any), as soon as practical and in
any event within 90 days after the end of each fiscal year.
(b) the Company's quarterly statements (statutory) (and GAAP, if any), as
soon as practical and in any event within 45 days after the end of
each quarterly period.
<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 below.
COMPANY: Farm Bureau Life Insurance Company
By its authorized officer
By: /s/ William J. Oddy
Title: Executive Vice President &
General Manager
Date: June 5, 1998.
FUND: EquiTrust Variable Insurance Series Fund
By its authorized officer
By: /s/ Richard D. Harris
Title: Senior Vice President, Secretary-
Treasurer & Trustee
Date: June 5, 1998.
UNDERWRITER: EquiTrust Investment Management Services, Inc.
By its authorized officer
By: /s/ William J. Oddy
Title: President
Date: June 5, 1998.
<PAGE>
SCHEDULE A
NAME OF SEPARATE ACCOUNT AND DATE ESTABLISHED BY BOARD OF DIRECTORS
Farm Bureau Life Variable Account II 1/6/98
Farm Bureau Life Annuity Account II 1/6/98
CONTRACTS FUNDED BY SEPARATE ACCOUNT
Flexible Premium Variable Life Insurance Policies
Flexible Premium Deferred Variable Annuity Contracts
DESIGNATED PORTFOLIOS
Value Growth Portfolio
High Grade Bond Portfolio
High Yield Bond Portfolio
Money Market Portfolio
Blue Chip Portfolio
<PAGE>
FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the 8th day of June, 1998, between Farm
Bureau Life Insurance Company, a life insurance company organized under the
laws of the State of Iowa ("Insurance Company"), and each of DREYFUS VARIABLE
INVESTMENT FUND; THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.; DREYFUS
LIFE AND ANNUITY INDEX FUND, INC. (d/b/a DREYFUS STOCK INDEX FUND); AND
DREYFUS INVESTMENT PORTFOLIOS (each a "Fund").
ARTICLE I
DEFINITIONS
1.1 "Act" shall mean the Investment Company Act of 1940, as amended.
1.2 "Board" shall mean the Board of Directors or Trustees, as the case may
be, of a Fund, which has the responsibility for management and control of
the Fund.
1.3 "Business Day" shall mean any day for which a Fund calculates net asset
value per share as described in the Fund's Prospectus.
1.4 "Commission" shall mean the Securities and Exchange Commission.
1.5 "Contract" shall mean a variable annuity or life insurance contract that
uses any Participating Fund (as defined below) as an underlying
investment medium. Individuals who participate under a group Contract
are "Participants".
1.6 "Contractholder" shall mean any entity that is a party to a Contract with
a Participating Company (as defined below).
1.7 "Disinterested Board Members" shall mean those members of the Board of a
Fund that are not deemed to be "interested persons" of the Fund, as
defined by the Act.
1.8 "Dreyfus" shall mean The Dreyfus Corporation and its affiliates,
including Dreyfus Service Corporation.
1.9 "Participating Companies" shall mean any insurance company (including
Insurance Company) that offers variable annuity and/or variable life
insurance contracts to the public and that has entered into an agreement
with one or more of the Funds.
- 1 -
<PAGE>
1.10 "Participating Fund" shall mean each Fund, including, as applicable, any
series thereof, specified in Exhibit A, as such Exhibit may be amended
from time to time by agreement of the parties hereto, the shares of which
are available to serve as the underlying investment medium for the
aforesaid Contracts.
1.11 "Prospectus" shall mean the current prospectus and statement of
additional information of a Fund, as most recently filed with the
Commission.
1.12 "Separate Account" shall mean Farm Bureau Life Annuity Account II and
Farm Bureau Life Variable Account II, individually, each a separate
account established by Insurance Company in accordance with the laws of
the State of Iowa.
1.13 "Software "Program" shall mean the software program used by a Fund for
providing Fund and account balance information including net asset value
per share. Such Program may include the Lion System. In situations
where the Lion System or any other Software Program used by a Fund is not
available, such information may be provided by telephone. The Lion
System shall be provided to Insurance Company at no charge.
1.14 "Insurance Company's General Account(s)" shall mean the general
account(s) of Insurance Company and its affiliates that invest in a Fund.
ARTICLE II
REPRESENTATIONS
2.1 Insurance Company represents and warrants that (a) it is an insurance
company duly organized and in good standing under applicable law; (b) it
has legally and validly established the Separate Account pursuant to the
Iowa Insurance Code for the purpose of offering to the public certain
individual and group variable annuity and life insurance contracts; (c)
it has registered the Separate Account as a unit investment trust under
the Act to serve as the segregated investment account for the Contracts;
and (d) the Separate Account is eligible to invest in shares of each
Participating Fund without such investment disqualifying any
Participating Fund as an investment medium for insurance company separate
accounts supporting variable annuity contracts or variable life insurance
contracts.
2.2 Insurance Company represents and warrants that (a) the Contracts will be
described in a registration statement filed under the Securities Act of
1933, as amended ("1933 Act"); (b) the Contracts will be issued and sold
in compliance in all material respects with all applicable federal and
state laws; and (c) the sale of the Contracts shall comply in all
material respects with state insurance law requirements. Insurance
Company agrees to notify each Participating Fund promptly of any
investment restrictions, of which Insurance Company has knowledge,
imposed by state insurance law and applicable to the Participating Fund.
- 2 -
<PAGE>
2.3 Insurance Company represents and warrants that the income, gains and
losses, whether or not realized, from assets allocated to the Separate
Account are, in accordance with the applicable Contracts, to be credited
to or charged against such Separate Account without regard to other
income, gains or losses from assets allocated to any other accounts of
Insurance Company. Insurance Company represents and warrants that the
assets of the Separate Account are and will be kept separate from
Insurance Company's General Account and any other separate accounts
Insurance Company may have, and will not be charged with liabilities from
any business that Insurance Company may conduct or the liabilities of any
companies affiliated with Insurance Company.
2.4 Each Participating Fund represents that it is registered with the
Commission under the Act as an open-end, management investment company
and possesses, and shall maintain, all legal and regulatory licenses,
approvals, consents and/or exemptions required for the Participating Fund
to operate and offer its shares as an underlying investment medium for
Participating Companies.
2.5 Each Participating Fund represents that it is currently qualified as a
regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), and that it will make every effort
to maintain such qualification (under Subchapter M or any successor or
similar provision) and that it will notify Insurance Company immediately
upon having a reasonable basis for believing that it has ceased to so
qualify or that it might not so qualify in the future.
2.6 Insurance Company represents and agrees that the Contracts are currently,
and at the time of issuance will be, treated as life insurance policies
or annuity contracts, whichever is appropriate, under applicable
provisions of the Code, and that it will make every effort to maintain
such treatment and that it will notify each Participating Fund and
Dreyfus immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so
treated in the future. Insurance Company agrees that any prospectus
offering a Contract that is a "modified endowment contract," as that term
is defined in Section 7702A of the Code, will identify such Contract as a
modified endowment contract (or policy).
2.7 Each Participating Fund agrees that its assets shall be managed and
invested in a manner that complies with the requirements of Section
817(h) of the Code.
2.8 Insurance Company agrees that each Participating Fund shall be permitted
(subject to the other terms of this Agreement) to make its shares
available to other Participating Companies and Contractholders.
2.9 Each Participating Fund represents and warrants that any of its
directors, trustees, officers, employees, investment advisers, and other
individuals/entities who deal with the money and/or securities of the
Participating Fund are and shall continue to be at all times
- 3 -
<PAGE>
covered by a blanket fidelity bond or similar coverage for the benefit of
the Participating Fund in an amount not less than that required by Rule
17g-1 under the Act. The aforesaid Bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding
company.
2.10 Insurance Company represents and warrants that all of its employees and
agents who deal with the money and/or securities of each Participating
Fund are and shall continue to be at all times covered by a blanket
fidelity bond or similar coverage in an amount not less than $2.5 million.
