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THE ENDEAVOR
VARIABLE ANNUITY
Issued Through
AUSA ENDEAVOR VARIABLE
ANNUITY ACCOUNT
and
AUSA ENDEAVOR TARGET ACCOUNT
by
AUSA LIFE INSURANCE COMPANY, INC.
Prospectus
December 6, 1999
This prospectus and the mutual fund prospectuses give you important information
about the policies and the mutual funds. Please read them carefully before you
invest and keep them for future reference.
If you would like more information about The Endeavor Variable Annuity Policy,
you can obtain a free copy of the Statement of Additional Information (SAI)
dated December 6, 1999. Please call us at (800) 525-6205 or write us at: AUSA
Life Insurance Company, Inc., Financial Markets Division, Variable Annuity
Department, 4333 Edgewood Road N.E., Cedar Rapids, Iowa, 52499-0001. A
registration statement, including the SAI has been filed with the Securities
and Exchange Commission (SEC) and is incorporated herein by reference.
Information about the mutual fund account and the target account can be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C. You
may obtain information about the operation of the public reference room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site
(http://www.sec.gov) that contains the prospectus, the SAI, material
incorporated by reference, and other information. The table of contents of the
SAI is included at the end of this prospectus.
Please note that the policies and the investment choices:
. are not bank deposits
. are not federally insured
. are not endorsed by any bank or government agency
. are not guaranteed to achieve their goal
. are subject to risks, including loss of premium
The flexible premium deferred annuity policy has many investment choices. There
are two separate accounts: (1) a mutual fund account; and (2) a target account.
The mutual fund subaccounts and the target series subaccounts are listed below.
You bear the entire investment risk for all amounts you put in either separate
account. There is also a fixed account, which offers an interest rate that is
guaranteed by AUSA Life Insurance Company, Inc. (AUSA Life). You can choose any
combination of these investment choices.
ENDEAVOR SERIES TRUST
Subadvised by Morgan Stanley
Asset Management Inc.
Endeavor Asset Allocation Portfolio
Endeavor Money Market Portfolio
Subadvised by T. Rowe Price Associates, Inc.
T. Rowe Price Equity Income Portfolio
T. Rowe Price Growth Stock Portfolio
Subadvised by Rowe Price-Fleming International, Inc.
T. Rowe Price International Stock Portfolio
Subadvised by OpCap Advisors
Endeavor Value Equity Portfolio
Endeavor Opportunity Value
Subadvised by J.P. Morgan Investment Management Inc.
Endeavor Enhanced Index Portfolio
Subadvised by The Dreyfus Corporation
Dreyfus U.S. Government Securities Portfolio
Dreyfus Small Cap Value Portfolio
Subadvised by Montgomery Asset Management, LLC
Endeavor Select 50 Portfolio
Subadvised by Massachusetts Financial Services Company
Endeavor High Yield Portfolio
Subadvised by Janus Capital Corporation
Endeavor Janus Growth Portfolio
THE TARGET ACCOUNT
Subadvised by First Trust Advisors, L.P.
The DowSM Target 10 (January Series)
The DowSM Target 5 (January Series)
The Securities and Exchange Commission has not approved or disapproved these
securities, or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
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TABLE OF CONTENTS Page
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GLOSSARY OF TERMS.......................................................... 3
SUMMARY.................................................................... 4
ANNUITY POLICY FEE TABLE................................................... 8
EXAMPLES................................................................... 11
1.THE ANNUITY POLICY....................................................... 13
2. ANNUITY PAYMENTS
(THE INCOME PHASE)...................................................... 13
Annuity Payment Options.................................................. 13
3.PURCHASE................................................................. 15
Policy Issue Requirements................................................ 15
Premium Payments......................................................... 15
Initial Premium Requirements............................................. 15
Additional Premium Payments.............................................. 15
Maximum Total Premium Payments........................................... 15
Allocation of Premium Payments........................................... 15
Policy Value............................................................. 16
4.INVESTMENT CHOICES....................................................... 16
The Separate Accounts.................................................... 16
The Mutual Fund Account.................................................. 16
The Target Account....................................................... 16
The Fixed Account........................................................ 22
Transfers................................................................ 22
Dollar Cost Averaging Program............................................ 23
Asset Rebalancing........................................................ 23
5.EXPENSES................................................................. 23
Surrender Charges........................................................ 23
Mortality and Expense Risk Fee........................................... 24
Administrative Charges................................................... 24
Premium Taxes............................................................ 24
Federal, State and Local Taxes........................................... 24
Transfer Fee............................................................. 24
Portfolio Management Fees................................................ 24
Target Account Fees...................................................... 25
6.TAXES.................................................................... 25
Annuity Policies in General.............................................. 25
Qualified and Nonqualified Policies...................................... 25
Tax Status of the Policy................................................. 26
Withdrawals - Nonqualified Policies...................................... 27
Withdrawals - Qualified Policies......................................... 27
Withdrawals - 403(b) Policies............................................ 27
Taxation of Death Benefit Proceeds....................................... 28
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Annuity Payments......................................................... 28
Transfers, Assignments or Exchanges of Policies.......................... 28
Possible Tax Law Changes................................................. 28
7.ACCESS TO YOUR MONEY..................................................... 29
Surrenders............................................................... 29
Delay of Payment and Transfers........................................... 29
Systematic Payout Option................................................. 29
8.PERFORMANCE.............................................................. 29
The Mutual Fund Account.................................................. 29
The Target Account....................................................... 30
9.DEATH BENEFIT............................................................ 30
When We Pay A Death Benefit.............................................. 30
When We Do Not Pay A Death Benefit....................................... 30
Amount of Death Benefit.................................................. 31
Guaranteed Minimum Death Benefit......................................... 31
Adjusted Partial Withdrawal.............................................. 31
10.OTHER INFORMATION....................................................... 32
Ownership................................................................ 32
Assignment............................................................... 32
AUSA Life Insurance Company, Inc......................................... 32
The Mutual Fund Account.................................................. 32
The Target Account....................................................... 32
Mixed and Shared Funding................................................. 33
Reinstatements........................................................... 33
Voting Rights............................................................ 33
Distributor of the Policies.............................................. 34
Non-participating Policy................................................. 34
Variations in Policy Provisions.......................................... 34
Year 2000 Matters........................................................ 34
IMSA..................................................................... 34
Legal Proceedings........................................................ 35
Financial Statements..................................................... 35
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............... 35
APPENDIX A
Condensed Financial Information
The Mutual Fund Account................................................... 36
APPENDIX B
Historical Performance Data
The Mutual Fund Account................................................... 39
Historical Performance Data
The Target Strategies and The Dow Jones Industrial Average................ 45
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GLOSSARY OF TERMS
Accumulation Unit--An accounting unit of measure used in calculating the policy
value in the mutual fund account and the target account before the annuity
commencement date.
Annual Stock Selection Date--The last business day of a specified 12-month
period.
Annuitant--The person during whose life any annuity payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which annuity payments are to
commence. This date may be any date at least thirty days after the policy date
and may not be later than the last day of the policy month starting after the
annuitant attains age 85, except as expressly allowed by AUSA Life. In no event
will this date be later than the last day of the policy month following
annuitant's 90th birthday.
Annuity Payment Option--A method of receiving a stream of annuity payments
selected by the owner.
Cash Value--The policy value less the surrender charge, service charge, and
premium tax charge, if any.
DJIA--The Dow Jones Industrial AverageSM. Thirty stocks chosen by the editors
of The Wall Street Journal as representative of the broad market and of
American industry.
Fixed Account--A part of the general account of AUSA Life. General account
assets consist of all of the assets of AUSA Life that are not in the mutual
fund account or the target account.
Guaranteed Period Option--The one year guaranteed interest rate period which
will be offered by AUSA Life into which premiums may be paid or amounts
transferred.
Initial Stock Selection Date--The date is December 31, 1999 for the January
Series.
Mutual Fund Account--A separate account established and registered as a unit
investment trust under the Investment Company Act of 1940, as amended, (the
"1940 Act"), to which premium payments under the policies may be allocated and
which invests in designated portfolios of Endeavor Series Trust and such other
mutual funds as AUSA Life may determine from time to time.
Mutual Fund Subaccount--A subdivision within the mutual fund account the assets
of which are invested in a specified portfolio of Endeavor Series Trust.
Owner or Owners--The person who may exercise all rights and privileges under
the policy. The owner during the lifetime of the annuitant and prior to the
annuity commencement date is the person designated as the owner or a successor
owner in the information that we require to issue a policy.
Policy Value--The policy form refers to this as "annuity purchase value." The
value in the policy that may be used to purchase a stream of annuity payments.
On or before the annuity commencement date, this is an amount equal to:
. the premiums paid; minus
. partial withdrawals taken; plus
. interest credited in the fixed account; plus
. accumulated gains or losses in the mutual fund account and the target
account; minus
. any applicable service charges, premium taxes, and transfer fees.
Target Account--A separate account established and registered as a management
investment company under the 1940 Act to which premium payments under the
policies may be allocated.
Target Series Subaccount--A subdivision within the target account, the assets
of which are invested in common stocks selected according to a specified
investment strategy, with a specific stock selection date.
(Note: The Statement of Additional Information contains a more
extensive Glossary.)
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SUMMARY
The sections in this summary correspond to sections in this prospectus, which
discuss the topics in more detail. Words printed in italics in this prospectus
are defined in the Glossary.
1. THE ANNUITY POLICY
The Flexible Premium Variable Annuity Policy offered by AUSA Life Insurance
Company, Inc. (AUSA Life, we, us or our) is a policy between you, as the owner,
and AUSA Life, an insurance company. The policy provides a way to invest on a
tax-deferred basis in the following investment choices: thirteen subaccounts of
the mutual fund account, two subaccounts of the target account, and a fixed
account of AUSA Life. The policy is intended to accumulate money for retirement
or other long-term investment purposes.
This policy offers fifteen subaccounts in both the mutual fund account and the
target account that are listed in Section 4. Each mutual fund subaccount
invests exclusively in shares of one of the portfolios of Endeavor Series
Trust. Each target series subaccount invests directly in individual stocks
according to its specific investment strategy. The policy value may depend on
the investment experience of the selected subaccounts. Therefore, you bear the
entire investment risk with respect to all policy value in any subaccount. You
could lose the amount that you invest.
The fixed account offers an interest rate that is guaranteed by AUSA Life. We
guarantee to return your investment with interest credited for all amounts
allocated to the fixed account.
You can transfer money between any of the investment choices. We reserve the
right to impose a $10 fee for each transfer in excess of 12 transfers per
policy year.
The policy, like all deferred annuity policies, 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
take them out of the policy. The income phase occurs when you begin receiving
regular payments from your policy. The money you can accumulate during the
accumulation phase will largely determine the income payments you receive
during the income phase.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
The policy allows you to receive income under one of five annuity payment
options. You may choose from fixed payment options, variable payment options,
or a combination of both. If you select a variable payment option, the dollar
amount of your payments may go up or down.
3. PURCHASE
You can buy a nonqualified policy with $5,000 or more, and a qualified policy
with $1,000 or more, under most circumstances. You may also buy a tax deferred
403(b) annuity policy with $50 or more. You can add as little as $50 at any
time during the accumulation phase.
4. INVESTMENT OPTIONS
You can allocate your premium payments to one or more of the investment choices
listed below.
The following thirteen mutual fund portfolios are described in the Endeavor
Series Trust prospectus:
SUBADVISED BY MORGAN STANLEY ASSET MANAGEMENT INC.
Endeavor Asset Allocation Portfolio
Endeavor Money Market Portfolio
SUBADVISED BY T. ROWE PRICE ASSOCIATES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price Growth Stock Portfolio
SUBADVISED BY ROWE PRICE-FLEMING INTERNATIONAL, INC.
T. Rowe Price International Stock Portfolio
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SUBADVISED BY OPCAP ADVISORS
Endeavor Value Equity Portfolio
Endeavor Opportunity Value Portfolio
SUBADVISED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.
Endeavor Enhanced Index Portfolio
SUBADVISED BY THE DREYFUS CORPORATION
Dreyfus U.S. Government Securities Portfolio
Dreyfus Small Cap Value Portfolio
SUBADVISED BY MONTGOMERY ASSET MANAGEMENT, LLC
Endeavor Select 50 Portfolio
SUBADVISED BY MASSACHUSETTS FINANCIAL SERVICES COMPANY
Endeavor High Yield Portfolio
SUBADVISED BY JANUS CAPITAL CORPORATION
Endeavor Janus Growth Portfolio
The following two target series subaccounts are described later in this
prospectus:
SUBADVISED BY FIRST TRUST ADVISORS L.P.
The DowSM Target 10 (January Series)
The DowSM Target 5 (January Series)
Depending upon their investment performance, you can make or lose money in any
of the mutual fund subaccounts or target series subaccounts.
You can also allocate your premium payments to the fixed account.
5. EXPENSES
No deductions are made from premium payments at the time you buy the policy so
that the full amount of each premium payment is invested in one or more of your
investment choices.
We may deduct a surrender charge of up to 7% of premium payments withdrawn
within seven years after the premium is paid. To calculate surrender charges,
we consider the premium you paid to come out before any earnings.
We deduct daily mortality and expense risk fees and administrative charges each
year from the assets in each mutual fund subaccount and target series
subaccount. The charges are the following annual percentages of assets:
. 1.55% in the first seven policy years and 1.40% thereafter, for the Annual
Step-Up Death Benefit; and
. 1.40% in the first seven policy years and 1.25% thereafter, for the Return
of Premium Death Benefit.
During the accumulation phase, we deduct an annual service charge from the
mutual fund account and/or the target account of no more than $35 from the
policy value on each policy anniversary. The charge is waived if the sum of all
premium payments, minus all partial withdrawals, is at least $50,000.
We will deduct state premium taxes, which currently range from 0% to 3.50%,
upon total surrender, payment of a death benefit or when annuity payments
begin.
The value of the net assets of the mutual fund subaccounts will reflect the
investment advisory fee and other expenses incurred by the underlying
portfolios. Those fees and expenses are detailed in the Endeavor Series Trust
prospectus that is attached to this prospectus. The value of the net assets of
the target series subaccounts will reflect the investment advisory fee and
other expenses incurred by the manager in operating each target series
subaccount.
6. TAXES
Your earnings, if any, are not taxed until you take them out. If you take money
out during the accumulation phase, earnings come out first for federal tax
purposes, 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 penalty tax on the earnings.
Payments during the income phase may be considered partly a return of your
original investment so that part of each payment would not be taxable as
income.
7. ACCESS TO YOUR MONEY
You can take out $500 or more anytime during the accumulation phase. After one
year, you may take out up to 10% of the
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policy value free of surrender charges once each year. Amounts withdrawn in the
first year are subject to a surrender charge. You may also have to pay income
tax and a tax penalty on any money you take out.
8. PERFORMANCE
The value of the policy will vary up or down depending upon the investment
performance of the mutual fund subaccounts or target series subaccounts you
choose. We provide performance information in Appendix B and in the Statement
of Additional Information. This data is not intended to indicate future
performance.
9. DEATH BENEFIT
If you are both the owner and the annuitant and you die before the income phase
begins, then your beneficiary will receive a death benefit.
Naming different persons as owner and annuitant can affect whether the death
benefit is payable and to whom amounts will be paid. Use care when naming
owners, annuitants, and beneficiaries, and consult your agent if you have
questions.
You generally may choose one of the following guaranteed minimum death
benefits:
. Annual Step-Up
. Return of Premium
10. OTHER INFORMATION
Right to Cancel Period. You may return your policy for a refund within 20 days
after you receive it. The amount of the refund will be the total of all premium
payments made and the accumulated gains or losses in the policy value, if any.
We will pay the refund within 7 days after we receive written notice of
cancellation and the returned policy. The policy will then be deemed void.
No Probate. Usually when you die, the person you choose as your beneficiary
will receive the death benefit under this policy without going through probate.
State laws vary on how the amount that may be paid is treated for estate tax
purposes.
Who should purchase the policy? This policy is designed for people seeking
long-term tax-deferred accumulation of assets, generally for retirement or
other long-term purposes; and for persons who have maximized their use of other
retirement savings methods, such as 401(k) plans and individual retirement
accounts. The tax-deferred feature is most attractive to people in high federal
and state tax brackets. You should not buy this policy if you are looking for a
short-term investment or if you cannot take the risk of losing the money that
you put in.
There are various additional fees and charges associated with variable
annuities. You should consider whether the features and benefits unique to
variable annuities, such as the opportunity for lifetime income payments, a
guaranteed death benefit and the guaranteed level of certain charges are
appropriate for your needs. Variable annuities also provide tax-deferral when
purchased outside of qualified plans; however, the tax deferral features of
variable annuities are unnecessary when purchased to fund a qualified plan.
Financial Statements. Financial Statements for AUSA Life and the mutual fund
subaccounts are in the Statement of Additional Information. As of the date of
this prospectus, the target series subaccounts have not commenced operations.
Additional Features. This policy has additional features that might interest
you. These include the following:
. You can arrange to have money automatically sent to you monthly, quarterly,
semi-annually or annually while your policy is in the accumulation phase.
This feature is referred to as the "systematic payout option." Amounts you
receive may be included in your gross income, and in certain circumstances,
may be subject to penalty taxes.
. You can arrange to have a certain amount of money automatically transferred
from the fixed account, either monthly or quarterly, into your choice of
mutual fund subaccounts or
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target series subaccounts. This feature is called "dollar cost averaging."
. We will, upon your request, automatically transfer amounts among the mutual
fund subaccounts or target series subaccounts on a regular basis to maintain
a desired allocation of the policy value among the various mutual fund
subaccounts or target series subaccounts. This feature is called "asset
rebalancing."
The dollar cost averaging and asset rebalancing features are inconsistent with
the target series subaccounts' investment strategy.
These features may not be suitable for your particular situation.
Inquiries
If you need more information, please contact us at:
Service Office:
Financial Markets Division
Variable Annuity Department
AUSA Life Insurance Company, Inc.
4333 Edgewood Road N.E.
P.O. Box 3183
Cedar Rapids, IA 52406-3183
Administrative Office:
AUSA Life Insurance Company, Inc.
666 Fifth Avenue, 25th Floor
New York, NY 10103
Home Office:
4 Manhattanville Road
Purchase, NY 10577
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ANNUITY POLICY FEE TABLE
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Policy Owner Transaction Expenses
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Sales Load On Purchase
Payments..................... 0
Maximum Surrender Charge
(as a % of Premium
Withdrawal)(/1/)(/2/)....... 7%
Surrender Fees............... 0
Annual Service
Charge(/1/)..... $35 Per Policy
Transfer
Fee(/1/)....... Currently No Fee
<CAPTION>
- --------------------------------------------------------------------------------
Separate Account Annual Expenses (as a percentage of average account value)
- --------------------------------------------------------------------------------
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Mortality and Expense Risk
Fee(/3/)..................... 1.40%
Administrative Charge........ 0.15%
-----
TOTAL SEPARATE ACCOUNT
ANNUAL EXPENSES............. 1.55%
<CAPTION>
- --------------------------------------------------------------------------------
Portfolio Annual Expenses(/4/) (as a percentage of average net assets and after
expense reimbursements)
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<CAPTION>
Total
Total Account
Rule Portfolio and
Management Other 12b-1 Annual Portfolio
Fees Expenses Fees(/5/) Expenses(/6/) Expenses
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Endeavor Asset Allocation..... 0.75% 0.03% 0.02% 0.80% 2.35%
Endeavor Money Market......... 0.50% 0.10% -- 0.60% 2.15%
T. Rowe Price Equity Income... 0.80% 0.05% -- 0.85% 2.40%
T. Rowe Price Growth Stock.... 0.80% 0.07% -- 0.87% 2.42%
T. Rowe Price International
Stock(/7/)................... 0.90% 0.08% -- 0.98% 2.53%
Endeavor Value Equity......... 0.80% 0.04% 0.01% 0.85% 2.40%
Endeavor Opportunity
Value(/8/)................... 0.80% 0.18% 0.01% 0.99% 2.54%
Endeavor Enhanced Index....... 0.75% 0.35% -- 1.10% 2.65%
Dreyfus U.S. Government
Securities(/9/).............. 0.60% 0.12% -- 0.72% 2.27%
Dreyfus Small Cap Value....... 0.80% 0.06% 0.08% 0.94% 2.49%
Endeavor Select 50(/10/)...... 1.10% 0.39% -- 1.49% 3.04%
Endeavor High Yield(/11/)..... 0.775% 0.525% -- 1.30% 2.85%
Endeavor Janus Growth(/12/)... 0.775% 0.095% -- 0.87% 2.42%
The DowSM Target 10
(January)(/13/)(/14/)........ 0.75% 0.55% -- 1.30% 2.85%
The DowSM Target 5
(January)(/13/)(/14/)........ 0.75% 0.55% -- 1.30% 2.85%
================================================================================
</TABLE>
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(/1/) The surrender charge and transfer fee, if any is imposed, apply to each
policy, regardless of how the policy value is allocated among the mutual
fund account, the target account and the fixed account. The annual service
charge, if any is imposed, applies only to the mutual fund account and the
target account, and is assessed on a pro rata basis relative to each
account's policy value as a percentage of the policy's total policy value.
The service charge is deducted on each policy anniversary. If applicable,
a surrender charge will only be applied to withdrawals that exceed the
amount available under certain listed exceptions. There is no transfer fee
for the first 12 transfers per year. For additional transfers, AUSA Life
may charge a fee of $10 per transfer, but currently does not charge for
any transfers.
(/2/) The surrender charge is decreased based on the number of years since the
premium payment was made, from 7% during the first year after the premium
payment was made to 0% after the seventh year after the premium payment
was made.
(/3/) The mortality and expense risk fees and the administrative charges shown
are those for the Annual Step-Up Death Benefit which apply during the
first seven policy years. After the seventh policy year the total separate
account charges are 1.40%. The corresponding fees for the Return of
Premium Death Benefit are 1.40% during the first seven policy years and
1.25% thereafter. The administrative charge may be increased in the
future. However, in no event will the total separate account charges
exceed 1.55% before the annuity commencement date. And, in no event will
the total separate account charges exceed 1.40% on or after the annuity
commencement date, regardless of the death benefit that was in effect
prior to commencement of annuity payments.
(/4/) The fee table information relating to Endeavor Series Trust was provided
to AUSA Life by Endeavor Management Co., and AUSA Life has not
independently verified such information. Actual future expenses of the
portfolios may be greater or less than those shown in the Table.
(/5/) The Board of Trustees of Endeavor Series Trust and the Board of Managers
of the target account have authorized an arrangement whereby, subject to
best price and execution, executing brokers will share commissions with
the Trust's or the target account's affiliated broker. Under supervision
of the Trustees and the Managers, the affiliated broker will use the
"recaptured commission" to promote marketing of the Trust's shares and
investments in the target account. The staff of the Securities and
Exchange Commission believes that, through the use of these recaptured
commissions, the Trust and the target account are indirectly paying for
distribution expenses and such amounts must be shown as 12b-1 fees in the
above table. This use of recaptured commissions to promote sales involves
no additional costs to the Trust, to the target account or any owner.
Endeavor Series Trust and the target account, based on advice of counsel,
do not believe that recaptured brokerage commissions should be treated as
12b-1 fees. For more information on the Trust's Brokerage Enhancement
Plan, see the Trust's prospectus accompanying this Prospectus. For more
information on the target account Brokerage Enhancement Plan, see the
target account's section of this prospectus.
(/6/) Endeavor Management Co. has agreed, until further notice, to assume
expenses of the Portfolios that exceed the following rates: Endeavor Money
Market--0.99%; Endeavor Asset Allocation--1.25%; T. Rowe Price
International Stock--1.53%; Endeavor Value Equity--1.30%; Dreyfus Small
Cap Value--1.30%; Dreyfus U.S. Government Securities--1.00%;
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T. Rowe Price Equity Income--1.30%; T. Rowe Price Growth Stock--1.30%;
Endeavor Opportunity Value--1.30%; Endeavor Enhanced Index--1.30%;
Endeavor Select 50--1.50%; Endeavor High Yield--1.30%. Endeavor
Management Co. has agreed for a period of at least one year to assume the
expenses of the Endeavor Janus Growth Portfolio that exceed 0.87%.
Expenses shown for the Endeavor Janus Growth Portfolio are estimated for
1999. Expenses shown for the Endeavor Select 50 and Endeavor High Yield
Portfolios are annualized.
(/7/) Total Portfolio Annual Expenses for the T. Rowe Price International Stock
Portfolio before credits allowed by the custodian for the period ended
December 31, 1998 were 1.10%.
(/8/) Total Portfolio Annual Expenses for the Endeavor Opportunity Value
Portfolio before waivers/reimbursement and credits allowed by the
custodian for the period ended December 31, 1998 were 1.00%.
(/9/) Total Portfolio Annual Expenses for the Dreyfus U.S. Government
Securities Portfolio before waiver/reimbursements and credits allowed by
the custodian for the period ended December 31, 1998 were 0.73%.
(/10/) Total Portfolio Annual Expenses for the Endeavor Select 50 Portfolio
before waivers/reimbursement and credit allowed by the custodian for the
period ended December 31, 1998 were 1.55% annualized.
(/11/) Total Portfolio Annual Expenses for the Endeavor High Yield Portfolio
before waivers/reimbursement and credits allowed to the custodian for the
period ended December 31, 1998 were 1.58% annualized.
(/12/) The Endeavor Janus Growth Portfolio is new, so the Total Portfolio Annual
Expenses before waivers/reimbursement for the period ending December 31,
1999 are estimated to be 0.895%.
(/13/) The manager is paid a fee of 0.75% of the average daily net assets of
each target series subaccount. For its services to the target account,
the manager pays the adviser a fee equal to 0.35% of the average daily
net assets of each target series subaccount.
