333-69647
File Nos. 811-09167
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. _1_ [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. _2_ [X]
(Check appropriate box or boxes.)
FSL SEPARATE ACCOUNT M
_________________________________________
(Exact Name of Registrant)
Fidelity Security Life Insurance Company
_________________________________________
(Name of Depositor)
3130 Broadway, Kansas City, Missouri 64111-2406
____________________________________________________________ __________
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (800) 648-8624
Name and Address of Agent for Service
Leland Eugene Schmitt
Senior Vice President and Secretary
Fidelity Security Life Insurance Company
3130 Broadway
Kansas City, Missouri 64111-2406
Copies to:
Lynn Korman Stone
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
__X__ on May 1, 2000 pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following:
____ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
Title of Securities Registered:
Individual Variable Annuity Contracts
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
(Required by Rule 495)
Item No. Location
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PART A
<S> <C>
Item 1. Cover Page Cover Page
Item 2. Definitions Index of Special of Terms
Item 3. Synopsis Highlights
Item 4. Condensed Financial Information Appendix
Item 5. General Description of Registrant, Depositor,
and Portfolio Companies Investment Choices,
The Company,
Other Information
Item 6. Deductions and Expenses Expenses
Item 7. General Description of Variable Annuity
Contracts The Annuity Contract
Item 8. Annuity Period Annuity Payments
Item 9. Death Benefit Death Benefit
Item 10. Purchases and Contract Value Purchase, Contract Value
Item 11. Redemptions Surrenders
Item 12. Taxes Taxes
Item 13. Legal Proceedings. Other Information
Item 14. Table of Contents of the Statement of
Additional Information Other Information
</TABLE>
CROSS REFERENCE SHEET (CONT'D)
(Required by Rule 495)
Item No. Location
- -------- --------
PART B
Item 15. Cover Page Cover Page
Item 16. Table of Contents. Table of Contents
Item 17. General Information and History Company
Item 18. Services Not Applicable
Item 19. Purchase of Securities Being Offered Not Applicable
Item 20. Underwriters Distribution
Item 21. Calculation of Performance Data Performance
Information
Item 22. Annuity Payments. Annuity Provisions
Item 23. Financial Statements Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate
Item so numbered, in Part C to this Registration Statement.
PART A
FIDELITY SECURITY LIFE INSURANCE COMPANY
FSL SEPARATE ACCOUNT M
FSL FLEXIBLE PREMIUM VARIABLE ANNUITY
This prospectus describes the variable annuity contract offered by Fidelity
Security Life Insurance Company (we, us, our). This is an individual deferred
variable annuity. The contract is offered as a non-qualified annuity, an
individual retirement annuity (IRA), as a tax sheltered annuity (TSA), or
pursuant to other qualified plans. This contract provides for accumulation of
contract values and annuity payments on a fixed and variable basis.
The contract has a number of investment choices (1 fixed account and 5
investment options). The fixed account is part of our general assets and
provides an investment rate guaranteed by us. The 5 investment options available
are portfolios of Investors Mark Series Fund, Inc. and Berger Institutional
Products Trust which are listed below. You can put your money in any of these
options which are offered through our separate account, the FSL Separate Account
M.
INVESTORS MARK SERIES FUND, INC.
Money Market Portfolio
Growth & Income Portfolio
Large Cap Growth Portfolio
Small Cap Equity Portfolio
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger/BIAM IPT - International Fund
Please read this Prospectus before investing. You should keep it for future
reference. It contains important information about the contract.
To learn more about the contract, you can obtain a copy of the Statement of
Additional Information (SAI) (dated May 1, 2000). The SAI has been filed with
the Securities and Exchange Commission (SEC) and is legally a part of this
prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference and other information regarding
companies that file electronically with the SEC. The Table of Contents of the
SAI is on page _ of this prospectus. For a free copy of the SAI, call us at
(800) 648-8624 or write to: Fidelity Security Life Insurance Company, Annuity
Products, 3130 Broadway, Kansas City, MO 64111-2406.
The Contracts:
* are not bank deposits.
* are not federally insured.
* are not endorsed by any bank or governmental agency.
* are not guaranteed and may be subject to loss of principal.
The SEC has not approved these contracts or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
May 1, 2000
TABLE OF CONTENTS
INDEX OF SPECIAL TERMS
HIGHLIGHTS
FSL SEPARATE ACCOUNT M TABLE OF FEES AND EXPENSES
THE COMPANY
THE ANNUITY CONTRACT
PURCHASE
INVESTMENT CHOICES
EXPENSES
CONTRACT VALUE
SURRENDERS
DEATH BENEFIT
ANNUITY PAYMENTS
TAXES
PERFORMANCE
OTHER INFORMATION
INDEX OF SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the contract, however, certain technical words
or terms are unavoidable. We have identified the following as some of these
words or terms. The page indicated here is where we believe you will find the
best explanation for the word or term. These words and terms are in italics on
the indicated page.
Page
Accumulation Phase
Accumulation Unit
Annuitant
Annuity Date
Annuity Options
Annuity Payments
Annuity Unit
Beneficiary
Income Phase
Investment Options
Non-Qualified
Qualified
HIGHLIGHTS
The variable annuity contract that we are offering is a contract between you,
the owner, and us, the insurance company. The contract provides a means for
investing on a tax-deferred basis in our fixed account and 5 investment
options. The contract is intended for retirement savings or other long-term
investment purposes and provides for a death benefit and guaranteed income
options.
The contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, earnings
accumulate on a tax-deferred basis and are taxed as income when you make a
withdrawal. If you make a withdrawal during the accumulation phase, we may also
assess a surrender charge of up to 7%. The income phase occurs when you begin
receiving regular payments from your contract.
You can choose to receive annuity payments on a variable basis, fixed basis or
combination of both. If you choose variable payments, the amount of the variable
annuity payments will depend upon the investment performance of the investment
options you select for the income phase. If you choose fixed payments, the
amount of the fixed annuity payments are level for the payout period.
Free Look. If you cancel the contract within 10 days after receiving it (or
whatever period is required in your state), we will send your money back without
assessing a surrender charge. You will receive whatever your contract is worth
on the day we receive your request. This may be more or less than your original
payment. If we are required by law to return your original payment, we will put
your money in the Money Market Portfolio during the free-look period plus 5
days.
Tax Penalty. The earnings in your contract are not taxed until you take money
out of your contract. If you take money out during the accumulation phase,
earnings come out first and are taxed as income. If you are younger than 59 1/2
when you take money out, you may be charged a 10% federal tax penalty on those
earnings. Payments during the income phase are considered partly a return of
your original investment.
Inquiries. If you need more information, please contact us at:
FSL Insurance Company
Annuity Products
3130 Broadway
Kansas City, Missouri 64111-2406
(800)648-8624
FSL SEPARATE ACCOUNT M TABLE OF FEES AND EXPENSES
<TABLE>
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OWNER TRANSACTION EXPENSES
Surrender Charge: (as a percentage of purchase payments surrendered) (See Note 2)
Number of Complete Years Surrender Charge (See Note 3)
From Receipt of Purchase Payments Easy Pay Lump Sum
--------------------------------- -------- --------
<S> <C> <C> <C>
0-1 6% 7%
1 6 6
2 6 5
3 5 4
4 5 3
5 4 2
6 3 1
7 2 0
8 2 0
9 1 0
10 and thereafter 0 0
Transfer Fee (See Notes 4 & 5) No charge for the first 12
transfers in a contract year
during the accumulation
phase; thereafter, the fee is
$50 per transfer. There is no
charge for the 4 allowable
transfers in a contract year
during the income phase.
</TABLE>
<TABLE>
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SEPARATE ACCOUNT ANNUAL EXPENSES: (as a percentage of the average account value)
Mortality and Expense Risk Fees (See Note 6)
<S> <C>
Lump Sum 0.90%
Easy Pay 1.50% (0.90% if contract value exceeds $100,000)*
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES
Lump Sum 0.90%
Easy Pay 1.50% (0.90% if contract value
exceeds $100,000)*
* Once your contract value reaches $100,000, it will be assessed the lower charge even if the contract value
is later reduced by changes in market value or withdrawals.
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT OPTION EXPENSES: (as a percentage of the average daily net assets of an investment
option)
Other
Expenses
(after Total Operating
expense Expenses (after
Management reimburse- expense
Fees ment) reimbursement)
---- ----- --------------
INVESTORS MARK SERIES FUND, INC.
(See Note 7)
<S> <C> <C> <C>
Money Market Portfolio .40% .10% .50%
Growth & Income Portfolio .80% .10% .90%
Large Cap Growth Portfolio .80% .10% .90%
Small Cap Equity Portfolio .95% .10% 1.05%
BERGER INSTITUTIONAL PRODUCTS TRUST
(See Note 8)
Berger/BIAM IPT - International Fund .00% 1.20% 1.20%
</TABLE>
EXAMPLES
There are two sets of examples below. The first set assumes your purchase
payments are Lump Sum payments or that your contract value exceeds $100,000. The
second set assumes that you are only making Easy Pay purchase payments to your
contract and that your contract value does not exceed $100,000.
These examples are designed to help you to understand the expenses in a
contract. You should not consider these to represent the actual expenses you
would pay. The actual expenses may be greater or less than those shown.
- --------------------------------------------------------------------------------
This first set of examples assumes you invested $1,000 in a contract and
allocated all of it to an investment option which earned 5% each year. It also
assumes that your purchase payments are Lump Sum payments or that your
contract value exceeded $100,000. All the expenses of the options shown above
are assumed to apply. Under these assumptions you would pay the following:
a) upon surrender at the end of each time period;
b) if the contract is not surrendered or if you begin the
income phase.
<TABLE>
<CAPTION>
Time Periods
1 Year 3 Year
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INVESTORS MARK SERIES FUND, INC.
<S> <C> <C>
Money Market Portfolio a) $84.00 $95.70
b) 14.00 45.70
Growth & Income Portfolio a) 88.00 108.53
b) 18.00 58.53
Large Cap Growth Portfolio a) 88.00 108.53
b) 18.00 58.53
Small Cap Equity Portfolio a) 89.50 113.31
b) 19.50 63.31
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger/BIAM IPT - International Fund a) 91.00 118.08
b) 21.00 68.08
____________________________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
This second set of examples assumes that you are only making Easy Pay purchase
payments to your contract and that your contract value does not exceed $100,000.
All the expenses of the investment options shown above are assumed to apply.
Under these assumptions you would pay the following:
a) upon surrender at the end of each time period;
b) if the contract is not surrendered or if you begin the
income phase.
Time Periods
1 Year 3 Year
------ ------
INVESTORS MARK SERIES FUND, INC.
<S> <C> <C>
Money Market Portfolio a) $80.00 $124.90
b) 20.00 64.90
Growth & Income Portfolio a) 84.00 137.58
b) 24.00 77.58
Large Cap Growth Portfolio a) 84.00 137.58
b) 24.00 77.58
Small Cap Equity Portfolio a) 85.50 142.31
b) 25.50 82.31
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger/BIAM IPT - International Fund a) $87.00 147.03
b) 27.00 87.03
<FN>
Notes to Table Of Fees and Expenses and Examples
1. The purpose of the Table of Fees and Expenses is to assist you in
understanding the various costs and expenses that you will incur directly
or indirectly. The Table reflects expenses of the separate account as well
as the investment options.
2. The contract provides for several circumstances under which we will waive
or reduce the surrender charge.
3. You can purchase a contract and add to it by making payments in one of two
ways:
* Lump Sum payments - any payment of $5000 or more; or
* Easy Pay payments - any payment of $50 or more but less than $5000.
4. We charge $50 per transfer during the accumulation phase for any transfers
after 12 in any contract year.
5. When you transfer contract values from one of our annuity contracts to
another, we assess an internal transfer fee of 2% of the amount
transferred.
6. The contract refers to a Product Expense Charge. This charge is equivalent
to the aggregate charges that until recently were referred to as a
Mortality and Expense Risk Charge and an Administrative Charge by many
companies issuing variable annuity contracts. Throughout this prospectus we
will refer to this charge as a Product Expense Charge.
7. Investors Mark Advisors, Inc. has voluntarily agreed to reimburse expenses
for each portfolio of Investors Mark Series Fund, Inc. for the year ended
December 31, 1999 and will continue this arrangement until April 30, 2001
so that the annual expenses do not exceed the amounts set forth above under
"Total Operating Expenses" for each portfolio. Absent such expense
reimbursement, the Total Annual Expenses for the year ended December 31,
1999 were: 2.30% for the Money Market Portfolio; 2.53% for the Small Cap
Equity Portfolio; 1.49% for the Large Cap Growth Portfolio; and 1.67% for
the Growth & Income Portfolio.
8. BBOI Worldwide LLC has voluntarily agreed to waive its advisory fee and
expects to voluntarily reimburse the Berger/BIAM IPT - International Fund
for additional expenses to the extent that normal operating expenses in any
fiscal year, including the management fee but excluding brokerage
commissions, interest, taxes and extraordinary expenses, of the fund exceed
1.20% of the fund's average daily net assets. If such an expense
reimbursement plan and fee waiver were not in place for the year ended
December 31, 1999, the management fee for the fund were: .90% and the
total annual expenses were 2.45%.
9. Premium taxes are not reflected in the examples and may apply in the state
where you live.
</FN>
</TABLE>
THERE IS AN ACCUMULATION UNIT VALUE HISTORY (CONDENSED FINANCIAL INFORMATION)
CONTAINED IN THE APPENDIX TO THIS PROSPECTUS.
THE COMPANY
Fidelity Security Life Insurance Company, 3130 Broadway, Kansas City, Missouri
64111-2406, is a stock life insurance company. We were originally incorporated
on January 17, 1969, as a Missouri Corporation. We are principally engaged in
the sale of life insurance and annuities. We are licensed in the District of
Columbia and all states except New York, where we are only admitted as a
reinsurer. Fidelity Security Life Insurance Company is majority owned by Richard
F. Jones (an individual).
THE ANNUITY CONTRACT
This Prospectus describes the variable annuity contract that we are offering.
An annuity is a contract between you, the owner, and us, the insurance company,
where we promise to pay you an income, in the form of annuity payments,
beginning on a designated date in the future. Until you decide to begin
receiving annuity payments, your annuity is in the accumulation phase. Once you
begin receiving annuity payments, your contract enters the income phase.
The contract benefits from tax deferral. Tax deferral means that you are not
taxed on earnings or appreciation on the assets in your contract until you take
money out of your contract.
The contract is called a variable annuity because you can choose among the
investment options, and depending upon market conditions, you can make or lose
money in any of these options. If you select the variable annuity portion of the
contract, the amount of money you are able to accumulate in your contract during
the accumulation phase depends upon the investment performance of the investment
option(s) you select as well as the interest we credit to the fixed account.
You can choose to receive annuity payments on a variable basis, fixed basis or a
combination of both. If you choose variable payments, the amount of the annuity
payments you receive will depend upon the investment performance of the
investment option(s) you select for the income phase. If you select to receive
payments on a fixed basis, the payments you receive will remain level.
PURCHASE
PURCHASE PAYMENTS
A purchase payment is the money you give us to buy the contract. You can make
payments in two ways:
* as Lump Sum payments; or
* as Easy Pay payments.