The aforesaid Bond shall include coverage for larceny and embezzlement
and shall be issued by a reputable bonding company.
2.11 Insurance Company agrees that Dreyfus shall be deemed a third party
beneficiary under this Agreement and may enforce any and all rights
conferred by virtue of this Agreement.
ARTICLE III
FUND SHARES
3.1 The Contracts funded through the Separate Account will provide for the
investment of certain amounts in shares of each Participating Fund.
3.2 Each Participating Fund agrees to make its shares available for purchase
at the then applicable net asset value per share by Insurance Company and
the Separate Account on each Business Day pursuant to rules of the
Commission. Notwithstanding the foregoing, each Participating Fund may
refuse to sell its shares to any person, or suspend or terminate the
offering of its shares, if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion
of its Board, acting in good faith and in light of its fiduciary duties
under federal and any applicable state laws, necessary and in the
best interests of the Participating Fund's shareholders.
3.3 Each Participating Fund agrees that shares of the Participating Fund will
be sold only to (a) Participating Companies and their separate accounts
or (b) "qualified pension or retirement plans" as determined under
Section 817(h)(4) of the Code. Except as otherwise set forth in this
Section 3.3, no shares of any Participating Fund will be sold to the
general public.
3.4 Each Participating Fund shall use its best efforts to provide closing net
asset value, dividend and capital gain information on a per-share basis
to Insurance Company by 6:00 p.m. Eastern time on each Business Day. Any
material errors in the calculation of net asset value, dividend and
capital gain information shall be reported immediately upon discovery to
Insurance Company. Non-material errors will be corrected in the next
Business Day's net asset value per share.
-4-
<PAGE>
3.5 At the end of each Business Day, Insurance Company will use the
information described in Sections 3.2 and 3.4 to calculate the unit values
of the Separate Account for the day. Using this unit value, Insurance
Company will process the day's Separate Account transactions received by
it by the close of the trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. Eastern time) to determine the net dollar
amount of each Participating Fund's shares that will be purchased or
redeemed at that day's closing net asset value per share. The net
purchase or redemption orders will be transmitted to each Participating
Fund by Insurance Company by 11:00 a.m. Eastern time on the Business Day
next following Insurance Company's receipt of that information. Subject
to Sections 3.6 and 3.8, all purchase and redemption orders for Insurance
Company's General Accounts shall be effected at the net asset value per
share of each Participating Fund next calculated after receipt of the
order by the Participating Fund or its Transfer Agent.
3.6 Each Participating Fund appoints Insurance Company as its agent for the
limited purpose of accepting orders for the purchase and redemption of
Participating Fund shares for the Separate Account. Each Participating
Fund will execute orders at the applicable net asset value per share
determined as of the close of trading on the day of receipt of such
orders by Insurance Company acting as agent ("effective trade date"),
provided that the Participating Fund receives notice of such orders by
11:00 a.m. Eastern time on the next following Business Day and, if such
orders request the purchase of Participating Fund shares, the conditions
specified in Section 3.8, as applicable, are satisfied. A redemption or
purchase request that does not satisfy the conditions specified above and
in Section 3.8, as applicable, will be effected at the net asset value
per share computed on the Business Day immediately preceding the next
following Business Day upon which such conditions have been satisfied in
accordance with the requirements of this Section and Section 3.8.
Insurance Company represents and warrants that all orders submitted by
the Insurance Company for execution on the effective trade date shall
represent purchase or redemption orders received from Contractholders
prior to the close of trading on the New York Stock Exchange on the
effective trade date.
3.7 Insurance Company will make its best efforts to notify each applicable
Participating Fund in advance of any unusually large purchase or
redemption orders.
3.8 If Insurance Company's order requests the purchase of a Participating
Fund's shares, Insurance Company will pay for such purchases by wiring
Federal Funds to the Participating Fund or its designated custodial
account on the day the order is transmitted. Insurance Company shall
make all reasonable efforts to transmit to the applicable Participating
Fund payment in Federal Funds by 12:00 noon Eastern time on the Business
Day the Participating Fund receives the notice of the order pursuant to
Section 3.5. Each applicable Participating Fund will execute such orders
at the applicable net asset value per share determined as of the close of
trading on the effective trade date if the Participating Fund receives
payment in Federal Funds by 12:00 midnight Eastern time on the Business
Day the Participating Fund receives the notice of the order pursuant to
-5-
<PAGE>
Section 3.5. If payment in Federal Funds for any purchase is not
received or is received by a Participating Fund after 12:00 noon Eastern
time on such Business Day, Insurance Company shall promptly, upon each
applicable Participating Fund's request, reimburse the respective
Participating Fund for any charges, costs, fees, interest or other
expenses incurred by the Participating Fund in connection with any
advances to, or borrowings or overdrafts by, the Participating Fund, or
any similar expenses incurred by the Participating Fund, as a result of
portfolio transactions effected by the Participating Fund based upon such
purchase request. If Insurance Company's order requests the redemption
of any Participating Fund's shares valued at or greater than $1 million
dollars, the Participating Fund will wire such amount to Insurance
Company within seven days of the order.
3.9 Each Participating Fund has the obligation to ensure that its shares are
registered with applicable federal agencies at all times.
3.10 Each Participating Fund will confirm each purchase or redemption order
made by Insurance Company. Transfer of Participating Fund shares will be
by book entry only. No share certificates will be issued to Insurance
Company. Insurance Company will record shares ordered from a
Participating Fund in an appropriate title for the corresponding account.
3.11 Each Participating Fund shall credit Insurance Company with the
appropriate number of shares.
3.12 On each ex-dividend date of a Participating Fund or, if not a Business
Day, on the first Business Day thereafter, each Participating Fund shall
communicate to Insurance Company the amount of dividend and capital gain,
if any, per share. All dividends and capital gains shall be
automatically reinvested in additional shares of the applicable
Participating Fund at the net asset value per share on the ex-dividend
date. Each Participating Fund shall, on the day after the ex-dividend
date or, if not on a Business Day, on the first Business Day thereafter,
notify Insurance Company of the number of shares so issued.
ARTICLE IV
STATEMENTS AND REPORTS
4.1 Each Participating Fund shall provide monthly statements of account as of
the end of each month for all of Insurance Company's accounts by the
fifteenth (15th) Business Day of the following month.
4.2 Each Participating Fund shall distribute to Insurance Company copies of
the Participating Fund's Prospectuses, proxy materials, notices, periodic
reports and other printed materials (which the Participating Fund
customarily provides to its shareholders) in quantities as
-6-
<PAGE>
Insurance Company may reasonably request for distribution to each
Contractholder and Participant.
4.3 Each Participating Fund will provide to Insurance Company at least
one complete copy of all registration statements, Prospectuses,
reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to
the Participating Fund or its shares, contemporaneously with the
filing of such document with the Commission or other regulatory
authorities.
4.4 Insurance Company will provide to each Participating Fund at least one
copy of all registration statements, Prospectuses, reports, proxy
statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Contracts or the
Separate Account, contemporaneously with the filing of such document
with the Commission.
ARTICLE V
EXPENSES
5.1 The charge to each Participating Fund for all expenses and costs of the
Participating Fund, including but not limited to management fees,
administrative expenses and legal and regulatory costs, will be made in
the determination of the Participating Fund's daily net asset value per
share.
5.2 Except as provided in this Article V and, in particular in the next
sentence, Insurance Company shall not be required to pay directly any
expenses of any Participating Fund or expenses relating to the
distribution of its shares. Insurance Company shall pay the following
expenses or costs:
a. Such amount of the production expenses of any Participating
Fund materials, including the cost of printing a Participating
Fund's Prospectus, or marketing materials for prospective
Insurance Company Contractholders and Participants as Dreyfus and
Insurance Company shall agree from time to time.
b. Distribution expenses of say Participating Fund materials or
marketing materials for prospective Insurance Company
Contractholders and Participants.
c. Distribution expenses of any Participating Fund materials or
marketing materials for Insurance Company Contractholders and
Participants.