(/14/) In addition to the management fees, the target account pays all expenses
not assumed by the manager. The manager has agreed to limit each target
series subaccount's total operating expenses, including management fees,
during its first year of operations to an annual rate of 1.30% of the
target series subaccount's average net assets. [This limit does not
include other fees and deductions (such as the mortality and expense risk
fee and administrative charge) or expenses incurred under the target
account's Brokerage Enhancement Plan.] (See the Statement of Additional
Information for more details.) Without this limitation, the total
operating expenses, including management fees, are expected to be 1.92%
for The DowSM Target 10 and 1.92% for The DowSM Target 5.
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EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a
hypothetical 5% annual return on assets, and assuming the entire policy value
is in the applicable mutual fund subaccount or target series subaccount.
The expenses reflect different mortality and expense risk fees depending on
which death benefit you select:
A = Annual Step-Up Death Benefit (1.40% in the first seven policy years and
1.25% thereafter)
B = Return of Premium Death Benefit (1.25% in the first seven policy years and
1.10% thereafter)
<TABLE>
<CAPTION>
If the Policy is annuitized at
If the Policy is surrendered the end of the applicable time
at the end of the applicable period or if the Policy is not
time period. surrendered or annuitized.
-------------------------------------------------------------------------
Subaccounts 1 3 5 10 1 3 5 10
Year Years Years Years Year Years Years Years
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Endeavor Asset
Allocation A $ 94 $120 $155 $269 $24 $75 $128 $269
B $ 93 $115 $147 $253 $23 $70 $121 $253
- ------------------------------------------------------------------------------------------------------
Endeavor Money Market A $ 92 $113 $145 $248 $22 $69 $118 $248
B $ 91 $109 $137 $233 $21 $64 $110 $233
- ------------------------------------------------------------------------------------------------------
T. Rowe Price Equity
Income A $ 95 $121 $157 $274 $25 $76 $131 $274
B $ 93 $117 $150 $258 $23 $72 $123 $258
- ------------------------------------------------------------------------------------------------------
T. Rowe Price Growth
Stock A $ 95 $122 $158 $276 $25 $77 $132 $276
B $ 94 $117 $151 $260 $24 $73 $124 $260
- ------------------------------------------------------------------------------------------------------
T. Rowe Price
International Stock A $ 96 $125 $164 $286 $26 $80 $137 $286
B $ 95 $120 $156 $272 $25 $76 $130 $272
- ------------------------------------------------------------------------------------------------------
Endeavor Value Equity A $ 95 $121 $157 $274 $25 $76 $131 $274
B $ 93 $117 $150 $258 $23 $72 $123 $258
- ------------------------------------------------------------------------------------------------------
Endeavor Opportunity
Value A $ 96 $125 $164 $287 $26 $81 $138 $287
B $ 95 $121 $157 $273 $25 $76 $130 $273
- ------------------------------------------------------------------------------------------------------
Endeavor Enhanced Index A $ 97 $129 $170 $298 $27 $84 $143 $298
B $ 96 $124 $162 $283 $26 $79 $136 $283
- ------------------------------------------------------------------------------------------------------
Dreyfus U.S. Government A $ 94 $117 $151 $260 $24 $73 $124 $260
Securities B $ 92 $113 $143 $245 $22 $68 $117 $245
- ------------------------------------------------------------------------------------------------------
Dreyfus Small Cap Value A $ 96 $124 $162 $282 $26 $79 $135 $282
B $ 94 $119 $154 $267 $24 $75 $128 $267
- ------------------------------------------------------------------------------------------------------
Endeavor Select 50 A $101 $140 $189 $335 $31 $95 $162 $335
B $100 $136 $182 $321 $30 $91 $155 $321
- ------------------------------------------------------------------------------------------------------
Endeavor High Yield A $ 99 $135 $180 $317 $29 $90 $153 $317
B $ 98 $130 $172 $303 $28 $85 $146 $303
- ------------------------------------------------------------------------------------------------------
Endeavor Janus Growth A $195 $122 $158 $276 $25 $77 $132 $276
B $ 94 $117 $151 $260 $24 $73 $124 $260
- ------------------------------------------------------------------------------------------------------
The DowSM Target 10 A $ 99 $135 $180 $317 $29 $90 $153 $317
(January Series) B $ 98 $130 $172 $303 $28 $85 $146 $303
- ------------------------------------------------------------------------------------------------------
The DowSM Target 5 A $ 99 $135 $180 $317 $29 $90 $153 $317
(January Series) B $ 98 $130 $172 $303 $28 $85 $146 $303
</TABLE>
- ------------------------------------------------------------------------------
11
<PAGE>
The above tables will assist you in understanding the costs and expenses that
you will bear, directly or indirectly. These include the 1998 expenses of the
underlying portfolios, except for Endeavor Janus Growth and the target series
subaccounts (whose expenses listed above are estimates for the first full year
of operations). In addition to the expenses listed above, premium taxes may be
applicable.
These examples should not be considered a representation of past or future
expenses, and actual expenses may be greater or lesser than those shown. The
assumed 5% annual return is hypothetical and should not be considered a
representation of past or future annual returns, which could be greater or less
than the assumed rate.
In these examples, the $35 annual service charge is reflected as a charge of
0.0522% based on an average policy value of $67,071. Normally, the service
charge would be waived if the premium payment, less partial withdrawals, is at
least $50,000 on a policy anniversary. However, $35 has been included in these
examples for illustrative purposes.
Financial Information. Condensed financial information for the mutual fund
subaccounts are in Appendix A to this prospectus.
12
<PAGE>
1. THE ANNUITY POLICY
This prospectus describes The Endeavor Variable Annuity Policy offered by AUSA
Life Insurance Company, Inc.
An annuity is a policy between you, the owner, and an insurance company (in
this case AUSA Life), where the insurance company promises to pay you an income
in the form of annuity payments. These payments begin on a designated date,
referred to as the annuity commencement date. Until the annuity commencement
date, your annuity is in the accumulation phase and the earnings are tax
deferred. Tax deferral means you generally are not taxed on your annuity until
you take money out of your annuity. After the annuity commencement date, your
annuity switches to the income phase.
The policy is a flexible premium variable annuity. You can use the policy to
accumulate funds for retirement or other long-term financial planning purposes.
It is a "flexible premium" policy because after you purchase it, you can
generally make additional investments of any amount of $50 or more, until the
annuity commencement date. But you are not required to make any additional
investments.
The policy is a "variable" annuity because the value of your investments can go
up or down based on the performance of your investment choices. If you select
the variable annuity portion of the policy, the amount of money you are able to
accumulate in your policy during the accumulation phase depends upon the
performance of your investment choices. The amount of annuity payments you
receive during the income phase from the variable annuity portion of your
policy also depends upon the investment performance of your investment choices
for the income phase.
The policy also contains a fixed account. The fixed account offers a one year
interest rate that is guaranteed by AUSA Life not to decrease during each one
year period.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
You choose the annuity commencement date. You can change this date by giving us
30 days written notice before the current annuity commencement date. The new
annuity commencement date must be at least 30 days after we receive the change.
The latest annuity commencement date cannot be after the policy month following
the month in which the annuitant attains age 90.
Election of Annuity Payment Option. Before the annuity commencement date, if
the annuitant is alive, you may choose an annuity payment option or change your
election. If the annuitant dies before the annuity commencement date, the
beneficiary may elect to receive the death benefit in a lump sum or under one
of the annuity payment options.
Unless you specify otherwise, the annuitant will receive the annuity payments.
After the annuitant's death, the beneficiary will receive any remaining
guaranteed payments.
Annuity Payment Options
The policy provides five annuity payment options that are described below. You
may choose any combination of annuity payment options. We will use your policy
value to provide these annuity payments. If the policy value on the annuity
commencement date is less than $2,000, AUSA Life reserves the right to pay it
in one lump sum in lieu of applying it under an annuity payment option. You can
receive annuity payments monthly, quarterly, semi-annually, or annually.
Unless you choose to receive variable payments under annuity payment options 3
or 5, the amount of each payment will be set on the annuity commencement date
and will not change. You may, however, choose to receive variable payments
under payment options 3 and 5. The dollar amount of the first variable payment
will be determined in accordance with the annuity payment rates set forth in
the
13
<PAGE>
applicable table contained in the policy. The dollar amount of additional
variable payments will vary based on the investment performance of the mutual
fund subaccount(s) and/or target series subaccount(s). The dollar amount of
each variable payment after the first may increase, decrease, or remain
constant. If the actual investment performance exactly matched the assumed
investment return of 5% at all times, the amount of each variable annuity
payment would remain equal. If actual investment performance exceeds the
assumed investment return, the amount of the variable annuity payments would
increase. Conversely, if actual investment performance is lower than the
assumed investment return, the amount of the variable annuity payments would
decrease.
A charge for premium taxes may be made when annuity payments begin.
The annuity payment options are explained below. Options 1, 2, and 4 are fixed
only. Options 3 and 5 can be fixed or variable.
Payment Option 1--Interest Payments. We will pay the interest on the amount we
use to provide annuity payments in equal payments or this amount may be left to
accumulate for a period of time you and AUSA Life agree to. You and AUSA Life
will agree on withdrawal rights when you elect this option.
Payment Option 2--Income for a Specified Period. We will make level payments
only for the fixed period you choose. No funds will remain at the end.
Payment Option 3--Life Income. You may choose between:
Fixed Payments
. No Period Certain--We will make level payments only during the
annuitant's lifetime.
. 10 Years Certain--We will make level payments for the longer of the
annuitant's lifetime or ten years.
. Guaranteed Return of Policy Proceeds--We will make level payments for
the longer of the annuitant's lifetime or until the total dollar amount
of payments we made to you equals the amount applied to this option.
Variable Payments
. No Period Certain--Payments will be made only during the lifetime of the
annuitant.
. 10 Years Certain--Payments will be made for the longer of the
annuitant's lifetime or ten years.
Payment Option 4--Income of a Specified Amount. Payments are made for any
specified amount until the amount applied to this option, with interest, is
exhausted. This will be a series of level payments followed by a smaller final
payment.
Payment Option 5--Joint and Survivor Annuity. You may choose between:
Fixed Payments
. Payments are made during the joint lifetime of the payee and a joint
payee of your selection. Payments will be made as long as either person
is living.
Variable Payments
. Payments are made as long as either the payee or the joint payee is
living.
Other annuity payment options may be arranged by agreement with AUSA Life.
NOTE CAREFULLY:
IF:
. you choose Life Income with No Period Certain or a Joint and Survivor
Annuity; and
. the annuitant(s) dies before the due date of the second annuity payment;
THEN:
. we may make only one annuity payment.
IF:
. you choose Income for a Specified Period, Life Income with 10 years Certain,
Life Income with Guaranteed Return of Policy Proceeds, or Income of a
Specified Amount; and
14
<PAGE>
. the person receiving payments dies prior to the end of the guaranteed
period;
THEN:
. the remaining guaranteed payments will be continued to that person's
beneficiary, or their present value may be paid in a single sum.
We will not pay interest on amounts represented by uncashed annuity payment
checks if the postal or other delivery service is unable to deliver checks to
the payee's address of record. The person receiving payments is responsible for
keeping AUSA Life informed of their current address of record.
3. PURCHASE
Policy Issue Requirements
AUSA Life will issue a policy IF:
. AUSA Life receives all information needed to issue the policy;
. AUSA Life receives a minimum initial premium payment; and
. You (annuitant and any joint owner) are age 79 or younger.
. You meet our underwriting standards.
Premium Payments
You should make checks for premium payments payable only to AUSA Life Insurance
Company, Inc. and send them to the administrative and service office. Your
check must be honored in order for AUSA Life to pay any associated payments and
benefits due under the policy.
Initial Premium Requirements
The initial premium payment for nonqualified policies must be at least $5,000,
and at least $1,000 for qualified policies. The initial premium payment for
policies issued under section 403(b) of the Internal Revenue Code is $50. We
will credit your initial premium payment to your policy within two business
days after the day we receive it and your complete policy information. If we
are unable to credit your initial premium payment, we will contact you within
five business days and explain why. We will also return your initial premium
payment at that time unless you tell us to keep it and credit it as soon as
possible.
The date on which we credit your initial premium payment to your policy is the
policy date. The policy date is used to determine policy years, policy months
and policy anniversaries.
Additional Premium Payments
You are not required to make any additional premium payments. However, you can
make additional premium payments as often as you like during the lifetime of
the annuitant and during the accumulation phase. Additional premium payments
must be at least $50. We will credit additional premium payments to your policy
as of the business day we receive your premium and required information.
Maximum Total Premium Payments
We allow premium payments up to a total of $1,000,000 without prior approval.
Allocation of Premium Payments
When you purchase a policy, we will allocate your premium payments to the
investment choices you select. Your allocation must be in whole percentages and
must total 100%. We will allocate additional premium payments the same way,
unless you request a different allocation.
If you allocate premium payment to the dollar cost averaging fixed account, you
must give us directions regarding the mutual fund subaccount(s) and/or target
series subaccount(s) to which transfers are to be made or we cannot accept your
premium payment.
You may change allocations for future additional premium payments by sending us
written instructions. The allocation change will apply to premium payments
received after the date we receive the change request.
15
<PAGE>
Policy Value
You should expect your policy value to change from valuation period to
valuation period. A valuation period begins at the close of trading on the New
York Stock Exchange on each business day and ends at the close of trading on
the next succeeding business day. A business day is each day that the New York
Stock Exchange is open. The New York Stock Exchange generally closes at 4:00
p.m. eastern time. Holidays are generally not business days.
4. INVESTMENT CHOICES
The Separate Accounts
There are currently fifteen variable subaccounts available under the policies.
There are thirteen subaccounts of the mutual fund account (which is a portion
of the AUSA Endeavor Variable Annuity Account) and two subaccounts of the AUSA
Endeavor Target Account.
The Mutual Fund Account
The mutual fund subaccounts invest in shares of the various portfolios of the
Endeavor Series Trust. The companies that provide investment advice and
administrative services for the underlying portfolios offered through this
policy are listed below. The following mutual fund investment choices are
currently offered through this policy:
Subadvised by Morgan Stanley Asset Management Inc.
Endeavor Asset Allocation Portfolio
Endeavor Money Market Portfolio
Subadvised by T. Rowe Price Associates, Inc.
T. Rowe Price Equity Income Portfolio
T. Rowe Price Growth Stock Portfolio
Subadvised by Rowe Price-Fleming International, Inc.
T. Rowe Price International Stock Portfolio
Subadvised by OpCap Advisors
Endeavor Value Equity Portfolio
Endeavor Opportunity Value Portfolio
Subadvised by J.P. Morgan Investment Management Inc.
Endeavor Enhanced Index Portfolio
Subadvised by The Dreyfus Corporation
Dreyfus U.S. Government Securities Portfolio
Dreyfus Small Cap Value Portfolio
Subadvised by Montgomery Asset Management, LLC
Endeavor Select 50 Portfolio
Subadvised by Massachusetts Financial Services Company
Endeavor High Yield Portfolio
Subadvised by Janus Capital Corporation
Endeavor Janus Growth Portfolio
The general public may not purchase shares of these underlying portfolios. The
investment objectives and policies may be similar to other portfolios and
mutual funds managed by the same investment adviser or manager that are sold
directly to the public. You should not expect that the investment results of
the other portfolios and mutual funds will be comparable to those of these
underlying portfolios.
More detailed information, including an explanation of the portfolio's
investment objectives, may be found in the current Endeavor Series Trust
prospectus, which is attached to this prospectus. You should read the Endeavor
Series Trust prospectus carefully before you invest.
We may receive expense reimbursements or other revenues from Endeavor Series
Trust or its manager. The amount of these reimbursements or revenues, if any,
may be based on the amount of assets that AUSA Life or its affiliates or the
mutual fund account invests in the underlying portfolios.
The Target Account
This section gives information on the target account, including the management
and investment strategies, and policies. The following target account
investment choices are currently offered through this policy:
THE TARGET ACCOUNT
Subadvised by First Trust Advisors, L.P.
The DowSM Target 10 (January Series)
The DowSM Target 5 (January Series)
16
<PAGE>
General. The target account is a managed separate account and is currently
divided into two target series subaccounts. There is currently The DowSM Target
10 Subaccount (January Series) and The DowSM Target 5 Subaccount (January
Series). Additional target series subaccounts may be established in the future
at the discretion of AUSA Life. Each target series subaccount invests according
to specific investment strategies.
Under New York law, the assets of the target account are owned by AUSA Life,
but they are held separately from the other assets of AUSA Life. To the extent
that these assets are attributable to the policy value of the policies, these
assets are not chargeable with liabilities incurred in any other business
operation of AUSA Life. Income, gains, and losses incurred on the assets in a
target series subaccount of the target account, whether or not realized, are
credited to or charged against that target series subaccount without regard to
other income, gains or losses of any other account or subaccount of AUSA Life.
Each target series subaccount operates as a separate investment fund.
Therefore, the investment performance of any target series subaccount should be
entirely independent of the investment performance of AUSA Life's general
account assets or any other account or subaccount maintained by AUSA Life.
Management of the Target Account. The investments and administration of each
managed target series subaccount are under the direction of a Board of
Managers. The Board of Managers for each target series subaccount annually
selects an independent public accountant, reviews the terms of the management
and investment advisory agreements, recommends any changes in the fundamental
investment policies, and takes any other actions necessary in connection with
the operation and management of the target series subaccounts.
Endeavor Management Co., an investment adviser registered with the SEC under
the Investment Advisers Act of 1940, is the target account's manager. The
manager performs administerial and managerial functions for the target account.
(The manager is an affiliate of AUSA Life.) First Trust Advisors L.P., an
Illinois limited partnership formed in 1991 and an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, is the
target account's investment adviser. The adviser is responsible for selecting
the investments of each target series subaccount consistent with the investment
objectives and policies of that target series subaccount, and will conduct
securities trading for the target series subaccount.
Portfolio Manager. There is no one individual primarily responsible for
portfolio management decisions for the target account. Investments are made
according to the prescribed strategy under the direction of a committee.
Investment Strategy. Each of The DowSM Target 10 Subaccounts will invest in the
common stock of the ten companies in the DJIA that have the highest dividend
yield as of a specified business day and hold those stocks for the following
12-month period.
Each of The DowSM Target 5 Subaccounts will invest in the common stock of the
five companies with the lowest per share stock price of the ten companies in
the DJIA that have the highest dividend yield as of a specified business day
and hold those stocks for the following 12-month period.
The objective of each target series subaccount is to provide an above-average
total return through a combination of dividend income and capital appreciation.
Each target series subaccount will function in a similar manner. Each target
series subaccount will initially invest in substantially equal amounts in the
common stock of the companies described above for each target series subaccount
(as held in a target series subaccount, such common stock is referred to as the
common shares) determined as of the initial stock selection date.
Each target series subaccount may have different investment series running
simultaneously for different 12-month
17
<PAGE>
periods. For example, within The DowSM Target 10 Subaccount there may be more
than one series, each with a different initial stock selection date. At the
initial stock selection date, a percentage relationship among the number of
common shares in a series will be established.
When additional funds are deposited into the series, additional common shares
will be purchased in such numbers reflecting as nearly as practicable the
percentage relationship of the number of common shares established at the
initial purchase. Sales of common shares by the series will likewise attempt to
replicate the percentage relationship of common shares. The percentage
relationship among the number of common shares in the series should therefore
remain stable. However, given the fact that the market price of such common
shares will vary throughout the year, the value of the common shares of each of
the companies as compared to the total assets of the series will fluctuate
during the year, above and below the proportion established on a stock
selection date.
As of the annual stock selection date, a new percentage relationship will be
established among the number of common shares described below for each series
on such date. Common shares may be sold or new equity securities bought each
year so that the series is equally invested in the common stock of each company
meeting the series' investment criteria. Thus the series may or may not hold
equity securities of the same companies as the previous year. Any purchase or
sale of additional common shares during the year will duplicate, as nearly as
practicable, the percentage relationship among the number of common shares as
of the annual stock selection date since the relationship among the value of
the common shares on the date of any subsequent transactions may be different
than the original relationship among their value. The adviser may depart from
the specified strategy to meet tax diversification requirements. (See Section
6, "TAXES--Diversification and Distribution Requirements").
As of the initial stock selection date (December 31, 1999), there are two
target series subaccounts. The DowSM Target 10 Subaccount (January Series) and
The DowSM Target 5 Subaccount (January Series).
The target account may determine to offer additional target series subaccounts
in the future, which may have different selection criteria or stock selection
dates (or both).
The DowSM Target 10 Subaccount and The DowSM Target 5 Subaccount have not been
designed so that their prices will parallel or correlate with movements in the
DJIA. It is expected that their prices will not do so.
An investment in a target series subaccount involves the purchase of a
portfolio of equity securities with high dividend yields in one convenient
purchase. Investing in the stocks of the DJIA with the highest dividend yields
amounts to a contrarian strategy because these shares are often out of favor.
Such strategy may be effective in achieving a target series subaccount's
investment objectives because regular dividends are common for established
companies and dividends have accounted for a substantial portion of the total
return on stocks of the DJIA as a group. However, there is no guarantee that
either a target series subaccount's objective will be achieved or that a target
series subaccount will provide for capital appreciation in excess of such
target series subaccount's expenses.
Each target series subaccount may also invest in futures and options, hold
warrants, and lend its common shares.
The Dow Jones Industrial AverageSM. The DJIA consists of 30 stocks. The stocks
are chosen by the editors of The Wall Street Journal as representative of the
broad market and of American industry. The companies are major factors in their
industries and their stocks are widely held by individuals and institutional
investors. Changes in the components of the DJIA are made entirely by the
editors of The Wall Street Journal without consultation
18
<PAGE>
with the companies, the stock exchange or any official agency. For the sake of
continuity, changes are made rarely. Most substitutions have been the result of
mergers, but from time to time, changes may be made. The components of the DJIA
may be changed at any time, for any reason. Any changes in the components of
the DJIA made after the initial stock selection date of any series will not
cause a change in the identity of the common shares included in that series,
including any equity securities deposited in that series, except on an annual
stock selection date. The following is a list of the companies that comprise
the DJIA as of May 1, 1999.
AT&T Corporation
Allied Signal
Aluminum Company of America
American Express Company
Boeing Company
Caterpillar Inc.
Chevron Corporation
Coca Cola Company
Walt Disney Company
International Business Machines Corporation
International Paper Company
Johnson & Johnson
McDonald's Corporation
Merck & Company, Inc.
Minnesota Mining & Manufacturing Company
E.I. du Pont de Nemours & Company
Eastman Kodak Company
Exxon Corporation
General Electric Company
General Motors Corporation
Goodyear Tire & Rubber Company
Hewlett Packard Company
J.P. Morgan & Company, Inc.
Philip Morris Companies, Inc.
Procter & Gamble Company
Sears, Roebuck & Company
Travelers Group
Union Carbide Corporation
United Technologies Corporation
Wal Mart Stores Inc.
The target account is not sponsored, endorsed, sold or promoted by Dow Jones.
Dow Jones makes no representation or warranty, express or implied, to the
owners of the target account or any member of the public regarding the
advisability of purchasing the target account. Dow Jones' only relationship to
First Trust Advisors, Endeavor Management Co. (Endeavor) and AUSA Life is the
licensing of certain copyrights, trademarks, service marks and service names of
Dow Jones. Dow Jones has no obligation to take the needs of First Trust
Advisors, Endeavor, AUSA Life or the owners of the target account into
consideration in determining, composing or calculating the Dow Jones Industrial
AverageSM. Dow Jones is not responsible for and has not participated in the
determination of the terms and conditions of the target account to be issued,
including the pricing or the amount payable under the policy. Dow Jones has no
obligation or liability in connection with the administration or marketing of
the target account.
Dow Jones does not guarantee the accuracy and/or the completeness of the Dow
Jones Industrial AverageSM or any data included therein and Dow Jones shall
have no liability for any errors, omission, or interruptions therein. Dow Jones
makes no warranty, express or implied, as to results to be obtained by First
Trust Advisors, Endeavor, AUSA Life, owners of the target account or any other
person or entity from the use of the Dow Jones Industrial AverageSM or any data
included therein. Dow Jones makes no express or implied warranties, and
expressly disclaims all warranties, of merchantability or fitness for a
particular purpose or use with respect to the Dow Jones Industrial AverageSM or
any data included therein. Without limiting any of the foregoing, in no event
shall Dow Jones have any liability for any lost profits or indirect, punitive,
special or consequential damages (including lost profits), even if notified of
the possibility of such damages.
Investment Risks. There is no assurance that any target series subaccount will
achieve its stated objective. More detailed
19
<PAGE>
information, including a description of each target series subaccount's
investment objective and policies and a description of risks involved in
investing in each of the target series subaccounts and of each target series
subaccount's fees and expenses is contained in the Statement of Additional
Information. Information contained in the Statement of Additional Information
should be read carefully before investing in a target series subaccount.
Each subaccount consists of different issues of equity securities, all of which
are listed on a securities exchange. In addition, each of the companies whose
equity securities are included in a subaccount are actively traded, well-
established corporations.
Common shares may be sold under certain circumstances. Common shares, however,
will not be sold by a target series subaccount to take advantage of market
fluctuations or changes in anticipated rates of appreciation or depreciation,
or if the common shares no longer meet the criteria by which they were
selected. However, common shares will be sold on or about each annual stock
selection date in accordance with the adviser's stock selection strategy.
Whether or not the common shares are listed on a securities exchange, the
principal trading market for the common shares may be in the over-the-counter
market. As a result, the existence of a liquid trading market for the common
shares may depend on whether dealers will make a market in the common shares.