A Lump Sum payment is any payment of $5,000 or more. Easy Pay payments are
designed to give you the opportunity to make regular payments to your contract.
The minimum Easy Pay payment, whether for your initial payment or a subsequent
payment, we will accept is $50. The maximum total of all purchase payments we
will accept for the contract without our prior consent is $500,000.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, you choose how we will apply your purchase
payments among the investment options. If you make additional purchase payments,
we will allocate them in the same way as your first purchase payment, unless you
tell us otherwise.
Free Look. If you change your mind about owning this contract, you can cancel it
within 10 days after receiving it (or the period required in your state, which
is shown on page 1 of your contract). When you cancel the contract within this
time period, we will not assess a surrender charge. You will receive back
whatever your contract is worth on the day we receive your request. In certain
states, or if you have purchased the contract as an IRA, we may be required to
give you back your purchase payment if you decide to cancel your contract within
10 days after receiving it (or whatever period is required in your state). If
that is the case, we will put your purchase payment in the Money Market
Portfolio for 15 days before we allocate your first purchase payment to the
investment option(s) you have selected. (In some states, the period may be
longer.) If we do allocate your purchase payment to the Money Market Portfolio
and you exercise your free look right, we will return the greater of your
contract value or your purchase payments.
Once we receive your purchase payment and the necessary information, we will
issue your contract and allocate your first purchase payment within 2 business
days. If you do not give us all of the information we need, we will contact you
to get it. If for some reason we are unable to complete this process within 5
business days, we will either send back your money or get your permission to
keep it until we get all of the necessary information. If you add more money to
your contract by making additional purchase payments, we will credit those
amounts to your contract within one business day. Our business day closes when
the New York Stock Exchange closes, usually 4:00 p.m. Eastern time.
INVESTMENT CHOICES
The contract offers you the choice of allocating purchase payments to our fixed
account or to one or more of the investment options which are listed below.
Additional investment options may be available in the future.
You should read the prospectuses for these funds carefully before investing.
Copies of these prospectuses are attached to this prospectus. Certain investment
options contained in the fund prospectuses may not be available with your
contract.
INVESTORS MARK SERIES FUND, INC.
Investors Mark Series Fund, Inc. is managed by Investors Mark Advisors, LLC
(Adviser). Investors Mark Series Fund, Inc. is a mutual fund with multiple
portfolios, four of which are available under the contract. Each portfolio has a
different investment objective. The Adviser has engaged sub-advisers to provide
investment advice for the individual portfolios. The following portfolios are
available under the contract:
* Money Market Portfolio - Standish, Ayer & Wood, Inc. is the
sub-advisor.
* Growth & Income Portfolio - Lord, Abbett & Co. is the sub-adviser.
* Large Cap Growth Portfolio - Stein Roe & Farnham, Incorporated is the
sub- adviser.
* Small Cap Equity Portfolio - Stein Roe & Farnham, Incorporated is the
sub- adviser.
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger Institutional Products Trust is a mutual fund with multiple portfolios,
of which only one is available under the contract. That portfolio is managed by
BBOI Worldwide LLC, a joint venture between Berger LLC and Bank of Ireland Asset
Management (U.S.) Limited (BIAM). BBOI Worldwide LLC has retained BIAM as
sub-adviser. Berger LLC and BIAM have entered into an agreement to dissolve BBOI
Worldwide LLC. The dissolution of BBOI Worldwide LLC will have no effect on the
investment advisory services provided to the fund. Contingent upon shareholder
approval, when BBOI Worldwide LLC is dissolved, Berger LLC will become the
fund's advisor and BIAM will continue to be responsible for day-to-day
management of the fund's portfolio as sub-advisor. If approved by shareholders,
these advisory changes are expected to take place in the first half of this
year. The available portfolio under the contract is:
* Berger/BIAM IPT - International Fund
The investment objectives and policies of certain of the investment options are
similar to the investment objectives and policies of other mutual funds that
certain of the investment advisors manage. Although the objectives and policies
may be similar, the investment results of the investment options may be higher
or lower than the results of such other mutual funds. The investment advisors
cannot guarantee, and make no representation, that the investment results of
similar funds will be comparable even though the investment options have the
same investment advisors.
An investment option's performance may be affected by risks specific to certain
types of investments, such as foreign securities, derivative investments,
non-investment grade debt securities, initial public offerings (IPOs) or
companies with relatively small market capitalizations. IPOs and other
investment techniques may have a magnified performance impact on an investment
option with a small asset base. An investment option may not experience similar
performance as its assets grow.
Shares of the investment options may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
investment options may also be sold directly to qualified plans. The investment
options believe that offering their shares in this manner will not be
disadvantageous to you.
We may enter into certain arrangements under which we are reimbursed by the
investment options' advisors, distributors and/or affiliates for the
administrative services which we provide to the options.
FIXED ACCOUNT
During the accumulation phase, you may allocate purchase payments and contract
values to our fixed account. The fixed account forms a portion of our general
account. At our discretion, we may, from time to time, declare an excess
interest rate for the fixed account.
GENERAL ACCOUNT
During the income phase, you can select to have your annuity payments paid out
of our general account. We guarantee a specified interest rate used in
determining the payments. If you choose this option, the payments you receive
will remain level. This option is only available during the income phase.
TRANSFERS
You can make transfers as described below. We have the right to terminate or
modify these transfer provisions.
You can make transfers by telephone. If you own the contract with a joint owner,
unless we are instructed otherwise, we will accept instructions from either you
or the other owner. We will use reasonable procedures to confirm that
instructions given to us by telephone are genuine. If we fail to use such
procedures, we may be liable for any losses due to unauthorized or fraudulent
instructions. However, we will not be liable for following telephone
instructions that we reasonably believe to be genuine. We may tape record
telephone instructions.
Transfers are subject to the following:
1. Currently, during the accumulation phase, you can make 12 transfers
every contract year without charge. You can transfer into the fixed
account from the investment options.
2. Currently, during the accumulation phase you can only make one
transfer in a calendar quarter out of the fixed account into the
investment options. Any transfer made pursuant to this provision is
counted in determining any transfer fee.
3. We will assess a $50 transfer fee for each transfer during the
accumulation phase in excess of the free 12 transfers allowed per
contract year. Transfers made at the end of the Free Look Period by us
and any transfers made pursuant to the Dollar Cost Averaging program,
the Rebalancing program, or for loans will not be counted in
determining the application of any transfer fee.
4. The minimum amount which you can transfer is $500 or your entire value
in the investment option or fixed account if it is less. This
requirement is waived if the transfer is made in connection with the
Dollar Cost Averaging program, the Rebalancing program, or loans.
5. After a transfer is made, you must keep a minimum of $100 in the
account, (either in the fixed account or an investment option) from
which the transfer was made, unless you transfer the entire account.
6. You may not make a transfer until after the end of the free look
period.
7. A transfer will be effected as of the end of a business day when we
receive an acceptable transfer request containing all required
information. This would include the amount which is to be transferred,
and the investment option(s) and/or the fixed account affected.
8. We are not liable for a transfer made in accordance with your
instructions.
9. We reserve the right to restrict transfers between investment options
to a maximum of 12 per contract year and to restrict transfers from
being made on consecutive business days. We also reserve the right to
restrict transfers into and out of the fixed account.
10. Your right to make transfers is subject to modification if we
determine, in our sole opinion, that the exercise of the right by one
or more owners is, or would be, to the disadvantage of other owners.
Restrictions may be applied in any manner reasonably designed to
prevent any use of the transfer right which is considered by us to be
to the disadvantage of other owners. A modification could be applied
to transfers to, or from, one or more of the investment options and
could include, but is not limited to:
a. the requirement of a minimum time period between each transfer;
b. not accepting a transfer request from an agent acting under a
power of attorney on behalf of more than one owner; or
c. limiting the dollar amount that may be transferred between
investment options by an owner at any one time.
11. Transfers do not change your allocation instructions for future
purchase payments.
12. Transfers made during the income phase are subject to the following:
a. you may make 4 transfers each contract year between investment
options or between the investment options and the general
account;
b. you may not make a transfer within 3 business days of the annuity
calculation date; and
c. you may not make a transfer from the general account to an
investment option.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount each month from a selected investment option or the fixed account to any
of the other investment options. By allocating amounts on a regular schedule as
opposed to allocating the total amount at one particular time, you may be less
susceptible to the impact of market fluctuations. The Dollar Cost Averaging
Program is available only during the accumulation phase.
The minimum amount which can be transferred each month is $100. You must have at
least $1,200 in the selected investment option or fixed account (or the amount
required to complete your program, if less) in order to participate in the
Dollar Cost Averaging Program.
We have the right to modify, terminate or suspend the Dollar Cost Averaging
Program.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee. If
you are participating in the Dollar Cost Averaging Program, you cannot also
participate in the Rebalancing Program.
Dollar Cost Averaging does not assure a profit and does not protect against loss
in declining markets. Dollar Cost Averaging involves continuous investment in
the selected investment option(s) regardless of fluctuating price levels of the
investment option(s). You should consider your financial ability to continue the
Dollar Cost Averaging Program through periods of fluctuating price levels.
REBALANCING PROGRAM
Once your money has been allocated among the investment options, the performance
of the selected options may cause your allocation to shift. You can direct us to
automatically rebalance your contract to return to your original percentage
allocations by selecting our Rebalancing Program. You can tell us whether to
rebalance monthly, quarterly, semi-annually or annually.
The Rebalancing Program is available only during the accumulation phase.
If you participate in the Rebalancing Program, the transfers made under the
program are not taken into account in determining any transfer fee. Amounts
allocated to the fixed account are not taken into account as part of the
Rebalancing Program. You cannot participate in the Rebalancing Program if you
are participating in the Dollar Cost Averaging Program.
EXAMPLE:
Assume that you want your initial purchase payment split between 2 investment
options. You want 80% to be in the Growth & Income Portfolio and 20% to be in
the International Fund. Over the next 2 1/2 months the domestic market does very
well while the international market performs poorly. At the end of the quarter,
the Growth & Income Portfolio now represents 86% of your holdings because of its
increase in value. If you had chosen to have your holdings rebalanced quarterly,
on the first day of the next quarter, we would sell some of your units in the
Growth & Income Portfolio to bring its value back to 80% and use the money to
buy more units in the International Fund to increase those holdings to 20%.
SUBSTITUTION AND LIMITATION ON FURTHER INVESTMENT
We may be required to substitute one of the investment options you have selected
with another investment option. We would not do this without the prior approval
of the Securities and Exchange Commission. We may also limit further investment
in an investment option. We will give you notice of our intent to take either of
these actions.
EXPENSES
There are charges and other expenses associated with the contracts that reduce
the return on your investment in the contract. These charges and expenses are:
PRODUCT EXPENSE CHARGE
Each day we make a deduction for our Product Expense Charge. We do this as part
of our calculation of the value of the accumulation units and the annuity units.
This charge is for all the insurance benefits e.g., guarantee of annuity rates,
the death benefit, for certain expenses of the contract, and for assuming the
risk (expense risk) that the current charges will be insufficient in the future
to cover the cost of administering the contract. If the charges under the
contract are not sufficient, then we will bear the loss. We do, however, expect
to profit from this charge. This charge cannot be increased.
We assess the Product Expense Charge each business day and it is based on the
average value of your contract. We assess a Product Expense Charge as follows:
<TABLE>
<CAPTION>
<S> <C>
* Lump Sum Payments: 0.90%, on an annual basis.
* Easy Pay Payments: 0.90%, on an annual basis, for contracts that have
reached a contract value of $100,000 or more.*
1.50%, on an annual basis, for contracts that have
reached a contract value less than $100,000.*
* Once your contract value reaches a $100,000, it will be assessed the lower
charge even if the contract value is later reduced by changes in market
value or withdrawals.
</TABLE>
REDUCTION OF PRODUCT EXPENSE CHARGE
We may, at our sole discretion, reduce the Product Expense Charge. We would do
so when sales of the contract are made to individuals or to a group of
individuals in such a manner that results in a reduction of our administrative
costs or other savings. We would consider making such a reduction when:
* the size and type of group to whom the contract is offered can
reasonably be expected to produce such a cost savings; or
* the amount of purchase payments can produce some economies resulting
in a savings to us.
Any reduction of the Product Expense Charge will not be unfairly discriminatory
against any person. We will make such reductions in accordance with our own
administrative rules in effect at the time the contract(s) is issued. We have
the right to change these rules from time to time.
SURRENDER CHARGE
During the accumulation phase, you can make surrenders from your contract. We
keep track of each purchase payment. Subject to the free surrender amount and
other waivers discussed below, if you make a surrender and it has been less than
the stated number of years since you made your purchase payment, we will assess
a surrender charge.
Surrender Charge: (as a percentage of purchase payments surrendered)
<TABLE>
<CAPTION>
SURRENDER CHARGES
Number of Complete Years Surrender Charge
From Receipt of Purchase Payments Easy Pay Lump Sum
--------------------------------- -------- --------
<S> <C> <C> <C>
0-1 6% 7%
1 6 6
2 6 5
3 5 4
4 5 3
5 4 2
6 3 1
7 2 0
8 2 0
9 1 0
10 and thereafter 0 0
</TABLE>
Each purchase payment has its own surrender charge period. For purposes of the
surrender charge, we treat surrenders as coming from the most recent purchase
payments first. When the surrender is for only part of the value of your
contract, the surrender charge is deducted from the remaining value in your
contract.
NOTE: FOR TAX PURPOSES EARNINGS ARE USUALLY CONSIDERED TO COME OUT FIRST.
WAIVER OF THE SURRENDER CHARGE
Free Surrenders. You may make one surrender of up to 10% of your contract value
during a contract year free from any surrender charge. This right is
non-cumulative.
Internal Transfers. It is our current practice to reduce surrender charges for
an owner of one of our annuity contracts who wishes to transfer contract values
to another of our annuity contracts. The following will apply to such internal
transfers:
* there is an internal transfer fee of 2% of the amount transferred when
you make a transfer of contract value to another contract (which could
be the variable annuity contract we are offering by this prospectus)
issued by us;
* once transferred into the other contract, the amount transferred will
be subject to an Adjusted Surrender Charge in accordance with the
following:
<TABLE>
<CAPTION>
ADJUSTED SURRENDER CHARGES
Number of Complete Number of Complete Years you have been our Annuity Customer
Years from Transfer 5 Years or less 5-10 Years 10 Years +
- ------------------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
0-1 6% 4% 3%
1 5 3 3
2 4 2 2
3 3 1 1
4 2 0 0
5 1 0 0
6 and longer 0 0 0
</TABLE>
* If your contract was issued prior to the effective date of this
registration, or is no longer subject to a surrender charge, we will not
assess the internal transfer fee for the first internal transfer you make.
Once contract values are in the new contract, they will be subject to the
Adjusted Surrender Charge shown above. Any subsequent internal transfer
will be subject to the above conditions.
Reduction of Surrender Charges. We may, at our sole discretion, reduce the
Surrender Charge or the Adjusted Surrender Charge. We would do so when sales of
the contract are made to individuals or to a group of individuals in such a
manner that results in a reduction of our distribution costs. Some examples are:
if there is a large group of individuals that will be purchasing the contract or
if a prospective purchaser already had a relationship with us. We may, at our
sole discretion, not deduct the surrender charge under a contract issued to an
officer, director or employee of ours or any of our affiliates.