-7-
<PAGE>
Except as provided herein, all other expenses of each Participating Fund
shall not be borne by Insurance Company.
ARTICLE VI
EXEMPTIVE RELIEF
6.1 Insurance Company has reviewed a copy of (i) the amended order dated
December 31, 1997 of the Securities and Exchange Commission under
Section 6(c) of the Act with respect to Dreyfus Variable Investment Fund
and Dreyfus Life and Annuity Index Fund, Inc.; and (ii) the order dated
February 5, 1998 of the Securities and Exchange Commission under Section
6(c) of the Act with respect to The Dreyfus Socially Responsible Growth
Fund, Inc. and Dreyfus Investment Portfolios, and, in particular, has
reviewed the conditions to the relief set forth in each related Notice.
As set forth therein, if Dreyfus Variable Investment Fund, Dreyfus Life
and Annuity Index Fund, Inc., The Dreyfus Socially Responsible Growth
Fund, Inc. or Dreyfus Investment Portfolios is a Participating Fund,
Insurance Company agrees, as applicable, to report any potential or
existing conflicts promptly to the respective Board of Dreyfus Variable
Investment Fund, Dreyfus Life and Annuity Index Fund, Inc., The Dreyfus
Socially Responsible Growth Fund, Inc. and/or Dreyfus Investment
Portfolios, and, in particular, whenever contract voting instructions
are disregarded, and recognizes that it will be responsible for
assisting each applicable Board in carrying out its responsibilities
under such application. Insurance Company agrees to carry out such
responsibilities with a view to the interests of existing
Contractholders.
6.2 If a majority of the board, or a majority of Disinterested Board
Members, determines that a material irreconcilable conflict exists with
regard to Contractholder investments in a Participating Fund, the Board
Shall give prompt notice to all Participating Companies and any other
Participating Fund. If the Board determines that Insurance Company is
responsible for causing or creating said conflict, Insurance Company
shall at its sole cost and expense, and to the extent reasonably
practicable (as determined by a majority of the Disinterested Board
Members), take such action as is necessary to remedy or eliminate
the irreconcilable material conflict. Such necessary action may
include, but shall not be limited to:
a. Withdrawing the assets allocable to the Separate Account from the
Participating Fund and reinvesting such assets in another
Participating Fund (if applicable) or a different investment
medium, or submitting the question of whether such segregation
should be implemented to a vote of all affected contractholders;
and/or
b. Establishing a new registered management investment company.
-8-
<PAGE>
6.3 If a material irreconcilable conflict arises as a result of a decision
by Insurance Company to disregard Contractholder voting instructions and
said decision represents a minority position or would preclude a
majority vote by all Contractholders having an interest in a
Participating Fund, Insurance Company may be required, at the Board's
election, to withdraw the investments of the Separate Account in that
Participating Fund.
6.4 For the purpose of this Article, a majority of the Disinterested Board
Members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will any
Participating Fund be required to bear the expense of establishing a new
funding medium for any Contract. Insurance Company shall not be required
by this Article to establish a new funding medium for any Contract if an
offer to do so has been declined by vote of a majority of the
Contractholders materially adversely affected by the irreconcilable
material conflict.
6.5 No action by Insurance Company taken or omitted, and no action by the
Separate Account or any Participating Fund taken or omitted as a result
of any act or failure to act by Insurance Company pursuant to this
Article VI, shall relieve Insurance Company of its obligations under,
or otherwise affect the operation of, Article V, VOTING OF PARTICIPATING
FUND SHARES.
ARTICLE VII
VOTING OF PARTICIPATING FUND SHARES
7.1 Each Participating Fund shall provide Insurance Company with copies, at
no cost to Insurance Company, of the Participating Fund's proxy
material, reports to shareholders and other communications to
shareholders in such quantity as Insurance Company shall reasonably
require for distributing to Contractholders or Participants.
Insurance Company shall:
(a) solicit voting instructions from Contractholders or Participants
on a timely basis and in accordance with applicable law;
(b) vote the Participating Fund shares in accordance with
instructions received from Contractholders or Participants; and
(c) vote the Participating Fund shares for which no instructions have
been received in the same proportion as Participating Fund shares
for which instructions have been received.
Insurance Company agrees at all times to vote its General Account shares
in the same proportion as the Participating Fund shares for which
instructions have been received from Contractholders or Participants.
Insurance Company further agrees to be
-9-
<PAGE>
responsible for assuring that voting the Participating Fund shares for
the Separate Account is conducted in a manner consistent with other
Participating Companies.
7.2 Insurance Company agrees that it shall not, without the prior written
consent of each applicable Participating Fund and Dreyfus, solicit, induce
or encourage Contractholders to (a) change or supplement the
Participating Fund's current investment adviser or (b) change, modify,
substitute, add to or delete from the current investment media for the
Contracts.
ARTICLE VIII
MARKETING AND REPRESENTATIONS
8.1 Each Participating Fund or its underwriter shall periodically furnish
Insurance Company with the following documents, in quantities as
Insurance Company may reasonably request:
a. Current Prospectus and any supplements thereto; and
b. Other marketing materials.
Expenses for the production of such documents shall be borne by Insurance
Company in accordance with Section 5.2 of this Agreement.
8.2 Insurance Company shall designate certain persons or entities that shall
have the requisite licenses to solicit applications for the sale of
Contracts. No representation is made as to the number or amount of
Contracts that are to be sold by Insurance Company. Insurance Company
shall make reasonable efforts to market the Contracts and shall comply
with all applicable federal and state laws in connection therewith.
8.3 Insurance Company shall furnish, or shall cause to be furnished, to each
applicable Participating Fund or its designee, each piece of sales
literature or other promotional material in which the Participating Fund,
its investment adviser or the administrator is named, at least fifteen
Business Days prior to its use. No such material shall be used unless the
Participating Fund or its designee approves such material. Such approval
(if given) must be in writing and shall be presumed not given if not
received within ten Business Days after receipt of such material. Each
applicable Participating Fund or its designee, as the case may be, shall
use all reasonable efforts to respond within ten days of receipt.
8.4 Insurance Company shall not give any information or make any
representations or statements on behalf of a Participating Fund or
concerning a Participating Fund in connection with the sale of the
Contracts other than the information or representations contained in the
registration statement or Prospectus of, as may be amended or
-10-
<PAGE>
supplemented from time to time, or in reports or proxy statements for,
the applicable Participating Fund, or in sales literature or other
promotional material approved by the applicable Participating Fund.
8.5 Each Participating Fund shall furnish, or shall cause to be furnished, to
Insurance Company, each piece of the Participating Fund's sales
literature or other promotional material in which Insurance Company or
the Separate Account is named, at least fifteen Business Days prior to
its use. No such material shall be used unless Insurance Company approves
such material. Such approval (if given) must be in writing and shall be
presumed not given if not received within ten Business Days after receipt
of such material. Insurance Company shall use all reasonable efforts to
respond within ten days of receipt.
8.6 Each Participating Fund shall not, in connection with the sale of
Participating Fund shares, give any information or make any
representations on behalf of Insurance Company or concerning insurance
company, the Separate Account, or the Contracts other than the
information or representations contained in a registration statement or
prospectus for the Contracts, as may be amended or supplemented from time
to time, or in published reports for the Separate Account that are in the
public domain or approved by Insurance Company for distribution to
Contractholders or Participants, or in sales literature or other
promotional material approved by Insurance Company.
8.7 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for
use, in a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards,
motion pictures or other public media), sales literature (such as any
written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, or reprints or excerpts of
any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or
made generally available to some or all agents or employees, registration
statements, prospectuses, statements of additional information,
shareholder reports and proxy materials, and any other material
constituting sales literature or advertising under National Association of
Securities Dealers, Inc. rules, the Act or the 1933 Act.