There can be no guarantee that a market will be made for any of the common
shares, that any market for the common shares will be maintained or that there
will be sufficient liquidity of the common shares in any markets made. The
price at which the common shares may be sold to meet transfers, partial
withdrawals or surrenders and the value of a target series subaccount will be
adversely affected if trading markets for the common shares are limited or
absent.
Investors should consider the following before making a decision to invest in a
target series subaccount:
. The value of the common shares will fluctuate over the life of a target
series subaccount and may be more or less than the price at which they were
purchased by such target series subaccount.
. The common shares may appreciate or depreciate in value (or pay dividends)
depending on the full range of economic and market influences affecting
these securities, including the impact of the target series subaccounts'
purchase and sale of the common shares and other factors.
. Transfers between the target account investment portfolios during the 12-
month period from stock selection date to stock selection date run counter
to the investment strategy of the target account investment portfolios,
namely holding the applicable stocks for a 12-month period, and may
adversely impact your investment performance. Similarly, using dollar cost
averaging and asset rebalancing for the target account investment portfolios
also runs counter to their investment strategies.
. The investment policies of each target series subaccount are narrow and
innovative, and the Internal Revenue Service has not addressed them. If you
are deemed to have investment control of the assets in a target series
subaccount, then you could be treated as the owner of those assets. If so,
income and gains from the subaccounts assets would be includable (pro rata)
in your taxable income each year.
You should understand the risks of investing in common stocks before making an
investment in a target series subaccount. In general, the value of your
investment will fall if the financial condition of the issuers of the common
stocks becomes impaired or if the general condition of the relevant stock
market worsens. Common stocks are especially susceptible to general stock
market
20
<PAGE>
movements and to volatile increases and decreases of value, as market
confidence in and perceptions of the issuers change. These perceptions are
based on unpredictable factors including:
. expectations regarding government, economic, monetary and fiscal policies;
. inflation and interest rates;
. economic expansion or contraction; and
. global or regional political, economic or banking crises.
At times, due to the objective nature of the investment selection criteria,
target series subaccounts may be considered concentrated in various industries.
AUSA Life cannot predict the direction or scope of any of these factors.
Generally, common stocks do not receive payments until all obligations of the
issuer have been paid. Unlike debt securities, common stocks do not offer any
assurance of income or provide guaranteed protection of capital.
An investment in The DowSM Target 5 Subaccount may subject you to greater
market risk than other target series subaccounts that contain a more
diversified portfolio of securities since it contains only five stocks.
Each target series subaccount is not actively managed and common shares will
not be sold to take advantage of market fluctuations or changes in anticipated
rates of appreciation.
Please note that each strategy has previously under-performed the DJIA.
AUSA Life and Endeavor Management Co. shall not be liable in any way for any
default, failure or defect in any common share.
Portfolio Turnover. It is anticipated that each target series subaccount's
annual rate of portfolio turnover normally will not exceed 100%. Portfolio
turnover for each target series subaccount will vary from year to year, and
depending on market conditions, the portfolio turnover rate could be greater in
periods of unusual market movement. A higher turnover rate would result in
heavier brokerage commissions or other transactional expenses which must be
borne, directly or indirectly by each target series subaccount, and ultimately
by you.
Brokerage Enhancement Plan. The target account has adopted a Brokerage
Enhancement Plan (the "Plan") for each of its subaccounts in accordance with
the substantive provisions of Rule 12b-1 under the Investment Company Act of
1940. The Plan uses available brokerage commissions to promote the sale and
distribution of interests in the subaccount's shares. Under the Plan, the
target account is using recaptured commissions to pay for distribution
expenses. Except for recaptured commissions, unlike asset based charges imposed
by many mutual funds for sales expenses, the subaccounts do not incur any asset
based or additional fees or charges under the Plan.
Under the Plan, the Manager is authorized to direct investment advisers to use
certain broker/dealers for securities transactions. (The duty of best price and
execution still applies to these transactions.) These broker/dealers have
agreed to give a percentage of their commission from the sale and purchase of
securities to the Endeavor Group.
Endeavor Group will not make any profit from participating in the Plan. It is
obligated to use any money given to it under the Plan for distribution expenses
(other than a minimal amount to defray its legal and administrative costs). The
rest will be spent on activities that are meant to result in the sale of the
policies, including:
. holding or participating in seminars and sales meetings promoting the
subaccounts;
. paying marketing fees requested by broker/dealers who sell policies;
. training sales personnel;
. compensating broker/dealers and/or registered representatives in connection
with the allocation of cash values and premiums to the target account;
. printing and mailing prospectuses, statements of additional information and
reports to prospective owners; and
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. creating and mailing advertising and sales literature.
The Fixed Account
Premium payments allocated and amounts transferred to the fixed account become
part of the general account of AUSA Life. Interests in the general account have
not been registered under the Securities Act of 1933 (the "1933 Act"), nor is
the general account registered as an investment company under the Investment
Company Act of 1940 (the "1940 Act"). Accordingly, neither the general account
nor any interests therein are generally subject to the provisions of the 1933
or 1940 Acts. AUSA Life has been advised that the staff of the SEC has not
reviewed the disclosures in this prospectus which relate to the fixed account.
We guarantee that the interest credited to the fixed account will not be less
than 3% per year. At the end of a guaranteed period option, the value in that
guaranteed period option will automatically be transferred into a new
guaranteed period option of the same length (or the next shorter period if the
same period is no longer offered) at the current interest rate for that period.
You can transfer to another investment choice by giving us notice within 30
days before the end of the expiring guaranteed period.
If you select the fixed account, your money will be placed with the other
general assets of AUSA Life. The amount of money you are able to accumulate in
the fixed account during the accumulation phase depends upon the total interest
credited. The amount of annuity payments you receive during the income phase
from the fixed portion of your policy will remain level for the entire income
phase.
Transfers
During the accumulation phase, you may make transfers from any mutual fund
subaccount or target series subaccount as often as you wish within certain
limitations. Transfers from the guaranteed period option of the fixed account
are limited as follows:
. At the end of a guaranteed period option, you must notify us within 30 days
prior to the end of the guaranteed period that you wish to transfer the
amount in that guaranteed period option to another investment choice.
. Transfers of amounts equal to interest credited in the one year guaranteed
period option may be made to any subaccount prior to the end of the
guaranteed period on a monthly, quarterly, semi-annual or annual basis. This
may affect your overall interest-crediting rate, because transfers are
deemed to come from the oldest premium payment first.
. Transfers of other amounts from the one year guaranteed period option prior
to the end of the guaranteed period option are limited to 25% of the policy
value in that guaranteed period option, less any previous transfer during
the current policy year.
There are no transfers permitted out of the dollar cost averaging fixed account
option except through the dollar cost averaging program.
Each transfer must be at least $500, or the entire mutual fund subaccount,
target series subaccount, or guaranteed period option policy value. If less
than $500 remains, then we reserve the right to either deny the transfer or
include that amount in the transfer.
During the income phase of your policy, you may transfer values out of any
mutual fund subaccount or target series subaccount up to four times per year.
However, you cannot transfer values out of the fixed account in this phase. The
minimum amount that can be transferred during this phase is the lesser of $10
of monthly income, or the entire monthly income of the annuity units in the
mutual fund subaccount or target series subaccount from which the transfer is
being made.
Currently, there is no charge for transfers. However, the number of transfers
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permitted may be limited in the future and charges per transfer may apply in
the future.
Dollar Cost Averaging Program
During the accumulation phase, you may instruct us to automatically transfer
money from the dollar cost averaging fixed account option, the Endeavor Money
Market Subaccount, or the Dreyfus U.S. Government Securities Subaccount, into
any other mutual fund subaccounts and/or target series subaccounts. You may
specify the dollar amount to be transferred either monthly or quarterly;
however each transfer must be at least $500. A minimum of 6 monthly or 4
quarterly transfers are required and a maximum of 24 monthly or 8 quarterly
transfers are allowed. Transfers must begin within 30 days. We will make the
transfers on the 28th day of the applicable month. There is no charge for this
program.
Dollar cost averaging buys more accumulation units when prices are low and
fewer accumulation units when prices are high. It does not guarantee profits or
assure that you will not experience a loss. You should consider your ability to
continue the dollar cost averaging program during all economic conditions.
We may credit different interest rates for dollar cost averaging programs of
varying time periods. If you discontinue the dollar cost averaging program
before its completion, then the interest credited on amounts in the dollar cost
averaging fixed account option may be adjusted downward, but not below the
minimum guaranteed effective annual interest rate of 3%.
Asset Rebalancing
During the accumulation phase you can instruct us to automatically rebalance
the amounts in your mutual fund subaccounts or target series subaccounts to
maintain your desired asset allocation. This feature is called asset
rebalancing and can be started and stopped at any time free of charge. However,
we will not rebalance if you are in the dollar cost averaging program or if any
other transfer is requested. Asset rebalancing ignores amounts in the fixed
account. You can choose to rebalance monthly, quarterly, semi-annually, or
annually.
5. EXPENSES
There are charges and expenses associated with your policy that reduce the
return on your investment in the policy.
Surrender Charges
During the accumulation phase, you can withdraw part or all of the cash value.
Cash value is the policy value decreased by any applicable surrender charge,
service charge, and premium tax charge. After the first year, you can withdraw
up to 10% of your policy value once each year free of surrender charges. This
amount is referred to as the free percentage and is determined at the time of
the withdrawal. If you withdraw money in excess of 10% of your policy value,
you might have to pay a surrender charge, which is a contingent deferred sales
charge, on the excess amount. The following schedule shows the surrender
charges that apply during the seven years following each premium payment:
<TABLE>
<CAPTION>
Surrender Charge
Number of Years (as a percentage of
Since Premium premium payment
Payment Date withdrawn)
- ------------------------------------------------------------------------------
<S> <C>
0-1 7%
1-2 6%
2-3 5%
3-4 4%
4-5 3%
5-6 2%
6-7 1%
7 or more 0%
</TABLE>
For example, assume your policy value is $100,000 at the beginning of policy
year 2 and you withdraw $30,000. Since that amount is more than your free
percentage, you would pay a surrender charge of $1,200 on the remaining $20,000
(6% of $30,000--$10,000).
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You will receive the full amount of a requested partial withdrawal because we
deduct any applicable surrender charge from your remaining policy value. You
receive your cash value upon full surrender.
For surrender charge purposes, the oldest premium is considered to be withdrawn
first.
Keep in mind that withdrawals may be taxable, and if made before age 59 1/2,
may be subject to a 10% federal penalty tax. For tax purposes, withdrawals are
considered to come from earnings first.
Mortality and Expense Risk Fee
We charge a fee as compensation for bearing certain mortality and expense risks
under the policy. Examples include a guarantee of annuity rates, the death
benefits, certain expenses of the policy, and assuming the risk that the
current charges will be insufficient in the future to cover costs of
administering the policy. For the Annual Step-Up Death Benefit, the mortality
and expense risk fee is at an annual rate of 1.40% of assets for the first
seven policy years and 1.25% of assets thereafter. For the Return of Premium
Death Benefit the mortality and expense risk fee is at an annual rate of 1.25%
of assets for the first seven policy years and 1.10% thereafter. This annual
fee is assessed daily based on the net asset value of each mutual fund
subaccount and target series subaccount.
If this charge does not cover our actual costs, we absorb the loss. Conversely,
if the charge more than covers actual costs, the excess is added to our
surplus. We expect to profit from this charge. We may use any profit for any
proper purpose, including distribution expenses.
Administrative Charges
We deduct an administrative charge to cover the costs of administering the
policies. This charge is equal to 0.15% per year of the daily net asset value
of the mutual fund account and the target account.
In addition, an annual service charge of the lesser of $35 or 2% of the policy
value is charged on each policy anniversary and at surrender. The service
charge is waived if your policy value or the sum of your premium(s), less all
partial withdrawals, is at least $50,000.
Premium Taxes
Some states assess premium taxes on the premium payments you make. We currently
do not deduct for these taxes at the time you make a premium payment. However,
we will deduct the total amount of premium taxes, if any, from the policy value
when:
. you elect to begin receiving annuity payments;
. you surrender the policy; or
. you die and a death benefit is paid (you must also be the annuitant for the
death benefit to be paid).
Generally, premium taxes range from 0% to 3.50%, depending on the state.
Federal, State and Local Taxes
We may in the future deduct charges from the policy for any taxes we incur
because of the policy. However, no deductions are being made at the present
time.
Transfer Fee
You are allowed to make 12 free transfers per year before the annuity
commencement date. If you make more than 12 transfers per year, we reserve the
right to charge $10 for each transfer. Premium payments, asset rebalancing and
dollar cost averaging transfers are not considered transfers. All transfer
requests made at the same time are treated as a single request.
Portfolio Management Fees
The value of the assets in each mutual fund subaccount will reflect the fees
and expenses paid by Endeavor Series Trust. A description of these expenses is
found in the Endeavor Series Trust prospectus.
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Target Account Fees
For its services to the target account, the manager is paid a fee of 0.75% of
the average daily net assets of each target series subaccount. For the
adviser's services to the target account, the manager pays the adviser a fee
equal to 0.35% of the average daily net assets of each target series
subaccount.
In addition to the management fees, the target account pays all expenses not
assumed by the manager, including, without limitation, the following:
. legal expenses;
. accounting and auditing services;
. interest;
. taxes;
. costs of printing and distributing reports to shareholders;
. proxy materials and prospectuses;
. custodian, transfer agent and dividend disbursing agent charges;
. registration fees;
. fees and expenses of the Board of Managers who are not affiliated persons of
the Manager or an Adviser;
. insurance;
. brokerage costs;
. litigation; and
. other extraordinary or nonrecurring expenses.
All general target account expenses are allocated among and charged to the
assets of the target series subaccounts on a basis that the Board of Managers
deems fair and equitable. This may be on the basis of relative net assets of
each target series subaccount or the nature of the services performed and
relative applicability to each target series subaccount.
The manager has agreed to limit each target series subaccount's management fee
and operating expenses during its first year of operations to an annual rate of
1.30% of the subaccount's average net assets. (This limit does not include
other fees and deductions, such as the mortality and expense risk fee and
administrative charge.)
6. TAXES
NOTE: AUSA Life has prepared the following information on federal income 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. AUSA Life has included an additional discussion regarding taxes
in the Statement of Additional Information.
Annuity Policies in General
Deferred annuity policies are a way of setting aside money for future needs
like retirement. Congress recognized how important saving for retirement is and
provided special rules in the Internal Revenue Code for annuities.
Simply stated, these rules provide that generally you will not be taxed on the
earnings, if any, on the money held in your annuity policy until you take the
money out. This is referred to as tax deferral. There are different rules as to
how you will be taxed depending on how you take the money out and the type of
policy--qualified or nonqualified (discussed below).
You will not be taxed on increases in the value of your policy until a
distribution occurs--either as a withdrawal or as annuity payments.
When a non-natural person (e.g., corporation or certain other entities other
than tax-qualified trusts) owns a nonqualified policy, the policy will
generally not be treated as an annuity for tax purposes.
Qualified and Nonqualified Policies
If you purchase the policy under an individual retirement annuity, a pension
plan, or specially sponsored program, your policy is referred to as a qualified
policy.
Qualified policies are issued in connection with the following plans:
. Individual Retirement Annuity (IRA): A traditional IRA allows individuals to
make contributions, which may be
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deductible, to the Contract. A Roth IRA also allows individuals to make
contributions to the Contract, but it does not allow a deduction for
contributions, and distributions may be tax-free if the owner meets certain
rules.
. Tax-Sheltered Annuity (403(b) Plan): A 403(b) Plan may be made available to
employees of certain public school systems and tax-exempt organizations and
permits contributions to the Contract on a pre-tax basis.
. Corporate Pension and Profit-Sharing and H.R. 10 Plan: Employers and self-
employed individuals can establish pension or profit-sharing plans for their
employees or themselves and make contributions to the Contract on a pre-tax
basis.
. Deferred Compensation Plan (457 Plan): Certain governmental and tax-exempt
organizations can establish a plan to defer compensation on behalf of their
employees through contributions to the Contract.
If you purchase the policy as an individual and not under an individual
retirement annuity, 403(b) plan, 457 plan, or pension or profit sharing plan,
your policy is referred to as a nonqualified policy.
Tax Status of the Policy
The following discussion is based on the assumption that the policy qualifies
as an annuity contract for federal income tax purposes.
Diversification Requirements. Section 817(h) of the Code provides that in order
for a variable contract which is based on a segregated asset account to qualify
as an annuity contract under the Code, the investments made by such account
must be "adequately diversified" in accordance with Treasury regulations. The
Treasury regulations issued under Section 817(h) (Treas. Reg. (S)1.817-5) apply
a diversification requirement to each of the mutual fund subaccounts and the
target series subaccounts. The mutual fund account, through its underlying
funds and their portfolios, and the target account, through its subaccounts,
intends to comply with the diversification requirements of the Treasury.
AUSA Life has entered into agreements regarding participation in the Endeavor
Series Trust, which requires the portfolios to be operated in compliance with
the Treasury regulations. AUSA Life has entered into an agreement with the
manager, who in turn, has entered into a contract with the adviser that
requires the target series subaccounts to be operated in compliance with the
Treasury regulations. The adviser reserves the right to depart from either
target series subaccount's investment strategy in order to meet these
diversification requirements. See the Statement of Additional Information for
more information concerning diversification requirements.
Owner Control. In certain circumstances, owners of variable annuity contracts
may be considered the owners, for federal income tax purposes, of the assets of
the mutual fund account used to support their contracts. In those
circumstances, income and gains from the mutual fund account assets would be
includable in the variable annuity contract owner's gross income. Several years
ago, the IRS stated in published rulings that a variable annuity contract owner
will be considered the owner of mutual fund account assets if the contract
owner possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. More recently, the Treasury
Department announced in connection with the issuance of regulations concerning
investment diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., you), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets."
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The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contract owners were not owners of mutual fund account assets.
For example, you have the choice of one or more subaccounts in which to
allocate premiums and policy values, and may be able to transfer among these
accounts more frequently than in such rulings. Moreover, the investment
strategies for the target subaccounts are narrow and innovative and the
Internal Revenue Service has not addressed them. These differences could result
in you being treated as the owner of the assets of the mutual fund account or
the target account. In addition, AUSA Life does not know what standards will be
set forth, if any, in the regulations or rulings that the Treasury Department
has stated it expects to issue. AUSA Life therefore reserves the right to
modify the policies as necessary to attempt to prevent you from being
considered the owner of a pro rata share of the assets of the mutual fund
account or target account.
Withdrawals--Nonqualified Policies
If you make a withdrawal from your policy before the annuity commencement date,
the Internal Revenue Code treats that withdrawal as first coming from earnings
and then from your premium payments. When you make a withdrawal you are taxed
on the amount of the withdrawal that is earnings. Different rules apply for
annuity payments. See "Annuity Payments" below.
The Internal Revenue Code also provides that withdrawn earnings may be subject
to a penalty. The amount of the penalty is equal to 10% of the amount that is
includable in income. Some withdrawals will be exempt from the penalty. They
include any amounts:
. paid on or after the taxpayer reaches age 59 1/2;
. paid after the taxpayer dies;
. paid if the taxpayer becomes totally disabled (as that term is defined in
the Internal Revenue Code);
. paid in a series of substantially equal payments made annually (or more
frequently) under a lifetime annuity;
. paid under an immediate annuity; or
. which come from premium payments made prior to August 14, 1982.
All deferred nonqualified annuity policies that are issued by AUSA Life (or its
affiliates) to the same owner during any calendar year are treated as one
annuity for purposes of determining the amount includable in the owner's income
when a taxable distribution occurs.
Withdrawals - Qualified Policies
The above information describing the taxation of nonqualified policies does not
apply to qualified policies. There are special rules that govern with respect
to qualified policies. Generally, these rules restrict:
. the amount that can be contributed to the policy during any year; and
. the time when amounts can be paid from the policies.
In addition, a penalty tax may be assessed on amounts withdrawn from the policy
prior to the date you reach age 59 1/2, unless you meet one of the exceptions
to this rule. You may also be required to begin taking minimum distributions
from the policy by a certain rule. The terms of the plan may limit the rights
otherwise available to you under the policies.
We have provided more information in the Statement of Additional Information.
You should consult your legal counsel or tax adviser if you are considering
purchasing a policy for use with any retirement plan.
Withdrawals - 403(b) Policies
The Internal Revenue Code limits the withdrawal of premium payments from
certain 403(b) policies. Withdrawals can generally only be made when an owner:
. reaches age 59 1/2;
. leaves his/her job;
. dies;
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<PAGE>
. becomes disabled (as that term is defined in the Internal Revenue Code); or
. in the case of hardship. However, in the case of hardship, the owner can
only withdraw the premium payments and not any earnings.
Taxation of Death Benefit Proceeds
Amounts may be distributed from the policy because of the death of an owner or
the annuitant. Generally, such amounts are includable in the income of the
recipient:
. if distributed in a lump sum, these amounts are taxed in the same manner as
a full surrender; or
. if distributed under an annuity payment option, these amounts are taxed in
the same manner as annuity payments.
For these purposes, the "investment in the contract" is not affected by the
owner's or annuitant's death. That is, the "investment in the contract" remains
generally the total premium payments, less amounts received, which were not
includable in gross income.
Annuity Payments
Although the tax consequences may vary depending on the annuity payment option
you select, in general, for nonqualified and certain qualified policies, only a
portion of the annuity payments you receive will be includable in your gross
income.
In general, the excludable portion of each annuity payment you receive will be
determined as follows:
. Fixed payments - by dividing the "investment in the contract" on the annuity
commencement date by the total expected value of the annuity payments for
the term of the payments. This is the percentage of each annuity payment
that is excludable.
. Variable payments - by dividing the "investment in the contract" on the
annuity commencement date by the total number of expected periodic payments.
This is the amount of each annuity payment that is excludable.
The remainder of each annuity payment is includable in gross income. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional annuity payments is includable in gross income. If you select more
than one annuity payment option, special rules govern the allocation of the
policy's entire "investment in the contract" to each such option, for purposes
of determining the excludable amount of each payment received under that
option. We advise you to consult a competent tax adviser as to the potential
tax effects of allocating amounts to any particular annuity payment option.
If, after the annuity commencement date, annuity payments stop because an
annuitant died, the excess (if any) of the "investment in the contract" as of
the annuity commencement date over the aggregate amount of annuity payments
received that was excluded from gross income is generally allowable as a
deduction for your last taxable year.
Transfers, Assignments or Exchanges of Policies
A transfer of ownership or assignment of a policy, the designation of an
annuitant or other beneficiary who is not also the owner, the selection of
certain annuity commencement dates, or a change of annuitant, may result in
certain income or gift tax consequences to the owner that are beyond the scope
of this discussion. An owner contemplating any such transfer, assignment,
selection, or change should contact a competent tax adviser in respect to the
potential tax effects of such a transaction.
Possible Tax Law Changes
Although the likelihood of legislative changes in uncertain, there is always
the possibility that the tax treatment of the policy could change by
legislation or otherwise. You should consult a tax adviser with respect to
possible tax law changes and their effect on the policy.
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7. ACCESS TO YOUR MONEY
Surrenders
During the accumulation phase, you can have access to the money in your policy
in several ways:
. by making a withdrawal (either a complete or partial withdrawal); or
. by taking annuity payments.
If you want to make a complete withdrawal, you will receive the cash value of
your policy.
If you want to take a partial withdrawal, in most cases it must be for at least
$500. Unless you tell us otherwise, we will take the withdrawal from each of
the investment choices in proportion to the policy value.
Remember that any withdrawal you take will reduce the policy value, and might
reduce the amount of the death benefit. See Section 9, Death Benefit, for more
details. Withdrawals may be subject to a surrender charge.
Income taxes, federal tax penalties and certain restrictions may apply to any
withdrawals you make.
During the income phase, the annuity payment option you select will determine
your access to the money in your policy.
Delay of Payment and Transfers
Payment of any amount due from the mutual fund account or target account for a
surrender, a death benefit, or the death of the owner of a nonqualified policy,
will generally occur within seven business days from the date all required
information is received by AUSA Life. AUSA Life may be permitted to defer such
payment from the mutual fund account and target account if:
. the New York Stock Exchange is closed other than for usual weekends or
holidays or trading on the Exchange is otherwise restricted;
. an emergency exists as defined by the SEC or the SEC requires that trading
be restricted; or
. the SEC permits a delay for the protection of owners.
In addition, transfers of amounts from the mutual fund subaccounts and target
series subaccounts may be deferred under these circumstances.
Pursuant to the requirements of certain state laws, we reserve the right to
defer payment of the cash value from the fixed account for up to six months.
Systematic Payout Option
You can receive regular payments from your policy by using the systematic
payout option. Under this option, you can receive up to 10% (annually) of the
policy value free of surrender charges. Payments can be made monthly,
quarterly, semi-annually, or annually.
8. PERFORMANCE
The Mutual Fund Account
AUSA Life periodically advertises performance of the various mutual fund
subaccounts. We may disclose at least four different kinds of performance.
First, we may 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 mortality and expense risk
fees and administrative charges. It does not reflect the deduction of any
applicable premium taxes or surrender charges. The deduction of any applicable
premium taxes or surrender charges would reduce the percentage increase or make
greater any percentage decrease.
Second, any advertisement will also include total return figures, which reflect
the deduction of the mortality and expense risk fees, administrative charges
and surrender charges. Third, for periods starting prior to the date the
policies were first offered, the performance will be based on the historical
performance of the
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corresponding investment portfolios for the periods commencing from the date on
which the particular investment portfolio was made available through the mutual
fund account. Fourth, in addition, for certain investment portfolios,
performance may be shown for the period commencing from the inception date of
the investment portfolio. These figures should not be interpreted to reflect
actual historical performance of the mutual fund account.