Any reduction of surrender charges will not be unfairly discriminatory against
any person. We will make such reductions in accordance with our administrative
rules in effect at the time the contract is issued. We have the right to change
those rules from time to time.
Waiver of Surrender Charges under Certain Benefits. Under the conditions set out
in the contract endorsements providing the following benefits, we will not
assess the surrender charge when:
* Terminal Illness Endorsement. You become terminally ill (which
means you are not expected to live more than 12 months). Under
this benefit, you may make a one time surrender during the
accumulation phase up to the full value of your account.
* Nursing Home or Hospital Confinement Endorsement. You become
confined to a long term care facility, nursing facility or
hospital for at least 30 consecutive days. Under this benefit,
the maximum amount that you can surrender without the imposition
of the surrender charge is $2,000 each month for the period of
confinement. The maximum total surrenders under this provision is
equal to your contract value. This benefit is only available
during the accumulation phase.
These benefits may not be available in your state.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. We are responsible for the payment of these
taxes and will make a deduction from the value of the contract for them. Some of
these taxes are due when the contract is issued, and others are due when annuity
payments begin. It is our current practice to not charge anyone for these taxes
until annuity payments begin. We may some time in the future discontinue this
practice and assess the charge when the tax is due. Premium taxes generally
range from 0% to 4%, depending on the state.
TRANSFER FEE
We will charge $50 for each additional transfer in excess of the free transfers
permitted. Transfers made at the end of the free look period by us and any
transfers made pursuant to the Dollar Cost Averaging program, Rebalancing
program, or loans will not be counted in determining the application of any
transfer fee.
INCOME TAXES
We will deduct from the contract for any income taxes which we incur because of
the contract. At the present time, we are not making any such deductions.
INVESTMENT OPTION EXPENSES
There are deductions from and expenses paid out of the assets of the various
investment options, which are described in the attached fund prospectuses.
CONTRACT VALUE
Your contract value is the sum of your interest in the various investment
options and our fixed account.
Your interest in the investment option(s) will vary depending upon the
investment performance of the options you choose. In order to keep track of your
contract value, we use a unit of measure called an accumulation unit. During the
income phase of your contract we call the unit an annuity unit.
ACCUMULATION UNITS
Every business day we determine the value of an accumulation unit and an annuity
unit for each of the investment options. We do this by:
1. determining the change in investment experience (including any
charges) for the investment option from the previous business day to
the current business day;
2. subtracting our Product Expense Charge and any other charges such as
taxes we have deducted; and
3. multiplying the previous business day's accumulation unit (or annuity
unit) value by this result.
When you make a purchase payment, we credit your contract with accumulation
units. The number of accumulation units credited is determined by dividing the
amount of the purchase payment allocated to an investment option by the value of
the accumulation unit for that investment option. When you make a surrender, we
deduct from your contract accumulation units representing the surrender.
We calculate the value of an accumulation unit for each investment option after
the New York Stock Exchange closes each day and then debit or credit your
account.
EXAMPLE:
On Monday we receive an additional purchase payment of $5,000 from you. You have
told us you want this to go to the Growth & Income Portfolio. When the New York
Stock Exchange closes on that Monday, we determine that the value of an
accumulation unit for the Growth & Income Portfolio is $13.90. We then divide
$5,000 by $13.90 and credit your contract on Monday night with 359.71
accumulation units for the Growth & Income Portfolio.
SURRENDERS
You can have access to the money in your contract:
* by making a surrender (either a partial or a complete surrender); or
* by electing to receive annuity payments; or
* when a death benefit is paid to your beneficiary; or
* if your contract was issued as a TSA, by taking a loan out of the
fixed account.
Surrenders can only be made during the accumulation phase.
When you make a complete surrender you will receive the value of your contract
on the day your request is received less any applicable surrender charge and
less any premium tax.
Unless you instruct us otherwise, any partial surrender will be made pro-rata
from all the investment options and the fixed account you selected. Under most
circumstances the amount of any partial surrender must be for at least $500, or
your entire interest in the fixed account or an investment option. We require
that after a partial surrender is made you keep at least $5,000 in your contract
for Lump Sum payments or $1,000 for Easy Pay payments.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY SURRENDER
YOU MAKE.
There are limits to the amount you can surrender from a qualified plan referred
to as a 403(b) plan (TSA). For a more complete explanation see the discussion in
the Taxes Section and the discussion in the Statement of Additional Information.
MINIMUM DISTRIBUTION PROGRAM
If your contract has been issued as an IRA, TSA or other qualified plan, you may
elect the Minimum Distribution Program. Under this program, we will make
payments to you that are designed to meet the applicable minimum distribution
requirements imposed by the Internal Revenue Code on such qualified plans. We
will make payments to you periodically at your election (currently: monthly,
quarterly, semi-annually or annually). The payment amount and frequency may be
limited. The payments will not be subject to the surrender charges and will be
in lieu of the 10% free surrender amount allowed each year.
LOANS
If you purchased this contract as a TSA (also referred to as a 403(b) plan),
during the accumulation phase you can take a loan out of the fixed account using
the contract as collateral. The minimum loan we will make is $2000. No loans are
permitted out of the investment options and no loans are permitted during the
income phase. When you request a loan, we will transfer any amounts necessary to
implement the loan request from the investment options to the fixed account.
Repayment of the loan will be made into the fixed account. We will then allocate
that money in the same manner that your purchase payments are being allocated.
Your loan documents will explain the terms, conditions and limitations regarding
loans from your TSA contract.
DEATH BENEFIT
DEATH OF CONTRACT OWNER DURING THE ACCUMULATION PHASE
Upon your death or that of the joint owner during the accumulation phase, the
death benefit will be paid to your primary beneficiary. Upon the death of a
joint owner, the surviving joint owner, if any, will be treated as the primary
beneficiary. Any other beneficiary designation on record at the time of death
will be treated as a contingent beneficiary unless you have informed us
otherwise in writing.
DEATH BENEFIT AMOUNT DURING THE ACCUMULATION PHASE
The death benefit during the accumulation phase will be the greater of:
1. the purchase payments, less any surrenders including any applicable
charges; or
2. your contract value.
The amount of the death benefit is determined as of the end of the business day
during which we receive both due proof of death and an election for the payment
method. The death benefit amount remains in an investment option and/or the
fixed account until distribution begins. From the time the death benefit is
determined until complete distribution is made, any amount in an investment
option will be subject to investment risk which is borne by the beneficiary.
DEATH BENEFIT OPTIONS DURING THE ACCUMULATION PHASE
A beneficiary must elect the death benefit to be paid under one of the following
options in the event of your death during the accumulation phase. If the
beneficiary is the spouse of the owner, he or she may elect to continue the
contract in his or her own name and exercise all the owner's rights under the
contract. In this event, the contract value will be adjusted to equal the death
benefit.
Option 1 - lump sum payment of the death benefit; or
Option 2 - the payment of the entire death benefit within 5 years of the
date of death of the owner or any joint owner; or
Option 3 - payment of the death benefit under an annuity option over the
lifetime of the beneficiary or over a period not extending beyond the life
expectancy of the beneficiary with distribution beginning within 1 year of
the date of your death or of any joint owner.
Any portion of the death benefit not applied under Option 3 within 1 year of the
date of your death, or that of a joint owner, must be distributed within 5 years
of the date of death.
If a lump sum payment is requested, the amount will be paid within 7 days,
unless the suspension of payments provision is in effect.
Payment to the beneficiary, in any form other than a lump sum, may only be
elected during the sixty-day period beginning with the date of receipt by us of
proof of death.
DEATH OF CONTRACT OWNER DURING THE INCOME PHASE
If you or a joint owner, who is not the annuitant, dies during the income phase,
any remaining payments under the annuity option elected will continue to be made
at least as rapidly as under the method of distribution in effect at the time of
your death. Upon your death during the income phase, the beneficiary becomes the
owner. The annuitant is the person whose life we look to when we make annuity
payments.
DEATH OF ANNUITANT
Upon the death of the annuitant, who is not an owner, during the accumulation
phase, you automatically become the annuitant. You may designate a new annuitant
subject to our underwriting rules then in effect. If the owner is a non-natural
person, the death of the annuitant will be treated as the death of the owner and
a new annuitant may not be designated.
Upon the death of the annuitant during the income phase, the death benefit, if
any, will be as specified in the annuity option elected. Death benefits will be
paid at least as rapidly as under the method of distribution in effect at the
annuitant's death.
ANNUITY PAYMENTS (THE INCOME PHASE)
Under the contract you can receive regular income payments. You can choose the
month and year in which those payments begin. We call that date the annuity
date. Your annuity date must be the first or fifteenth day of a calendar month.
You can also choose among income plans. We call those annuity options.
Your annuity date must be at least 1 month after you buy the contract. Annuity
payments must begin by the annuitant's 85th birthday or the 85th birthday of the
oldest joint annuitant. The annuitant is the person whose life we look to when
we make annuity payments.
If you do not choose an annuity option at the time you purchase the contract, we
will assume that you selected Option 2 with 10 years of guaranteed payments.
During the income phase, you have the same investment choices you had just
before the start of the income phase. If you do not tell us otherwise, your
annuity payments will be based on the investment allocations that were in place
on the annuity date.
The dollar amount of your payment from the investment option(s) will depend upon
four things:
* the value of your contract in the investment option(s) on the annuity
date;
* the 3% assumed investment rate used in the annuity table for the
contract;
* the performance of the investment options you selected; and
* if permitted in your state and under the type of contract you have
purchased, the age and sex of the annuitant(s).
If the actual performance exceeds the 3% assumed rate plus the deductions for
expenses, your annuity payments will increase. Similarly, if the actual
performance is less than 3% plus the amount of the deductions for expenses, your
annuity payments will decrease.
We will determine the amount of your variable annuity payments, including the
first, no more than 10 business days prior to the payment date. The payment
dates must be the same day each month as the date you selected for the annuity
date, i.e. the first or the fifteenth. The day we determine the variable annuity
payment is called the annuity calculation date.
You can choose one of the following annuity options. After annuity payments
begin, you cannot change the annuity option. All annuity payments are made to
you unless you direct us otherwise.
Option 1 - Life Annuity.
Under this option we make monthly income payments during the lifetime of the
annuitant and terminating with the last payment preceding his/her death.
Option 2 - Life Income with a Guaranteed Period.
Under this option we make monthly income payments during the lifetime of the
annuitant. We guarantee that if, at the death of the annuitant, payments have
been made for less than a stated period, which may be five, ten, fifteen or
twenty years, as elected, the monthly income will continue during the remainder
of the stated period. However, the owner may elect to receive a single sum
payment. A single sum payment will be equal to the present value of remaining
payments as of the date of receipt of due proof of death commuted at the assumed
investment rate.
Option 3 - Survivorship Annuity.
Under this option we make monthly income payments during the joint lifetime of
the annuitant and another named individual and thereafter during the lifetime of
the survivor. Payments cease with the last income payment due prior to the death
of the survivor.
Option 4 - Other Options.
Under this option we provide you with any payout plan that is mutually agreed
upon between you and us.
OTHER BENEFITS
DISABILITY BENEFIT
This benefit is only available with respect to Easy Pay payments during the
accumulation phase. Under this benefit, so long as you are totally and
permanently disabled and can provide us with evidence of that fact, we will pay
you a life annuity with fixed payments at your normal retirement date (which is
defined in your endorsement) or make a death benefit payment to your beneficiary
if you die prior to that date. You should refer to the endorsement in your
contract for additional details.
ACCIDENTAL DEATH BENEFIT
During the accumulation phase, in the event that you die due to an accidental
injury prior to age 70, we will pay your beneficiary an accidental death benefit
equal to the contract value (less any outstanding loan balance if your contract
was issued as a 403(b)contract and you took out a loan)on the date of death.
This benefit is in addition to the death benefit contained in the contract. The
maximum amount of the accidental death benefit is $500,000.
These benefits may not be available in your state.
TAXES
NOTE: We have prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any individual.
You should consult your own tax adviser about your own circumstances. We have
included a more comprehensive discussion regarding taxes in the Statement of
Additional Information.
ANNUITY CONTRACTS IN GENERAL
Annuity contracts are a means of setting aside money for future needs - usually
retirement. Congress recognized how important saving for retirement was and
provided special rules in the Internal Revenue Code (Code) for annuities.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your annuity contract until you take the money out. This is
referred to as tax deferral. There are different rules as to how you are taxed
depending on how you take the money out and the type of contract - qualified or
non-qualified (see following sections).
Under non-qualified contracts, you, as the owner, are not taxed on increases in
the value of your contract until a distribution occurs - either as a withdrawal
or as annuity payments. When you make a withdrawal, you are taxed on the amount
of the withdrawal that is earnings. For annuity payments, different rules apply.
A portion of each annuity payment is treated as a partial return of your
purchase payments and is not taxed. The remaining portion of the annuity payment
is treated as ordinary income. How the annuity payment is divided between
taxable and non-taxable portions depends upon the period over which the annuity
payments are expected to be made. Annuity payments received after you have
received all of your purchase payments are fully includible in income.
When a non-qualified contract is owned by a non-natural person (e.g.,
corporation or certain other entities other than a trust holding the contract as
an agent for a natural person), the contract will generally not be treated as an
annuity for tax purposes.
QUALIFIED AND NON-QUALIFIED CONTRACTS
If you purchase the contract as an individual and not under any pension plan,
specially sponsored program or an individual retirement annuity, your contract
is referred to as a non-qualified contract.
If you purchase the contract under a pension plan, specially sponsored program,
or an individual retirement annuity, your contract is referred to as a qualified
contract. Examples of qualified plans are: Individual Retirement Annuities
(IRAs), Tax-Sheltered Annuities (sometimes referred to as 403(b) contracts), and
pension and profit-sharing plans, which include 401(k) plans and H.R. 10 Plans.
A qualified contract will not provide any necessary or additional tax deferral
if it is used to fund a qualified plan that is tax deferred. However, the
contract has features and benefits other than tax deferral that may make it an
appropriate investment for a qualified plan. You should consult your tax adviser
regarding these features and benefits prior to purchasing a qualified contract.
WITHDRAWALS - NON-QUALIFIED CONTRACTS
If you make a withdrawal from your contract, the Code treats such a withdrawal
as first coming from earnings and then from your purchase payments. Such
withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract which
is included in income may be subject to a penalty. The amount of the penalty is
equal to 10% of the amount that is includible in income. Some withdrawals will
be exempt from the penalty. They include any amounts:
(1) paid on or after the taxpayer reaches age 59 1/2;
(2) paid after you die;
(3) paid if the taxpayer becomes totally disabled (as that term is defined
in the Code);
(4) paid in a series of substantially equal payments made annually (or
more frequently) for life or a period not exceeding life expectancy;
(5) paid under an immediate annuity; or
(6) which come from purchase payments made prior to August 14, 1982.
WITHDRAWALS - QUALIFIED CONTRACTS
If you make a withdrawal from your qualified contract, a portion of the
withdrawal is treated as taxable income. This portion depends on the ratio of
the pre-tax purchase payments to the after-tax purchase payments in your
contract. If all of your purchase payments were made with pre-tax money then the
full amount of any withdrawal is includible in taxable income. Special rules may
apply to withdrawals from certain types of qualified contracts.