ARTICLE IX
INDEMNIFICATION
9.1 Insurance Company agrees to indemnify and hold harmless each
Participating Fund, Dreyfus, each respective Participating Fund's
investment adviser and sub-investment adviser (if applicable), each
respective Participating Fund's distributor, and their respective
affiliates, and each of their directors, trustees, officers, employees,
agents and
-11-
<PAGE>
each person, if any, who controls or is associated with any of the
foregoing entities or persons within the meaning of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of Section 9.1),
against any and all losses, claims, damages or liabilities joint or
several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of, any
action, suit or proceeding or any claim asserted) for which the
Indemnified Parties may become subject, under the 1933 Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect to thereof) (i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
information furnished by Insurance Company for use in the registration
statement or Prospectus or sales literature or advertisements of the
respective Participating Fund or with respect to the Separate Account or
Contracts, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; (ii) arise
out of or as a result of conduct, statements or representations (other
than statements or representations contained in the Prospectus and sales
literature or advertisements of the respective Participating Fund) of
Insurance Company or its agents, with respect to the sale and
distribution of Contracts for which the respective Participating Fund's
shares are an underlying investment; (iii) arise out of the wrongful
conduct of Insurance Company or persons under its control with respect to
the sale or distribution of the Contracts or the respective Participating
Fund's shares; (iv) arise out of Insurance Company's incorrect calculation
and/or untimely reporting of net purchase or redemption orders; or (v)
arise out of any breach by Insurance Company of a material term of this
Agreement or as a result of any failure by Insurance Company to provide
the services and furnish the materials or to make any payments provided
for in this Agreement. Insurance Company will reimburse any Indemnified
Party in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that with respect to
clauses (i) and (ii) above Insurance Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission or
alleged omission made in such registration statement, prospectus, sales
literature, or advertisement in conformity with written information
furnished to Insurance Company by the respective Participating Fund
specifically for use therein. This indemnity agreement will be in
addition to any liability which Insurance Company may otherwise have.
9.2 Each Participating Fund severally agrees to indemnify and hold harmless
Insurance Company and each of its directors, officers, employees, agents
and each person, if any, who controls Insurance Company within the meaning
of the 1933 Act against any losses, claims, damages or liabilities to
which Insurance Company or any such director, officer, employee, agent or
controlling person may become subject, under the 1933 Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) (1) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the
registration statement or Prospectus or sales literature or advertisements
of the respective Participating Fund: (2) arise out of or
-12-
<PAGE>
are based upon the omission to state in the registration statement or
Prospectus or sales literature or advertisements of the respective
Participating Fund any material fact required to be stated therein or
necessary to make the statements therein not misleading; or (3) arise out
of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in the registration statement or Prospectus or
sales literature or advertisements with respect to the Separate Account or
the Contracts and such statements were based on information provided to
Insurance Company by the respective Participating Fund; and the respective
Participating Fund will reimburse any legal or other expenses reasonably
incurred by Insurance Company or any such director, officer, employee,
agent or controlling person in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that
the respective Participating Fund will not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or omission or alleged omission made in
such registration statement, Prospectus, sales literature or advertisements
in conformity with written information furnished to the respective
Participating Fund by Insurance Company specifically for use therein. This
indemnity agreement will be in addition to any liability which the
respective Participating Fund may otherwise have.
9.3 Each Participating Fund severally shall indemnify and hold Insurance
Company harmless against any and all liability, loss, damages, costs or
expenses which Insurance Company may incur, suffer or be required to pay
due to the respective Participating Fund's (1) incorrect calculation of the
daily net asset value, dividend rate or capital gain distribution rate; (2)
incorrect reporting of the daily net asset value, dividend rate or capital
gain distribution rate; and (3) untimely reporting of the net asset value,
dividend rate or capital gain distribution rate; provided that the
respective Participating Fund shall have no obligation to indemnify and
hold harmless Insurance Company if the incorrect calculation or incorrect
or untimely reporting was the result of incorrect information furnished by
Insurance Company or information furnished untimely by Insurance Company or
otherwise as a result of or relating to a breach of this Agreement by
Insurance Company.
9.4 Promptly after receipt by an indemnified party under this Article of notice
of the commencement of any action, such indemnified party will, if a claim
in respect thereof is to be made against the indemnifying party under this
Article, notify the indemnifying party of the commencement thereof. The
omission to so notify the indemnifying party will not relieve the
indemnifying party from any liability under this Article IX, except to the
extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a
result of the failure to give such notice. In case any such action is
brought against any indemnified party, and it notified the indemnifying
party of the commencement thereof, the indemnifying party will be entitled
to participate therein and, to the extent that it may wish, assume the
defense thereof, with counsel satisfactory to such indemnified party, and
to the extent that the indemnifying party has given notice to such effect
to the indemnified party and is
-13-
<PAGE>
performing its obligations under this Article, the indemnifying party shall
not be liable for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof, other than
reasonable costs of investigation. Notwithstanding the foregoing, in any
such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent.
A successor by law of the parties to this Agreement shall be entitled to
the benefits of the indemnification contained in this Article IX. The
provisions of this Article IX shall survive termination of this Agreement.
9.5 Insurance Company shall indemnify and hold each respective Participating
Fund, Dreyfus and sub-investment adviser of the Participating Fund
harmless against any tax liability incurred by the Participating Fund under
Section 851 of the Code arising from purchases or redemptions by Insurance
Company's General Accounts or the account of its affiliates.
ARTICLE X
COMMENCEMENT AND TERMINATION
10.1 This Agreement shall be effective as of the date hereof and shall continue
in force until terminated in accordance with the provisions herein.
10.2 This Agreement shall terminate without penalty:
a. As to any Participating Fund, at the option of Insurance Company or
the Participating Fund at any time from the date hereof upon 180 days'
notice, unless a shorter time is agreed to by the respective
Participating Fund and Insurance Company;
b. As to any Participating Fund, at the option of Insurance Company, if
shares of that Participating Fund are not reasonably available to meet
the requirements of the Contracts as determined by Insurance Company.
Prompt notice of election to terminate shall be furnished by Insurance
Company, said termination to be effective ten days after receipt of
notice unless the Participating Fund makes available a sufficient
number of shares to meet the requirements of the Contracts within said
ten-day period;
-14-
<PAGE>
c. As to a Participating Fund, at the option of Insurance Company, upon the
institution of formal proceedings against that Participating Fund by the
Commission, National Association of Securities Dealers or any other
regulatory body, the expected or anticipated ruling, judgment or outcome of
which would, in Insurance Company's reasonable judgment, materially impair
that Participating Fund's ability to meet and perform the Participating
Fund's obligations and duties hereunder. Prompt notice of election to
terminate shall be furnished by Insurance Company with said termination to
be effective upon receipt of notice;
d. As to a Participating Fund, at the option of each Participating Fund, upon
the institution of formal proceedings against Insurance Company by the
Commission, National Association of Securities Dealers or any other
regulatory body, the expected or anticipated ruling, judgment or outcome of
which would, in the Participating Fund's reasonable judgment, materially
impair Insurance Company's ability to meet and perform Insurance Company's
obligations and duties hereunder. Prompt notice of election to terminate
shall be furnished by such Participating Fund with said termination to be
effective upon receipt of notice;
e. As to a Participating Fund, at the option of that Participating Fund, if
the Participating Fund shall determine, in its sole judgment reasonably
exercised in good faith, that Insurance Company has suffered a material
adverse change in its business or financial condition or is the subject of
material adverse publicity and such material adverse change or material
adverse publicity is likely to have a material adverse impact upon the
business and operation of that Participating Fund or Dreyfus, such
Participating Fund shall notify Insurance Company in writing of such
determination and its intent to terminate this Agreement, and after
considering the actions taken by Insurance Company and any other changes in
circumstances since the giving of such notice, such determination of the
Participating Fund shall continue to apply on the sixtieth (60th) day
following the giving of such notice, which sixtieth day shall be the
effective date of termination;
f. As to a Participating Fund, upon termination of the Investment Advisory
Agreement between that Participating Fund and Dreyfus or its successors
unless Insurance Company specifically approves the selection of a new
Participating Fund investment adviser. Such Participating Fund shall
promptly furnish notice of such termination to Insurance Company;
g. As to a Participating Fund, in the event that Participating Fund's shares
are not registered, issued or sold in accordance with applicable federal
law, or such law precludes the use of such shares as the underlying
investment medium of Contracts issued or to be issued by Insurance Company.