We also 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.
Appendix B contains performance information that you may find useful. It is
divided into various parts, depending upon the type of performance information
shown. Future performance will vary and future results will not be the same as
the results shown.
The Target Account
Performance information regarding the target series subaccount is in Appendix B
and in the Statement of Additional Information.
9. DEATH BENEFIT
We will pay a death benefit to your beneficiary, under certain circumstances,
if the annuitant dies before the accumulation phase and the annuitant was also
an owner. (If the annuitant was not an owner, a death benefit may or may not be
paid. See below). The beneficiary may choose an annuity payment option, or may
choose to receive a lump sum.
When We Pay A Death Benefit
Before the Annuity Commencement Date
We will pay a death benefit to your beneficiary IF:
. you are both the annuitant and an owner of the policy; and
. you die before the annuity commencement date.
If the only beneficiary is your surviving spouse, then he or she may elect to
continue the policy as the new annuitant and owner, instead of receiving the
death benefit.
We will also pay a death benefit to your beneficiary IF:
. you are not the annuitant; and
. the annuitant dies before the annuity commencement date; and
. you specifically requested that the death benefit be paid upon the
annuitant's death.
Distribution requirements apply to the policy value upon the death of any
owner. These requirements are detailed in the Statement of Additional
Information.
After the Annuity Commencement Date
The death benefit payable, if any, on or after the annuity commencement date
depends on the annuity payment option selected.
IF:
. you are not the annuitant; and
. you die on or after the annuity commencement date; and
. the entire interest in the policy has not been paid;
THEN:
. the remaining portion of such interest in the policy will be distributed at
least as rapidly as under the method of distribution being used as of the
date of your death.
When We Do Not Pay A Death Benefit
No death benefit is paid in the following cases:
IF:
. you are not the annuitant; and
. the annuitant dies prior to the annuity commencement date; and
. you did not specifically request that the death benefit be paid upon the
annuitant's death;
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THEN:
. you will become the new annuitant and the policy will continue.
IF:
. you are not the annuitant; and
. you die prior to the annuity commencement date;
THEN:
. the new owner must surrender the policy for the policy value within five
years of your death.
Note carefully. If the owner does not name a contingent owner, the owner's
estate will become the new owner. If no probate estate is opened (because, for
example, the owner has precluded the opening of a probate estate by means of a
trust or other instrument), and AUSA Life has not received written notice of
the trust as a successor owner signed prior to the owner's death, then that
trust may not exercise ownership rights to the policy. It may be necessary to
open a probate estate in order to exercise ownership rights to the policy if no
contingent owner is named in a written notice received by AUSA Life.
Amount of Death Benefit
The death benefit may be paid as a lump sum or as annuity payments. The amount
of the death benefit depends on the guaranteed minimum death benefit option you
chose when you bought the policy. The death benefit will be the greater of:
. the policy value on the date we receive the required information; or
. the guaranteed minimum death benefit (discussed below), plus premium
payments, less partial withdrawals from the date of death to the date the
death benefit is paid.
Guaranteed Minimum Death Benefit
On the policy application, you generally may choose one of the following
guaranteed minimum death benefit options listed below.
After the policy is issued, you cannot make an election and the death benefit
cannot be changed.
Annual Step-Up Death Benefit
Largest policy value on the date of issue or on any policy anniversary prior to
the earlier of the date of death or the owner's 81st birthday, plus premium
payments less any partial withdrawals taken, subsequent to the date of the
policy anniversary with the largest policy value.
The Annual Step-Up Death Benefit is not available if the owner or annuitant is
81 or older on the policy date.
Return of Premium Death Benefit
Total premium payments, less any partial withdrawals (discussed below) as of
the date of death.
The Return of Premium Death Benefit will be in effect if you do not choose one
of the options on the policy application.
IF, under both death benefit options:
. the surviving spouse elects to continue the policy instead of receiving the
death benefit; and
. the guaranteed minimum death benefit is greater than the policy value;
THEN:
. we will increase the policy value to be equal to the guaranteed minimum
death benefit. This increase is made only at the time the surviving spouse
elects to continue the policy.
Adjusted Partial Withdrawal
When you request a partial withdrawal, your guaranteed minimum death benefit
will be reduced by an amount called the adjusted partial withdrawal. Under
certain circumstances, the adjusted partial withdrawal may be more than the
amount of your withdrawal request. It is also possible that if a death benefit
is paid after you have made a partial withdrawal, then the total amount paid
could be less than the total premium payments. We have included an explanation
of this adjustment in the Statement of Additional Information.
31
<PAGE>
10. OTHER INFORMATION
Ownership
You, as owner of the policy, exercise all rights under the policy. You can
change the owner at any time by notifying us in writing. An ownership change
may be a taxable event.
Assignment
You can also assign the policy any time during your lifetime. AUSA Life 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 policy before we receive notice of the assignment. An
assignment may be a taxable event. There may be limitations on your ability to
assign a policy.
AUSA Life Insurance Company, Inc.
AUSA Life Insurance Company, Inc. was incorporated under the laws of the State
of New York on October 3, 1947. It is engaged in the sale of life and health
insurance and annuity policies. AUSA Life is a wholly-owned indirect subsidiary
of AEGON USA, Inc. which conducts most of its operations through subsidiary
companies engaged in the insurance business or in providing non-insurance
financial services. All of the stock of AEGON USA, Inc., is indirectly owned by
AEGON N.V. of the Netherlands, the securities of which are publicly traded.
AEGON N.V., a holding company, conducts its business through subsidiary
companies engaged primarily in the insurance business. AUSA Life is licensed in
the District of Columbia, and in all states except Hawaii.
All obligations arising under the policies, including the promise to make
annuity payments, are general corporate obligations of AUSA Life.
The Mutual Fund Account
AUSA Life established a mutual fund account, called the AUSA Endeavor Variable
Annuity Account, under the laws of the State of New York on September 27, 1994.
The mutual fund account receives and currently invests the premium payments
that are allocated to it for investment in shares of the underlying mutual fund
portfolios.
The mutual fund account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940. However, the SEC does not supervise
the management, the investment practices, or the policies of the mutual fund
account or AUSA Life.
The assets of the mutual fund account are held in AUSA Life's name on behalf of
the mutual fund account and belong to AUSA Life. However, those assets that
underlie the policies are not chargeable with liabilities arising out of any
other business AUSA Life may conduct.
Information about the mutual fund account can be reviewed and copied at the
SEC's Public Reference Room in Washington, D.C. You may obtain information
about the operation of the public reference room by calling the SEC at 1-800-
SEC-0330. In addition, the SEC maintains a web site (http://www.sec.gov) that
contains other information regarding the mutual fund account.
The Target Account
AUSA Life established the AUSA Endeavor Target Account (the target account)
under the laws of the state of New York on March 24, 1998. The target account
is registered with the SEC under the Investment Company Act of 1940, as
amended, as an open-end management investment company and meets the definition
of a separate account under federal securities laws. However, the SEC does not
supervise the management or the investment practices or policies of the target
account or AUSA Life.
The DowSM Target 10 Subaccount (January Series) and the DowSM Target 5
Subaccount (January Series) are non-diversified target series subaccounts of
the target account.
32
<PAGE>
Legislation. Legislation may be enacted at any time that could negatively
affect the common shares in the target series subaccounts or the issuers of the
common shares. Changing approaches to regulation, particularly with respect to
the environment or with respect to the petroleum industry, may have a negative
impact on certain companies represented in the target series subaccounts. There
can be no assurance that future legislation, regulation or deregulation will
not have a material adverse effect on the target series subaccounts or will not
impair the ability of the issuers of the common shares to achieve their
business goals.
Mixed and Shared Funding
Before making a decision concerning the allocation of premium payments to a
particular mutual fund subaccount, please read the Endeavor Series Trust
prospectus. Endeavor Series Trust is not limited to selling its shares to this
mutual fund account and can accept investments from any separate account or
qualified retirement plan of an insurance company. Since the portfolios of
Endeavor Series Trust are available to registered mutual fund accounts offering
variable annuity products of AUSA Life, as well as variable annuity and
variable life products of other insurance companies, there is a possibility
that a material conflict may arise between the interests of this mutual fund
account and one or more of the mutual fund accounts of another participating
insurance company. In the event of a material conflict, the affected insurance
companies, including AUSA Life, agree to take any necessary steps to resolve
the matter. This includes removing their mutual fund accounts from Endeavor
Series Trust. See the Endeavor Series Trust prospectus for more details.
Reinstatements
You may surrender your policy and transfer your money directly to another life
insurance company (sometimes referred to as a 1035 Exchange or a trustee-to-
trustee transfer). You may also request us to reinstate your policy after such
a transfer by returning the same total dollar amount of funds to the applicable
investment choices. The dollar amount will be used to purchase new accumulation
units at the then-current price. Because of changes in market value, your new
accumulation units may be worth more or less than the units you previously
owned. We recommend that you consult a tax professional to explain the possible
tax consequences of exchanges and/or reinstatements.
Voting Rights
Mutual Fund Account. AUSA Life will vote all shares of Endeavor Series Trust in
accordance with instructions we receive from you and other owners that have
voting interests in the portfolios. We will send you and other owners written
requests for instructions on how to vote those shares. When we receive those
instructions, we will vote all of the shares in proportion to those
instructions. If, however, we determine that we are permitted to vote the
shares in our own right, we may do so.
Each person having a voting interest will receive proxy material, reports, and
other materials relating to the appropriate portfolio.
Target Account. You (or the person receiving annuity payments) can vote on
certain matters with respect to the target series subaccounts you have an
interest in. Such matters include:
. changes in the investment advisory agreement;
. changes in the fundamental investment policies;
. any other matter requiring a vote of persons holding voting interests; and
. matters pursuant to the requirements of Rules 12b-1 and 18f-2 of the
Investment Company Act of 1940.
On certain matters, each target series subaccount may vote separately. Each
person having a voting interest will receive proxy material, reports, and other
materials relating to the appropriate target series subaccount.
33
<PAGE>
Distributor of the Policies
AFSG Securities Corporation is the principal underwriter of the policies. Like
AUSA Life, it is an indirect wholly-owned subsidiary of AEGON USA, Inc. It is
located at 4333 Edgewood Road N.E., Cedar Rapids, IA 52499-0001. AFSG
Securities Corporation is registered as a broker/dealer under the Securities
Exchange Act of 1934. It is a member of the National Association of Securities
Dealers, Inc.
Commissions of up to 6% of premium payments will be paid to broker/dealers who
sell the policies under agreements with AFSG Securities Corporation. These
commissions are not deducted from premium payments. In addition, certain
production, persistency and managerial bonuses may be paid. AUSA Life may also
pay compensation to financial institutions for their services in connection
with the sale and servicing of the policies.
Non-participating Policy
The policy does not participate or share in the profits or surplus earnings of
AUSA Life. No dividends are payable on the policy.
Variations in Policy Provisions
Certain provisions of the policies may vary from the descriptions in this
prospectus in order to comply with different state laws. See your policy for
variations since any such state variations will be included in your policy or
in riders or endorsements attached to your policy.
Year 2000 Matters
We have in place a Year 2000 Project Plan (the "Plan") to review and analyze
existing hardware and software systems, as well as voice and data
communications systems, to determine if they are Year 2000 compliant. As of the
date of this prospectus, all of our mission-critical systems are Year 2000
compliant and ready. The Year 2000 Project Plan is continuing as scheduled, as
we continue with the validation of our mission-critical and non-mission-
critical systems, including revalidation testing in 1999. In addition, AUSA
Life has undertaken aggressive initiatives to test all systems that interface
with any third parties and other business partners. All of these steps are
aimed at allowing current operations to remain unaffected by the Year 2000 date
change.
As of the date of this prospectus, we have identified and made available what
we believe are the appropriate resources of hardware, people, and dollars,
including the engagement of outside third parties, to ensure that the Plan will
be completed.
Our actions under The Year 2000 Project Plan are intended to significantly
reduce AUSA Life's risk of a material business interruption based on the Year
2000 issues. Resolving the Year 2000 computer problem is complex and
multifaceted. We cannot know conclusively whether a response plan is successful
until the Year 2000 arrives (or an earlier date if the systems or equipment
address Year 2000 data prior to the Year 2000). In spite of its efforts or
results, AUSA Life's ability to function unaffected to and through the Year
2000 may be adversely affected by actions, or failure to act, of third parties
beyond our knowledge or control.
This statement is a Year 2000 Readiness Disclosure pursuant to Section 3(9) of
the Year 2000 Information and Readiness Disclosure Act, 15 U.S.C. (S) 1 (1998).
See the prospectus for the One Group Investment Trust for information on its
preparation for Year 2000.
IMSA
AUSA Life is a charter member of the Insurance Marketplace Standards
Association (IMSA). IMSA is an independent, voluntary organization of life
insurance companies. It promotes high ethical standards in sales, advertising
and servicing of individual life insurance and annuity products. Companies must
undergo a rigorous self and independent assessment of their practices to become
a
34
<PAGE>
member of IMSA. The IMSA logo in our sales literature shows our ongoing
commitment to these standards.
Legal Proceedings
There are no legal proceedings to which the mutual fund account or target
account is a party or to which the assets of the account are subject. AUSA
Life, like other life insurance companies, is involved in lawsuits. In some
class action and other lawsuits involving other insurers, substantial damages
have been sought and/or material settlement payments have been made. Although
the outcome of any litigation cannot be predicted with certainty, AUSA Life
believes that at the present time there are no pending or threatened lawsuits
that are reasonably likely to have a material adverse impact on the mutual fund
account, target account or AUSA Life.
Financial Statements
The financial statements of AUSA Life and the mutual fund account are included
in the Statement of Additional Information. There are no financial statements
for the target account because it had not commenced operations as of the date
of this prospectus.
Table of Contents of the Statement of Additional Information
<TABLE>
<S> <C>
Glossary of Special Terms
The Policy - General Provisions
Certain Federal Income Tax Consequences
Investment Experience
Historical Performance Data
The Target Account
Published Ratings
State Regulation of AUSA Life
Administration
Records and Reports
Distribution of the Policies
Voting Rights
Other Products
Custody of Assets
Legal Matters
Independent Auditors
Other Information
Financial Statements
</TABLE>
35
<PAGE>
APPENDIX A
CONDENSED FINANCIAL INFORMATION
The Mutual Fund Account
The accumulation unit values and the number of accumulation units outstanding
for each mutual fund subaccount from the date of inception are shown in the
following tables.
Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning of at End of Units at End
Year Year of Year
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Endeavor Asset Allocation Subaccount
1998(/6/)......................... $ 2.168718 $ 2.529863 31,242.813
- ---------------------------------------------------------------------------------
Endeavor Money Market Subaccount
1998(/6/)......................... $ 1.196982 $ 1.236621 52,322.018
- ---------------------------------------------------------------------------------
T. Rowe Price Equity Income
Subaccount
1998(/6/)......................... $ 1.885394 $ 2.060734 145,891.829
- ---------------------------------------------------------------------------------
T. Rowe Price Growth Stock
Subaccount
1998(/6/)......................... $ 2.011973 $ 2.586964 206,657.078
- ---------------------------------------------------------------------------------
T. Rowe Price International Stock
Subaccount
1998(/6/)......................... $ 1.313338 $ 1.529380 39,361.912
- ---------------------------------------------------------------------------------
Endeavor Value Equity Subaccount
1998(/6/)......................... $ 2.022644 $ 2.207657 106,211.103
- ---------------------------------------------------------------------------------
Endeavor Opportunity Value
Subaccount
1998(/6/)......................... $ 1.136598 $ 1.197263 70,958.668
- ---------------------------------------------------------------------------------
Endeavor Enhanced Index Subaccount
1998(/6/)......................... $ 1.199020 $ 1.574026 202,995.681
- ---------------------------------------------------------------------------------
Dreyfus U.S. Government Securities
Subaccount
1998(/6/)......................... $ 1.231625 $ 1.283673 38,151.310
- ---------------------------------------------------------------------------------
Dreyfus Small Cap Value Subaccount
1998(/6/)......................... $ 1.780884 $ 1.781675 119,463.216
- ---------------------------------------------------------------------------------
Endeavor Janus Growth Subaccount
1998(/6/)......................... $19.428802 $31.822714 18,019.791
</TABLE>
36
<PAGE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning at End Units at End
of Year of Year of Year
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Endeavor Asset Allocation Subaccount
1998.............................. $ 2.171948 $ 2.535888 2,197,971.735
1997.............................. $ 1.833135 $ 2.171948 1,871,808.286
1996.............................. $ 1.577873 $ 1.833135 1,123,469.170
1995.............................. $ 1.301669 $ 1.577873 607,869.454
- -------------------------------------------------------------------------------
Endeavor Money Market Subaccount
1998.............................. $ 1.196418 $ 1.239556 1,017,991.339
1997.............................. $ 1.154219 $ 1.196418 611,981.762
1996.............................. $ 1.115718 $ 1.154219 665,174.123
1995.............................. $ 1.072424 $ 1.115718 271,034.756
- -------------------------------------------------------------------------------
T. Rowe Price Equity Income
Subaccount
1998.............................. $ 1.925022 $ 2.065623 3,702,824.740
1997.............................. $ 1.521680 $ 1.925022 2,982,510.532
1996.............................. $ 1.287240 $ 1.521680 1,387,607.312
1995(/2/)......................... $ 1.000000 $ 1.287240 293,619.530
- -------------------------------------------------------------------------------
T. Rowe Price Growth Stock
Subaccount
1998.............................. $ 2.043480 $ 2.593121 2,640,487.984
1997.............................. $ 1.611613 $ 2.043480 1,925,118.021
1996.............................. $ 1.353339 $ 1.611613 964,658.085
1995(/3/)......................... $ 1.000000 $ 1.353339 189,613.999
- -------------------------------------------------------------------------------
T. Rowe Price International Stock
Subaccount
1998.............................. $ 1.346560 $ 1.533035 4,958,037.992
1997.............................. $ 1.330640 $ 1.346560 4,334,553.810
1996.............................. $ 1.171039 $ 1.330640 2,084,832.841
1995.............................. $ 1.073958 $ 1.171039 681,093.799
- -------------------------------------------------------------------------------
Endeavor Value Equity Subaccount
1998.............................. $ 2.086130 $ 2.212928 3,668,656.747
1997.............................. $ 1.694854 $ 2.086130 2,981,906.712
1996.............................. $ 1.387903 $ 1.694854 1,565,599.143
1995.............................. $ 1.045610 $ 1.387903 547,233.586
- -------------------------------------------------------------------------------
Endeavor Opportunity Value
Subaccount
1998.............................. $ 1.156993 $ 1.200101 886,891.881
1997.............................. $ 1.004355 $ 1.156993 869,832.105
1996(/4/)......................... $ 1.000000 $ 1.004355 178,913.412
- -------------------------------------------------------------------------------
Endeavor Enhanced Index Subaccount
1998.............................. $ 1.217647 $ 1.577775 1,007,218.727
1997(/5/)......................... $ 1.000000 $ 1.217647 422,227.210
</TABLE>
37
<PAGE>
Return of Premium Death Benefit continued
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
at Beginning at End Units at End
of Year of Year of Year
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Dreyfus Small Cap Value Subaccount
1998.............................. $ 1.851229 $ 1.785929 2,915,575.262
1997.............................. $ 1.496065 $ 1.851229 2,294,637.110
1996.............................. $ 1.206843 $ 1.496065 1,239,443.264
1995.............................. $ 1.072941 $ 1.206843 535,283.029
- ------------------------------------------------------------------------------
Endeavor Janus Growth Subaccount
1998.............................. $19.665157 $31.898334 636,917.148
1997.............................. $16.964068 $19.665157 557,897.978
1996.............................. $14.583843 $16.964068 306,855.075
1995.............................. $10.051117 $14.583843 97,436.321
- ------------------------------------------------------------------------------
Dreyfus U.S. Government Securities
Subaccount
1998.............................. $ 1.215033 $ 1.286733 1,728,824.679
1997.............................. $ 1.128769 $ 1.215033 1,093,934.793
1996.............................. $ 1.124292 $ 1.128769 589,779.900
1995(/1/)......................... $ 0.985803 $ 1.124292 204,813.593
</TABLE>
(1) Period from June 16, 1995 through December 31, 1995
(2) Period from June 28, 1995 through December 31, 1995
(3) Period from April 28, 1995 through December 31, 1995
(4) Period from December 13, 1996 through December 31, 1996.
(5) Period from May 1, 1997 through December 31, 1997.
(6) Period from January 14, 1998 through December 31, 1998.
The Endeavor Select 50 Subaccount and the Endeavor High Yield Subaccount had
not commenced operations as of December 31, 1998. Accordingly, no comparable
data is available for those Subaccounts.
38
<PAGE>
APPENDIX B
HISTORICAL PERFORMANCE DATA
THE MUTUAL FUND ACCOUNT
Standardized Performance Data
AUSA Life may advertise historical yields and total returns for the subaccounts
of the mutual fund account. In addition, AUSA Life may advertise the effective
yield of the subaccount investing in the Endeavor Money Market Portfolio (the
"Endeavor Money Market Subaccount"). These figures will be calculated according
to standardized methods prescribed by the SEC. They are based on historical
earnings and are not intended to indicate future performance.
Endeavor Money Market Subaccount. The yield of the Endeavor Money Market
Subaccount for a policy refers to the annualized income generated by an
investment under a policy in the subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-
day period is generated each seven-day period over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment under a
policy in the subaccount is assumed to be reinvested. The effective yield will
be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Other Subaccounts. The yield of a mutual fund subaccount (other than the
Endeavor Money Market Subaccount) for a policy refers to the annualized income
generated by an investment under a policy in the subaccount over a specified
thirty-day period. The yield is calculated by assuming that the income
generated by the investment during that thirty-day period is generated each
thirty-day period over a 12-month period and is shown as a percentage of the
investment.
The total return of a subaccount refers to return quotations assuming an
investment under a policy has been held in the subaccount for various periods
of time including a period measured from the date the subaccount commenced
operations. When a subaccount has been in operation for one, five, and ten
years, respectively, the total return for these periods will be provided. The
total return quotations for a subaccount will represent the average annual
compounded rates of return that equate an initial investment of $1,000 in the
subaccount to the redemption value of that investment as of the last day of
each of the periods for which total return quotations are provided.
The yield and total return calculations for a subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular policy. The
yield calculations also do not reflect the effect of any surrender charge that
may be applicable to a particular policy. To the extent that a premium tax
and/or surrender charge is applicable to a particular policy, the yield and/or
total return of that policy will be reduced. For additional information
regarding yields and total returns calculated using the standard formats
briefly summarized above, please refer to the Statement of Additional
Information, a copy of which may be obtained from the service office of AUSA
Life upon request.
Based on the method of calculation described in the Statement of Additional
Information, the average annual total returns for periods from inception of the
subaccounts to December 31, 1998, and for the one and five year periods ended
December 31, 1998, are shown in Table 1 below. Total returns shown reflect
deductions for the mortality and expense risk fee and administrative charges.
Performance figures may reflect the 1.25% mortality and expense risk fee for
the Annual Step-Up Death Benefits, or the 1.10% mortality and expense risk fee
for the Return of Premium Death Benefit. Standard total return calculations
will reflect the effect of surrender charges that may be applicable to a
particular period.
39
<PAGE>
TABLE 1
Standard Average Annual Total Returns(/1/)
- ------------------------------------------------------------------------------
Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception
1 Year 5 Year of the Subaccount
Ended Ended Subaccount Inception
Subaccount 12/31/98 12/31/98 to 12/31/98 Date
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation... 11.22% N/A 12.51% January 1, 1995
T. Rowe Price Equity
Income..................... 1.73% N/A 19.09% June 28, 1995
T. Rowe Price Growth Stock.. 21.40% N/A 26.23% April 28, 1995
T. Rowe Price International
Stock...................... 8.30% N/A 5.39% January 1, 1995
Endeavor Value Equity....... 0.50% N/A 14.86% January 1, 1995
Endeavor Opportunity Value.. (1.86%) N/A 15.10% December 13, 1996
Endeavor Enhanced Index..... 24.09% N/A 52.22% May 1, 1997
Dreyfus U.S. Government
Securities................. 0.32% N/A 4.92% June 16, 1995
Dreyfus Small Cap
Value(/2/)................. (9.14%) N/A 10.29% January 1, 1995
Endeavor Select 50(/3/)..... N/A N/A N/A N/A
Endeavor High Yield(/3/).... N/A N/A N/A N/A
Endeavor Janus Growth(/4/).. 56.86% N/A 16.45% January 1, 1995
- -------------------------------------------------------------------------------
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
- -------------------------------------------------------------------------------
<CAPTION>
Inception
1 Year 5 Year of the Subaccount
Ended Ended Subaccount Inception
Subaccount 12/31/98 12/31/98 to 12/31/98 Date
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation... 11.40% N/A 17.70% January 1, 1995
T. Rowe Price Equity
Income..................... 1.89% N/A 18.48% June 28, 1995
T. Rowe Price Growth Stock.. 21.59% N/A 24.32% April 28, 1995
T. Rowe Price International
Stock(/1/)................. 8.47% N/A 8.75% January 1, 1995
Endeavor Value Equity....... 0.70% N/A 20.22% January 1, 1995
Endeavor Opportunity Value.. (1.71%) N/A 7.33% December 13, 1996
Endeavor Enhanced Index..... 24.29% N/A 28.82% May 1, 1997
Dreyfus U.S. Government
Securities................. 0.48% N/A 4.35% June 16, 1995
Dreyfus Small Cap
Value(/2/)................. (9.00%) N/A 13.09% January 1, 1995
Endeavor Select 50(/3/)..... N/A N/A N/A N/A
Endeavor High Yield(/3/).... N/A N/A N/A N/A
Endeavor Janus Growth(/4/).. 57.14% N/A 33.17% January 1, 1995
</TABLE>
- ------------------------------------------------------------------------------
(1) These calculations also assume the policy has been in effect for less than
eight years and that annuity payments have not commenced. Policies in
effect for more than seven years would experience lower mortality and
expense risk fees and therefore the yield and/or total return of such
policies would be increased. In no event will policies which have reached
the annuity commencement date reflect a return based on a mortality and
expense risk fee and administrative charge of more than 1.40%, regardless
of the death benefit option in effect just prior to the commencement of
annuity payments.