The Code also provides that any amount received under a qualified contract which
is included in income may be subject to a penalty. The amount of the penalty is
equal to 10% of the amount that is includible in income. Some withdrawals will
be exempt from the penalty. They include any amounts:
(1) paid on or after you reach age 59 1/2;
(2) paid after you die;
(3) paid if you become totally disabled (as that term is defined in the
Code);
(4) paid to you after leaving your employment in a series of substantially
equal payments made annually (or more frequently) under a lifetime
annuity;
(5) paid to you after you have attained age 55 and left your employment;
(6) paid for certain allowable medical expenses (as defined in the Code);
(7) paid pursuant to a qualified domestic relations order;
(8) paid on account of an IRS levy upon the qualified contract;
(9) paid from an IRA for medical insurance (as defined in the Code);
(10) paid from an IRA for qualified higher education expenses; or
(11) up to $10,000 for qualified first time homebuyer expenses (as defined
in the Code).
The exceptions in (5) and (7) above do not apply to IRAs. The exception in (4)
above applies to IRAs but without the requirement of leaving employment.
We have provided a more complete discussion in the Statement of Additional
Information.
WITHDRAWALS - TAX-SHELTERED ANNUITIES
The Code limits the withdrawal of amounts attributable to purchase payments made
under a salary reduction agreement by owners from Tax-Sheltered Annuities.
Withdrawals can only be made when an owner:
(1) reaches age 59 1/2;
(2) leaves his/her job;
(3) dies;
(4) becomes disabled (as that term is defined in the Code);
(5) in the case of hardship; or
(6) has account balances as of December 31, 1998.
However, in the case of hardship, the owner can only withdraw the purchase
payments and not any earnings.
DIVERSIFICATION
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. We believe that the investment options are managed so as to
comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the degree
of control you exercise over the underlying investments, are considered the
owner of the shares of the investment options. If you are considered owner of
the shares, it will result in the loss of the favorable tax treatment for the
contract. It is unknown to what extent owners are permitted to select investment
options, to make transfers among the investment options or the number and type
of investment options owners may select from without being considered owner of
the shares. If any guidance is provided which is considered a new position, then
the guidance is generally applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This would
mean that you, as the owner of the contract, could be treated as the owner of
the investment options.
Due to the uncertainty in this area, we reserve the right to modify the contract
in an attempt to maintain favorable tax treatment.
PERFORMANCE
We periodically advertise performance of the various investment options. We will
calculate performance by determining the percentage change in the value of an
accumulation unit by dividing the increase (decrease) for that unit by the value
of the accumulation unit at the beginning of the period. This performance number
reflects the deduction of the insurance charges. It does not reflect the
deduction of any surrender charge. The deduction of any surrender charges would
reduce the percentage increase or make greater any percentage decrease. Any
advertisement will also include total return figures which reflect the deduction
of the product expense charges and surrender charges.
The performance will be based on the historical performance of the corresponding
investment options for the periods commencing from the date on which the
particular investment option was made available through the contracts. In
addition, for certain investment options performance may be shown for the period
commencing from the inception date of the investment option. These figures
should not be interpreted to reflect actual historical performance of the
Separate Account.
We may, from time to time, include in our advertising and sales materials, tax
deferred compounding charts and other hypothetical illustrations, which may
include comparisons of currently taxable and tax deferred investment programs,
based on selected tax brackets.
OTHER INFORMATION
THE SEPARATE ACCOUNT
We established a separate account, FSL Separate Account M (Separate Account), to
hold the assets that underlie the contracts. Our Board of Directors adopted a
resolution to establish the Separate Account under Missouri insurance law on
August 25, 1998. We have registered the Separate Account with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940.
The assets of the Separate Account are held in our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the contracts, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
contracts and not against any other contracts we may issue.
VOTING RIGHTS
We are the legal owner of the investment option shares. However, we believe that
when an investment option solicits proxies in conjunction with a vote of
shareholders, it is required to obtain from you and other owners instructions as
to how to vote those shares. When we receive those instructions, we will vote
all of the shares we own in proportion to those instructions. This will also
include any shares that we own on our own behalf. Should we determine that we
are no longer required to comply with the above, we will vote the shares in our
own right.
DISTRIBUTOR
National Pension & Group Consultants, Inc. (NPGC) serves as the distributor for
the contracts. NPGC is located at 3130 Broadway, Kansas City MO 64111-2406.
Commissions will be paid to agents and broker-dealers who sell the contracts.
Such agents and broker-dealers will be paid commissions up to 3% of purchase
payments but, under certain circumstances, may be paid an additional .25%
of assets as a trail commission.
OWNERSHIP
Owner. You, as the owner of the contract, have all the rights under the
contract. Prior to the annuity date, the owner is as designated at the time the
contract is issued, unless changed. On and after the annuity date, you continue
as the owner.
Joint Owner. The contract can be owned by joint owners. Any joint owner must be
the spouse of the other owner (except in Pennsylvania). Upon the death of either
joint owner, the surviving joint owner will be the designated beneficiary. Any
other beneficiary designation at the time the contract was issued or as may have
been later changed will be treated as a contingent beneficiary unless otherwise
indicated.
BENEFICIARY
The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time the contract is issued unless
changed at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before you die.
ASSIGNMENT
You can assign the contract at any time during your lifetime. We will not be
bound by the assignment until we receive written notice of the assignment. We
will not be liable for any payment or other action we take in accordance with
the contract before we receive notice of the assignment. AN ASSIGNMENT MAY BE A
TAXABLE EVENT.
If the contract is issued pursuant to a qualified plan, there may be limitations
on your ability to assign the contract.
SUSPENSION OF PAYMENTS OR TRANSFERS
We may be required to suspend or postpone payments for surrenders or transfers
for any period when:
1. the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment options is not reasonably practicable or we cannot
reasonably value the shares of the investment options;
4. during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
We have reserved the right to defer payment for a withdrawal or transfer from
the fixed account for the period permitted by law but not for more than six
months.
FINANCIAL STATEMENTS
Our statutory basis financial statements have been included in the Statement of
Additional Information. The financial statements of the Separate Account are
also included in the Statement of Additional Information.
ADDITIONAL INFORMATION
For further information about the contract you may obtain a Statement of
Additional Information. You can call the telephone number indicated on the cover
page or you can write to us. For your convenience we have included a post card
for that purpose.
The Table of Contents of this statement is as follows:
Company
Independent Auditors
Legal Opinions
Distribution
Calculation of Performance Information
Federal Tax Status
Annuity Provisions
Financial Statements
APPENDIX
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUE HISTORY
The table below provides accumulation unit values for the period from the
commencement of operations (5/14/99) to December 31, 1999. This data has been
extracted from the Separate Account's Financial Statements. This information
should be read in conjunction with the Separate Account's Financial Statements
and related notes which are included in the Statement of Additional Information.
Period Ended
12/31/99
------------
LUMP SUM EASY PAY
-------- ---------
Money Market
Beginning of Period $10.00 $10.00
End of Period $10.23 $10.19
Number of Accum. Units Outstanding 20,570 157
Growth & Income
Beginning of Period $10.00 $10.00
End of Period $10.30 $10.27
Number of Accum. Units Outstanding 16,745 2,344
Large Cap Growth
Beginning of Period $10.00 $10.00
End of Period $12.31 $12.27
Number of Accum. Units Outstanding 25,582 3,477
Small Cap Equity
Beginning of Period $10.00 $10.00
End of Period $15.30 $15.24
Number of Accum. Units Outstanding 8,438 971
Berger/BIAM IPT - International
Beginning of Period $10.00 $10.00
End of Period $12.39 $12.34
Number of Accum. Units Outstanding 12,371 1,177
FIDELITY SECURITY LIFE INSURANCE COMPANY
3130 BROADWAY
KANSAS CITY, MO 64111-2406
ATTN:
____________________________________________________________________________
Please send me, at no charge, the Statement of Additional Information
dated May 1, 2000 for the Annuity Contract issued by Fidelity Security Life
Insurance Company.
(Please print or type and fill in all information)
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City State Zip Code
- --------------------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED VARIABLE AND FIXED
ANNUITY CONTRACT
ISSUED BY
FSL SEPARATE ACCOUNT M
AND
FIDELITY SECURITY LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 2000 FOR THE INDIVIDUAL
FLEXIBLE PURCHASE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACT WHICH IS
DESCRIBED HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: 3130 Broadway, Kansas City, MO 64111-2406, (800) 648-8624.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 2000.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
COMPANY
INDEPENDENT AUDITORS
LEGAL OPINIONS
DISTRIBUTION
Reduction of the Surrender Charge
CALCULATION OF PERFORMANCE INFORMATION
Total Return
Historical Unit Values
Reporting Agencies
Performance Information
FEDERAL TAX STATUS
Diversification
Multiple Contracts
Contracts Owned by Other than Natural Persons
Tax Treatment of Assignments
Death Benefits
Income Tax Withholding
Tax Treatment of Withdrawals - Non-Qualified Contracts
Qualified Plans
Tax Treatment of Withdrawals - Qualified Contracts
Tax-Sheltered Annuities - Withdrawal Limitations
ANNUITY PROVISIONS
Variable Annuity
Fixed Annuity
Annuity Unit
Net Investment Factor
Expense Guarantee
FINANCIAL STATEMENTS
</TABLE>
COMPANY
Fidelity Security Life Insurance Company (the "Company") was originally
incorporated on January 17, 1969, as a Missouri corporation. The Company
presently is licensed to do business in the District of Columbia and all states
except New York, where it is only admitted as a reinsurer.
The Company is a Kansas City-based stock company with more than $8 billion of
life insurance in force and in excess of $400 million in assets. It provides
life and health insurance, retirement plans, and related financial services to
individuals and groups.
INDEPENDENT AUDITORS
The statutory basis consolidated financial statements of the Company as of and
for the years ended December 31, 1999 and 1998 and the financial statements of
FSL Separate Account M as of December 31, 1999 and for the period May 14, 1999
(date of inception) to December 31, 1999, included in this Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their independent auditors' reports appearing herein.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the Contracts.
DISTRIBUTION
National Pension and Group Consultants, Inc. ("NPGC") acts as the distributor.
NPGC is an affiliate of the Company. The offering is on a continuous basis.
REDUCTION OF THE SURRENDER CHARGE. The amount of the Surrender Charge on the
Contracts may be reduced or eliminated when sales of the Contracts are made to
individuals or to a group of individuals in a manner that results in savings of
sales expenses. The entitlement to reduction of the Surrender Charge will be
determined by the Company after examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made. Generally,
the sales expenses for a larger group are less than for a smaller
group because of the ability to implement large numbers of Contracts
with fewer sales contacts.
2. The total amount of purchase payments to be received. Per Contract
sales expenses are likely to be less on larger purchase payments than
on smaller ones.
3. Any prior or existing relationship with the Company. Per Contract
sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the Contract
with fewer sales contacts.
4. Other circumstances, of which the Company is not presently aware,
which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines that
there will be a reduction in sales expenses, the Company may provide for a
reduction of the Surrender Charge.
The Surrender Charge may be eliminated when the Contracts are issued to an
officer, director or employee of the Company or any of its affiliates.
In no event will any reduction or elimination of the Surrender Charge be
permitted where the reduction or elimination will be unfairly discriminatory to
any person.
CALCULATION OF PERFORMANCE INFORMATION
TOTAL RETURN. From time to time, the Company may advertise performance data.
Such data will show the percentage change in the value of an Accumulation Unit
based on the performance of an investment option over a period of time, usually
a calendar year, determined by dividing the increase (decrease) in value for
that unit by the Accumulation Unit value at the beginning of the period.
Any such advertisement will include total return figures for the time periods
indicated in the advertisement. Such total return figures will reflect the
deduction of a .90% or 1.50% (depending on the Contract Value or the type of
purchase payment) Product Expense Charge, the expenses for the underlying
investment option being advertised and any applicable Surrender Charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Surrender Charge to arrive at the ending hypothetical value. The average annual
total return is then determined by computing the fixed interest rate that a
$1,000 purchase payment would have to earn annually, compounded annually, to
grow to the hypothetical value at the end of the time periods described. The
formula used in these calculations is:
n
P (1 + T) = ERV
Where:
P= a hypothetical initial payment of $1,000
T= average annual total return
n= number of years
ERV= ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment made at
the beginning of the time periods used.
The Company may also advertise performance data which will be calculated in the
same manner as described above but which will not reflect the deduction of any
Surrender Charge. The deduction of any Surrender Charge would reduce any
percentage increase or make greater any percentage decrease.
Owners should note that the investment results of each investment option will
fluctuate over time, and any presentation of the investment option's total
return for any period should not be considered as a representation of what an
investment may earn or what an owner's total return may be in any future period.
HISTORICAL UNIT VALUES. The Company may also show historical Accumulation Unit
values in certain advertisements containing illustrations. These illustrations
will be based on actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the investment options
against established market indices such as the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average or other management
investment companies which have investment objectives similar to the investment
option being compared. The Standard & Poor's 500 Composite Stock Price Index is
an unmanaged, unweighted average of 500 stocks, the majority of which are listed
on the New York Stock Exchange. The Dow Jones Industrial Average is an
unmanaged, weighted average of thirty blue chip industrial corporations listed
on the New York Stock Exchange. Both the Standard & Poor's 500 Composite Stock
Price Index and the Dow Jones Industrial Average assume quarterly reinvestment
of dividends.
REPORTING AGENCIES. The Company may also distribute sales literature which
compares the performance of the Accumulation Unit values of the Contracts with
the unit values of variable annuities issued by other insurance companies. Such
information will be derived from the Lipper Variable Insurance Products
Performance Analysis Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is published
by Lipper Analytical Services, Inc., a publisher of statistical data which
currently tracks the performance of almost 4,000 investment companies. The
rankings compiled by Lipper may or may not reflect the deduction of asset-based
insurance charges. The Company's sales literature utilizing these rankings will
indicate whether or not such charges have been deducted. Where the charges have
not been deducted, the sales literature will indicate that if the charges had
been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect the
deduction of asset-based insurance charges. In addition, VARDS prepares risk
adjusted rankings, which consider the effects of market risk on total return
performance. This type of ranking may address the question as to which funds
provide the highest total return with the least amount of risk. Other ranking
services may be used as sources of performance comparison, such as
CDA/Weisenberger.
Morningstar rates a variable annuity against its peers with similar investment
objectives. Morningstar does not rate any variable annuity that has less than
three years of performance data.
PERFORMANCE INFORMATION. The Accumulation Units invest in the portfolios of
Investors Mark Series Fund, Inc. and Berger Institutional Products Trust.
While the Separate Account has recently commenced operations, these portfolios
have been in existence for some time and consequently have an investment
performance history. In order to demonstrate how the investment experience of
the these portfolios affect Accumulation Unit values, performance information
will be developed. The information is based upon the historical experience of
the portfolios and is for the periods shown.
Future performance of the portfolios will vary and the results shown are not
necessarily representative of future results. Performance for periods ending
after those shown may vary substantially from the examples shown. The
performance of the portfolios is calculated for a specified period of time by
assuming an initial purchase payment of $1,000 allocated to the portfolio.