Termination shall be effective immediately as to that Participating Fund
only upon such occurrence without notice;
-15-
<PAGE>
h. At the option of a Participating Fund upon a determination by its
Board in good faith that it is no longer advisable and in the best
interests of shareholders of that Participating Fund to continue to
operate pursuant to this Agreement. Termination pursuant to this
Subsection (h) shall be effective upon notice by such Participating
Fund to Insurance Company of such termination;
i. At the option of a Participating Fund if the Contracts cease to
qualify as annuity contracts or life insurance policies, as
applicable, under the Code, or if such Participating Fund
reasonably believes that the Contracts may fail to so qualify;
j. At the option of any party to this Agreement, upon another party's
breach of any material provision of this Agreement;
k. At the option of a Participating Fund, if the Contracts are not
registered, issued or sold in accordance with applicable federal
and/or state law; or
l. Upon assignment of this Agreement, unless made with the written
consent of every other non-assigning party.
Any such termination pursuant to Section 10.2a, 10.2d, 10.2e, 10.2f or
10.2k herein shall not affect the operation of Article V of this
Agreement. Any termination of this Agreement shall not affect the
operation of Article IX of this Agreement.
10.3 Notwithstanding any termination of this Agreement pursuant to Section
10.2 hereof, each Participating Fund and Dreyfus may, at the option of
the Participating Fund, continue to make available additional shares of
that Participating Fund for as long as the Participating Fund desires
pursuant to the terms and conditions of this Agreement as provided below,
for all Contracts in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, if that Participating Fund and Dreyfus
so elect to make additional Participating Fund shares available, the
owners of the Existing Contracts or Insurance Company, whichever shall
have legal authority to do so, shall be permitted to reallocate
investments in that Participating Fund, redeem investments in that
Participating Fund and/or invest in that Participating Fund upon the
making of additional purchase payments under the Existing Contracts. In
the event of a termination of this Agreement pursuant to Section 10.2
hereof, such Participating Fund and Dreyfus, as promptly as is
practicable under the circumstances, shall notify Insurance Company
whether Dreyfus and that Participating Fund will continue to make that
Participating Fund's shares available after such termination. If such
Participating Fund shares continue to be made available after such
termination, the provisions of this Agreement shall remain in effect and
thereafter either of that Participating Fund or Insurance Company may
terminate the Agreement as to that Participating Fund, as so continued
pursuant to this Section 10.3, upon prior written
-16-
<PAGE>
notice to the other party, such notice to be for a period that is
reasonable under the circumstances but, if given by the Participating
Fund, need not be for more than six months.
10.4 Termination of this Agreement as to any one Participating Fund shall not
be deemed a termination as to any other Participating Fund unless
Insurance Company or such other Participating Fund, as the case may be,
terminates this Agreement as to such other Participating Fund in
accordance with this Article X.
ARTICLE XI
AMENDMENTS
11.1 Any other changes in the terms of this Agreement, except for the addition
or deletion of any Participating Fund as specified in Exhibit A, shall be
made by agreement in writing between Insurance Company and each
respective Participating Fund.
ARTICLE XII
NOTICE
12.1 Each notice required by this Agreement shall be given by certified mail,
return receipt requested, to the appropriate parties at the following
addresses:
Insurance Company: Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
Attn: Sue Cornick
Participating Funds: [Name of Fund]
c/o Premier Mutual Fund Services, Inc.
200 Park Avenue
New York, New York 10166
Attn: Vice President and Assistant Secretary
with copies to: [Name of Fund]
c/o The Dreyfus Corporation
200 Park Avenue
New York, New York 10166
Attn: Mark N. Jacobs, Esq.
Steven F. Newman
Stroock & Stroock & Lavan
180 Maiden Lane
New York, New York 10038-4982
-17-
<PAGE>
Attn: Lewis G. Cole, Esq.
Stuart H. Coleman, Esq.
Notice shall be deemed to be given on the date of receipt by the
addresses as evidenced by the return receipt.
MISCELLANEOUS
13.1 This Agreement has been executed on behalf of each Fund by the
undersigned officer of the Fund in his capacity as an officer of the
Fund. The obligations of this Agreement shall only be binding upon the
assets and property of the Fund and shall not be binding upon any
director, trustee, officer or shareholder of the Fund individually. It
is agreed that the obligations of the Funds are several and not joint,
that no Fund shall be liable for any amount owing by another Fund and
that the Funds have executed one instrument for convenience only.
LAW
14.1 This Agreement shall be construed in accordance with the internal laws of
the State of New York, without giving effect to principles of conflict of
laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be duly
executed and attested as of the date first above written.
FARM BUREAU LIFE INSURANCE COMPANY
By: /s/ William J. Oddy
-----------------------------
Its: Executive Vice President &
General Manager
----------------------------
Attest: /s/ Dennis M. Marker
-----------------------------
DREYFUS LIFE AND ANNUITY INDEX FUND, INC.
(d/b/a DREYFUS STOCK INDEX FUND)
By: /s/ Michael S. Petrucelli
-----------------------------
Its: Vice President
----------------------------
-18-
<PAGE>
Attest: /s/ Doreen Plante
-----------------------------
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
FUND, INC.
By: /s/ Michael S. Petrucelli
-----------------------------
Its: Vice President
----------------------------
Attest: /s/ Doreen Plante
-----------------------------
DREYFUS VARIABLE INVESTMENT FUND
By: /s/ Michael S. Petrucelli
-----------------------------
Its: Vice President
----------------------------
Attest: /s/ Doreen Plante
-----------------------------
DREYFUS INVESTMENT PORTFOLIOS
By: /s/ Michael S. Petrucelli
-----------------------------
Its: Vice President
----------------------------
Attest: /s/ Doreen Plante
-----------------------------
-19-
<PAGE>
EXHIBIT A
LIST OF PARTICIPATING FUNDS
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio
Disciplined Stock Portfolio
Growth and Income Portfolio
International Equity Portfolio
Small Cap Portfolio
-20-
<PAGE>
PARTICIPATION AGREEMENT
Among
T. ROWE PRICE EQUITY SERIES, INC.,
T. ROWE PRICE INTERNATIONAL SERIES, INC.,
T. ROWE PRICE INVESTMENT SERVICES, INC.,
and
FARM BUREAU LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this 8th day of June, 1998
by and among Farm Bureau Life Insurance Company (hereinafter, the "Company"), a
Iowa insurance company, on its own behalf and on behalf of each segregated asset
account of the Company set forth on Schedule A hereto as may be amended from
time to time (each account hereinafter referred to as the "Account"), and the
undersigned funds, each, a corporation organized under the laws of Maryland
(each hereinafter referred to as the "Fund") and T. Rowe Price Investment
Services, Inc. (hereinafter the "Underwriter"), a Maryland corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is or will be available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance 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 "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
<PAGE>
WHEREAS, T. Rowe Price Associates, Inc. and Rowe Price-Fleming
International, Inc. (each hereinafter referred to as the "Adviser") are each
duly registered as an investment adviser under the Investment Advisers Act of
1940, as amended, and any applicable state securities laws; and
WHEREAS, the Company has registered or will register certain variable life
insurance or variable annuity contracts supported wholly or partially by the
Account (the "Contracts") under the 1933 Act, and said Contracts are listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid Contracts; and
WHEREAS, the Company has registered or will register the Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with 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. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios which the Account orders, 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 Designated Portfolios.