(2) Effective September 16, 1996, The Dreyfus Corporation became the adviser
to the Dreyfus Small Cap Value Portfolio, formerly known as Quest for
Value Small Cap Portfolio. The portfolio was previously advised by OpCap
Advisors.
(3) The Endeavor Select 50 Portfolio and the Endeavor High Yield Portfolio had
not commenced operations as of December 31, 1998. Accordingly, comparable
information is not available.
(4) Effective April 30, 1999, shares of the WRL Growth Portfolio were removed
and replaced with shares of the Endeavor Janus Growth Portfolio.
Performance prior to May 1, 1999 reflects performance of the annuity
subaccount while it was invested in the WRL Growth Portfolio.
The figures for the "from inception" periods in the above tables reflect waiver
of advisory fees and reimbursement of other expenses for all portfolios except
the T. Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock
Portfolio. In the absence of such waivers, the average annual total return
figures above for the inception periods would have been lower.
40
<PAGE>
Non-Standardized Performance Data
In addition to the standard data discussed above, similar performance data for
other periods may also be shown.
AUSA Life may present the total return data described above on a non-
standardized basis. This means that the data may not be reduced by all the fees
and charges under the policy and that the data may be presented for different
time periods and for different premium payment amounts. Non-standardized
performance data will only be disclosed if standardized performance data for
the required periods is also disclosed. Table 2 shows average annual total
returns of the mutual fund subaccount since their inception reduce by all fees
and charges under the policy except surrender charges:
TABLE 2
Average Annual Total Returns(/1/)
(Assuming No Surrender Charge)
- ------------------------------------------------------------------------------
Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception
1 Year 5 Year of the Subaccount
Ended Ended Subaccount Inception
Subaccount 12/31/98 12/31/98 to 12/31/98 Date
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation... 16.52% N/A 12.56% January 1, 1995
T. Rowe Price Equity
Income..................... 7.09% N/A 19.68% June 28, 1995
T. Rowe Price Growth Stock.. 26.64% N/A 26.69% April 28, 1995
T. Rowe Price International
Stock...................... 13.62% N/A 5.47% January 1, 1995
Endeavor Value Equity....... 5.87% N/A 15.01% January 1, 1995
Endeavor Opportunity Value.. 3.52% N/A 19.50% December 13, 1996
Endeavor Enhanced Index..... 29.32% N/A 57.27% May 1, 1997
Dreyfus U.S. Government
Securities................. 5.69% N/A 5.39% June 16, 1995
Dreyfus Small Cap
Value(/2/)................. (3.72%) N/A 10.56% January 1, 1995
Endeavor Select 50(/3/)..... N/A N/A N/A N/A
Endeavor High Yield(/3/).... N/A N/A N/A N/A
Endeavor Janus Growth(/4/).. 61.89% N/A 16.45% January 1, 1995
- -------------------------------------------------------------------------------
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
- -------------------------------------------------------------------------------
<CAPTION>
Inception
1 Year 5 Year of the Subaccount
Ended Ended Subaccount Inception
Subaccount 12/31/98 12/31/98 to 12/31/98 Date
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation... 16.70% N/A 18.07% January 1, 1995
T. Rowe Price Equity
Income..................... 7.25% N/A 19.08% June 28, 1995
T. Rowe Price Growth Stock.. 26.83% N/A 24.79% April 28, 1995
T. Rowe Price International
Stock...................... 13.79% N/A 9.24% January 1, 1995
Endeavor Value Equity....... 6.06% N/A 20.56% January 1, 1995
Endeavor Opportunity Value.. 3.67% N/A 9.30% December 13, 1996
Endeavor Enhanced Index..... 29.51% N/A 31.36% May 1, 1997
Dreyfus U.S. Government
Securities................. 5.85% N/A 5.23% June 16, 1995
Dreyfus Small Cap
Value(/2/)................. (3.58%) N/A 13.52% January 1, 1995
Endeavor Select 50(/3/)..... N/A N/A N/A N/A
Endeavor High Yield(/3/).... N/A N/A N/A N/A
Endeavor Janus Growth(/4/).. 62.17% N/A 33.39% January 1, 1995
</TABLE>
- ------------------------------------------------------------------------------
41
<PAGE>
(1) These calculations also assume the policy has been in effect for less than
eight years and that annuity payments have not commenced. Policies in
effect for more than seven years would experience lower mortality and
expense risk fees and therefore the yield and/or total return of such
policies would be increased. In no event will policies which have reached
the annuity commencement date reflect a return based on a mortality and
expense risk fee and administrative charge of more than 1.40%, regardless
of the death benefit option in effect just prior to the commencement of
annuity payments.
(2) Effective September 16, 1996, The Dreyfus Corporation became the adviser to
the Dreyfus Small Cap Value Portfolio, formerly known as Quest for Value
Small Cap Portfolio. The portfolio was previously advised by OpCap
Advisors.
(3) The Endeavor Select 50 Portfolio and the Endeavor High Yield Portfolio had
not commenced operations as of December 31, 1998. Accordingly, comparable
information is not available.
(4) Effective April 30, 1999, shares of the WRL Growth Portfolio were removed
and replaced with shares of the Endeavor Janus Growth Portfolio.
Performance prior to May 1, 1999 reflects performance of the annuity
subaccount while it was invested in the WRL Growth Portfolio.
The figures for the "from inception" periods in the above tables reflect waiver
of advisory fees and reimbursement of other expenses for all portfolios except
the T. Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock
Portfolio. In the absence of such waivers, the average annual total return
figures above for the inception periods would have been lower.
Adjusted Historical Performance Data. AUSA Life may present historic
performance data for the underlying portfolios since their inception reduced by
some or all of the fees and charges under the policy. Such adjusted historic
performance includes data that precedes the inception dates of the mutual fund
subaccounts. This data is designed to show the performance that would have
resulted if the policy had been in existence during that time.
For instance, as shown in Table 3 and Table 4 below, AUSA Life may disclose
average annual total returns for the portfolios reduced by all fees and charges
under the policy, as if the policy had been in existence since the inception of
the portfolio. Such fees and charges include the mortality and expense risk
fee, administrative charge and surrender charges. Table 3 assumes a complete
surrender of the policy at the end of the period; therefore the surrender
charge is deducted. Table 4 assumes that the policy is not surrendered, and
therefore the surrender charge is not deducted.
42
<PAGE>
The following information is based on the method of calculation described in
the Statement of Additional Information. The adjusted historical average annual
total returns for periods ended December 31, 1998, were as follows:
TABLE 3
Adjusted Historical Average Annual Total Returns(/1/)
Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corresponding
10 Year or Portfolio
Portfolio 1 Year 5 Year Inception Inception Date
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation....... 11.22% 12.29% 12.51% April 8, 1991
T. Rowe Price Equity Income..... 1.73% N/A 19.09% January 3, 1995
T. Rowe Price Growth Stock...... 21.40% N/A 26.23% January 3, 1995
T. Rowe Price International
Stock(/2/)..................... 8.30% 5.31% 5.39% April 8, 1991
Endeavor Value Equity........... 0.50% 16.38% 14.86% May 27, 1993
Endeavor Opportunity Value...... (1.86%) N/A 6.87% November 18, 1996
Endeavor Enhanced Index......... 24.09% N/A 28.63% May 1, 1997
Dreyfus U.S. Government
Securities..................... 0.32% N/A 4.92% May 9, 1994
Dreyfus Small Cap Value(/3/).... (9.14%) 9.57% 10.29% May 4, 1993
Endeavor Select 50.............. N/A N/A (1.93%) February 2, 1998
Endeavor High Yield............. N/A N/A (10.99%) June 2, 1998
Endeavor Janus Growth(/4/)...... 56.86% 23.09% 20.63% October 2, 1986
- ------------------------------------------------------------------------------
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
- ------------------------------------------------------------------------------
<CAPTION>
Corresponding
10 Year or Portfolio
Portfolio 1 Year 5 Year Inception Inception Date
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation....... 11.40% 12.45% 12.68% April 8, 1991
T. Rowe Price Equity Income..... 1.89% N/A 19.39% January 3, 1995
T. Rowe Price Growth Stock...... 21.59% N/A 26.51% January 3, 1995
T. Rowe Price International
Stock(/2/)..................... 8.47% 5.46% 5.55% April 8, 1991
Endeavor Value Equity........... 0.70% 16.57% 15.07% May 27, 1993
Endeavor Opportunity Value...... (1.71%) N/A 7.03% November 18, 1996
Endeavor Enhanced Index......... 24.29% N/A 28.82% May 1, 1997
Dreyfus U.S. Government
Securities..................... 0.48% N/A 5.08% May 9, 1994
Dreyfus Small Cap Value(/3/).... (9.00%) 9.74% 10.55% May 4, 1993
Endeavor Select 50.............. N/A N/A (1.79%) February 2, 1998
Endeavor High Yield............. N/A N/A (10.91%) June 2, 1998
Endeavor Janus Growth(/4/)...... 57.14% 23.28% 20.76% October 2, 1986
</TABLE>
+ Ten Year Date
43
<PAGE>
TABLE 4
Adjusted Historical Average Annual Total Returns(/1/)
(Assuming No Surrender Charge)
Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corresponding
10 Year or Portfolio
Portfolio 1 Year 5 Year Inception Inception Date
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation....... 16.52% 12.49% 12.56% April 8, 1991
T. Rowe Price Equity Income..... 7.09% N/A 19.68% January 3, 1995
T. Rowe Price Growth Stock...... 26.64% N/A 26.69% January 3, 1995
T. Rowe Price International
Stock(/2/)..................... 13.62% 5.59% 5.47% April 8, 1991
Endeavor Value Equity........... 5.87% 16.55% 15.01% May 27, 1993
Endeavor Opportunity Value...... 3.52% N/A 8.78% November 18, 1996
Endeavor Enhanced Index......... 29.32% N/A 31.18% May 1, 1997
Dreyfus U.S. Government
Securities..................... 5.69% N/A 5.39% May 9, 1994
Dreyfus Small Cap Value(/3/).... (3.72%) 9.81% 10.56% May 4, 1993
Endeavor Select 50.............. N/A N/A 5.07% February 2, 1998
Endeavor High Yield............. N/A N/A (3.99%) June 2, 1998
Endeavor Janus Growth(/4/)...... 61.89% 23.22% 20.63% October 2, 1986
- ------------------------------------------------------------------------------
</TABLE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corresponding
10 Year or Portfolio
Portfolio 1 Year 5 Year Inception Inception Date
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation....... 16.70% 12.66% 12.72% April 8, 1991
T. Rowe Price Equity Income..... 7.25% N/A 19.85% January 3, 1995
T. Rowe Price Growth Stock...... 26.83% N/A 26.87% January 3, 1995
T. Rowe Price International
Stock(/2/)..................... 13.79% 5.74% 5.62% April 8, 1991
Endeavor Value Equity........... 6.06% 16.74% 15.22% May 27, 1993
Endeavor Opportunity Value...... 3.67% N/A 8.94% November 18, 1996
Endeavor Enhanced Index......... 29.51% N/A 31.36% May 1, 1997
Dreyfus U.S. Government
Securities..................... 5.85% N/A 5.55% May 9, 1994
Dreyfus Small Cap Value(/3/).... (3.58%) 9.97% 10.73% May 4, 1993
Endeavor Select 50.............. N/A N/A 5.21% February 2, 1998
Endeavor High Yield............. N/A N/A (3.91%) June 2, 1998
Endeavor Janus Growth(/4/)...... 62.17% 23.40% 20.76% October 2, 1986
</TABLE>
- ------------------------------------------------------------------------------
+ Ten Year Date
(1) The calculation of total return performance for periods prior to inception
of the subaccounts reflects deductions for the mortality and expense risk
fee and administrative charge on a monthly basis, rather than a daily
basis. The monthly deduction is made at the beginning of each month and
generally approximates the performance that would have resulted if the
subaccounts had actually been in existence since the Inception of the
Portfolio.
(2) Effective January 1, 1995, Rowe-Price Fleming International, Inc. became
the Adviser to the T. Rowe Price International Stock Portfolio. The
Portfolio's name was changed from the Global Growth Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (i.e.,
non-U.S. companies).
(3) Effective September 16, 1996, The Dreyfus Corporation became the adviser to
the Dreyfus Small Cap Value Portfolio, formerly known as Quest for Value
Small Cap Portfolio. The portfolio was previously advised by OpCap
Advisors.
(4) Effective April 30, 1999, shares of the WRL Growth Portfolio were removed
and replaced with shares of the Endeavor Janus Growth Portfolio.
Performance prior to May 1, 1999 reflects performance of the annuity
subaccount while it was invested in the WRL Growth Portfolio.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and the T. Rowe
Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception periods
would have been lower.
44
<PAGE>
HISTORICAL PERFORMANCE DATA
The Target Strategies and the Dow Jones Industrial AverageSM
The total return for each target series subaccount will also reflect the
manager's fee and other operating expenses.
Target Strategies--Performance Data
Certain aspects of the investment strategies can be demonstrated using
historical data.
The following table contains three columns that show the performance of:
Column One: the Ten Highest Dividend Yielding Stocks Strategy for
the DJIA;
Column Two: Five Lowest Priced Stocks of the Ten Highest Dividend
Yielding Stocks Strategies in the DJIA; and
Column Three: the performance of the DJIA.
The returns shown in the following table and graphs are not guarantees of
future performance and should not be used as predictors of returns to be
expected in connection with a target series subaccount. Both stock prices
(which may appreciate or depreciate) and dividends (which may be increased,
reduced or eliminated) will affect the returns. Each strategy under performed
its respective index in certain years. Accordingly, there can be no assurance
that a target series subaccount will outperform its respective index over the
life of a target series subaccount or over consecutive rollover periods, if
available.
An investor in a target series subaccount would not necessarily realize as high
a total return on an investment in the stocks upon which the hypothetical
returns are based for the following reasons: the total return figures shown do
not reflect the impact of the target account's expenses, brokerage commissions,
or taxes; the target series subaccounts are established at different times of
the year; and the target series subaccounts may not be fully invested at all
times or equally weighted in all stocks comprising a strategy. If the above-
mentioned charges were reflected in the hypothetical returns, the returns would
be lower than those presented here.
45
<PAGE>
COMPARISON OF TOTAL RETURN(/2/)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Strategy Total Returns
--------------------------------
10 Highest 5 Lowest Priced
Dividend of the 10 Highest Index
Yielding Dividend Total Return
Year Stocks(/1/) Yielding Stocks(/1/) DJIA
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1974............................ (1.02)% (5.40)% (23.64)%
1975............................ 56.10 % 64.77 % 44.46 %
1976............................ 35.18 % 40.96 % 22.80 %
1977............................ (1.95)% 5.49 % (12.91)%
1978............................ 0.03 % 1.23 % 2.66 %
1979............................ 13.01 % 9.84 % 10.60 %
1980............................ 27.90 % 41.69 % 21.90 %
1981............................ 7.46 % 3.19 % (3.61)%
1982............................ 27.12 % 43.37 % 26.85 %
1983............................ 39.07 % 36.38 % 25.82 %
1984............................ 6.22 % 11.12 % 1.29 %
1985............................ 29.54 % 38.34 % 33.28 %
1986............................ 35.63 % 30.89 % 27.00 %
1987............................ 5.59 % 10.69 % 5.66 %
1988............................ 24.57 % 21.47 % 16.03 %
1989............................ 26.97 % 10.55 % 32.09 %
1990............................ (7.82)% (15.74)% (0.73)%
1991............................ 34.20 % 62.03 % 24.19 %
1992............................ 7.69 % 22.90 % 7.39 %
1993............................ 27.08 % 34.01 % 16.87 %
1994............................ 4.21 % 8.27 % 5.03 %
1995............................ 36.85 % 30.50 % 36.67 %
1996............................ 28.35 % 26.20 % 28.71 %
1997............................ 21.68 % 19.97 % 24.82 %
1998............................ 10.59 % 12.36 % 18.03 %
</TABLE>
(/1/)The Ten Highest Dividend Yielding Stocks and the Five Lowest Priced Stocks
of the Ten Highest Dividend Yielding Stocks in the DJIA for any given
period were selected by ranking the dividend yields for each of the stocks
in the index, as of the beginning of the period, and dividing by the
stock's market value on the first trading day on the exchange where that
stock principally trades in the given period.
(/2/)Total Return represents the sum of the percentage change in market value
of each group of stocks between the first trading day of a period and the
total dividends paid on each group of stocks during the period divided by
the opening market value of each group of stocks as of the first trading
day of a period. Total Return does not take into consideration any sales
charges, commissions, expenses or taxes. Total Return dividends are
reinvested semi-annually and all returns are stated in terms of the United
States dollar. Based on the year-by-year returns contained in the table,
over the twenty-five years listed above, the Ten Highest Dividend Yielding
Stocks in the DJIA achieved an average annual total return of 18.73%,
while the Five Lowest Priced Stocks of the Ten Highest Dividend Yielding
Stocks in the DJIA achieved an average annual total return of 21.07%. In
addition, over this period, the individual strategies achieved a greater
average annual total return than that of the DJIA, which was 14.48%.
Although each target series subaccount seeks to achieve a better
performance than the index as a whole, there can be no assurance that a
target series subaccount will achieve a better performance.
46
<PAGE>
The performance shown for the strategies does not guarantee future success, nor
should it be used as a predictor of returns. The DowSM Target 5 strategy and
The DowSM Target 10 strategy under-performed the DJIA in 8 and 9, respectively,
of the 25 years shown. There can be no assurance that the strategies will
outperform a given index over any time period, or that they will have positive
results. They have the potential for loss.
The results of the strategies do not represent actual investment advice of
First Trust Advisors L.P. or any actual trading using client assets. They were
achieved by the retroactive application of a model designed with the benefit of
hindsight and should not be considered indicative of the competence or skill of
First Trust Advisors L.P. In addition, the strategy results do not reflect the
impact material, economic, and market factors might have had on First Trust
Advisors L.P.'s decision making, if First Trust Advisors L.P. had actually
managed client money during the period indicated.
Past Performance of the DJIA
[CHART]
[PLOT POINTS TO COME]
The chart above represents past performance of the DJIA, the Ten Highest
Dividend Yielding DJIA Stocks and the Five Lowest Priced Stocks of the Ten
Highest Yielding DJIA Stocks (but not The DowSM Target 10 Subaccount or The
DowSM Target 5 Subaccount) from January 1, 1974 through December 31, 1998 and
should not be considered indicative of future results. Further, these results
are hypothetical. The chart assumes that all dividends during a year are
reinvested semi-annually and does not reflect sales charges, commissions,
expenses or taxes. There can be no assurance that either The DowSM Target 10
Subaccount or The DowSM Target 5 Subaccount will outperform the DJIA.
Investors should not rely on the preceding financial information as an
indication of the past or future performance of the target series subaccounts.
Standardized Performance Data
AUSA Life may advertise historical total returns for the target series
subaccounts. These figures will be calculated according to standardized methods
prescribed by the SEC. They will be based on historical earnings and are not
intended to indicate future performance.
The total return calculations for a target series subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular policy. To
the extent that any or all of a premium tax is applicable to a particular
policy, the total return of that policy will be reduced. For additional
information regarding total returns calculated using the standard formats
briefly summarized above, please refer to the Statement of Additional
Information.
47
<PAGE>
Non-Standardized Performance Data
AUSA Life may also advertise or disclose average annual total return or other
performance data in non-standard formats for a target series subaccount. The
non-standard data may assume that the policy remains in force and therefore not
reflect the surrender charge. The non-standard performance data may make other
assumptions such as the amount invested in a target series subaccount,
differences in time periods to be shown, or the effect of partial withdrawals
or annuity payments and may also make other assumptions.
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information.
48
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE ENDEAVOR VARIABLE ANNUITY
Issued through
AUSA ENDEAVOR VARIABLE ANNUITY ACCOUNT
and
AUSA ENDEAVOR TARGET ACCOUNT
Offered by
AUSA LIFE INSURANCE COMPANY, INC.
666 Fifth Avenue
New York, New York 10103
This Statement of Additional information expands upon subjects discussed in the
current prospectus for the Endeavor Variable Annuity offered by AUSA Life
Insurance Company, Inc. ("AUSA Life"). You may obtain a copy of the prospectus
dated December 6, 1999, by calling 1-800-525-6205, or by writing to the Service
Office, Financial Markets Division--Variable Annuity Dept., 4333 Edgewood Road,
N.E., Cedar Rapids, Iowa 52499-0001. Terms used in the current prospectus for
the policy are incorporated in this Statement of Additional Information.
This Statement of Additional Information is not a prospectus and should be read
only in conjunction with the prospectuses for the policy, the target account,
and the Endeavor Series Trust.
Dated: December 6, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GLOSSARY OF TERMS.......................................................... 4
THE POLICY--GENERAL PROVISIONS............................................. 6
Owner.................................................................... 6
Entire Policy............................................................ 6
Misstatement of Age or Sex............................................... 7
Addition, Deletion, Substitution of Investments.......................... 7
Reallocation of Policy Values After the Annuity Commencement Date........ 8
Annuity Payment Options.................................................. 8
Death Benefit............................................................ 9
Death of Owner........................................................... 12
Assignment............................................................... 12
Evidence of Survival..................................................... 12
Non-Participating........................................................ 12
Amendments............................................................... 12
Employee and Agent Purchases............................................. 13
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 13
Tax Status of the Policy................................................. 13
Taxation of AUSA Life.................................................... 16
INVESTMENT EXPERIENCE...................................................... 16
Accumulation Units....................................................... 16
Annuity Unit Value and Annuity Payment Rates............................. 18
HISTORICAL PERFORMANCE DATA................................................ 21
Money Market Yields...................................................... 21
Other Subaccount Yields.................................................. 22
Total Returns............................................................ 22
Other Performance Data................................................... 23
Adjusted Historical Performance Data--The Mutual Fund Account............ 23
THE TARGET ACCOUNT......................................................... 24
What is the Investment Strategy?......................................... 24
Determination of Unit Value; Valuation of Securities..................... 25
The Board of Managers.................................................... 25
The Investment Advisory Services......................................... 29
The Manager.............................................................. 29
Operating Expenses....................................................... 30
Transfer Agent and Custodian............................................. 30
Brokerage Allocation..................................................... 30
Investment Restrictions.................................................. 31
Fundamental Policies..................................................... 31
Operating Policies....................................................... 31
Options and Futures Strategies........................................... 32
Securities Lending....................................................... 34
Tax Limitation........................................................... 34
PUBLISHED RATINGS.......................................................... 34
STATE REGULATION OF AUSA LIFE.............................................. 35
RECORDS AND REPORTS........................................................ 35
DISTRIBUTION OF THE POLICIES............................................... 35
VOTING RIGHTS.............................................................. 36
The Mutual Fund Account.................................................. 36
The Target Account....................................................... 36
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
OTHER PRODUCTS............................................................. 37
CUSTODY OF ASSETS.......................................................... 37
LEGAL MATTERS.............................................................. 37
INDEPENDENT AUDITORS....................................................... 38
OTHER INFORMATION.......................................................... 38
FINANCIAL STATEMENTS....................................................... 38
</TABLE>
-3-
<PAGE>
GLOSSARY OF TERMS
Accumulation Unit--An accounting unit of measure used in calculating the policy
value in the mutual fund account and target account before the annuity
commencement date.
Annual Stock Selection Date--The last business day of a specified 12-month
period.
Annuitant--The person entitled to receive annuity payments after the annuity
commencement date and during whose life any annuity payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which annuity payments are to
commence. This date may be any date at least thirty days after the policy date
and may not be later than the last day of the policy month starting after the
annuitant attains age 85, except as expressly allowed by AUSA Life. In no event
will this date be later than the last day of the policy month following
annuitant's 90th birthday.
Annuity Payment Option--A method of receiving a stream of annuity payments
selected by the owner.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each additional variable annuity payment.
Application--A written application, order form, or any other information
received electronically or otherwise upon which the policy is issued and/or is
reflected on the data or specifications page.
Beneficiary--The person who has the right to the death benefit set forth in the
policy.
Business Day--A day when the New York Stock Exchange is open for business.
Cash Value--The policy value less the surrender charge, service charge, and
premium tax charge, if any.
Code--The Internal Revenue Code of 1986, as amended.
DJIA--The Dow Jones Industrial Average SM. Thirty stocks chosen by the editors
of The Wall Street Journal as representative of the broad market and of
American industry.
Due Proof of Death--A certified copy of a death certificate, a certified copy
of a decree of a court of competent jurisdiction as to the finding of death, a
written statement by the attending physician, or any other proof satisfactory
to AUSA Life will constitute due proof of death.
Excess Premium Withdrawals--The amount of a premium payment withdrawal which is
more than the amount that may be taken free from surrender charge.
Fixed Account--A part of the general account of AUSA Life. General account
assets consist of all of the assets of AUSA Life that are not in separate
accounts.
Guaranteed Period Option--The one year guaranteed interest rate period which
will be offered by AUSA Life into which premiums may be paid or amounts
transferred.