Performance figures for the Accumulation Units will reflect the Product Expense
Charges as well as the portfolio expenses. There are also performance figures
for the Accumulation Units which reflect the Product Expense Charges, the
portfolio expenses, and assume that you make a surrender at the end of the
period and therefore the Surrender Charge is reflected. The percentage increases
(decreases) are determined by subtracting the initial purchase payment from the
ending value and dividing the remainder by the beginning value. The performance
may also show figures when no surrender is assumed.
FEDERAL TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS.
PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO
ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
GENERAL. Section 72 of the Code governs taxation of annuities in general. An
Owner is not taxed on increases in the value of a Contract until distribution
occurs, either in the form of a lump sum payment or as annuity payments under
the Annuity Option selected. For a lump sum payment received as a total
withdrawal (total surrender), the recipient is taxed on the portion of the
payment that exceeds the cost basis of the Contract. For Non-Qualified
Contracts, this cost basis is generally the purchase payments, while for
Qualified Contracts there may be no cost basis. The taxable portion of the lump
sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includable in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period or refund feature) bears
to the expected return under the Contract. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Contract (adjusted for any period certain or refund guarantee) by the number
of years over which the annuity is expected to be paid. Payments received after
the investment in the Contract has been recovered i.e. when the total of the
excludable amount equals the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable annuity contracts. The Code
provides that a variable annuity contract will not be treated as an annuity
contract for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Contract as an annuity contract would result in the imposition of federal
income tax to the Owner with respect to earnings allocable to the Contract prior
to the receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the investment
options underlying variable contracts such as the Contract. The Regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the Regulations, an investment option will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
option is represented by any one investment; (2) no more than 70% of the value
of the total assets of the option is represented by any two investments; (3) no
more than 80% of the value of the total assets of the option is represented by
any three investments; and (4) no more than 90% of the value of the total assets
of the option is represented by any four investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment options underlying the Contracts will be
managed in such a manner as to comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACT. The Code provides that multiple non-qualified annuity
contracts which are issued within a calendar year to the same contract owner by
one company or its affiliates are treated as one annuity contract for purposes
of determining the tax consequences of any distribution. Such treatment may
result in adverse tax consequences including more rapid taxation of the
distributed amounts from such combination of contracts. For purposes of this
rule, contracts received in a Section 1035 exchange will be considered issued in
the year of the exchange. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS. Under Section 72(u) of the Code,
the investment earnings on premiums for the Contracts will be taxed currently to
the Owner if the Owner is a non-natural person, e.g., a corporation or certain
other entities. Such Contracts generally will not be treated as annuities for
federal income tax purposes. However, this treatment is not applied to a
Contract held by a trust or other entity as an agent for a natural person nor to
Contracts held by Qualified Plans. Purchasers should consult their own tax
counsel or other tax adviser before purchasing a Contract to be owned by a
non-natural person.
TAX TREATMENT OF ASSIGNMENTS. An assignment, pledge, or other transfer of a
Contract may be a taxable event. Owners should therefore consult competent tax
advisers should they wish to assign, pledge, or transfer their Contracts.
DEATH BENEFITS. Any death benefits paid under the Contract are taxable to the
beneficiary. The rules governing the taxation of payments from an annuity
contract, as discussed above, generally apply to the payment of death benefits
and depend on whether the death benefits are paid as a lump sum or as annuity
payments. Estate taxes may also apply.
INCOME TAX WITHHOLDING. All distributions or the portion thereof which is
includable in the gross income of the Owner are subject to federal income tax
withholding. Generally, amounts are withheld from periodic payments at the same
rate as wages and at the rate of 10% from non-periodic payments. However, the
Owner, in most cases, may elect not to have taxes withheld or to have
withholding done at a different rate.
Certain distributions from retirement plans qualified under Section 401 or
Section 403(b) of the Code, which are not directly rolled over to another
eligible retirement plan or individual retirement account or individual
retirement annuity, are subject to a mandatory 20% withholding for federal
income tax. The 20% withholding requirement generally does not apply to: a) a
series of substantially equal payments made at least annually for the life or
life expectancy of the participant or joint and last survivor expectancy of the
participant and a designated beneficiary or for a specified period of 10 years
or more; or b) distributions which are required minimum distributions; or c) the
portion of the distributions not includable in gross income (i.e. returns of
after-tax contributions); or d) hardship distributions. Participants should
consult their own tax counsel or other tax adviser regarding withholding
requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS. Section 72 of the Code
governs treatment of distributions from annuity contracts. It provides that if
the Contract Value exceeds the aggregate purchase payments made, any amount
withdrawn will be treated as coming first from the earnings and then, only after
the income portion is exhausted, as coming from the principal. Withdrawn
earnings are includable in gross income. It further provides that a ten percent
(10%) penalty will apply to the income portion of any premature distribution.
However, the penalty is not imposed on amounts received: (a) after the taxpayer
reaches age 59 1/2; (b) after the death of the Owner; (c) if the taxpayer is
totally disabled (for this purpose disability is as defined in Section 72(m)(7)
of the Code); (d) in a series of substantially equal periodic payments made not
less frequently than annually for the life (or life expectancy) of the taxpayer
or for the joint lives (or joint life expectancies) of the taxpayer and his or
her Beneficiary; (e) under an immediate annuity; or (f) which are allocable to
purchase payments made prior to August 14, 1982.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified Contracts.
(See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS. The Contracts offered herein are designed to be suitable for
use under various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that benefits
under a Qualified Plan may be subject to the terms and conditions of the plan
regardless of the terms and conditions of the Contracts issued pursuant to the
plan. Some retirement plans are subject to distribution and other requirements
that are not incorporated into the Company's administrative procedures. The
Company is not bound by the terms and conditions of such plans to the extent
such terms conflict with the terms of a Contract, unless the Company
specifically consents to be bound. Owners, Annuitants and Beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts comply with applicable law.
A Qualified Contract will not provide any necessary or additional tax deferral
if it is used to fund a Qualified Plan that is tax deferred. However, the
Contract has features and benefits other than tax deferral that may make it an
appropriate investment for a Qualified Plan. Following are general descriptions
of the types of Qualified Plans with which the Contracts may be used. Such
descriptions are not exhaustive and are for general informational purposes only.
The tax rules regarding Qualified Plans are very complex and will have differing
applications depending on individual facts and circumstances. Each purchaser
should obtain competent tax advice prior to purchasing a Contract issued under a
Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
certain Qualified Plans will utilize annuity tables which do not differentiate
on the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
A. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, educational and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the Contracts for the benefit of their employees. Such
contributions are not includable in the gross income of the employees until the
employees receive distributions from the Contracts. The amount of contributions
to the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals Qualified Contracts" and "Tax-Sheltered Annuities -
Withdrawal Limitations" below.) Any employee should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
B. INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's taxable income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of Contracts to be
qualified as Individual Retirement Annuities should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
ROTH IRAS.
Section 408A of the Code provides that beginning in 1998, individuals may
purchase a new type of non-deductible IRA, known as a Roth IRA. Purchase
payments for a Roth IRA are limited to a maximum of $2,000 per year and are not
deductible from taxable income. Lower maximum limitations apply to individuals
with adjusted gross incomes between $95,000 and $110,000 in the case of single
taxpayers, between $150,000 and $160,000 in the case of married taxpayers filing
joint returns, and between $0 and $10,000 in the case of married taxpayers
filing separately. An overall $2,000 annual limitation continues to apply to all
of a taxpayer's IRA contributions, including Roth IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held the Roth IRA for at
least five years and, in addition, that the distribution is made either after
the individual reaches age 59 1/2, on the individual's death or disability, or
as a qualified first-time home purchase, subject to a $10,000 lifetime maximum,
for the individual, a spouse, child, grandchild, or ancestor. Any distribution
which is not a qualified distribution is taxable to the extent of earnings in
the distribution. Distributions are treated as made from contributions first and
therefore no distributions are taxable until distributions exceed the amount of
contributions to the Roth IRA. The 10% penalty tax and the regular IRA
exceptions to the 10% penalty tax apply to taxable distributions from a Roth
IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA. Furthermore,
an individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents income or a
previously deductible IRA contribution.
Purchasers of Contracts to be qualified as a Roth IRA should obtain competent
tax advice as to the tax treatment and suitability of such an investment.
C. PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 401(k) of the Code permit employers, including self-employed
individuals, to establish various types of retirement plans for employees. These
retirement plans may permit the purchase of the Contracts to provide benefits
under the Plan. Contributions to the Plan for the benefit of employees will not
be includable in the gross income of the employees until distributed from the
Plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all Plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Purchasers of Contracts for use with Pension or Profit Sharing Plans should
obtain competent tax advice as to the tax treatment and suitability of such an
investment.
D. GOVERNMENT AND TAX-EXEMPT ORGANIZATION'S DEFERRED COMPENSATION PLAN UNDER
SECTION 457
Under Code provisions, employees and independent contractors performing services
for state and local governments and other tax-exempt organizations may
participate in Deferred Compensation Plans under Section 457 of the Code. The
amounts deferred under a Plan which meets the requirements of Section 457 of the
Code are not taxable as income to the participant until paid or otherwise made
available to the participant or beneficiary. As a general rule, the maximum
amount which can be deferred in any one year is the lesser of $8,000 or 33 1/3
percent of the participant's includible compensation. However, in limited
circumstances, the plan may provide for additional catch- up contributions in
each of the last three years before normal retirement age. Furthermore, the Code
provides additional requirements and restrictions regarding eligibility and
distributions.
All of the assets and income of a Plan established by a governmental employer
after August 20, 1996, must be held in trust for the exclusive benefit of
participants and their beneficiaries. For this purpose, custodial accounts and
certain annuity contracts are treated as trusts. Plans that were in existence on
August 20, 1996 may be amended to satisfy the trust and exclusive benefit
requirements any time prior to January 1, 1999, and must be amended not later
than that date to continue to receive favorable tax treatment. The requirement
of a trust does not apply to amounts under a Plan of a tax exempt
(non-governmental) employer. In addition, the requirement of a trust does not
apply to amounts under a Plan of a governmental employer if the Plan is not an
eligible plan within the meaning of Section 457(b) of the Code. In the absence
of such a trust, amounts under the plan will be subject to the claims of the
employer's general creditors.
In general, distributions from a Plan are prohibited under Section 457 of the
Code unless made after the participating employee:
* attains the age 70 1/2,
* separates from service,
* dies, or
* suffers an unforeseeable financial emergency as defined in the Code.
Under present federal tax law, amounts accumulated in a Plan under Section 457
of the Code cannot be transferred or rolled over on a tax-deferred basis except
for certain transfers to other Plans under Section 457.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS. In the case of a withdrawal
under a Qualified Contract, a ratable portion of the amount received is taxable,
generally based on the ratio of the individual's cost basis to the individual's
total accrued benefit under the retirement plan. Special tax rules may be
available for certain distributions from a Qualified Contract. Section 72(t) of
the Code imposes a 10% penalty tax on the taxable portion of any distribution
from qualified retirement plans, including Contracts issued and qualified under
Code Sections 401 (Pension and Profit-Sharing Plans), 403(b)(Tax-Sheltered
Annuities) and 408 and 408A (Individual Retirement Annuities). To the extent
amounts are not includable in gross income because they have been rolled over to
an IRA or to another eligible Qualified Plan, no tax penalty will be imposed.
The tax penalty will not apply to the following distributions: (a) if
distribution is made on or after the date on which the Owner or Annuitant (as
applicable) reaches age 59 1/2; (b) distributions following the death or
disability of the Owner or Annuitant (as applicable) (for this purpose
disability is as defined in Section 72(m) (7) of the Code); (c) after separation
from service, distributions that are part of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the Owner or Annuitant (as applicable) or the joint lives (or
joint life expectancies) of such Owner or Annuitant (as applicable) and his or
her designated Beneficiary; (d) distributions to an Owner or Annuitant (as
applicable) who has separated from service after he has attained age 55; (e)
distributions made to the Owner or Annuitant (as applicable) to the extent such
distributions do not exceed the amount allowable as a deduction under Code
Section 213 to the Owner or Annuitant (as applicable) for amounts paid during
the taxable year for medical care; (f) distributions made to an alternate payee
pursuant to a qualified domestic relations order; (g) distributions made on
account of an IRS levy upon the Qualified Contract; (h) distributions from an
Individual Retirement Annuity for the purchase of medical insurance (as
described in Section 213(d)(1)(D) of the Code) for the Owner or Annuitant (as
applicable) and his or her spouse and dependents if the Owner or Annuitant (as
applicable) has received unemployment compensation for at least 12 weeks (this
exception will no longer apply after the Owner or Annuitant (as applicable) has
been re-employed for at least 60 days); (i) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) to the extent
such distributions do not exceed the qualified higher education expenses (as
defined in Section 72(t)(7) of the Code) of the Owner or Annuitant (as
applicable) for the taxable year; and (j) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) which are
qualified first-time home buyer distributions (as defined in Section 72(t)(8)of
the Code.) The exceptions stated in (d) and (f) above do not apply in the case
of an Individual Retirement Annuity. The exception stated in (c) above applies
to an Individual Retirement Annuity without the requirement that there be a
separation from service.
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years on which the exception was used.
Generally, distributions from a qualified plan must begin no later than April
1st of the calendar year following the later of (a) the year in which the
employee attains age 70 1/2 or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed. There are no required distributions from a Roth IRA prior to the
death of the owner.
TAX-SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS. The Code limits the withdrawal
of amounts attributable to contributions made pursuant to a salary reduction
agreement (as defined in Section 403(b)(11) of the Code) to circumstances only
when the Owner: (1) attains age 59 1/2; (2) separates from service; (3) dies;
(4) becomes disabled (within the meaning of Section 72(m)(7) of the Code); or
(5) in the case of hardship. However, withdrawals for hardship are restricted to
the portion of the Owner's Contract Value which represents contributions made by
the Owner and does not include any investment results. The limitations on
withdrawals became effective on January 1, 1989 and apply only to salary
reduction contributions made after December 31, 1988, to income attributable to
such contributions and to income attributable to amounts held as of December 31,
1988. The limitations on withdrawals do not affect transfers between
Tax-Sheltered Annuity Plans. Owners should consult their own tax counsel or
other tax adviser regarding any distributions.
ANNUITY PROVISIONS
VARIABLE ANNUITY. A variable annuity is an annuity with payments which: (1) are
not predetermined as to dollar amount; and (2) will vary in amount with the net
investment results of the applicable investment option(s) of the separate
account. At the annuity calculation date, the contract value in each investment
option will be applied to the applicable annuity tables. The annuity table used
will depend upon the annuity option chosen. The dollar amount of Annuity
Payments after the first is determined as follows:
(1) the dollar amount of the first annuity payment is divided by the value
of an annuity unit as of the annuity calculation date. This
establishes the number of annuity units for each monthly payment. The
number of annuity units remains fixed during the annuity payment
period.
(2) the fixed number of annuity units per payment in each Subaccount is
multiplied by the annuity unit value as of the annuity calculation
date. This result is the dollar amount of the payment.
The total dollar amount of each variable annuity payment is the sum of all
investment option variable annuity payments.
The Company determines the amount of variable annuity payments, including the
first, no more than ten (10) business days prior to the payment date. The
payment date must be the same day each month as the date selected for the
annuity date, i.e. the first or the fifteenth.