1.2 The Fund agrees to make shares of the Designated Portfolios
available for purchase at the applicable net asset value per share by the
Company and the Account on those days on which the Fund calculates its net asset
value pursuant to rules of the SEC, and the Fund shall use its best efforts to
calculate such net asset value on each day which the New York Stock Exchange is
open for trading. Notwithstanding the foregoing, the Board of Directors of the
Fund (hereinafter the "Board") may refuse to sell shares of any Designated
Portfolio to any person, or suspend or terminate the offering of shares of any
Designated Portfolio 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 Designated Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
<PAGE>
shares of any Designated Portfolios will be sold to the general public. The
Fund and the Underwriter will not sell Fund shares to any insurance company or
separate account unless an agreement containing provisions substantially the
same as Articles I, III and VII of this Agreement is in effect to govern such
sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios 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, except that
the Fund reserves the right to suspend the right of redemption or postpone the
date of payment or satisfaction upon redemption consistent with Section 22(e) of
the 1940 Act and any sales thereunder, and in accordance with the procedures and
policies of the Fund as described in the then current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the
designee of the Fund for receipt of purchase and redemption orders from the
Account, and receipt by such designee shall constitute receipt by the Fund;
provided that the Company receives the order by 4:00 p.m. Baltimore time and the
Fund receives notice of such order by 9:30 a.m. Baltimore 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 Fund calculates its net
asset value pursuant to the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each
Designated Portfolio offered by the then current prospectus of the Fund and in
accordance with the provisions of such prospectus.
1.7 The Company shall pay for Fund shares one Business Day after receipt
of an order to purchase Fund shares is made in accordance with the provisions of
Section 1.5 hereof. Payment shall be in federal funds transmitted by wire by
3:00 p.m. Baltimore time. If payment in Federal Funds for any purchase is not
received or is received by the Fund after 3:00 p.m. Baltimore time on such
Business Day, the Company shall promptly, upon the Fund's request, reimburse the
Fund for any charges, costs, fees, interest or other expenses incurred by the
Fund in connection with any advances to, or borrowings or overdrafts by, the
Fund, or any similar expenses incurred by the Fund, as a result of portfolio
transactions effected by the Fund based upon such purchase request. For
purposes of Section 2.8 and 2.9 hereof, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Designated Portfolios' shares. The
Company hereby elects to receive all such income, dividends, and capital gain
distributions as are payable on Designated Portfolio shares in additional shares
of that Portfolio. The Company reserves the right to revoke this election and
to receive all such income dividends and capital gain distributions in cash.
The Fund shall notify the Company of the number of shares so issued as payment
of such dividends and distributions.
<PAGE>
1.10 The Fund shall make the net asset value per share for each
Designated Portfolio available to the Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated (normally
by 6:30 p.m. Baltimore time) and shall use its best efforts to make such net
asset value per share available by 7 p.m. Baltimore time. If the net asset
value is materially incorrect through no fault of the Company, the Company on
behalf of each Account, shall be entitled to an adjustment to the number of
shares purchased or redeemed to reflect the correct net asset value in
accordance with Fund procedures. Any material error in the net asset value
shall be reported to the Company promptly upon discovery. Any administrative or
other costs or losses incurred for correcting underlying Contract owner accounts
shall be at Company's expense.
1.11 The Parties hereto acknowledge that the arrangement contemplated by
this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the cash
value of the Contracts may be invested in other investment companies.
ARTICLE II. Representations and Warranties
2.1 The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; 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 law and that it has legally and validly established the Account
prior to any issuance or sale thereof as a segregated asset account under the
Iowa insurance laws and has registered or, prior to any issuance or sale of the
Contracts, will register 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.
2.2 The Fund represents and warrants that Fund 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 Iowa and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. 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 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 or the
Underwriter.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it may
make such payments in the future. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund will undertake to have
the Board, a majority of whom are not interested persons of the Fund, formulate
and approve any plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses.
2.4 The Fund makes no representations as to whether any aspect of its
operations, including but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the various
states, except that the Fund represents that the Fund's investment policies,
<PAGE>
fees and expenses are and shall at all times remain in compliance with the laws
of the state of Iowa to the extent required to perform this Agreement.
2.5 The Fund 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.
2.6 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Iowa and any applicable state and
federal securities laws.
2.7 The Underwriter represents and warrants that the Adviser is and
shall remain duly registered under all applicable federal and state securities
laws and that the Adviser shall perform its obligations for the Fund in
compliance in all material respects with the laws of the State of Iowa and any
applicable state and federal securities laws.
2.8 The Fund and the Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other individuals or
entities dealing with the money and/or securities of the Fund are and shall
continue to be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund in an amount not less than the minimum
coverage as required currently by 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
bonding company.
2.9 The Company represents and warrants that all of its directors,
officers, employees, and other individuals/entities employed or controlled by
the Company 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 $2.5
million. The aforesaid bond includes coverage for larceny and embezzlement and
is issued by a reputable bonding company. The Company agrees that any amounts
received under such bond in connection with claims that arise from the
arrangements described in this Agreement will be held by the Company for the
benefit of the Fund if, and when, applicable. 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
Underwriter in the event that such coverage no longer applies. The Company
agrees to exercise its best efforts to ensure that other individuals/entities
not employed or controlled by the Company and dealing with the money and/or
securities of the Fund maintain a similar bond or coverage in a reasonable
amount.
ARTICLE III. Prospectuses, Statements of Additional Information, and Proxy
Statements; Voting
3.1 The Underwriter shall provide the Company (at the Company's expense)
with as many copies of the Fund's current prospectus (describing only the
Designated Portfolios listed on Schedule A) as the Company may reasonably
request. If requested by the Company in lieu thereof, the Fund shall provide
such documentation (including a final copy of the new prospectus as set in type
or on a diskette, at the Fund's expense) and other assistance as is reasonably
necessary in order for the Company (at the Company's expense) once each year (or
more frequently if the prospectus for the Fund is amended) to have the
<PAGE>
prospectus for the Contracts and the Fund's prospectus printed together in one
document (such printing to be at the Company's expense).
3.2 The Fund's prospectus shall state that the current Statement of
Additional Information ("SAI") for the Fund is available from the Company (or,
in the Fund's discretion, from the Fund), and the Underwriter (or the Fund), at
its expense, shall print, or otherwise reproduce, and provide a copy of such SAI
free of charge to the Company for itself and for any owner of a Contract who
requests such SAI.
3.3 The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners in the Fund. The Underwriter (at the Company's
expense) shall provide the Company with copies of the Fund's annual and semi-
annual reports to shareholders in such quantity as the Company shall reasonably
request for use in connection with offering the Variable Contracts issued by the
Company. If requested by the Company in lieu thereof, the Underwriter shall
provide such documentation (which may include a final copy of the Fund's annual
and semi-annual reports as set in type or on diskette) and other assistance as
is reasonably necessary in order for the Company (at the Company's expense) to
print such shareholder communications for distribution to Contract owners.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Designated Portfolio for which
instructions have been received,
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 or to the
extent otherwise required by law. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law.
3.5 Participating Insurance Companies shall be responsible for assuring
that each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive Order
and consistent with any reasonable standards that the Fund may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the SEC's interpretation of the requirements of Section 16(a)
with respect to periodic elections of directors or trustees and with whatever
rules the SEC may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
<PAGE>
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 that the Company develops or uses and in which the Fund (or a Portfolio
thereof) or the Adviser or the Underwriter is named, at least ten calendar days
prior to its use. No such material shall be used if the Fund or its designee
reasonably object to such use within ten calendar days after receipt of such
material. The Fund or its designee reserves the right to reasonably object to
the continued use of such material, and no such material shall be used if the
Fund or its designee so object.