Initial Stock Selection Date--The date is December 31, 1999 for the January
Series.
Mutual Fund Account--A separate account established and registered as a unit
investment trust under the Investment Company Act of 1940, as amended, to which
premium payments under the policies may be allocated and which invests in the
portfolios of the Endeavor Series Trust and such other mutual funds as AUSA
Life may determine from time to time.
-4-
<PAGE>
Mutual Fund Subaccount--A subdivision within the mutual fund account the assets
of which are invested in a specified portfolio of the underlying funds.
Nonqualified Policy--A policy other than a qualified policy.
Owner or Owners--The person who may exercise all rights and privileges under
the policy. The owner during the lifetime of the annuitant and prior to the
annuity commencement date is the person designated as the owner or a successor
owner in the application.
Policy Year--A policy year begins on the date of issue and on each policy
anniversary.
Policy Value--The policy form refers to this as "annuity purchase value." The
value in the policy that may be used to purchase a stream of annuity payments.
On or before the annuity commencement date, this is an amount equal to (a) the
premiums paid; minus (b) partial withdrawals taken; plus (c) interest credited
in the fixed account; plus (d) accumulated gains or losses in the mutual fund
account and the target account; minus (e) any applicable service charges,
premium taxes, and transfer fees.
Premium Payment--An amount paid to AUSA Life by the owner or on the owner's
behalf as consideration for the benefits provided by the policy.
Qualified Policy--A policy issued in connection with retirement plans that
qualify for special federal income tax treatment.
Service Charge--An annual charge on each policy anniversary for policy
maintenance and related administrative expenses. This annual charge is the
lesser of 2% of the policy value or $35.
Service Office--Financial Markets Division--Variable Annuity Dept., 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Successor Owner--A person appointed by the owner to succeed to ownership of the
policy in the event of the death of the owner who is not the annuitant before
the annuity commencement date.
Surrender Charge--A percentage of each excess premium withdrawal, which is
deducted by AUSA Life upon surrender or partial withdrawal from the policy. The
surrender charge percentage ranges from 7% to 0% depending upon the length of
time from the date of each premium payment to the date of withdrawal.
Target Account--A separate account established and registered as a management
investment company under the 1940 Act to which premium payments under the
policies may be allocated.
Target Series Subaccount--A subdivision within the target account, the assets
of which are invested in common stocks selected according to a specified
investment strategy.
Valuation Period--The period of time from one determination of accumulation
unit and annuity unit values to the next subsequent determination of values.
Such determination shall be made on each business day.
Variable Annuity Payments--Payments made pursuant to an annuity payment option
which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified subaccounts within the separate
account.
Written Notice or Written Request--Written notice, signed by the owner, that
gives AUSA Life the information it requires and is received at the service
office. For some transactions, AUSA Life may accept an electronic notice. Such
electronic notice must meet the requirements AUSA Life establishes for such
notices. Telephone instructions are not permitted.
-5-
<PAGE>
In order to supplement the description in the prospectus, the following
provides additional information about AUSA Life and the policy, which may be of
interest to a prospective purchaser. Words printed in italics in this Statement
of Additional Information are defined in the Glossary of Terms, found on page
4.
THE POLICY--GENERAL PROVISIONS
Owner
The policy shall belong to the owner upon issuance of the policy after
completion of an application and delivery of the initial premium payment. While
the annuitant is living, the owner may: (1) assign the policy; (2) surrender
the policy; (3) amend or modify the policy with AUSA Life's consent; (4)
receive annuity payments or name a payee to receive the payments; and (5)
exercise, receive and enjoy every other right and benefit contained in the
policy. The exercise of these rights may be subject to the consent of any
assignee or irrevocable beneficiary.
A successor owner can be named in the application or in a written notice. The
successor owner will become the new owner upon the owner's death, if the owner
predeceases the annuitant. If no successor owner survives the owner and the
owner predeceases the annuitant, the owner's estate will become the owner.
Note carefully. If the owner does not name a contingent owner, the owner's
estate will become the new owner. If no probate estate is opened because the
owner has precluded the opening of a probate estate by means of a trust or
other instrument, unless AUSA Life has received written notice of the trust as
a successor owner signed prior to the owner's death, that trust may not
exercise ownership rights to the policy. It may be necessary to open a probate
estate in order to exercise ownership rights to the policy if no contingent
owner is named in a written notice received by AUSA Life.
The owner may change the ownership of the policy in a written notice. When this
change takes effect, all rights of ownership in the policy will pass to the new
owner. A change of ownership may have adverse tax consequences.
When there is a change of owner or successor owner, the change will take effect
as of the date the owner signs the written notice, subject to any payment AUSA
Life has made or action AUSA Life has taken before recording the change.
Changing the owner or naming a new successor owner cancels any prior choice of
successor owner, but does not change the designation of the beneficiary or the
annuitant.
If ownership is transferred (except to the owner's spouse) because the owner
dies before the annuitant, the cash value generally must be distributed to the
successor owner within five years of the owner's death, or payments must be
made for a period certain or for the successor owner's lifetime so long as any
period certain does not exceed that successor owner's life expectancy, if the
first payment begins within one year of the owner's death.
Entire Policy
The policy, any endorsements thereon, and the application constitute the entire
contract between AUSA Life and the owner. All statements in the application are
representations and not warranties. No statement will cause the policy to be
void or to be used in defense of a claim unless contained in the application.
-6-
<PAGE>
Misstatement of Age or Sex
If the age or sex of the annuitant has been misstated, AUSA Life will change
the annuity benefit payable to that which the premium payments would have
purchased for the correct age or sex. The dollar amount of any underpayment
made by AUSA Life shall be paid in full with the next payment due such person
or the beneficiary. The dollar amount of any overpayment made by AUSA Life due
to any misstatement shall be deducted from payments subsequently accruing to
such person or beneficiary. Any underpayment or overpayment will include
interest at 5% per year, from the date of the wrong payment to the date of the
adjustment. The age of the annuitant may be established at any time by the
submission of proof satisfactory to AUSA Life.
Addition, Deletion, or Substitution of Investments
AUSA Life cannot and does not guarantee that any of the mutual fund subaccounts
or target series subaccounts will always be available for premium payments,
allocations, or transfers. AUSA Life retains the right, subject to any
applicable law, to make certain changes in the mutual fund account and its
investments. AUSA Life reserves the right to eliminate the shares of any
portfolio held by a mutual fund subaccount and to substitute shares of another
portfolio of the underlying funds, or of another registered open-end management
investment company for the shares of any portfolio, if the shares of the
portfolio are no longer available for investment or if, in AUSA Life's
judgment, investment in any portfolio would be inappropriate in view of the
purposes of the mutual fund account. To the extent required by the 1940 Act,
substitutions of shares attributable to your interest in a mutual fund
subaccount will not be made without prior notice to you and the prior approval
of the SEC. AUSA Life retains the right, subject to any applicable law, to make
certain changes in the target account and its investments. AUSA Life reserves
the right to eliminate a target series subaccount if, in AUSA Life's judgment,
investment in any target series subaccount would be inappropriate in view of
the purposes of the policy or for any other reason. Nothing contained herein
shall prevent the mutual fund account from purchasing other securities for
other series or classes of variable annuity policies, or from effecting an
exchange between series or classes of variable annuity policies on the basis of
your requests.
New subaccounts may be established when, in the sole discretion of AUSA Life,
marketing, tax, investment or other conditions warrant. Any new subaccounts may
be made available to existing owners on a basis to be determined by AUSA Life.
Each additional subaccount will purchase shares in a mutual fund portfolio,
other investment vehicle, or, in the case of the target account, in shares of
common stock. AUSA Life may also eliminate one or more subaccounts if, in its
sole discretion, marketing, tax, investment or other conditions warrant such
change. In the event any subaccount is eliminated, AUSA Life will notify you
and request a reallocation of the amounts invested in the eliminated
subaccount. If no such reallocation is provided by you, AUSA Life will reinvest
the amounts in the subaccount that invests in the Endeavor Money Market
Portfolio (or in a similar portfolio of money market instruments), in another
subaccount, or in the fixed account, if appropriate.
In the event of any such substitution or change, AUSA Life may, by appropriate
endorsement, make such changes in the policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the policies,
the mutual fund account may be (i) operated as a management company under the
1940 Act or any other form permitted by law, (ii) deregistered under the 1940
Act in the event such registration is no longer required or (iii) combined with
one or more other mutual fund accounts, and the target account may be (i)
operated in any form permitted by law, (ii) deregistered under the 1940 Act in
the event such registration is no longer required or (iii) combined with one or
more other mutual fund accounts. To the extent permitted by applicable law,
AUSA Life also may transfer the assets of the mutual fund account or target
account associated with the policies to another account or accounts.
-7-
<PAGE>
Reallocation of Annuity Units After the Annuity Commencement Date
After the annuity commencement date, the owner may reallocate the value of a
designated number of annuity units of a mutual fund subaccount or of a target
series subaccount then credited to a policy into an equal value of annuity
units of one or more other mutual fund subaccounts or target series
subaccounts. The reallocation shall be based on the relative value of the
annuity units of the subaccount(s) at the end of the business day on the next
payment date. The minimum amount which may be reallocated is the lesser of (1)
$10 of monthly income or (2) the entire monthly income of the annuity units in
the subaccount from which the transfer is being made. If the monthly income of
the annuity units remaining in a subaccount after a reallocation is less than
$10, AUSA Life reserves the right to include the value of those annuity units
as part of the transfer. The request must be in writing to AUSA Life's service
office. There is no charge assessed in connection with such reallocation. AUSA
Life reserves the right to limit the number of times a reallocation of annuity
units may be made in any given policy year.
Annuity Payment Options
During the lifetime of the annuitant and prior to the annuity commencement
date, the owner may choose an annuity payment option or change the election,
but written notice of any election or change of election must be received by
AUSA Life at its service office at least thirty (30) days prior to the annuity
commencement date. If no election is made prior to the annuity commencement
date, annuity payments will be made under (i) Payment Option 3, life income
with level payments for 10 years certain, using the existing policy value of
the fixed account, or (ii) under Payment Option 3, life income with variable
payments for 10 years certain using the existing policy value of the mutual
fund account or the target account, or (iii) in a combination of (i) and (ii).
The person who elects an annuity payment option can also name one or more
successor payees to receive any unpaid amount AUSA Life has at the death of a
payee. Naming these payees cancels any prior choice of a successor payee.
A payee who did not elect the annuity payment option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells AUSA Life in writing and AUSA
Life agrees.
Variable Payment Options. The dollar amount of the first variable annuity
payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the policy. The tables are based on
a 5% effective annual Assumed Investment Return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.) The dollar amount of additional variable
annuity payments will vary based on the investment performance of the mutual
fund subaccount(s) of the mutual fund account and thru the target series
subaccounts of the target account selected by the annuitant or beneficiary.
-8-
<PAGE>
Determination of the First Variable Payment. The amount of the first variable
payment depends upon the sex (if consideration of sex is allowed under state
law) and adjusted age of the annuitant. The adjusted age is the annuitant's
actual age nearest birthday, on the annuity commencement date, adjusted as
follows:
<TABLE>
<CAPTION>
Annuity
Commencement Date Adjusted Age
----------------- ------------
<S> <C>
Before 2001 Actual Age
2001-2010 Actual Age minus 1
2011-2020 Actual Age minus 2
2021-2030 Actual Age minus 3
2031-2040 Actual Age minus 4
After 2040 As determined by AUSA Life
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
Determination of Additional Variable Payments. All variable annuity payments
other than the first are calculated using annuity units and are credited to the
policy. The number of annuity units to be credited in respect of a particular
subaccount is determined by dividing that portion of the first variable annuity
payment attributable to that subaccount by the annuity unit value of that
subaccount on the annuity commencement date. The number of annuity units of
each particular subaccount credited to the policy then remains fixed, assuming
no transfers to or from that subaccount occur. The dollar value of variable
annuity units in the chosen subaccount will increase or decrease reflecting the
investment experience of the chosen subaccount. The dollar amount of each
variable annuity payment after the first may increase, decrease or remain
constant. This amount is equal to the sum of the amounts determined by
multiplying the number of annuity units of each particular subaccount credited
to the policy by the annuity unit value for the particular subaccount as of the
first business day of each month.
Death Benefit
Adjusted Partial Withdrawal. The amount of your guaranteed minimum death
- ----------------------------
benefit is reduced due to an adjusted partial withdrawal. The reduction amount
depends on the relationship between your guaranteed minimum death benefit and
policy value. The adjusted partial withdrawal in the guaranteed minimum death
benefit is the sum of (1) and (2), where:
(1) The surrender-charge-free withdrawal amount taken; and
(2) The amount that an excess partial withdrawal (the portion of a
withdrawal that can be subject to a surrender charge) reduces the
policy value times [(a) divided by (b)] where:
(a)is the amount of the death benefit prior to the excess partial
withdrawal; and
(b)is the policy value prior to the excess partial withdrawal.
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<PAGE>
The following examples describe the effect of a withdrawal on the guaranteed
minimum death benefit and policy value.
Example 1
- --------------------------------------------------------------------------------
(Assumed Facts)
<TABLE>
- --------------------------------------------------------------------------------
<C> <S>
$75,000 current Guaranteed Minimum Death Benefit (GMDB) before
withdrawal
- --------------------------------------------------------------------------------
$50,000 current policy value before withdrawal
- --------------------------------------------------------------------------------
$75,000 current death benefit (larger of policy value and GMDB)
- --------------------------------------------------------------------------------
6% current surrender charge percentage
- --------------------------------------------------------------------------------
$15,000 requested withdrawal
- --------------------------------------------------------------------------------
$ 5,000 surrender charge-free amount (assumes 10% free percentage is
available)
- --------------------------------------------------------------------------------
(Results)
- --------------------------------------------------------------------------------
$10,000 excess partial withdrawal -- EPW (amount subject to surrender
charge)
- --------------------------------------------------------------------------------
$ 600 surrender charge on (EPW) = 0.06 * 10,000
- --------------------------------------------------------------------------------
$10,600 reduction in policy value due to excess partial withdrawal =
10,000 + 600
- --------------------------------------------------------------------------------
$20,000 adjusted partial withdrawal = $5,000+ $10,000 * (75,000/50,000)
- --------------------------------------------------------------------------------
$55,000 New GMDB (after withdrawal) = 75,000 - 20,000
- --------------------------------------------------------------------------------
$34,400 New policy value (after withdrawal) = 50,000 - 5,000 - 10,600
</TABLE>
<TABLE>
<CAPTION>
Summary:
- --------
<S> <C>
Reduction in guaranteed minimum death benefit = $20,000
Reduction in policy value = $15,600
</TABLE>
Note, the guaranteed minimum death benefit is reduced more than the policy
value since the guaranteed minimum death benefit was greater than the policy
value just prior to the withdrawal.
-10-
<PAGE>
Example 2
<TABLE>
- -----------------------------------------------------
<S> <C>
(Assumed Facts)
- -----------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
$50,000 current Guaranteed Minimum Death Benefit (GMDB) before
withdrawal
- -----------------------------------------------------------------------------
$75,000 current policy value before withdrawal
- -----------------------------------------------------------------------------
$75,000 current death benefit (larger of policy value and GMDB)
- -----------------------------------------------------------------------------
6% current surrender charge percentage
- -----------------------------------------------------------------------------
$15,000 requested withdrawal
- -----------------------------------------------------------------------------
$ 7,500 surrender charge-free amount (assumes 10% free percentage is
available)
- -----------------------------------------------------------------------------
(Results)
- -----------------------------------------------------------------------------
$ 7,500 excess partial withdrawal--EPW (amount subject to surrender
charge)
- -----------------------------------------------------------------------------
$ 450 surrender charge on (EPW) = 0.06 * 7,500
- -----------------------------------------------------------------------------
$ 7,950 reduction in policy value due to EPW = 7,500 + 450
- -----------------------------------------------------------------------------
$15,450 adjusted partial withdrawal = $7,500 + $7,950 *
(75,000/75,000)
- -----------------------------------------------------------------------------
$34,550 New GMDB (after withdrawal) = 50,000 - 15,450
- -----------------------------------------------------------------------------
$59,550 New policy value (after withdrawal) = 75,000 - 7,500 - 7,950
</TABLE>
<TABLE>
<CAPTION>
Summary:
- --------
<S> <C>
Reduction in the guaranteed minimum death
benefit = $15,450
Reduction in policy value = $15,450
</TABLE>
Note, the guaranteed minimum death benefit and policy value are reduced by the
same amount since the policy value was higher than the guaranteed minimum death
benefit just prior to the withdrawal.
Due proof of death of the annuitant is proof that the annuitant who is the
owner died prior to the commencement of annuity payments. Upon receipt of this
proof and an election of a method of settlement and return of the policy, the
death benefit generally will be paid within seven days, or as soon thereafter
as AUSA Life has sufficient information about the beneficiary to make the
payment. The beneficiary may receive the amount payable in a lump sum cash
benefit, or, subject to any limitation under any state or federal law, rule, or
regulation, under one of the annuity payment options described above, unless a
settlement agreement is effective at the death of the owner preventing such
election.
If the annuitant was the owner, and the beneficiary was not the annuitant's
spouse, the death benefit must (1) be distributed within five years of the date
of the deceased owner's death, or (2) payments under an annuity payment option
must begin no later than one year after the deceased owner's death and must be
made for the beneficiary's lifetime or for a period certain (so long as any
certain period does not exceed the beneficiary's life expectancy). Death
Proceeds which are not paid to or for the benefit of a natural person must be
distributed within five years of the date of the deceased owner's death. If the
sole beneficiary is the deceased owner's surviving spouse, such spouse may
elect to continue the policy as the new annuitant and owner instead of
receiving the death benefit.
If the annuitant is not the owner, and the owner dies prior to the annuity
commencement date, a successor owner may surrender the policy at any time for
the amount of the policy value. If the successor owner is not the deceased
owner's spouse, however, the policy value must be distributed: (1) within five
years after the date of the deceased owner's death, or (2) payments under an
annuity payment option must begin no later than one year after the deceased
owner's death and must be made for the successor owner's lifetime or for a
period certain (so long as any period certain does not exceed the successor
owner's life expectancy).
-11-
<PAGE>
Beneficiary. The beneficiary designation in the application will remain in
effect until changed. The owner may change the designated beneficiary by
sending written notice to AUSA Life. The beneficiary's consent to such change
is not required unless the beneficiary was irrevocably designated or law
requires consent. (If an irrevocable beneficiary dies, the owner may then
designate a new beneficiary.) The change will take effect as of the date the
owner signs the written notice, whether or not the owner is living when the
notice is received by AUSA Life. AUSA Life will not be liable for any payment
made before the written notice is received. If more than one beneficiary is
designated, and the owner fails to specify their interests, they will share
equally.
Death of Owner
Federal tax law requires that if any owner (including any joint owner or any
successor owner who has become a current owner) dies before the annuity
commencement date, then the entire value of the policy must generally be
distributed within five years of the date of death of such owner. Certain rules
apply where (1) the spouse of the deceased owner is the sole beneficiary, (2)
the owner is not a natural person and the primary annuitant dies or is changed,
or (3) any owner dies after the annuity commencement date. See "Certain Federal
Income Tax Consequences" for a detailed description of these rules. Other rules
may apply to qualified policies.
Assignment
During the lifetime of the annuitant the owner may assign any rights or
benefits provided by the policy. An assignment will not be binding on AUSA Life
until a copy has been filed at its service office. The rights and benefits of
the owner and beneficiary are subject to the rights of the assignee. AUSA Life
assumes no responsibility for the validity or effect of any assignment. Any
claim made under an assignment shall be subject to proof of interest and the
extent of the assignment. An assignment may have tax consequences.
Unless the owner so directs by filing written notice with AUSA Life, no
beneficiary may assign any payments under the policy before they are due. To
the extent permitted by law, no payments will be subject to the claims of any
beneficiary's creditors.
Ownership of qualified policies is restricted to comply with the Code.
Evidence of Survival
AUSA Life reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be made
until AUSA Life receives such evidence.
Non-Participating
The policy will not share in AUSA Life's surplus earnings; no dividends will be
paid.
Amendments
No change in the policy is valid unless made in writing by AUSA Life and
approved by one of AUSA Life's officers. No registered representative has
authority to change or waive any provision of the policy.
AUSA Life reserves the right to amend the policies to meet the requirements of
the Code, regulations or published rulings. An owner can refuse such a change
by giving written notice, but a refusal may result in adverse tax consequences.
-12-
<PAGE>
Employee and Agent Purchases
The policy may be acquired by an employee or registered representative of any
broker/dealer authorized to sell the policy or their spouse or minor children,
or by an officer, director, trustee or bona-fide full-time employee of AUSA
Life or its affiliated companies or their spouse or minor children. In such a
case, AUSA Life may credit an amount equal to a percentage of each premium
payment to the policy due to lower acquisition costs AUSA Life experiences on
those purchases. The credit will be reported to the Internal Revenue Service as
taxable income to the employee or registered representative. AUSA Life may
offer certain employer sponsored savings plans, in its discretion, reduced fees
and charges including, but not limited to, the surrender charges, the mortality
and expense risk fee and the administrative charge for certain sales under
circumstances which may result in savings of certain costs and expenses. In
addition, there may be other circumstances of which AUSA Life is not presently
aware which could result in reduced sales or distribution expenses. Credits to
the policy or reductions in these fees and charges will not be unfairly
discriminatory against any owner.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the Internal
Revenue Code of 1986, as amended, proposed and final Treasury Regulations
thereunder, judicial authority, and current administrative rulings and
practice. This summary discusses only certain federal income tax consequences
to "United States Persons," and does not discuss state, local, or foreign tax
consequences. United States Persons means citizens or residents of the United
States, domestic corporations, domestic partnerships and trusts or estates that
are subject to United States federal income tax regardless of the source of
their income.
Tax Status of the Policy
The following discussion is based on the assumption that the policy qualifies
as an annuity contract for federal income tax purposes.
Distribution Requirements. The Code also requires that nonqualified policies
contain specific provisions for distribution of policy proceeds upon the death
of the owner. In order to be treated as an annuity contract for federal income
tax purposes, the Code requires that such policies provide that if any owner
dies on or after the annuity commencement date and before the entire interest
in the policy has been distributed, the remaining portion must be distributed
at least as rapidly as under the method in effect on such owner's death. If any
owner dies before the annuity commencement date, the entire interest in the
policy must generally be distributed within 5 years after such owner's date of
death or be applied to provide an immediate annuity under which payments will
begin within one year of such owner's death and will be made for the life of
the beneficiary or for a period not extending beyond the life expectancy of the
"designated beneficiary" as defined in Section 72(s) of the Code. However, if
upon such owner's death prior to the annuity commencement date, such owner's
surviving spouse becomes the sole new owner under the policy, then the policy
may be continued with the surviving spouse as the new owner. Under the policy,
the beneficiary is the designated beneficiary of an owner/annuitant and the
successor owner is the designated beneficiary of an owner who is not the
annuitant. If any owner is not a natural person, then for purposes of these
distribution requirements, the primary annuitant shall be treated as an owner,
and any death or change of such primary annuitant shall be treated as the death
of an owner. The nonqualified policies contain provisions intended to comply
with these requirements of the Code. No regulations interpreting these
requirements of the Code have yet been issued and thus no assurance can be
given that the provisions
-13-
<PAGE>
contained in the policies satisfy all such Code requirements. The provisions
contained in the policies will be reviewed and modified if necessary to
maintain their compliance with the Code requirements when clarified by
regulation or otherwise.
Withholding. The portion of any distribution under a policy that is includable
in gross income will be subject to federal income tax withholding unless the
recipient of such distribution elects not to have federal income tax withheld.
Election forms will be provided at the time distributions are requested or
made. For certain qualified policies, certain distributions are subject to
mandatory withholding. The withholding rate varies according to the type of
distribution and the owner's tax status. For qualified policies, "eligible
rollover distributions" from section 401(a) plans and section 403(b) tax-
sheltered annuities are subject to a mandatory federal income tax withholding
of 20%. An eligible rollover distribution is the taxable portion of any
distribution from such a plan, except certain distributions such as
distributions required by the Code or distributions in a specified annuity
form. The 20% withholding does not apply, however, if the owner chooses a
"direct rollover" from the plan to another tax-qualified plan or IRA.
Qualified Policies. The qualified policy is designed for use with several types
of tax-qualified retirement plans. The tax rules applicable to participants and
beneficiaries in tax-qualified retirement plans vary according to the type of
plan and the terms and conditions of the plan. Special favorable tax treatment
may be available for certain types of contributions and distributions. Adverse
tax consequences may result from contributions in excess of specified limits;
distributions prior to age 59 1/2 (subject to certain exceptions);
distributions that do not conform to specified commencement and minimum
distribution rules; and in other specified circumstances. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into our policy administration procedures. Owners, participants and
beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the policies comply with applicable law.
For qualified plans under section 401(a), 403(a), 403(b), and 457, the Code
requires that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the owner (or
plan participant) (i) reaches age 70 1/2 or (ii) retires, and must be made in a
specified form or manner. If the plan participant is a "5 percent owner" (as
defined in the Code), distributions generally must begin no later than April 1
of the calendar year in which the owner (or plan participant) reaches age 70
1/2. Each owner is responsible for requesting distributions under the policy
that satisfy applicable tax rules.
AUSA Life makes no attempt to provide more than general information about use
of the policy with the various types of retirement plans. Purchasers of
policies for use with any retirement plan should consult their legal counsel
and tax adviser regarding the suitability of the policy.