FIXED ANNUITY. A fixed annuity is a series of payments made during the annuity
period which are guaranteed as to dollar amount by the Company and do not vary
with the investment experience of the Separate Account. The general account
value as of the annuity calculation date will be used to determine the fixed
annuity monthly payment. The first monthly annuity payment will be based upon
the annuity option elected and the appropriate annuity option table. Fixed
annuity payments will remain level.
ANNUITY UNIT. The value of an annuity unit for each investment option was
arbitrarily set initially at $10. This was done when the first investment option
shares were purchased. The investment option annuity unit value for any business
day is determined by multiplying the investment option annuity unit value for
the immediately preceding business day by the product of (a) the Net Investment
Factor for the business day for which the annuity unit value is being
calculated, and (b) 0.999919.
NET INVESTMENT FACTOR. The Net Investment Factor for any investment option for
any business day is determined by dividing:
(a) the accumulation unit value as of the close of the current business
day, by
(b) the accumulation unit value as of the close of the immediately
preceding business day.
The Net Investment Factor may be greater or less than one, as the annuity unit
value may increase or decrease.
EXPENSE GUARANTEE. The Company guarantees that the dollar amount of each annuity
payment after the first annuity payment will not be affected by variations in
actual mortality or expense experience.
FINANCIAL STATEMENTS
The statutory basis financial statements of the Company included herein should
be considered only as bearing upon the ability of the Company to meet its
obligations under the contracts.
FIDELITY SECURITY LIFE INSURANCE COMPANY
FSL SEPARATE ACCOUNT M
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
AND FOR THE PERIOD FROM MAY 14, 1999 (DATE OF
INCEPTION) TO DECEMBER 31, 1999, AND
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
The Contract Owners of Fidelity Security Life Insurance Company
FSL Separate Account M
and the Board of Directors
of Fidelity Security Life Insurance Company
We have audited the accompanying statement of net assets of Fidelity Security
Life Insurance Company FSL Separate Account M (the "Separate Account") as of
December 31, 1999 and the related statement of operations and changes in net
assets for the period from May 14, 1999 (date of inception) to December 31,
1999. These financial statements are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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. Our procedures included confirmation of securities owned at December
31, 1999 by correspondence with the issuers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of the Separate Account at December
31, 1999, and the results of its operations and changes in its net assets for
the period from May 14, 1999 (date of inception) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
March 17, 2000
<TABLE>
<CAPTION>
FIDELITY SECURITY LIFE INSURANCE COMPANY
FSL SEPARATE ACCOUNT M
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments:
Berger Institutional Products Trust:
<S> <C> <C>
IPT International Fund - 11,486 shares at net asset value of $14.63 per share
(cost $145,343) $ 168,034
Investors Mark Series Fund, Inc.:
Growth & Income Portfolio - 15,547 shares at net asset value of $12.67 per
share (cost $198,921) 196,975
Large Cap Growth Fund - 19,871 shares at net asset value of $18.03 per share
(cost $301,063) 358,279
Small Cap Equity Fund - 10,916 shares at net asset value of $13.20 per share
(cost $106,865) 144,085
Money Market Portfolio - 212,138 shares at net asset value $1.00 per share
(cost $212,138) 212,138
-------
Total assets 1,079,511
LIABILITIES
Accrued mortality and expense risk charges (1,452)
------
NET ASSETS $ 1,078,059
===========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIDELITY SECURITY LIFE INSURANCE COMPANY
FSL SEPARATE ACCOUNT M
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
PERIOD FROM MAY 14, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
Berger
Institutional
Products Investors Mark Series Fund, Inc.
Trust IPT Growth & Large Cap Small Cap Money
International Income Growth Equity Market
Fund Portfolio Fund Fund Portfolio Total
---- --------- ---- ---- ---------------
Investment income:
<S> <C> <C> <C> <C>
Dividend distributions $925 $1,582 $1,836 $4,343
Capital gains distributions 9,709 9,709
Realized gain (loss) on investments 527 -64 $730 $3,408 4,601
Unrealized appreciation (depreciation) on investments 22,691 -1,946 57,217 37,219 115,181
Net investment income 24,143 9,281 57,947 40,627 1,836 133,834
------ ----- ------ ------ ----- -------
Expenses -
Mortality and expense risk charges 421 580 1,028 381 349 2,759
--- --- ----- --- --- -----
Increase in net assets from operations 23,722 8,701 56,919 40,246 1,487 131,075
Payments and withdrawals:
Premium transfers in 19,731 31,700 53,694 8,210 852,823 966,158
Annuity benefits transfers -48 -50 -98
Policy loan transfers 96 94 190
Other transfers 124,337 156,265 247,031 95,338 -642,237 -19,266
------- ------- ------- ------ ------- ------
Payments and withdrawals 144,068 187,917 300,771 103,642 210,586 946,984
------- ------- ------- ------- ------- -------
Net increase in net assets 167,790 196,618 357,690 143,888 212,073 1,078,059
Beginning of period net assets
End of period net assets $167,790 $196,618 $357,690 $143,888 $212,073 $1,078,059
======== ======== ======== ======== ======== ==========
See notes to financial statements.
</TABLE>
FIDELITY SECURITY LIFE INSURANCE COMPANY
FSL SEPARATE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM MAY 14, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION
The FSL Separate Account M (the "Separate Account"), marketed as FSL
Flexible Premium Variable Annuity (the "Contract"), is a segregated
investment account of Fidelity Security Life Insurance Company (the
"Company"). The Separate Account is registered with the Securities and
Exchange Commission as a unit investment trust pursuant to the provisions
of the Investment Company Act of 1940. The Separate Account was established
by the Company on May 14, 1999 and commenced operations on May 20, 1999.
All deposits received by the Separate Account are invested in one or more
of the investment options, as listed below, in accordance with the
selection made by the contract owner.
The Contract has six investment choices, one fixed account and five
investment options. The fixed account is part of the general assets of the
Company and provides an investment rate guaranteed by the Company. The five
investment options available are portfolios of Investors Mark Series Fund,
Inc. and Berger Institutional Products Trust and collectively constitute
the assets of the Separate Account. These options are as follows:
Investors Mark Series Fund, Inc.
o Money Market Portfolio
o Growth & Income Portfolio
o Large Cap Growth Fund
o Small Cap Equity Fund
Berger Institutional Products Trust
o IPT - International Fund
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION - Investments in the Separate Account are valued by
using net asset values which are based on the daily closing prices of the
underlying securities in the Separate Account's funds.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
recorded on the trade date. Dividend income is recorded on the ex-dividend
date. The cost of investments sold and the corresponding capital gains and
losses are determined on a specific identification basis. Net investment
income and net realized gains and losses and unrealized appreciation or
depreciation are allocated to the contracts on each valuation date based on
each contract's pro-rata share of the assets of the fund as of the
beginning of the valuation date.
UNIT VALUATIONS - Investments in all five investment options are tracked
using an accumulation unit. Contract owners may elect to own Lump Sum units
or Easy Pay units depending on the payment plan selected (see Note 3).
Every business day the value of the accumulation unit is determined after
the New York Stock Exchange closes. The value is determined by computing
the change in the published net asset value, for the investment option from
the previous day to the current business day, subtracting any charges
including the Product Expense Charge and any taxes, and multiplying the
previous business day's accumulation unit value by this result.
FEDERAL INCOME TAX - The Company is taxed as a life insurance company under
the provisions of the Internal Revenue Code. The operations of the Separate
Account are part of the total operations of the Company and are not taxed
as a separate entity. Under Federal income tax law, net investment income
and realized gains (losses) are retained in the Separate Account and are
not taxable until received by the contract owner or beneficiary in the form
of annuity payments or other distributions.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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 income and expense during the reporting period. Actual
results could differ from those estimates.
3. EXPENSES AND DEDUCTIONS
Each day the Company makes a deduction from the Separate Account for a
Product Expense Charge. This charge is for all of the insurance benefits
(i.e., guarantee of annuity rates, the death benefit) and for assuming the
risk that current charges will be insufficient in the future to cover the
cost of administering the Separate Account. The Product Expense Charge is
assessed based on the daily unit values of the contract holder's portion of
the assets in the Separate Account. The assessments are as follows:
o Lump Sum Payments - 0.90%, on an annual basis
o Easy Pay Payments - 0.90%, on an annual basis, for contracts that have
reached a value of $100,000 or more, or 1.50%, on an annual basis, for
contracts that have a value of less than $100,000.
This charge cannot be increased and could be reduced if sales of the
contract are made to individuals or to a group of individuals in such a
manner that results in a reduction of the Company's administrative costs or
other savings.
A surrender charge may be deducted in the event of a surrender from a
contract. Subject to a free surrender amount and other waivers or
reductions, surrender charges are assessed as follows:
Number of Complete Years From Surrender Charge
Receipt of Purchase Payments Easy Pay Lump Sum
---------------------------- -------- --------
0 - 1 6% 7%
1 6 6
2 6 5
3 5 4
4 5 3
5 4 2
6 3 1
7 2 0
8 2 0
9 1 0
10 and thereafter 0 0
There were no significant surrender charges deducted during the period.
The Company also assesses a transfer charge for each transfer during the
accumulation phase in excess of 12 transfers during a contract year.
4. NET ASSETS
Net assets is represented by accumulation units in the Separate Account. At
December 31, 1999, the net assets of the Separate Account was represented
by the following units and unit values:
<TABLE>
<CAPTION>
Unit Units Net
Fund Value Outstanding Assets
---- ----- ----------- ------
Berger Institutional Products Trust -
IPT International Fund:
<S> <C> <C> <C>
Lump sum units $12.388682 12,371.0138 $ 153,261
Easy pay units 12.343031 1,177.1186 14,529
------
167,790
-------
Investors Mark Series Fund, Inc.:
Growth & Income Portfolio
Lump sum units 10.304872 16,744.6659 172,553
Easy pay units 10.266946 2,343.9566 24,065
------
196,618
-------
Large Cap Growth Fund
Lump sum units 12.314694 25,581.7077 315,030
Easy pay units 12.269260 3,476.9839 42,660
------
357,690
-------
Small Cap Equity Fund
Lump sum units 15.299479 8,437.6807 129,091
Easy pay units 15.243043 970.7365 14,797
------
143,888
-------
Money Market Portfolio
Lump sum units 10.232239 20,569.6411 210,474
Easy pay units 10.194467 156.8603 1,599
-----
212,073
-------
$ 1,078,059
===========
</TABLE>
* * * * * *
FIDELITY SECURITY LIFE INSURANCE COMPANY
STATUTORY FINANCIAL STATEMENTS AS OF AND FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998, AND
INDEPENDENT AUDITORS' REPORT - GENERAL DISTRIBUTION
<TABLE>
<CAPTION>
FIDELITY SECURITY LIFE INSURANCE COMPANY
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT ON STATUTORY FINANCIAL STATEMENTS 1
STATUTORY FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998:
Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus 2
Statutory Statements of Income 3
Statutory Statements of Capital and Surplus 4
Statutory Statements of Cash Flows 5
Notes to Statutory Financial Statements 6-14
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Fidelity Security Life Insurance Company
Kansas City, Missouri
We have audited the accompanying statutory basis statements of admitted assets,
liabilities and capital and surplus of Fidelity Security Life Insurance Company
(the "Company") as of December 31, 1999 and 1998, and the related statutory
statements of income, changes in capital and surplus, and cash flows for the
years then ended. 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 auditing standards generally accepted
in the United States of America. 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.
As described in Note 1 to the financial statements, these financial statements
were prepared in conformity with the accounting practices prescribed or
permitted by the Missouri Department of Insurance which practices differ from
accounting principles generally accepted in the United States of America. The
effects on the financial statements of the variances between the statutory basis
of accounting and accounting principles generally accepted, although not
reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States of
America, the financial position of the Company as of December 31, 1999 and 1998,
or the results of its operations or its cash flows for the years then ended.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the statutory basis admitted assets, liabilities, and
capital and surplus of the Company as of December 31, 1999 and 1998 and the
results of its operations and its cash flows for the years then ended, on the
basis of accounting described in Note 1.
March 30, 2000
<TABLE>
<CAPTION>
FIDELITY SECURITY LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND CAPITAL AND SURPLUS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------------------------
ADMITTED ASSETS 1999 1998
<S> <C> <C> <C>
Bonds, at amortized cost (market, $326,422,352 and $353,603,634) $ 338,634,269$ 334,624,376
Preferred stocks, at market (cost of $426,700 and $176,700) 426,700 147,000
Common stocks, at market (cost of $1,592,827 and $3,259,537) 1,609,571 3,494,581
Mortgage loans 10,731
Policy loans 6,394,433 6,644,747
Short-term investments, at cost 4,244,790 16,416,559
Cash and cash equivalents 9,720,373 3,976,804
Other invested assets 3,610,082 3,835,985
Due and deferred premiums 16,293,887 12,663,688
Accrued investment income 5,334,013 4,921,052
Due from other companies 22,669,663 12,706,062
State guaranty fund assessments 422,568 336,133
Due from brokers, including margin accounts 536,184 533,554
Assets held in separate account 1,079,511
---------
TOTAL $ 410,976,044$ 400,311,272
==========================
LIABILITIES, CAPITAL AND SURPLUS
Liabilities and reserves:
Aggregate reserves:
Life insurance and annuity contracts $ 304,815,585$ 305,727,836
Accident and health insurance 19,496,591 17,455,014
Claim reserves:
Life insurance 2,289,672 2,088,971
Accident and health insurance 12,631,813 10,371,746
Premiums received in advance 651,510 693,307
Due to other companies 15,487,491 11,370,713
Due and deferred premium collection expenses 154,578 336,831
Commissions, taxes and general expenses 4,946,683 3,494,856
Income taxes payable 483,381 380,039
Group contingency reserves 828,974 2,200,291
Interest maintenance reserve 2,490,621 2,559,766
Asset valuation reserve 878,759 2,253,143
Liabilities related to separate account 1,079,511
---------
Total liabilities and reserves 366,235,169 358,932,513
=========== ===========
Contingencies (Note 9)
Capital and surplus:
Common stock, $2.50 par value:
Authorized, 1,100,000 shares
Issued, 1,000,000 shares 2,500,000 2,500,000
Preferred stock, $100.00 par value:
Authorized 50,000 shares
Issued and outstanding, 30,000 shares 3,000,000 3,000,000
Paid-in and contributed surplus 985,639 983,948
Unassigned surplus 39,180,023 35,809,973
---------- ----------
45,665,662 42,293,921
Less treasury stock, at cost 924,787 915,162
------- -------
Total capital and surplus 44,740,875 41,378,759
---------- ----------
TOTAL $ 410,976,044 $400,311,272
============= ===========
</TABLE>
See notes to statutory financial statements.