4.2 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus or SAI for
the Fund shares, as such registration statement and prospectus or SAI 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 or by the Underwriter, except with the permission of the
Fund or the Underwriter or the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company, each piece of sales literature or other
promotional material in which the Company, and/or its Account, is named at least
ten calendar days prior to its use. No such material shall be used if the
Company reasonably objects to such use within ten calendar days after receipt of
such material. The Company reserves the right to reasonably object to the
continued use of such material and no such material shall be used if the Company
so objects.
4.4 The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or SAI for the Contracts, as
such registration statement, prospectus or SAI may be amended or supplemented
from time to time, or in published reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5 The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, SAIs, 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 Fund or its shares, within a reasonable time after the filing of
such document(s) 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, SAIs, 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 the Account, within a
reasonable time after the filing of such document(s) with the SEC or other
regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature and
other promotional materials" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
<PAGE>
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, 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, and registration statements, prospectuses,
SAIs, shareholder reports, proxy materials, and any other communications
distributed or made generally available with regard to the Funds.
ARTICLE V. Fees and Expenses
5.1 The Fund and the Underwriter shall pay no fee or other compensation
to the Company under this Agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing, and such payments will be made out of existing fees otherwise payable
to the Underwriter, past profits of the Underwriter, or other resources
available to the Underwriter. No such payments shall be made directly by the
Fund. Currently, no such payments are contemplated.
5.2 All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund, except as otherwise provided herein. 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
deemed 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, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
5.3 The Company shall bear the expenses of printing the Fund's
prospectus (in accordance with 3.1) and of distributing the Fund's prospectus,
proxy materials, and reports to Contract owners and prospective Contract owners.
ARTICLE VI. Diversification and Qualification
6.1 The Fund will invest the assets of each Designated Portfolio in such
a manner as to ensure that the Contracts will be treated as annuity, endowment,
or life insurance contracts, whichever is appropriate, under the Internal
Revenue Code of 1986, as amended (the Code ) and the regulations issued
thereunder (or any successor provisions). Without limiting the scope of the
foregoing, each Designated Portfolio of the Fund will comply with Section 817(h)
of the Code and Treasury Regulation 1.817-5, and any Treasury interpretations
thereof, relating to the diversification requirements for variable annuity,
endowment, or life insurance contracts, and any amendments or other
modifications or successor provisions 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
<PAGE>
the Fund so as to achieve compliance within the grace period afforded by
Regulation 817.5.
6.2 The Fund represents that each Designated Portfolio is or will be
qualified as a Regulated Investment Company under Subchapter M of the Code, and
that it will make every effort to maintain such qualification (under Subchapter
M or any successor or similar provisions) 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.
6.3 The Company represents that the Contracts are currently, and at the
time of issuance shall be, treated as life insurance, endowment contracts, or
annuity insurance contracts, under applicable provisions of the Code, and that
it will make every effort to maintain such treatment, and that it will notify
the Fund and the Underwriter immediately upon having a reasonable basis for
believing the Contracts have ceased to be so treated or that they might not be
so treated in the future. The Company agrees that any prospectus offering a
contract that is a "modified endowment contract" as that term is defined in
Section 7702A of the Code (or any successor or similar provision), shall
identify such contract as a modified endowment contract.
ARTICLE VII. Potential Conflicts.
7.1 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 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 will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information 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.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), 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
<PAGE>
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
provided, however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as determined
by a majority of the disinterested members of the Board. Any such withdrawal
and termination must take place within six (6) months after the Fund gives
written notice that this provision is being implemented, and until the end of
that six month period the Fund shall continue to accept and implement orders by
the Company for the purchase (and redemption) of shares of the Fund.
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
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Fund shall continue to
accept and implement orders by the company for the purchase (and redemption) of
shares of the Fund.
7.6 For purposes of Section 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 Contract 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 If and to the extent 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 Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such 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, 3.5, 3.6, 7.1., 7.2, 7.3, 7.4, and 7.5 of this Agreement
<PAGE>
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
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and the Underwriter and each of their officers and directors and each person, if
any, who controls the Fund or the Underwriter 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 legal and other expenses), to which the Indemnified
Parties may become subject under any statute or 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 statements or
alleged untrue statements of any material fact contained in the Registration
Statement, prospectus, or statement of additional information ( SAI ) 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, 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 for use in the Registration Statement, prospectus or SAI for the
Contracts or in the Contracts or sales literature or other promotional material
(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
(other than statements or representations contained in the Registration
Statement, 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 authorization or control, with
respect to the sale or distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement, prospectus, SAI, 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 if such a statement or omission was made in
reliance upon information furnished to the Fund by or on behalf of the Company;
or
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or otherwise, to
comply with the qualification requirements specified in Article VI of this
Agreement); or
<PAGE>
(v) 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,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(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 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 its obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company 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 Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, the Company shall be entitled to participate, at
its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense; provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulation referring to the Indemnified Parties or
their conduct. After notice from the Company to such party of the Company'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 Company 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.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund.
<PAGE>
8.2 Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of it 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 Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute or 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 or prospectus or SAI or sales literature or other promotional material
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, 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 Underwriter or Fund by or on behalf of the Company
for use in the Registration Statement or prospectus for the Fund or in sales
literature or other promotional material (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 (other than statements or representations contained in the
Registration Statement, prospectus or sales literature or other promotional
material for the Contracts not supplied by the Underwriter or persons under its
control) or wrongful conduct of the Fund or Underwriter or persons under their
control, with respect to the sale or distribution of the Contracts or Fund
shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement, prospectus,
SAI, or sales literature or other promotional material of 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, if such statement or
omission was made in reliance upon information furnished to the Company by or on
behalf of the Fund; or
(iv) arise as a result of any material failure by the Fund to
provide the services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or otherwise, to
comply with the diversification and other qualification requirements specified
in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this Agreement or
arise out of or result from any other material breach of this Agreement by the
Underwriter;
<PAGE>
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter 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 or such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter 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 Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Party, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent, include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Underwriter to such
party of the Underwriter'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 Underwriter 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.
8.2(d). The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Contracts
or the operation of the Account.
8.3 Indemnification By the Fund
8.3(a). The Fund 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 8.3) against any and all
losses, claims, expenses, damages, liabilities (including amounts paid in
settlement with the written consent of the Fund) or litigation (including legal
and other expenses) to which the Indemnified Parties may be required to pay or
may become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, expenses, damages, liabilities or expenses (or
actions in respect thereof) or settlements, are related to the operations of the
Fund and:
(i) arise as a result of any material failure by the Fund to
provide the services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or otherwise, to
<PAGE>
comply with the diversification and other qualification requirements specified
in Article VI of this Agreement); or
(ii) 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;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund 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 or to
the Company, the Fund, the Underwriter or the Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund 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 indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the expense thereof, with counsel satisfactory to the party named in the
action and to settle the claim at its own expense; provided, however, that no
such settlement shall, without the Indemnified Parties' written consent, include
any factual stipulation referring to the Indemnified Parties or their conduct.
After notice from the Fund to such party of the Fund'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 Fund 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.
8.3(d). The Company and the Underwriter agree promptly to notify
the Fund of the commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund.