Individual Retirement Annuities. In order to qualify as a traditional
individual retirement annuity under Section 408(b) of the Code, a policy must
contain certain provisions: (i) the owner must be the annuitant; (ii) the
policy generally is not transferable by the owner, e.g., the owner may not
designate a new owner, designate a contingent owner or assign the policy as
collateral security; (iii) the total premium payments for any calendar year may
not exceed $2,000, except in the case of a rollover amount or contribution
under Section 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code; (iv)
annuity payments or withdrawals must begin no later than April 1 of the
calendar year following the calendar year in which the annuitant attains age 70
1/2; (v) an annuity payment option with a period certain that will guarantee
annuity payments beyond the life expectancy of the annuitant and the
beneficiary may not be selected; and (vi) certain payments of death benefits
must be made in the event the annuitant dies prior to the distribution of the
policy value. Policies intended to qualify as a traditional individual
retirement annuities under Section 408(b) of the Code contain such provisions.
Amounts in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. Distributions prior to age 59 1/2 (unless certain
exceptions apply) are subject to a 10% penalty tax.
-14-
<PAGE>
Section 408 of the Code also indicates that no part of the funds for a
traditional individual retirement account or annuity should be invested in a
life insurance contract, but the regulations thereunder allow such funds to be
invested in an annuity contract that provides a death benefit that equals the
greater of the premiums paid or the cash value for the contract. The policy
provides an enhanced death benefit that could exceed the amount of such a
permissible death benefit, but it is unclear to what extent such an enhanced
death benefit could disqualify the policy under Section 408 of the Code. The
Internal Revenue Service has not reviewed the policy for qualification as an
IRA, and has not addressed in a ruling of general applicability whether an
enhanced death benefit provision, such as the provision in the policy, comports
with IRA qualification requirements.
Roth Individual Retirement Annuities (Roth IRA). The Roth IRA, under Section
408A of the Code, contains many of the same provisions as a traditional IRA.
However, there are some differences. First, the contributions are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A rollover from or conversion of an IRA to a Roth IRA
may be subject to tax and other special rules may apply. You should consult a
tax adviser before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years. The
Roth IRA is available to individuals with earned income and whose adjusted
gross income is under $110,000 for single filers, $160,000 for married filing
jointly, and $10,000 for married filing separately. The amount per individual
that may be contributed to all IRAs (Roth and traditional) is $2,000. Secondly,
the distributions are taxed differently. The Roth IRA offers tax-free
distributions when made from assets which have been held in the account for 5
tax years and are made after attaining age 59 1/2, to pay for qualified first
time homebuyer expenses (lifetime maximum of $10,000) or due to death or
disability. All other distributions are subject to income tax when made from
earnings and may be subject to a premature withdrawal penalty tax unless an
exception applies. Unlike the traditional IRA, there are no minimum required
distributions during the owner's lifetime; however, required distributions at
death are the same.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by public
school systems and certain tax exempt organizations to purchase policies for
their employees are excludable from the gross income of the employee, subject
to certain limitations. However, such payments may be subject to FICA (Social
Security) taxes. The policy includes a death benefit that in some cases may
exceed the greater of the premium payments or the policy value. The death
benefit could be characterized as an incidental benefit, the amount of which is
limited in any tax-sheltered annuity under section 403(b). Because the death
benefit may exceed this limitation, employers using the policy in connection
with such plans should consult their tax adviser. Additionally, in accordance
with the requirements of the Code, Section 403(b) annuities generally may not
permit distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age 59
1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the
case of hardship.
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans. Sections 401(a)
and 403(a) of the Code permit corporate employers to establish various types of
retirement plans for employees and self-employed individuals to establish
qualified plans for themselves and their employees. Such retirement plans may
permit the purchase of the policies to accumulate retirement savings. Adverse
tax consequences to the plan, the participant or both may result if the policy
is assigned or transferred to any individual as a means to provide benefit
payments. The policy includes a death benefit that in some cases may exceed the
greater of the premium payments or the policy value. The death benefit could be
characterized as an incidental benefit, the amount of which is limited in an
pension or profit sharing plan. Because the death benefit may exceed this
limitation, employers using the policy in connection with such plans should
consult their tax adviser.
-15-
<PAGE>
Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities, and tax exempt
organizations. The policies can be used with such plans. Under such plans a
participant may specify the form of investment in which his or her
participation will be made. For non-government Section 457 plans all such
investments, however, are owned by, and are subject to, the claims of the
general creditors of the sponsoring employer. Depending on the terms of the
particular plan, a non-government employer may be entitled to draw on deferred
amounts for purposes unrelated to its Section 457 plan obligations. In general,
all amounts received under a Section 457 plan are taxable and are subject to
federal income tax withholding as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity contract
held by a taxpayer other than a natural person generally will not be treated as
an annuity contract under the Code; accordingly, an owner who is not a natural
person will recognize as ordinary income for a taxable year the excess of (i)
the sum of the policy value as of the close of the taxable year and all
previous distributions under the policy over (ii) the sum of the premium
payments paid for the taxable year and any prior taxable year and the amounts
includable in gross income for any prior taxable year with respect to the
policy. Notwithstanding the preceding sentences in this paragraph, Section
72(u) of the Code does not apply to (i) a policy the nominal owner of which is
not a natural person but the beneficial owner of which is a natural person,
(ii) a policy acquired by the estate of a decedent by reason of such decedent's
death, (iii) a qualified policy (other than one qualified under Section 457) or
(iv) a single-payment annuity the annuity commencement date for which is no
later than one year from the date of the single premium payment; instead, such
policies are taxed as described above under the heading "Taxation of
Annuities."
Taxation of AUSA Life
AUSA Life at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The mutual fund account and the target account are
treated as part of AUSA Life and, accordingly, will not be taxed separately as
a "regulated investment company" under Subchapter M of the Code. AUSA Life does
not expect to incur any federal income tax liability with respect to investment
income and net capital gains arising from the activities of the mutual fund
account retained as part of the reserves under the policy. Based on this
expectation, it is anticipated that no charges will be made against the mutual
fund account for federal income taxes. If, in future years, any federal income
taxes are incurred by AUSA Life with respect to the mutual fund account or the
target account, AUSA Life may make a charge to that account.
INVESTMENT EXPERIENCE
An "investment experience factor" is used to determine the value of
accumulation units and annuity units, and to determine Annuity Payment rates.
Accumulation Units
Allocations of a premium payment directed to a mutual fund subaccount or target
series subaccount are credited in the form of accumulation units. Each mutual
fund subaccount or target series subaccount has a distinct accumulation unit
value. The number of units credited is determined by dividing the premium
payment or amount transferred to the mutual fund subaccount or target series
subaccount by the accumulation unit value of the mutual fund subaccount or
target series subaccount as of the end of the valuation period during which the
allocation is made. For each mutual fund subaccount or target series
subaccount, the accumulation unit value for a given
-16-
<PAGE>
business day is based on the net asset value of a share of the corresponding
portfolio of the underlying funds less any applicable charges or fees.
Upon allocation to the selected mutual fund subaccount or target series
subaccount, premium payments are converted into accumulation units of the
mutual fund subaccount or target series subaccount. The number of accumulation
units to be credited is determined by dividing the dollar amount allocated to
each mutual fund subaccount or target series subaccount by the value of an
accumulation unit for that subaccount as next determined after the premium
payment is received at the service office or, in the case of the initial
premium payment, when the application is completed, whichever is later. The
value of an accumulation unit was arbitrarily established at $1 (except the
target series subaccounts, which were established at $10) at the inception of
each mutual fund subaccount or target series subaccount. Thereafter, the value
of an accumulation unit is determined as of the close of trading on each day
the New York Stock Exchange is open for business.
For the mutual fund account, an index (the "investment experience factor")
which measures the investment performance of a subaccount during a valuation
period is used to determine the value of an accumulation unit for the next
subsequent valuation period. The investment experience factor may be greater or
less than or equal to one; therefore, the value of an accumulation unit may
increase, decrease or remain the same from one valuation period to the next.
The owner bears this investment risk. The Net Investment Performance of a
subaccount and deduction of certain charges affects the accumulation unit
value.
The investment experience factor for any mutual fund subaccount or target
series subaccount for any valuation period is determined by dividing (a) by
(b), and subtracting (c) from the result, where:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
subaccount determined at the end of the current valuation period, plus
(2) The per share amount of any dividend or capital gain distribution
made with respect to the shares held in the subaccount if the ex-
dividend date occurs during the current valuation period, plus or minus
(3) a per share credit or charge for any taxes determined by AUSA
Life to have resulted from the investment operations of the subaccount
and for which it has created a reserve;
(b) is the net asset value per share of the shares held in the subaccount
determined as of the end of the immediately preceding valuation period; and
(c) is the charge for mortality and expense risk during the valuation
period equal on an annual basis to X percent of the daily net asset value
of the subaccount, where "X" depends on the Death Benefit Option and policy
year, plus the 0.15% annual administrative charge.
-17-
<PAGE>
Illustration of Accumulation Unit Value Calculations
Formula and Illustration for Determining the Investment Experience Factor
(Assumes the Return of Premium Death Benefit is still in effect
and that the policy is within the first seven policy years.)
Investment Experience Factor = (A + B - C) - E
D
<TABLE>
<C> <S> <C> <C>
Where: A = The net asset value of an underlying fund share as of the end
of the current valuation period.
Assume.................................A = $11.57
B = The per share amount of any dividend or capital gains
distribution since the end of the immediately preceding
valuation period.
Assume......................................B = 0
C = The per share charge or credit for any taxes reserved for at
the end of the current valuation period.
Assume......................................C = 0
D = The net asset value of an underlying fund share at the end of
the immediately preceding valuation period.
Assume.................................D = $11.40
E = The daily deduction for mortality and expense risk fees and
administrative charges, which totals 1.40% on an annual basis.
On a daily basis= 0.0000380909
</TABLE>
Then, the investment experience factor = (11.57 + 0 - 0) -
0.0000380909 = Z = 1.0148741898
11.40
Formula and Illustration for Determining Accumulation Unit Value
Accumulation Unit Value = A * B
<TABLE>
<C> <S> <C>
Where: A = The accumulation unit value for the immediately preceding valuation
period.
Assume............................................ = $X
B = The net investment factor for the current valuation period.
Assume............................................. = Y
</TABLE>
Then, the accumulation unit value = $X * Y = $Z
Annuity Unit Value And Annuity Payment Rates
For both the mutual fund account and the target account, the amount of variable
annuity payments will vary with annuity unit values. Annuity unit values rise
if the net investment performance of the subaccount exceeds the Assumed
Investment Return of 5% annually. Conversely, annuity unit values fall if the
net investment performance of the subaccount is less than the Assumed
Investment Return. The value of a variable annuity unit in each mutual fund
subaccount was established at $1.00 (The unit values were established at $10 in
the target series subaccounts.) on the date operations began for that
subaccount. For the mutual fund account, the value of a variable annuity unit
on any subsequent business day is equal to (a) multiplied by (b) multiplied by
(c), where:
(a) is the variable annuity unit value on the immediately preceding
business day;
(b) is the net investment factor of the valuation period; and
(c) is the investment result adjustment factor for the valuation period.
-18 -
<PAGE>
The investment result adjustment factor for the valuation period is the product
of discount factors of 0.99986634 per day to recognize the 5% effective annual
Assumed Investment Return. The valuation period is the period from the close of
the immediately preceding business day to the close of the current business
day.
For the target account, at the end of each valuation period, the annuity unit
value is established by multiplying the value of an annuity unit determined at
the end of the immediately preceding valuation period by a net investment
factor for the current valuation period, and then multiplying that product by
an investment result adjustment factor for the purpose of offsetting the effect
of an assumed investment return of 5.0% per annum which is assumed in the
annuity conversion rates for the contracts. The net investment factor for the
target series subaccounts is very similar to the net investment factor for the
mutual fund account, except that it is based upon the value of the assets in
the subaccount, instead of the net asset value for a mutual fund share. The net
investment factor includes a charge for mortality and expense risks, that is,
the mortality and expense risk fee, and administrative charge.
The dollar amount of subsequent variable annuity payments will depend upon
changes in applicable annuity unit values.
The annuity payment rates vary according to the annuity option elected and the
sex and adjusted age of the annuitant at the annuity commencement date. The
policy also contains a table for determining the adjusted age of the annuitant.
Illustration of Calculations for Annuity Unit Value
and Variable Annuity Payments
Formula and Illustration for Determining Annuity Unit Value
Annuity unit value = A * B * C
<TABLE>
<C> <S> <C> <C>
Where: A = Annuity unit value for the immediately preceding valuation
period.
Assume............................................. = $ X
B = Investment Experience Factor for the valuation period for
which the annuity unit value is being calculated.
Assume................................................= Y
C = A factor to neutralize the Assumed Investment Return of 5%
built into the annuity tables used.
Assume................................................= Z
</TABLE>
Then, the annuity unit value is:
$ X * Y * Z = $ Q
-19-
<PAGE>
Formula and Illustration for Determining Amount of
First Monthly Variable Annuity Payment
First monthly variable annuity payment = A * B
$1,000
<TABLE>
<C> <S> <C>
Where: A = The policy value as of the annuity commencement date.
Assume..........................................= $X
B = The annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the annuitant according to
the tables contained in the policy.
Assume..........................................= $Y
</TABLE>
Then, the first monthly variable annuity payment = $X * $Y = $Z
1,000
Formula and Illustration for Determining the Number of Annuity Units
Represented by Each Monthly Variable Annuity Payment
Number of annuity units = A
B
<TABLE>
<C> <S> <C>
Where: A = The dollar amount of the first monthly variable annuity payment.
Assume............................................= $X
B = The annuity unit value for the valuation date on which the first
monthly payment is due.
Assume............................................= $Y
</TABLE>
Then, the number of annuity units = $X = Z
$Y
-20-
<PAGE>
HISTORICAL PERFORMANCE DATA
Money Market Yields
AUSA Life may from time to time disclose the current annualized yield of the
Endeavor Money Market Subaccount, which invests in the Endeavor Money Market
Portfolio, for a 7-day period in a manner which does not take into
consideration any realized or unrealized gains or losses on shares of the
Endeavor Money Market Portfolio or on its portfolio securities. This current
annualized yield is computed by determining the net change (exclusive of
realized gains and losses on the sale of securities and unrealized appreciation
and depreciation and income other than investment income) at the end of the 7-
day period in the value of a hypothetical account; having a balance of 1 unit
of the Endeavor Money Market Subaccount at the beginning of the 7-day period,
dividing such net change in account value by the value of the account at the
beginning of the period to determine the base period return, and annualizing
this quotient on a 365-day basis. The net change in account value reflects
(i) net income from the portfolio attributable to the hypothetical account; and
(ii) charges and deductions imposed under a policy that are attributable to the
hypothetical account. The charges and deductions include the per unit charges
for the hypothetical account for (i) the administrative charges; and (ii) the
Mortality and Expense Risk Charge. Current Yield will be calculated according
to the following formula:
Current Yield = ((NCS - ES)/UV) * (365/7)
Where:
NCS= The net change in the value of the portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment
income) for the 7-day period attributable to a hypothetical account
having a balance of 1 subaccount unit.
ES= Per unit expenses of the subaccount for the 7-day period.
UV= The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a policy, the yield for the
Endeavor Money Market Subaccount will be lower than the yield for the Endeavor
Money Market Portfolio. The yield calculations do not reflect the effect of any
premium taxes or surrender charges that may be applicable to a particular
policy. Surrender charges range from 7% to 0% of the amount of premium
withdrawn based on the policy year since payment of the premium.
AUSA Life may also disclose the effective yield of the Endeavor Money Market
Subaccount for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the base period return according
to the following formula:
Effective Yield = (1 + ((NCS - ES)/UV))/365///7/ - 1
Where:
NCS= The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment
income) for the 7-day period attributable to a hypothetical account
having a balance of 1 subaccount unit.
ES= Per unit expenses of the subaccount for the 7-day period.
UV=
The unit value on the first day of the 7-day period.
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<PAGE>
The yield on amounts held in the Endeavor Money Market Subaccount normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Endeavor Money Market Subaccount's actual yield is affected by
changes in interest rates on money market securities, average portfolio
maturity of the Endeavor Money Market Portfolio, the types and quality of
portfolio securities held by the Endeavor Money Market Portfolio and its
operating expenses. For the seven days ended December 31, 1998, the yield of
the Endeavor Money Market Subaccount was 3.066%, and the effective yield was
3.113% for the Annual Step-Up Death Benefit. For the seven days ended December
31, 1998, the yield of the Endeavor Money Market Subaccount was 3.219%, and the
effective yield was 3.271% for the Return of Premium Death Benefit.
Other Subaccount Yields
AUSA Life may from time to time advertise or disclose the current annualized
yield of one or more of the mutual fund subaccounts and the target series
subaccounts (except the Endeavor Money Market Subaccount) for 30-day periods.
The annualized yield of a subaccount refers to income generated by the
subaccount over a specific 30-day period. Because the yield is annualized, the
yield generated by a subaccount during the 30-day period is assumed to be
generated each 30-day period over a 12-month period. The yield is computed by:
(i) dividing the net investment income of the subaccount less subaccount
expenses for the period, by (ii) the maximum offering price per unit on the
last day of the period times the daily average number of units outstanding for
the period, (iii) compounding that yield for a 6-month period, and (iv)
multiplying that result by 2. Expenses attributable to the subaccount include
(i) the administrative charge and (ii) the Mortality and Expense Risk Charge.
The 30-day yield is calculated according to the following formula:
Yield = 2 * ((((NI - ES)/(U - UV)) + 1)/6/ - 1)
Where:
NI= Net investment income of the subaccount for the 30-day period
attributable to the subaccount's unit.
ES= Expenses of the subaccount for the 30-day period.
U= The average number of units outstanding.
UV= The unit value at the close (highest) of the last day in the 30-day
period.
Because of the charges and deductions imposed by the mutual fund account, the
yield for a mutual fund subaccount will be lower than the yield for its
corresponding portfolio. The yield calculations do not reflect the effect of
any premium taxes or surrender charges that may be applicable to a particular
policy. Surrender charges range from 7% to 0% of the amount of the excess
premium withdrawal based on the number of years since payment of the premium.
The yield on amounts held in the mutual fund subaccounts and the target series
subaccounts normally will fluctuate over time. Therefore, the disclosed yield
for any given past period is not an indication or representation of future
yields or rates of return. The types and quality of its investments and its
operating expenses affect a subaccount's actual yield.
Total Returns
AUSA Life may from time to time also advertise or disclose total returns for
one or more of the mutual fund subaccounts or the target series subaccounts for
various periods of time. One of the periods of time will include the period
measured from the date the subaccount commenced
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<PAGE>
operations. When a subaccount has been in operation for 1, 5 and 10 years,
respectively, the total return for these periods will be provided. Total
returns for other periods of time may from time to time also be disclosed.
Total returns represent the average annual compounded rates of return that
would equate an initial investment of $1,000 to the redemption value of that
investment as of the last day of each of the periods. The ending date for each
period for which total return quotations are provided will be for the most
recent month end practicable, considering the type and media of the
communication and will be stated in the communication.
Total returns will be calculated using subaccount unit values, which AUSA Life
calculates on each business day, based on the performance of the mutual fund
account's underlying portfolio, and the target series subaccount's common
shares, and the deductions for the mortality and expense risk fee and the
administrative charges. The total return for each target series subaccount will
also reflect the manager's fee and other operating expenses. Standard total
return calculations will reflect the effect of surrender charges that may be
applicable to a particular period. The total return will then be calculated
according to the following formula:
P(1 + T)N = ERV
Where:
T= The average annual total return net of subaccount recurring charges.
ERV= The ending redeemable value of the hypothetical account at the end of
the period.
P= A hypothetical initial payment of $1,000.
N= The number of years in the period.
Other Performance Data
AUSA Life may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above.
The non-standard format will be identical to the standard format except
assuming that the surrender charge percentage will be 0%.
AUSA Life may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the surrender
charge percentage will be 0%.
CTR = (ERV / P)-1
Where:
CTR=
The cumulative total return net of subaccount recurring charges for
the period.
ERV=
The ending redeemable value of the hypothetical investment at the end
of the period.
P= A hypothetical initial payment of $1,000.
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.
Adjusted Historical Performance Data--The Mutual Fund Account
From time to time, sales literature or advertisements may quote average annual
total returns for periods prior to the date a particular mutual fund subaccount
commenced operations. Such
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<PAGE>
performance information for the mutual fund subaccounts will be calculated
based on the performance of the various portfolios and the assumption that the
mutual fund subaccounts were in existence for the same periods as those
indicated for the portfolios, with the level of policy charges that are
currently in effect.
THE TARGET ACCOUNT
What is the Investment Strategy?
The objective of each of the target series subaccounts is to provide an above-
average total return through a combination of dividend income and capital
appreciation. While the objectives of the target series subaccounts are the
same, each target series subaccount follows a different investment strategy
(set forth below) in order to achieve its stated objective.
Each target series subaccount will initially invest in equal amounts in the
common stock described below for each target series subaccount (the common
shares) determined as of a specified business day (initial stock selection
date). The DowSM Target 10 Subaccount will invest in the common stock of the
ten companies in the DJIA that have the highest dividend yield. The DowSM
Target 5 Subaccount will invest in the common stock of the five companies with
the lowest per share stock price of the ten companies in The DowSM Target 10
Subaccount. These stocks will be held for approximately one year.
At the initial stock selection date, a percentage relationship among the number
of common shares in a target series subaccount will be established. When
additional funds are deposited into the target series subaccount, additional
common shares will be purchased in such numbers reflecting as nearly as
practicable the percentage relationship of the number of common shares
established at the initial purchase. Sales of common shares by the target
series subaccount will likewise attempt to replicate the percentage
relationship of common shares. The percentage relationship among the number of
common shares in the target series subaccount should therefore remain stable.
However, given the fact that the market price of such common shares will vary
throughout the year, the value of the common shares of each of the companies as
compared to the total assets of the target series subaccount will fluctuate
during the year, above and below the proportion established on a stock
selection date. On the last business day of the 12-month period following the
preceding stock selection date (annual stock selection date), a new percentage
relationship will be established among the number of common shares described
above for each target series subaccount on such date. Common shares may be sold
or new equity securities bought so that the target series subaccount is equally
invested in the common stock of each company meeting the target series
subaccount's investment criteria. Thus the target series subaccount may or may
not hold equity securities of the same companies as the previous year. Any
purchase or sale of additional common shares during the year will duplicate, as
nearly as practicable, the percentage relationship among the number of common
shares as of the annual stock selection date since the relationship among the
value of the common shares on the date of any subsequent transactions may be
different than the original relationship among their value.
The yield for each equity security listed on the DJIA is calculated by
annualizing the last quarterly or semi-annual ordinary dividend declared and
dividing the result by the market value of such equity security as of the close
of business on the stock selection date.
The publishers of the DJIA are not affiliated with AUSA Life, Endeavor
Management Co., or First Trust Advisers L.P. and have not participated in the
creation of the target series subaccounts or the selection of the equity
securities included therein. Any changes in the components of any of the
respective indices made after a stock selection date will not cause a change in
the identity of the
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<PAGE>
common shares included in a target series subaccount, including any additional
common shares purchased thereafter, until the next annual stock selection date.
Investors should note that the above criteria were applied and will in the
future be applied to the common shares selected for inclusion in the target
series subaccounts as of the respective stock selection date. Additional common
shares, which were originally selected through this process, may be purchased
throughout the year, as investors may continue to invest in the target series
subaccounts, even though the yields on these common shares may have changed
subsequent to the previous stock selection date. These common shares may no
longer be included in the index, or may not meet a target series subaccount's
selection criteria at that time, and therefore, such common shares would no
longer be chosen for inclusion in the target series subaccounts if the
selection process were to be performed again at that time. The equity
securities selected as common shares and the percentage relationship among the
number of shares will not change for purchase or sales by a target series
subaccount until the next annual stock selection date.
Determination of Unit Value; Valuation of Securities
AUSA Life determines the unit value of each target series subaccount each
business day. This daily determination of unit value is made by dividing the
total assets of a target series subaccount, less all of its liabilities, by the
total number of units outstanding at the time the determination is made. This
is made as of the close of regular trading on the New York Stock Exchange,
currently 4:00 p.m. New York time, unless the Exchange closes earlier.
Purchases and redemptions will be effected at the time of determination of unit
value next following the receipt of any purchase or redemption order deemed to
be in good order.
Equity securities are valued at the last sale price on the exchange on which
they are primarily traded or at the ask price on the NASDAQ system for unlisted
national market issues, or at the last quoted bid price for securities in which
there were no sales during the day or for unlisted securities not reported on
the NASDAQ system. Short-term obligations, which mature in 60 days or less, are
valued at amortized cost, which approximates fair value as determined by the
Board of Managers. Futures and option contracts that are traded on commodities
or securities exchanges are normally valued at the settlement price on the
exchange on which they are traded. Securities (other than short-term
obligations) for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Board of
Managers of the target series subaccounts.
The Board of Managers
The members of the Board of Managers of the target account, and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Unless otherwise indicated, the address of each
member is 2101 East Coast Highway, Suite 300, Corona del Mar, California 92625.