<TABLE>
<CAPTION>
FIDELITY SECURITY LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
INCOME:
<S> <C> <C>
Life premiums $ 22,349,314 $ 23,879,432
Annuity deposits 15,902,496 33,468,795
Accident and health premiums 78,350,578 74,608,947
Investment income, net 24,917,003 24,883,798
---------- ----------
Total income 141,519,391 156,840,972
----------- -----------
INCOME:
Benefits to policy owners and beneficiaries:
Life 10,805,579 11,778,643
Annuities 31,412,400 26,867,025
Accident and health 23,484,789 20,728,099
---------- ----------
65,702,768 59,373,767
Increase in aggregate reserves 1,127,478 32,214,364
--------- ----------
Total policy benefits and expenses 66,830,246 91,588,131
COMMISSIONS 52,988,931 46,421,453
GENERAL INSURANCE EXPENSES 12,704,492 11,294,624
SEPARATE ACCOUNT TRANSFERS 946,984
INSURANCE TAXES, LICENSES AND FEES 1,524,881 1,161,985
CHANGE IN LOADING AND COST OF COLLECTION
ON DUE AND DEFERRED PREMIUMS 113,196 169,873
------- -------
135,108,730 150,636,066
----------- -----------
INCOME BEFORE INCOME TAXES AND
NET REALIZED CAPITAL GAIN 6,410,661 6,204,906
INCOME TAX EXPENSE 1,604,448 1,597,505
--------- ---------
INCOME BEFORE NET REALIZED
CAPITAL GAIN 4,806,213 4,607,401
NET REALIZED CAPITAL GAIN, NET OF FEDERAL
INCOME TAX PROVISION OF $164,469 AND $46,828 319,263 90,902
-------- ------- ------- ------
NET INCOME $ 5,125,476 $ 4,698,303
=========== ===========
</TABLE>
See notes to statutory financial statements.
FIDELITY SECURITY LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
STATUTORY STATEMENTS OF CAPITAL AND SURPLUS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
COMMON STOCK $ 2,500,000 $ 2,500,000
=========== ===========
PREFERRED STOCK $ 3,000,000 $ 3,000,000
=========== ===========
PAID-IN AND CONTRIBUTED SURPLUS $ 985,639 $ 983,948
========= =========
UNASSIGNED SURPLUS:
Balance, beginning of year $ 35,809,973 $ 31,900,683
Net income 5,125,476 4,698,303
Net unrealized capital gains (losses) (2,288,598) 104,885
Dividends on preferred stock (232,500) (232,500)
Change in liability for reinsurance in unauthorized companies 339,051 (339,051)
Assumption reinsurance costs (831,656) (455,452)
Change in nonadmitted assets (116,107) 403,934
Change in asset valuation reserve 1,374,384 (270,829)
--------- --------
Balance, end of year 39,180,023 35,809,973
LESS TREASURY STOCK (924,787) (915,162)
-------- --------
TOTAL CAPITAL AND SURPLUS $ 44,740,875 $ 41,378,759
============ ============
</TABLE>
See notes to statutory financial statements.
FIDELITY SECURITY LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
STATUTORY STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Premium and annuity considerations $ 96,774,748 $ 93,484,436
Deposit type funds 12,250,610 30,345,405
Considerations for supplemental contracts with life contingencies 2,125,276 2,124,884
Considerations from supplemental contracts without life contingencies
and dividend accumulations 1,526,610 998,506
Net investment income 22,987,977 23,093,697
Commissions and expense allowances on reinsurance ceded 5,609,507 4,050,722
Fees associated with investment management, administration and contract
guarantees from separate account 1,307
Miscellaneous income 257 60,001
Death benefits (9,083,833) (9,624,772)
Matured endowments (6,919)
Annuity benefits (28,592,355) (24,311,073)
Disability benefits and benefits under accident and health policies (21,224,722) (16,799,848)
Surrender benefits and other fund withdrawals (1,514,129) (2,240,073)
Interest on policy or contract funds (10,643) (13,358)
Payments on supplementary contracts with life contingencies (1,373,417) (1,293,146)
Payments on supplemental contracts without life and dividend accumulation (1,446,628) (1,262,806)
Commissions on premiums and annuity considerations (55,424,290) (47,355,334)
Commissions and expense allowances on reinsurance assumed (2,654,647) (3,300,358)
General insurance expenses (12,685,844) (12,403,957)
Insurance, taxes, licenses and fees (637,751) (1,149,267)
Net transfers to separate account (946,984)
Federal income taxes (1,796,344) (2,160,000)
---------- ----------
Net cash flows from operating activities 3,877,786 32,243,659
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, matured, or repaid 44,978,523 55,982,347
Costs of investments acquired (47,373,645) (96,586,451)
Net decrease in policy loans 250,314 8,307
------- -----
Net cash flows used in investing activities (2,144,808) (40,595,797)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES AND MISCELLANEOUS SOURCES:
Capital and surplus paid in 1,691 8,366
Other cash provided 3,418,753 5,533,065
Dividends paid to stockholders (232,500) (232,500)
Other applications, net (11,349,122) (8,501,261)
----------- ----------
Net cash flows used in financing activities and miscellaneous sources (8,161,178) (3,192,330)
---------- ----------
DECREASE IN CASH AND SHORT-TERM INVESTMENTS (6,428,200) (11,544,468)
CASH AND SHORT-TERM INVESTMENTS:
Beginning of year 20,393,363 31,937,831
---------- ----------
End of year $ 13,965,163 $ 20,393,363
============ ============
</TABLE>
See notes to statutory financial statements.
FIDELITY SECURITY LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
NATURE OF OPERATIONS - Fidelity Security Life Insurance Company (the
"Company") is a stock life insurance company writing life, accident and
health and variable annuity contracts. The Company domiciles in the State
of Missouri and is licensed in the District of Columbia and all states
except New York, where it is licensed as a reinsurer. The Company currently
markets group annuities, group life and group accident and health,
including group medical and self funding arrangements primarily through
independent brokers and third party administrators who specialize in group
coverage.
STATUTORY ACCOUNTING PRINCIPLES - The Company prepares its statutory
financial statements in accordance with accounting practices prescribed or
permitted by the Missouri Department of Insurance and not in conformity
with accounting principles generally accepted in the United States of
America ("GAAP"). Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance
Commissioners ("NAIC"), as well as state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed.
The principal differences between GAAP and prescribed or permitted
statutory accounting practices are: (a) premiums are taken into income on a
pro rata basis over the policy term, whereas related acquisition and
commission costs for the full policy term are expensed currently; (b)
policy reserves are based on statutory mortality and interest requirements
and without consideration for withdrawals, which may differ from reserves
based on reasonably conservative estimates of mortality, interest and
withdrawals; (c) the tax effect of temporary differences between financial
statements and tax returns is not recognized; (d) group contingency
reserves are reported as a liability rather than as an appropriation of
surplus; (e) statutory asset valuation and interest maintenance reserves
are reported as liabilities; (f) nonadmitted assets are excluded from the
statement of financial position; (g) changes in the reserve for reinsurance
in unauthorized companies is recorded directly to unassigned surplus; (h)
statutory reporting provides that premiums related to investment annuity
products are to be recorded as revenue; (i) statutory reporting does not
require classification of debt and equity securities as trading, available
for sale or held to maturity, whereas, for GAAP purposes, trading
securities are recorded at fair value with unrealized gains and losses
included in income; securities available for sale are recorded at fair
value with unrealized gains and losses reported as a separate component of
shareholder's equity until realized and; (j) deposits made to the state
guarantee fund of Missouri are considered non-admitted assets and are
recorded directly to surplus (this practice was permitted by the Insurance
Department of the State of Missouri for the years ended December 31, 1999
and 1998); (k) comprehensive income and its components are not presented in
the financial statements.
The aggregate effects of these differences on unassigned surplus and net
income have not been determined. Also, the presentation of cash flows is in
accordance with statutory practices rather than GAAP.
BASIS OF VALUATION OF INVESTED ASSETS - Asset values are generally stated
as follows:
o Bonds, corporate securities and mortgage-backed securities - at
amortized cost.
o Preferred stock - at cost, or lower of cost or market if not in good
standing, as prescribed by the Security Valuation Office ("SVO") of
the NAIC.
o Common stock - at market, as prescribed by the SVO.
o Mortgage loans - at the unpaid principal balance.
o Policy loans - unpaid balance plus accrued interest.
o Short-term investments - at cost.
o Other invested assets - at market.
ASSET VALUATION RESERVE ("AVR") - AVR is a required reserve for life
insurance companies and is calculated based on a statutory formula for
investments in bonds, preferred stocks, common stocks, mortgage loans on
real estate, and real estate and other investments. The reserve is designed
to mitigate the effect on unassigned surplus of fluctuations in the market
value of common stock, real estate and other invested assets and credit
losses on long-term bonds and preferred stock. Changes in the reserve are
applied directly to unassigned surplus.
INTEREST MAINTENANCE RESERVE ("IMR") - The IMR is designed to capture the
tax-effected capital gains and losses which result from changes in the
overall level of interest rates and amortize them into income over the
approximate remaining life of the investment sold. Interest-related
realized gains and losses, net of tax, resulting from the irrevocable sale,
transfer or reinsurance of a block of liabilities are credited to IMR and
amortized into income in the current period. Certain investment gains and
losses are deferred, net of tax, and added to the interest maintenance
reserve to be amortized using statutory formulas and included in investment
income over the remaining life of the investments sold.
POLICY RESERVES - Statutory reserves for life insurance policies, other
than single premium life insurance, have been computed primarily by the
Commissioners Reserve Valuation Method and Net Level reserve methods. These
methods take into account statutory valuation mortality rates and valuation
interest rates. Interest rates vary from 2.5% to 5.5% depending on year of
issue and type of insurance. Mortality is based on 1958 CSO, 1958 CET, and
1980 CSO also depending on issue year and type of insurance.
For single premium life insurance policies, reserves have been computed by
the Universal Life Insurance Reserves methods and are based on 1980 CSO
mortality with 4.0% interest.
Annuity reserves are calculated by the Commissioners Annuity Reserve
Valuation Method reserve method. This takes into account valuation interest
rates, future guaranteed interest rates, surrender charges available at
various dates into the future, and all other policy guaranteed provisions,
including the guaranteed settlement option rates in the policy forms.
SEPARATE ACCOUNT - Separate account assets and liabilities generally
represent funds maintained in accounts to meet specific investment
objectives of contractholders who bear the investment risk. Investment
income and investment gains and losses accrue directly to such
contractholders. The assets of the account are legally segregated and are
not subject to claims that arise out of any other business of the Company.
The assets and liabilities are carried at market value. Deposits are
received and transferred to the separate account through the Company. Net
investment income, and realized and unrealized capital gains and losses on
separate account assets are not reflected in the Statements of Income of
the Company and are reflected directly in separate account liabilities.
FAIR VALUES OF FINANCIAL INSTRUMENTS - Management has identified the
following financial instruments in the statutory financial statements: cash
and short-term investments, bonds, preferred stocks, common stocks,
mortgage loans, policy loans, receivables, assets and liabilities in the
separate account, payables, other invested assets and other liabilities.
Fair values of bonds and stocks are presented in Note 2. For the remaining
instruments, management believes the carrying value approximates fair value
due to the short maturity, terms and fluctuations in market conditions of
those instruments. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
USE OF ESTIMATES - The preparation of statutory financial statements in
accordance with accounting practices prescribed or permitted by the
Insurance Department of the State of Missouri requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CODIFICATION - In March 1998, the NAIC adopted Codification of Statutory
Accounting Principles ("Codification"). The Codification, which is intended
to standardize regulatory accounting and reporting for the insurance
industry, is proposed to be effective January 1, 2001. However, statutory
accounting principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if, the State of
Missouri will require adoption of Codification for the preparation of
statutory financial statements. The Company has not finalized the
quantification of the effects of the Codification on its statutory
financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1998
statutory financial statements to conform to the 1999 presentation.
2. INVESTMENTS
Market value information for investments are values determined by the NAIC
at December 31, 1999 and 1998, except for certain collateralized mortgage
obligation investments which are obtained from the Merrill Lynch Bloomberg
Data Base Service.
At December 31, 1999 and 1998, bonds having an amortized value of
$3,241,180 and $3,240,846, respectively, were on deposit with state
insurance departments in accordance with statutory reserve deposit
requirements.
The amortized cost, estimated market value and unrealized market gains and
losses of bonds are as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury securities and
obligations of U.S.
government corporations
<S> <C> <C> <C> <C>
and agencies $ 77,387,355 $ 42,225 $ 5,891,555 $ 71,538,025
Corporate securities 210,809,014 2,029,776 8,445,247 204,393,543
Mortgage-backed securities 50,437,900 1,011,117 958,233 50,490,784
---------- --------- ------- ----------
Total $ 338,634,269 $ 3,083,118 $ 15,295,035 $ 326,422,352
============= =========== ============ =============
</TABLE>
During 1999, the Company recognized a $2,100,000 other than temporary
decline in the value of a bond.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury securities and
obligations of U.S.
government corporations
<S> <C> <C> <C> <C>
and agencies $ 73,212,327 $ 2,501,245 $ 29,608 $ 75,683,964
Corporate securities 198,190,996 14,042,008 846,302 211,386,702
Mortgage-backed securities 63,221,053 3,335,116 23,201 66,532,968
---------- --------- ------ ----------
Total $ 334,624,376 $ 19,878,369 $ 899,111 $ 353,603,634
============= ============ ========= =============
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1999, 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>
Estimated
Amortized Market
Cost Value
---- -----
<S> <C> <C>
One year or less $ 7,879,457 $ 7,903,500
After one year through five years 67,433,491 65,837,036
After five years through ten years 67,289,019 64,905,798
After ten years 145,594,402 137,282,234
----------- -----------
288,196,369 275,931,568
Mortgage-backed securities 50,437,900 50,490,784
---------- ----------
$ 338,634,269 $ 326,422,352
============= =============
</TABLE>
The consideration received, carrying value and realized gains and losses on
sales and maturities of bonds and stocks were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Consideration received $ 44,967,795 $ 54,466,624
Carrying value 43,873,544 54,238,068
---------- ----------
Net realized gains $ 1,094,251 $ 228,556
=========== =========
Investment gains $ 1,722,923 $ 1,018,144
Investment losses (628,672) (789,588)
-------- --------
Net realized gains $ 1,094,251 $ 228,556
=========== =========
</TABLE>
Net realized gains of $384,615 and $788,727, less tax expenses of $130,769
and $268,166, were deferred and recorded in the interest maintenance
reserve during 1999 and 1998, respectively (see Note 3).
Revenues in the accompanying Statements of Income for the years ended
December 31, 1999 and 1998 include net investment income from the following
sources:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
U.S. government bonds $ 3,628,079 $ 3,238,129
Other bonds 19,986,812 19,947,770
Preferred stock 27,778 12,361
Common stock 107,110 57,604
Mortgage loans 67 7,687
Premium notes, policy loans, liens 180,132 219,446
Cash on hand and on deposit 38,068 45,481
Short-term investments 546,866 1,262,343
Deposits with brokers 13,973 14,164
Amortization of interest maintenance reserve 322,991 302,967
Other 340,556 (30,434)
------- -------
25,192,432 25,077,518
Investment expenses (275,429) (193,720)
-------- --------
Net investment income $ 24,917,003 $ 24,883,798
============ ============
</TABLE>
3. STATUTORY INVESTMENT RESERVES
The tables shown below present changes in the major elements of the Asset
Valuation Reserve and Interest Maintenance Reserve.