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
(including, but not limited to, any Shared Funding Exemptive Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
<PAGE>
ARTICLE X. Termination
10.1 This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party, for any reason with respect to
some or all Designated Portfolios, by six (6) months' advance written notice
delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Designated Portfolio based upon the
Company's determination that shares of the Fund are not reasonably available to
meet the requirements of the Contracts; provided that such termination shall
apply only to the Designated Portfolio not reasonably available; or
(c) termination by the Company by written notice to the Fund and
the Underwriter in the event any of the Designated Portfolio's shares are not
registered, issued or sold in accordance with applicable state and/or federal
law or such law precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by the Company; or
(d) termination by the Fund or Underwriter in the event that
formal administrative proceedings are instituted against the Company by the
NASD, the SEC, the Insurance Commissioner or like official of any state or any
other regulatory body regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the operation of any Account, or the
purchase of the Fund shares; provided, however, that the Fund or Underwriter
determines in its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse effect upon the ability
of the Company to perform its obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund or Underwriter by the
NASD, the SEC, or any state securities or insurance department or any other
regulatory body; provided, however, that the Company determines in its sole
judgment exercised in good faith, that any such administrative proceedings will
have a material adverse effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Designated Portfolio in the event that such
Designated Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M or fails to comply with the Section 817(h) diversification
requirements specified in Article VI hereof, or if the Company reasonably
believes that such Designated Portfolio may fail to so qualify or comply; or
(g) termination by the Fund or Underwriter by written notice to
the Company in the event that the Contracts fail to meet the qualifications
specified in Section 6.3 hereof; or if the Fund or Underwriter reasonably
believes that such Contracts may fail to so qualify; or
(h) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or the Underwriter
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
<PAGE>
(i) termination by the Company by written notice to the Fund and
the Underwriter, if the Company shall determine, in its sole judgment exercised
in good faith, that the Fund or the Underwriter 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.
10.2 Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, the owners of the Existing Contracts may 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 10.2 shall not
apply to any termination under Article VII and the effect of such Article VII
termination shall be governed by Article VII of this Agreement. The parties
further agree that this Section 10.2 shall not apply to any termination under
Section 10.1(g) of this Agreement.
10.3 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) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a Legally Required Redemption ), or (iii) pursuant
to the terms of a substitution order issued by the SEC pursuant to Section 26(b)
of the 1940 Act. Upon request, the Company will promptly furnish to the Fund
and the Underwriter the opinion of counsel for the Company (which counsel shall
be reasonably satisfactory to the Fund and the Underwriter) to the effect that
any redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
10.4 Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
If to the Company:
Farm Bureau Life Insurance Company
5400 University Avenue
<PAGE>
West Des Moines, Iowa 50266
Attention: Sue Cornick
If to Underwriter:
T. Rowe Price Investment Services
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
ARTICLE XII. Miscellaneous
12.1 All references herein to the Fund are to each of the undersigned
Funds as if this agreement were between such individual Fund and the Underwriter
and the Company. All references herein to the Adviser relate solely to the
Adviser of such individual Fund, as appropriate. All persons dealing with a
Fund must look solely to the property of such Fund, and in the case of a series
company, the respective Designated Portfolio listed on Schedule A hereto as
though such Designated Portfolio had separately contracted with the Company and
the Underwriter for the enforcement of any claims against the Fund. The parties
agree that neither the Board, officers, agents or shareholders assume any
personal liability or responsibility for obligations entered into by or on
behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all
<PAGE>
information reasonably identified as confidential in writing by any other party
hereto and, except as permitted by this Agreement, 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 such information may come into the public domain.
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 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.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Iowa Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with Iowa
variable annuity laws and regulations and any other applicable law or
regulations.
12.7 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.
12.8 This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto.
12.9 The Company shall furnish or cause to be furnished, to the Fund or
its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory accounting
principles) and annual report (prepared under generally accepted accounting
principles ( GAAP ), if any), as soon as practical and in any event within 90
days after the end of each fiscal year.
(b) the Company s quarterly statements (statutory) (and GAAP, if any),
as soon as practical and in any event within 45 days after the end of each
quarterly period.
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 below.
<PAGE>
COMPANY: FARM BUREAU LIFE INSURANCE COMPANY
By its authorized officer
By: /s/ William J. Oddy
Title: Executive Vice President & General Manager
Date: June 8, 1998
FUND: T. ROWE PRICE EQUITY SERIES, INC.
By its authorized officer
By: /s/ Henry H. Hopkins
Title: Vice President
Date: June 8, 1998
FUND: T. ROWE PRICE INTERNATIONAL SERIES, INC.
By its authorized officer
By: /s/ Henry H. Hopkins
Title: Vice President
Date: June 8, 1998
<PAGE>
UNDERWRITER: T. ROWE PRICE INVESTMENT SERVICES, INC.
By its authorized officer
By: /s/ Darrell N. Braman
Title: Vice President
Date: June 8, 1998
<PAGE>
SCHEDULE A
Name of Separate Account and Date Established by Board of Directors:
Farm Bureau Life Variable Account II
1/6/98
Contracts Funded by Separate Account:
Flexible Premium Variable Life Insurance Policy
Designated Portfolios:
T. Rowe Price Equity Series, Inc.
- Equity Income Portfolio
- Mid-Cap Growth Portfolio
- New America Growth Portfolio
- Personal Strategy Balanced Portfolio
T. Rowe Price International Series, Inc.
- International Stock Portfolio
Name of Separate Account and Date Established by Board of Directors:
Farm Bureau Life Annuity Account II
1/6/98
Contracts Funded by Separate Account:
Flexible Premium Deferred Variable Annuity Contract
Designated Portfolios:
T. Rowe Price Equity Series, Inc.
- Equity Income Portfolio
- Mid-Cap Growth Portfolio
- New America Growth Portfolio
- Personal Strategy Balanced Portfolio
T. Rowe Price International Series, Inc.
- International Stock Portfolio
<PAGE>
Farm Bureau letterhead
May 21, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen,
With reference to the Registration Statement on Form N-4 filed by Farm Bureau
Life Insurance Company ("Company") and its Farm Bureau Life Annuity Account II
with the Securities and Exchange Commission covering certain variable annuity
contracts, I have examined such documents and such law as I considered necessary
and appropriate, and on the basis of such examinations, it is my opinion that:
(1) Company is duly organized and validly existing under the laws of the State
of Iowa.
(2) The variable annuity contracts, when issued as contemplated by the said
Form N-4 Registration Statement will constitute legal, validly issued and
binding obligations of Farm Bureau Life Insurance Company.
I hereby consent to the filing of this opinion as an exhibit to the said Form
N-4 Registration Statement and to the reference to my name under the caption
"Legal Matters" in the Prospectus contained in the said Registration Statement.
In giving this consent, I am not admitting that I am in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Stephen M. Morain
Stephen M. Morain
Senior Vice President
& General Counsel
<PAGE>
Sutherland, Asbill & Brennan LLP letterhead
May 29, 1998
Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal Matters"
in the statement of additional information filed as part of the registration
statement on Form N-4 for Farm Bureau Life Annuity Account II (File No.
333-46595). 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
1933.
Sincerely,
SUTHERLAND, ASBILL & BRENNAN LLP
/s/ Stephen E. Roth, Esq.
Stephen E. Roth
<PAGE>
Ernst & Young LLP letterhead
The Board of Directors
Farm Bureau Life Insurance Company
We consent to the reference to our firm under the captions "Financial
Statements" and "Experts" and to the use of our report dated February 16, 1998
with respect to Farm Bureau Life Insurance Company, in the Pre-Effective
Amendment No. 1 to the Registration Statement under the Securities Act of
1933 (Form N-4 No. 333-46595) and related Prospectus of Farm Bureau Life
Annuity Account II.
Sincerely,
/s/ Ernst & Young LLP
Des Moines, Iowa
June 9, 1998
<PAGE>
Farm Bureau letterhead
May 21, 1998
Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
Gentlemen:
This opinion is furnished in connection with the registration by Farm Bureau
Life Insurance Company of a flexible premium deferred variable annuity contract
("Contract") under the Securities Act of 1933, as amended. The prospectus
included in Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-4 (File No. 333-46595) describes the Contract. I have provided actuarial
advice concerning the preparation of the contract form described in the
Registration Statement, and I am familiar with the Registration Statement and
exhibits thereto.
It is my professional opinion that the fees and charges deducted under the
Contract, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred and the risks assumed by the insurance
company.
I hereby consent to the use of this opinion as an exhibit to Pre-Effective
Amendment No. 1 to the Registration Statement.
Sincerely,
/s/ Christopher G. Daniels
Christopher G. Daniels, FSA, MSAA
Life Product Development and Pricing Vice
President
Farm Bureau Life Insurance Company