<TABLE>
<CAPTION>
1999 1998
---- ----
Asset Valuation Reserve:
Balance, beginning of year $ 2,253,143 $ 1,982,314
<S> <C> <C>
Unrealized investment gains/(losses) (2,288,598) 104,885
Unrealized capital gain - separate account 115,182
Required by formula 799,032 165,944
------- -------
Balance, end of year $ 878,759 $ 2,253,143
========= ===========
Interest Maintenance Reserve:
Balance, beginning of year $ 2,559,766 $ 2,342,172
Realized investment gains, net of tax 253,846 520,561
Amortization of investment gains (322,991) (302,967)
-------- --------
Balance, end of year $ 2,490,621 $ 2,559,766
=========== ===========
</TABLE>
4. FEDERAL INCOME TAXES
Under the Tax Reform Act of 1984, life insurance companies with assets of
less than $500,000,000 and taxable income less than $3,000,000 are allowed
a small life company deduction of 60% of taxable income. The deduction is
gradually phased out as income exceeds $3,000,000. This special deduction
has been applied to the Company and is the primary reason for the Company's
lower effective tax rate.
Under a previous tax act, certain items deductible from taxable income were
credited to a "policyholders' surplus" memorandum account. The 1984 Tax Act
froze the balance in this account and provides for taxation of the balance
if the companies do not meet certain limitations, fail to qualify as a life
insurance company for two consecutive years, or distribute the amounts to
shareholders. At December 31, 1999, "policyholders' surplus" amounted to
approximately $3,736,000. The Company has no present plans to distribute
the amount in "policyholders' surplus" and, as the Company qualifies as a
life company, no provisions for Federal income taxes on the "policyholders'
surplus" have been made in the accompanying statutory financial statements.
5. CAPITAL AND SURPLUS
Following is a schedule outlining activity in treasury stock and paid-in
and contributed surplus for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Number Treasury Paid-in and
of Stock, Contributed
Shares at Cost Surplus
------ ------- -------
<S> <C> <C> <C> <C>
Balance, January 1,1998 33,198 $ 929,956 $ 975,583
Sales (650) (14,794) 8,365
---- ------- -----
Balance, December 31, 1998 32,548 915,162 983,948
Purchases 300 11,901
Sales (100) (2,276) 1,691
---- ------ -----
Balance, December 31, 1999 32,748 $ 924,787 $ 985,639
=== ==== ====== ========= =========
</TABLE>
6. RELATED PARTY TRANSACTIONS
Related parties provide the Company with certain administrative and
marketing services on a direct cost reimbursement basis. Expenses incurred
by the Company in 1999 and 1998 related to those services were $497,558 and
$514,213, respectively. The Company pays a majority of expenses on a direct
basis to third party vendors. In addition, commission and policy
administration expenses paid by the Company in 1999 and 1998 related to
policies serviced by related parties were $3,090,844 and $2,732,623,
respectively. The Company also had net amounts due from related parties of
$94,369 and $156,835 at December 31, 1999 and 1998, respectively.
The Company has ceded $2,929,141 and $3,125,118 of life insurance in force
at December 31, 1999 and 1998, respectively, to an insurance company owned
by the President of the Company. American Service Life Insurance Company
("ASLIC") received $26,665 and $26,841 of ceded premium from the Company
for the years ended December 31, 1999 and 1998, respectively.
Other invested assets at December 31, 1999 and 1998 of $3,610,082 and
$3,835,985, respectively, consists primarily of an investment in a limited
partnership, the general partner of which is the President of the Company.
The limited partnership is engaged in the speculative trading of commodity
futures, option contracts and other commodity interests, including forward
contracts in foreign currencies.
7. REINSURANCE CEDED AND ASSUMED WITH OTHER INSURANCE COMPANIES
The Company reinsures portions of insurance it writes. The maximum amount
of insurance retained by the Company on any one life is $75,000.
A summary of reinsurance for each of the years in the two-year period ended
December 31, 1999 follows:
<TABLE>
<CAPTION>
Assumed Ceded
Direct from Other to Other Net
Year Description Amount Companies Companies Amount
---- ----------- ------ --------- --------- ------
1999 Life insurance
<S> <C> <C> <C> <C> <C>
in force (000) $ 5,652,738 $ 47,856 $ (2,184,065) $ 3,516,529
Premiums:
Life and
supplemental
contracts 29,916,033 2,755,200 (6,670,031) 26,001,202
Accident
and health 178,061,992 3,120,832 (102,832,246) 78,350,578
1998 Life insurance
in force (000) $ 5,418,653 $ 33,172 $ (1,934,124) $ 3,517,701
Premiums:
Life and
supplemental
contracts 29,091,128 2,866,801 (4,955,107) 27,002,822
Accident
and health 137,593,931 13,242,294 (76,227,278) 74,608,947
</TABLE>
Future policy and claim reserves are stated after reduction of applicable
reinsurance reserves which aggregated approximately $11,213,000 in 1999 and
$10,231,000 in 1998 on life business, and $44,279,000 in 1999 and
$40,709,000 in 1998 on accident and health business. The Company is
contingently liable for the portion of the policies reinsured in the event
the reinsurance companies are unable to pay their portion of any resulting
claim.
8. REINSURANCE
The Company follows a policy of reinsuring portions of ordinary life and
accidental death coverages as well as certain accident and health risks.
The Company recorded a reinsurance recoverable of $12,501,488 and
$5,901,594 as of December 31, 1999 and 1998, respectively, which is
recorded in due from other companies on the statements of admitted assets,
liabilities and capital and surplus. The Company was also primarily liable
to reinsurers for the amounts of $8,446,662 and $4,000,702 as of December
31, 1999 and 1998, respectively. Such liabilities are recorded in due to
other companies on the statements of admitted assets, liabilities and
capital and surplus.
9. CONTINGENCIES
The Company is named defendant in various lawsuits by policyholders
alleging breach of the Company's covenant of good faith and fair dealings.
The lawsuits, although various in nature, are primarily the result of the
Company denying benefits, as it is the Company's interpretation that the
plaintiffs misrepresented the facts in applying for a policy or the claims
in question were not covered by the policy acquired. Lawsuits of this type
are commonplace in the industry. The Company intends to vigorously defend
against these lawsuits and is of the opinion that, even if the Company is
held liable, any monetary damages assessed would probably not exceed the
current reserves for these litigated claims, and if so, the amount would
not have a material impact on the Company's statutory financial statements.
10. ACQUISITIONS OF LINES OF BUSINESS
In June 1998, the Company initiated the process of assuming three
additional lines of business of other insurance companies. The Company
received approximately $29,728,000 in cash and $168,000 in policy loans,
agent's balances and due and deferred premiums to assume $674,000 in life
insurance policy reserves, $9,137,000 in accident and health reserves,
$813,000 in supplementary contract reserves and $19,727,000 in annuity
contract reserves. These agreements were initiated on an indemnity basis.
In 1999, the Company completed the process of assuming these additional
lines of business and the indemnity reinsurance was converted to assumption
reinsurance upon the completion of various events outlined in the
contracts. The Company assumed an additional $186,000 in life insurance
policy reserves, $520,000 in annuity reserves, $38,000 in agent's balances
and unearned reinsurance allowances and paid $88,000 in cash. The
assumption reinsurance costs were approximately $832,000 and $455,000 in
1999 and 1998, respectively, to assume these lines of business.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS
The following financial statements of the Separate Account are included in Part
B hereof:
1. Independent Auditors' Report.
2. Statement of Net Assets as of December 31, 1999.
3. Statement of Operations and Changes in Net Assets - Period from May
14, 1999 (Date of Inception) to December 31, 1999.
4. Notes to Financial Statements - Period from May 14, 1999 (Date of
Inception) to December 31, 1999.
The following consolidated financial statements of the Company are included in
Part B hereof:
1. Independent Auditors' Report.
2. Statutory Statements of Admitted Assets, Liabilities and Capital and
Surplus as of December 31, 1999 and 1998.
3. Statutory Statements of Income for the years ended December 31,
1999 and 1998.
4. Statutory Statements of Capital and Surplus for the years ended
December 31, 1999 and 1998.
5. Statutory Statements of Cash Flows for the years ended December 31,
1999 and 1998.
6. Notes to Statutory Financial Statements - Years Ended December 31,
1999 and 1998.
B. EXHIBITS
1. Resolution of Board of Directors of the Company authorizing the
establishment of the Separate Account.*
2. Not Applicable.
3. (i) Draft Distribution and Principal Underwriters Agreement.**
(ii) Draft Affiliation Agreement.**
(iii) Draft Form of Selling Agreement.**
4. (i) Individual Flexible Purchase Payment Deferred Variable and Fixed
Annuity Contract.**
(ii) IRA Endorsement.**
(iii) 403(b) Endorsement.**
(iv) Unisex Endorsement.**
(v) Company Completion Benefit.**
(vi) Company Completion Benefit.**
(vii) Loan Provision Endorsement.**
(viii)401 Plan Endorsement.**
(ix) 457 Plan Endorsement.**
(x) Terminal Illness and Nursing Home or Hospital Confinement
Endorsement.**
(xi) Roth 408(a) Endorsement.**
5. Application Forms.**
6. (i) Copy of Articles of Incorporation of the Company.*
(ii) Copy of the Bylaws of the Company.*
7. Not Applicable.
8. (i) IMSF Participation Agreement.**
(ii) BBOI Participation Agreement.**
9. Opinion and Consent of Counsel.
10. Independent Auditors Consent.
11. Not Applicable.
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Company Organizational Chart.*
* Incorporated by reference to Registrant's Form N-4 (File Nos. 333-69647 and
811-09167) electronically filed on December 23, 1998.
** Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to
Form N-4 (File Nos. 333-69647 and 811-09167) electronically filed on April 14,
1999.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following are the Executive Officers and Directors of the Company:
Name and Principal Position and Offices
Business Address* with Depositor
- ----------------------- ----------------------------------------
Richard Forrest Jones Chief Executive Officer, Chief Financial
Officer, Director
Michael Eugene Hall Sr. Vice President, Director
Leland Eugene Schmitt Sr. Vice President, Secretary, Director
Robert Bruce Schorb Sr. Vice President, Director
Mark Linsley Burley Vice President of Administration
Benjamin Arthur Pullan Controller, Asst. Secretary
David James Smith III Vice President of Marketing and Advertising
John Collings Caton Vice President-Actuary
Dorothy Marie Jones Director
Albert Harry Wohlers Director
1440 N. Northwest Hwy.
Park Ridge, IL
George John Bereska Director
Richard L. Andrews Director
118 Hill Hall
Columbia, MO
Robert Eugene McGannon Director
922 Walnut
Kansas City, Missouri
Gale Thomas Bartow Consultant, Director
1201 Fairway Circle
Blue Springs, MO
* The principal business address for all officers and directors listed above
is 3130 Broadway, Kansas City, Missouri 64111-2406 except as noted above.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The Company organizational chart is incorporated by reference to Registrant's
Form N-4 (File Nos. 333-69647 and 811-09167) electronically filed on December
23, 1998.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 2000 there were 305 Qualified Contract Owners and 11
Non-Qualified Contract Owners.
ITEM 28. INDEMNIFICATION
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 mater
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.
The Bylaws of the Company (Article XII) provide, in part, that:
The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that he is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director or officer
of another corporation, partnership, joint venture, trust or other 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
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not Applicable.
(b) National Pension & Group Consultants, Inc. ("NPGC") is the principal
underwriter for the Policies. The following persons are the officers and
directors of NPGC. The principal business address for each officer and
director of NPGC is 3130 Broadway, Kansas City, MO 64111-2406.
Name and Principal Positions and Offices
Business Address with Underwriter
---------------- ----------------
Richard F. Jones President, Treasurer
Michael E. Hall Vice President
N. Susan Kirks Secretary
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
David James, Assistant Vice President, whose address is 3130 Broadway, Kansas
City, Missouri 64111-2406, maintains physical possession of the accounts, books
or documents of the Separate Account required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and the rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
a. Registrant hereby undertakes to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that the audited
financial statements in the registration statement are never more than sixteen
(16) months old for so long as payment under the variable annuity contracts may
be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
Form promptly upon written or oral request.
d. Fidelity Security Life Insurance Company ("Company") hereby represents
that the fees and charges deducted under the Contracts described in the
Prospectus, in the aggregate, are reasonable in relation to the services
rendered, the expenses to be incurred and the risks assumed by the Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by Section
403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b) annuity
contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment alternatives
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf in the City of Kansas City and
State of Missouri, on this 10th day of April 2000.
FSL SEPARATE ACCOUNT M
(Registrant)
By: FIDELITY SECURITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ LELAND E. SCHMITT
-----------------
Leland E. Schmitt
FIDELITY SECURITY LIFE INSURANCE
(Depositor)
By: /s/ LELAND E. SCHMITT
-----------------
Leland E. Schmitt
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Chief Executive Officer,
RICHARD F. JONES* Chief Financial Officer, 4/10/00
- ---------------------- --------
Richard F. Jones and Director (Principal
Executive Officer and
Principal Financial
Officer)
BENJAMIN A. PULLAN* Controller (Principal 4/10/00
- ---------------------- Accounting Officer) --------
Benjamin A. Pullan
/s/ LELAND E. SCHMITT Director 4/10/00
- ---------------------- --------
Leland E. Schmitt
ROBERT L. SCHORB* Director 4/10/00
- ---------------------- --------
Robert L. Schorb
MICHAEL E. HALL* Director 4/10/00
- ---------------------- --------
Michael E. Hall
DOROTHY M. JONES* Director 4/10/00
- ---------------------- --------
Dorothy M. Jones
GALE T. BARTOW* Director 4/10/00
- ---------------------- --------
Gale T. Bartow
*By /s/ LELAND E. SCHMITT
_______________________________________
Leland E. Schmitt, Power of Attorney
FSL SEPARATE ACCOUNT M
POST-EFFECTIVE AMENDMENT NO. 1
TO
REGISTRATION STATEMENT ON FORM N-4
INDEX TO EXHIBITS
EXHIBIT NO.
EX-99.B9 Opinion and Consent of Counsel.
EX-99.B10 Independent Auditors Consent.
April 18, 2000
Board of Directors
Fidelity Security Life Insurance Company
3130 Broadway
Kansas, City, MO 64111-2406
RE: Opinion of Counsel - FSL Separate Account M
- -----------------------------------------------
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission of a Post-Effective Amendment to a
Registration Statement on Form N-4 for the Individual Variable Deferred Annuity
Contracts (the "Contracts") issued by Fidelity Security Life Insurance Company
and its separate account, FSL Separate Account M.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. FSL Separate Account M is a Unit Investment Trust as that term is
defined in Section 4(2) of the Investment Company Act of 1940 (the
"Act"), and is currently registered with the Securities and Exchange
Commission, pursuant to Section 8(a) of the Act.
2. Upon the acceptance of purchase payments made by an Owner pursuant to
a Contract issued in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable law, such
an Owner will have a legally-issued, fully paid, non-assessable
contractual interest under such Contract.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Statement of Additional Information which forms a part of the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/ LYNN KORMAN STONE
__________________________
Lynn Korman Stone
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No. 333-69647 of FSL Separate Account M of our report dated March 17,
2000, with respect to the statutory basis consolidated financial statements of
Fidelity Security Life Insurance Company and to the use of our report dated
March 17, 2000, with respect to the financial statements of FSL Separate Account
M, appearing in the Statement of Additional Information, which is a part of such
Registration Statement, and to the reference to us under the heading
"INDEPENDENT AUDITORS" also appearing in the Statement of Additional
Information.
/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
April 13, 2000