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<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Held With Registrant During Past 5 Years
--------------------- -------------------------- ---------------------------------
<S> <C> <C>
*+Vincent J. McGuinness, President and Chief From February, 1997 to December
Jr. (34) Financial 1997, Executive Vice-President,
Officer (Treasurer) Chief of Operations, from March
1997 to October 1999, Director,
from December, 1997 to October
1999, Chief Operating Officer and
from June, 1998 to October 1999,
Chief Financial Officer, from
July 1999 to October 1999 Chief
Executive Officer of Endeavor
Group; from September, 1996 to
June, 1997, and from June 1998 to
October 1999, Chief Financial
Officer, since May, 1996,
Director, and from June, 1997 to
October, 1998, Executive Vice
President-- Administration, from
October 1998 to October 1999,
President, and from July 1999 to
October 1999 Chief Executive
Officer of Endeavor Management
Co.; since August, 1996, Chief
Financial Officer of VJM
Corporation; from May, 1996 to
January 1997, Executive Vice
President and Director of Sales,
Western Division of Endeavor
Group; since May, 1996, Chief
Financial Officer of McGuinness &
Associates; from July, 1993 to
August, 1995 Rocky Mountain
Regional Marketing Director for
Endeavor Group; President, Chief
Financial Officer, and Trustee of
Endeavor Series Trust.
*Vincent J. McGuinness Manager Chairman and Director of Endeavor
(64) Group and Endeavor Management
Co.; President of VJM Corporation
(oil and gas); since February
1996 President of McGuinness &
Associates; until July 1999,
Chairman, Chief Executive Officer
and Director of McGuinness &
Associates and VJM Corporation;
until July 1996 Chairman, Chief
Executive Officer and Director of
McGuinness Group (insurance
marketing); from September 1988
to July 1999, Chief Executive
Officer of Endeavor Management
Co.; until October 1998,
President of Endeavor Management
Co.; Trustee, Endeavor Series
Trust.
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Held With Registrant During Past 5 Years
--------------------- -------------------------- ---------------------------------
<S> <C> <C>
Timothy A. Devine (64) Manager Vice President, Plant Control,
1424 Dolphin Terrace Inc. (landscape contracting and
Corona del Mar, maintenance); Trustee, Endeavor
California Series Trust.
92625
Thomas J. Hawekotte (64) Manager President, Thomas Hawekotte, P.C.
6007 North Sheridan Road (law practice); Trustee, Endeavor
Chicago, Illinois 60660 Series Trust.
Steven L. Klosterman (47) Manager Since July, 1995, President of
5973 Avenida Encinas, #300 Klosterman Capital Corporation
Carlsbad, California (investment adviser); Investment
92008 Counselor, Robert J. Metcalf &
Associates, Inc. (investment
adviser) from August, 1990 to
June, 1995; Trustee, Endeavor
Series Trust.
Halbert D. Lindquist (53) Manager President, Lindquist, Stephenson
1650 E. Fort Lowell Road & White (investment adviser) and
Suite 203 since December, 1987 Tucson Asset
Tucson, Arizona 85719-2324 Management Inc. (commodity
trading advisor), and since
November, 1987, Presidio
Government Securities,
Incorporated (broker-dealer);
since January 1998, Chief
Investment Officer, Blackstone
Alternative Asset Management;
Trustee, Endeavor Series Trust.
Keith H. Wood (63) Manager Since 1972, Chairman and Chief
Executive Officer of Jamison,
Eaton & Wood (investment adviser)
and since 1978 to December 1997,
President of Ivory & Sime
International, Inc. (investment
adviser); Trustee, Endeavor
Series Trust.
Peter F. Muratore (67) Manager From June, 1989 to March 1998,
Too Far President of OCC Distributors
Posthouse Road (broker/dealer), a subsidiary of
Morristown, NJ 07960 Oppenheimer Capital; Trustee,
Enndeavor Series Trust
*William. L. Busler (56) Manager Vice President, AUSA Life
4333 Edgewood Road N.E. Insurance Company, Inc.; Trustee,
Cedar Rapids, Iowa 52499-0001 Endeavor Series Trust.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Held With Registrant During Past 5 Years
--------------------- -------------------------- ---------------------------------
<S> <C> <C>
Michael Pond (46) Executive Vice President-- Since November 1, 1998, Executive
Administration and Vice President--Administration
Compliance and Compliance of Endeavor Group;
from November 1, 1998 to October
1999, Executive Vice President--
Administration and Compliance and
Chief Investment Officer of
Endeavor Management Co.; since
October 1999, President, Chief
Executive Officer and Chief
Investment Officer of Endeavor
Management Co.; from November,
1991 to November, 1996, Chairman
and President, the Preferred
Group of Mutual Funds; from
October, 1989 to November, 1996,
President of Caterpillar
Securities, Inc. and Caterpillar
Investment Manager, Ltd.
Gail A. Hanson (57) Secretary Since September 1994, Counsel for
First Data Investor Services
Group, Inc. (mutual fund
adminstration)
</TABLE>
- -------------------------
* An "interested person" of the target account as defined in the 1940 Act.
+ Vincent J. McGuinness, Jr. is the son of Vincent J. McGuinness.
The "rules and regulations" of the target account provide that the target
account will indemnify its Board of Managers and officers against liabilities
and expenses incurred in connection with litigation in which they may be
involved because of their offices with the target account, except if it is
determined in the manner specified in the rules and regulations that they have
not acted in good faith in the reasonable belief that their actions were in the
best interests of the target account or that such indemnification would relieve
any officer or member of the Board of Managers of any liability to the target
account or its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his duties. The target account, at its
expense, provides liability insurance for the benefit of its Board of Managers
and officers.
Compensation. For the period ended December 31, 1998, the following
compensation was paid to members of the Board of Managers:
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation From Account and Fund
Name of Person From Account Complex Paid to Managers
- -------------- ------------ ------------------------
<S> <C> <C>
Vincent J. McGuinness................... -0- -0-
Timothy A. Devine....................... $700.00 $13,075.00
Thomas J. Hawekotte..................... $700.00 $13,075.00
Steven L. Klosterman.................... $700.00 $13,075.00
Halbert D. Lindquist.................... $350.00 $ 8,225.00
R. Daniel Olmstead (retired as of
12/31/98).............................. $700.00 $13,075.00
Keith H. Wood........................... $700.00 $13,075.00
Vincent J. McGuinness, Jr............... -0- -0-
William L. Busler....................... -0- -0-
Peter F. Muratore....................... $700.00 $ 6,700.00
</TABLE>
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<PAGE>
The Investment Advisory Services
First Trust Advisors L.P. (the "adviser") is the target account's investment
adviser. The adviser manages the assets of each target series subaccount,
consistent with the investment objective and policies described herein and in
the prospectus, pursuant to an investment advisory agreement (the "advisory
agreement") with Endeavor Management Co., the target account's manager.
The adviser's address is 1001 Warrenville Road, Lisle, Illinois 60532. First
Trust Advisers L.P. is a limited partnership with one limited partner, Grace
Partners of Dupage L.P., and one general partner, Nike Securities Corporation.
Grace Partners of Dupage L.P. is a limited partnership with one general
partner, Nike Securities Corporation, and a number of limited partners. Nike
Securities Corporation is an Illinois corporation controlled by the Robert
Donald Van Kampen family.
Under the advisory agreement, the investment adviser provides each target
series subaccount with discretionary investment services. Specifically, the
adviser is responsible for supervising and directing the investments of each
target series subaccount in accordance with each target series subaccount's
investment objective, program, and restrictions as provided in the prospectus
and this Statement of Additional Information. The investment adviser is also
responsible for effecting all security transactions on behalf of each target
series subaccount.
As compensation for its services, the adviser receives a fee of 0.35% of the
average daily net assets of each target series subaccount, which is paid by the
manager. Each target series subaccount's advisory agreement also provides that
the adviser, its directors, officers, employees, and certain other persons
performing specific functions for the target series subaccounts will only be
liable to the target series subaccount for losses resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty. The
amount that Endeavor Management Co. paid to the adviser during 1998 was $0.
The adviser is also the portfolio supervisor of certain unit investment trusts
sponsored by Nike Securities L.P. ("Nike Securities") which are substantially
similar to the target series subaccounts in that they have the same investment
objectives as the target series subaccounts but have a life of approximately
one year. Nike Securities specializes in the underwriting, trading and
distribution of unit investment trusts and other securities. Nike Securities,
an Illinois limited partnership formed in 1991, acts as sponsor for successive
series of The First Trust Combined Series, The First Trust Special Situations
Trust, the First Trust Insured Corporate Trust, The First Trust of Insured
Municipal Bonds and the First Trust GNMA. First Trust introduced the first
insured unit investment trust in 1974 and to date more than $11 billion in
First Trust unit investment trusts have been deposited.
The Manager
The target account is managed by Endeavor Management Co. ("the manager") which,
subject to the supervision and direction of the target account's Board of
Managers, has overall responsibility for the general management and
administration of the target account. All of the outstanding commonstock of
Endeavor Management Co. is owned by AUSA Holding Company, an affiliate of AUSA
Life.
The manager is responsible for providing investment management to the target
account and in the exercise of such responsibility selects an investment
adviser for each of the target series subaccounts (the "adviser") and monitors
the adviser's investment program and results, reviews brokerage matters,
oversees compliance by the target account with various federal and state
statutes, and carries out the directives of the Board of Managers. The manager
is responsible for providing the target account with office space, office
equipment, and personnel necessary to operate and administer the target
account's business, and also supervises the provision of services by third
parties such as the target account's custodian, transfer agent and
administrator. Pursuant to an administration agreement, First Data Investor
Services Group, Inc. assists the manager in the performance of its
administrative
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<PAGE>
responsibilities to the target account. For its administrative
responsibilities, the target account pays First Data Investor Services Group a
fee of $10,000 per annum per subaccount and reimburses out-of-pocket fees.
As compensation for its services, the manager receives a fee equal to 0.75% of
the average daily net assets of each target series subaccount. The amount that
the target account paid the manager during 1998 was $0.
Operating Expenses
In addition to the management fees, the target account pays all expenses not
assumed by the manager, including, without limitation, expenses for legal,
accounting and auditing services, interest, taxes, costs of printing and
distributing reports to shareholders, proxy materials and prospectuses, charges
of its custodian, transfer agent and dividend disbursing agent, registration
fees, fees and expenses of the Board of Managers who are not affiliated persons
of the manager or an adviser, insurance, brokerage costs, litigation, and other
extraordinary or nonrecurring expenses. All general target account expenses are
allocated among and charged to the assets of the target series subaccounts on a
basis that the Board of Managers deems fair and equitable, which may be on the
basis of relative net assets of each target series subaccount or the nature of
the services performed and relative applicability to each target series
subaccount. The manager has agreed to limit each target series subaccount's
management fee and operating expenses during its first year of operations to an
annual rate of 1.30% of the target series subaccount's average net assets.
(This limit does not include other fees and deductions such as the mortality
and expense risk fee, and administrative charge.)
Transfer Agent and Custodian
Boston Safe Deposit and Trust Company holds all cash and securities of each
target series subaccount as custodian. First Data Investor Services Group,
located at 4400 Computer Drive, Westborough, Massachusetts 01581, serves as
transfer agent for the target account.
Brokerage Allocation
The adviser invests all assets of the target series subaccounts in common stock
and incurs brokerage costs in connection therewith.
Allocations of transactions by the target series subaccounts, including their
frequency, to various dealers is determined by the adviser in its best judgment
and in a manner deemed to be in the best interest of the investors in the
target series subaccount rather than by any formula. The primary consideration
is prompt execution of orders in an effective manner at the most favorable
price. Purchases and sales of securities may be principal transactions; that
is, securities may be purchased directly from the issuer or from an underwriter
or market maker for the securities. Any transactions for which the target
series subaccounts pays a brokerage commission will be effected at the best
price and execution available. Purchases from underwriters of securities
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers include the spread between the
bid and the asked price. Brokerage may be allocated based on the sale of
policies by dealers or activities in support of sales of the policies. The
target account has adopted a Brokerage Enhancement Plan, whereby all or a
portion of certain brokerage commissions paid by the target series subaccounts
may be allocated or credited to the distributor or other entities marketing the
policies, to help finance sales activities.
The target account did not pay compensation to any affiliated broker of
Endeavor Management Co. or First Trust Advisors L.P. during 1998.
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<PAGE>
Investment Restrictions
Fundamental policies of the target series subaccounts may not be changed
without the approval of the lesser of (1) 67% of the persons holding voting
interests (generally owners) present at a meeting if the holders of more than
50% are present in person or by proxy or (2) more than 50% of the persons
holding voting interests. Other restrictions, in the form of operating
policies, are subject to change by the Board of Managers without the approval
of persons holding a voting interest. Any investment restriction which involves
a maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, a
target series subaccount.
Fundamental Policies
As a matter of fundamental policy, each target series subaccount may not:
(1) Borrowing. Borrow money, except each target series subaccount may
borrow as a temporary measure for extraordinary or emergency purposes, and
then only in amounts not exceeding 30% of its total assets valued at
market. Each target series subaccount will not borrow in order to increase
income (leveraging), but only to facilitate redemption requests which might
otherwise require untimely investment liquidations;
(2) Loans. Make loans, although the target series subaccounts may purchase
money market securities and enter into repurchase agreements; and they may
lend their common shares.
(3) Margin. Purchase securities on margin;
(4) Mortgaging. Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the target series subaccounts as security for
indebtedness except as may be necessary in connection with permissible
borrowings, in which event such mortgaging, pledging, or hypothecating may
not exceed 30% of each target series subaccount's total assets, valued at
market;
(5) Real Estate. Purchase or sell real estate;
(6) Senior Securities. Issue senior securities (except permitted
borrowings);
(7) Short Sales. Effect short sales of securities; or
(8) Underwriting. Underwrite securities issued by other persons, except to
the extent the target series subaccounts may be deemed to be underwriters
within the meaning of the Securities Act of 1933 in connection with the
purchase and sale of their portfolio securities in the ordinary course of
pursuing their investment programs.
In addition, as a matter of fundamental policy, each target series subaccount
may engage in futures and options transactions and hold warrants.
The investment objective of each target series subaccount is also a fundamental
policy and may not be changed without the necessary approval described above.
Operating Policies
As a matter of operating policy, each target series subaccount may not:
(1) Control of Companies. Invest in companies for the purpose of exercising
management or control;
(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 15% of the value of each target series subaccount's net
assets would be invested in illiquid securities or other securities that
are not readily marketable.
(3) Oil and Gas Programs. Purchase participations or other direct interests
or enter into leases with respect to, oil, gas, other mineral exploration
or development program.
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<PAGE>
Options and Futures Strategies
A target series subaccount may at times seek to hedge against either a decline
in the value of its portfolio securities or an increase in the price of
securities which the adviser plans to purchase through the writing and purchase
of options and the purchase or sale of future contracts and related options.
Expenses and losses incurred as a result of such hedging strategies will reduce
a target series subaccount's current return.
The ability of a target series subaccount to engage in the options and futures
strategies described below will depend on the availability of liquid markets in
such instruments. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore no assurance
can be given that a target series subaccount will be able to utilize these
instruments effectively for the purposes stated below.
Writing Covered Options on Securities. A target series subaccount may write
covered call options and covered put options on optionable securities of the
types in which it is permitted to invest from time to time as the adviser
determines is appropriate in seeking to attain the target series subaccount's
investment objective. Call options written by a target series subaccount give
the holder the right to buy the underlying security from the target series
subaccount at a stated exercise price; put options give the holder the right to
sell the underlying security to the target series subaccount at a stated price.
A target series subaccount may only write call options on a covered basis or
for cross-hedging purposes and will only write covered put options. A put
option would be considered "covered" if the target series subaccount owns an
option to sell the underlying security subject to the option having an exercise
price equal to or greater than the exercise price of the "covered" option at
all times while the put option is outstanding. A call option is covered if the
target series subaccount owns or has the right to acquire the underlying
securities subject to the call option (or comparable securities satisfying the
cover requirements of securities exchanges) at all times during the option
period. A call option is for cross-hedging purposes if it is not covered, but
is designed to provide a hedge against another security which the target series
subaccount owns or has the right to acquire. In the case of a call written for
cross-hedging purposes or a put option, the target series subaccount will
maintain in a segregated account at the target series subaccount's custodian
bank cash or short-term U.S. government securities with a value equal to or
greater than the target series subaccount's obligation under the option. A
target series subaccount may also write combinations of covered puts and
covered calls on the same underlying security.
A target series subaccount will receive a premium from writing an option, which
increases the target series subaccount's return in the event the option expires
unexercised or is terminated at a profit. The amount of the premium will
reflect, among other things, the relationship of the market price of the
underlying security to the exercise price of the option, the term of the
option, and the volatility of the market price of the underlying security. By
writing a call option, a target series subaccount will limit its opportunity to
profit from any increase in the market value of the underlying security above
the exercise price of the option. By writing a put option, a target series
subaccount will assume the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
price, resulting in a potential capital loss if the purchase price exceeds the
market price plus the amount of the premium received.
A target series subaccount may terminate an option, which it has written prior
to its expiration, by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written. The target
series subaccount will realize a profit (or loss) from such transaction if the
cost of such transaction is less (or more) than the premium received from the
writing of the option. Because increases in the market price of a call option
will generally reflect increases in the
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<PAGE>
market price of the underlying security, any loss resulting from the repurchase
of a call option may be offset in whole or in part by unrealized appreciation
of the underlying security owned by the target series subaccount.
Purchasing Put and Call Options on Securities. A target series subaccount may
purchase put options to protect its portfolio holdings in an underlying
security against a decline in market value. This protection is provided during
the life of the put option since the target series subaccount, as holder of the
put, is able to sell the underlying security at the exercise price regardless
of any decline in the underlying security's market price. For the purchase of a
put option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, any profit which the
target series subaccount might otherwise have realized on the underlying
security will be reduced by the premium paid for the put option and by
transaction costs.
A target series subaccount may also purchase a call option to hedge against an
increase in price of a security that it intends to purchase. This protection is
provided during the life of the call option since the target series subaccount,
as holder of the call, is able to buy the underlying security at the exercise
price regardless of any increase in the underlying security's market price. For
the purchase of a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. By using call options in this matter, any
profit which the target series subaccount might have realized had it brought
the underlying security at the time it purchased the call option will be
reduced by the premium paid for the call option and by transaction costs.
No target series subaccount intends to purchase put or call options if, as a
result of any such transaction, the aggregate cost of options held by the
target series subaccount at the time of such transaction would exceed 5% of its
total assets.
Limitations. A target series subaccount will not purchase or sell futures
contracts or options on futures contracts for non-hedging purposes if, as a
result, the sum of the initial margin deposits on its existing futures
contracts and related options positions and premiums paid for options on
futures contracts would exceed 5% of the net assets of the target series
subaccount unless the transaction meets certain "bona fide hedging" criteria.
Risks of Options and Futures Strategies. The effective use of options and
futures strategies depends, among other things, on a target series subaccount's
ability to terminate options and futures positions at times when the adviser
deems it desirable to do so. Although a target series subaccount will not enter
into an option or futures position unless the adviser believes that a liquid
market exists for such option or future, there can be no assurance that a
target series subaccount will be able to effect closing transactions at any
particular time or at an acceptable price. The adviser generally expects that
options and futures transactions for the target series subaccounts will be
conducted on recognized exchanges. In certain instances, however, a target
series subaccount may purchase and sell options in the over-the-counter market.
The staff of the SEC considers over-the-counter options to be illiquid. A
target series subaccount's ability to terminate option positions established in
the over-the-counter market may be more limited than in the case of exchange
traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to the
target series subaccount.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
the securities that are the subject of the hedge. The successful use of these
strategies also depends on the ability of the target series subaccounts'
adviser to forecast correctly interest rate movements and general stock market
price movements. The risk increases as the composition of the securities held
by the target series subaccount diverges from the composition of the relevant
option or futures contract.
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<PAGE>
Securities Lending
Each target series subaccount may also lend common shares to broker-dealers and
financial institutions to realize additional income. As an operating policy,
the target series subaccounts will not lend common shares or other assets, if
as a result, more than 33% of each subaccount's total assets would be lent to
other parties. Under applicable regulatory requirements (which are subject to
change), the following conditions apply to securities loans: (a) the loan must
be continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) each
target series subaccount must receive any dividends or interest paid by the
issuer on such securities; (c) each target series subaccount must have the
right to call the loan and obtain the securities loaned at any time upon notice
of not more than five business days, including the right to call the loan to
permit voting of the securities; and (d) each target series subaccount must
receive either interest from the investment of collateral or a fixed fee from
the borrower.
Securities loaned by a target series subaccount remain subject to fluctuations
in market value. A target series subaccount may pay reasonable finders,
custodian and administrative fees in connection with a loan. Securities
lending, as with other extensions of credit, involves the risk that the
borrower may default. Although securities loans will be fully collateralized at
all times, a target series subaccount may experience delays in, or be prevented
from, recovering the collateral. During the period that the target series
subaccount seeks to enforce its rights against the borrower, the collateral and
the securities loaned remain subject to fluctuations in market value. The
target series subaccounts do not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if it were considered
important with respect to the investment. A target series subaccount may also
incur expenses in enforcing its rights. If a target series subaccount has sold
a loaned security, it may not be able to settle the sale of the security and
may incur potential liability to the buyer of the security on loan for its
costs to cover the purchase.
Tax Limitation
Section 817(h) of the Code provides that in order for a variable contract which
is based on a segregated asset account to qualify as an annuity contract under
the Code, the investments made by such account must be "adequately diversified"
in accordance with Treasury regulations. The Treasury regulations issued under
Section 817(h) (Treas. Reg.(S)1.817-5) apply a diversification requirement to
each of the subaccounts of the target account. To qualify as "adequately
diversified," each subaccount may have:
. No more than 55% of the value of its total assets represented by any one
investment;
. No more than 70% of the value of its total assets represented by any two
investments;
. No more than 80% of the value of its total assets represented by any
three investments; and
. No more than 90% of the value of its total assets represented by any
four investments.
The target account, through the target series subaccounts, intends to comply
with the section 817(h) diversification requirements. AUSA Life has entered
into an agreement with the manager, who in turn, has entered into a contract
with the adviser, that requires the target series subaccounts be operated in
compliance with Treasury regulations. Therefore, each target series subaccount
may deviate from its stated strategy to the extent necessary to comply with
these requirements.
PUBLISHED RATINGS
AUSA Life may from time to time publish in advertisements, sales literature and
reports to owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is to reflect the financial
strength and/or
-34-
<PAGE>
claims-paying ability of AUSA Life. The ratings should not be considered as
bearing on the investment performance of assets held in the mutual fund account
or the target account or of the safety or riskiness of an investment in the
mutual fund account or target account. Each year the A.M. Best Company reviews
the financial status of thousands of insurers, culminating in the assignment of
Best's Ratings. These ratings reflect their current opinion of the relative
financial strength and operating performance of an insurance company in
comparison to the norms of the life/health insurance industry. In addition, the
claims-paying ability of AUSA Life as measured by Standard & Poor's Insurance
Ratings Services, Moody's Investors Service or Duff & Phelps Credit Rating Co.
may be referred to in advertisements or sales literature or in reports to
owners. These ratings are opinions of an operating insurance company's
financial capacity to meet the obligations of its insurance policies in
accordance with their terms. Claims-paying ability ratings do not refer to an
insurer's ability to meet non-policy obligations (i.e., debt/commercial paper).
STATE REGULATION OF AUSA LIFE
AUSA Life is subject to the laws of New York governing insurance companies and
to regulation by the New York Department of Insurance. An annual statement in a
prescribed form is filed with the Department of Insurance each year covering
the operation of AUSA Life for the preceding year and its financial condition
as of the end of such year. Regulation by the Department of Insurance includes
periodic examination to determine AUSA Life's contract liabilities and reserves
so that the Department may determine the items are correct. AUSA Life's books
and accounts are subject to review by the Department of Insurance at all times
and a full examination of its operations is conducted periodically by the
National Association of Insurance Commissioners. In addition, AUSA Life is
subject to regulation under the insurance laws of other jurisdictions in which
it may operate.
RECORDS AND REPORTS
All records and accounts relating to the mutual fund account and the target
account will be maintained by AUSA Life. As presently required by the
Investment Company Act of 1940 and regulations promulgated thereunder, AUSA
Life will mail to all owners at their last known address of record, at least
annually, reports containing such information as may be required under that Act
or by any other applicable law or regulation. Owners will also receive
confirmation of each financial transaction and any other reports required by
law or regulation.
DISTRIBUTION OF THE POLICIES
The policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the policies
is continuous and AUSA Life does not anticipate discontinuing the offering of
the policies. However, AUSA Life reserves the right to discontinue the offering
of the policies.
AFSG Securities Corporation, is the principal underwriter of the policies. AFSG
Securities Corporation will enter into agreements with broker-dealers for the
distribution of the policies. Prior to May 1, 1998, AEGON USA Securities, Inc.
was the principal underwriter. During 1998, the amount paid to AEGON USA
Securities, Inc. and/or broker-dealers for their services was $412,538.27.
Amount paid for these services in 1997 and 1996 were $1,430,319.48 and
$1,115,508, respectively. During 1998 the amount paid to AFSG Securities
Corporation was $202,758.60.
The target account has adopted a distribution plan in accordance with Rule 12b-
1 under the 1940 Act for the distribution expenses (the "distribution plan").
The distribution plan has been approved by a
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<PAGE>
majority of the disinterested members of the Board of Managers of the target
account. The distribution plan is designed to partially compensate AUSA Life
for the cost of distributing the policies. Charges under the distribution plan
will be used to support marketing efforts, training of representatives and
reimbursement of expenses incurred by broker/dealers who sell the policies, and
will be based on a percentage of the daily net assets of the target account.
The distribution plan may be terminated at any time by a vote of a majority of
the disinterested members of the target account's Board of Managers, or by a
vote of the majority of its outstanding shares.
VOTING RIGHTS
The Mutual Fund Account
To the extent required by law, AUSA Life will vote the underlying funds' shares
held by the mutual fund account at regular and special shareholder meetings of
the underlying funds in accordance with instructions received from persons
having voting interests in the portfolios, although Endeavor Series Trust does
not hold regular annual shareholder meetings. If, however, the 1940 Act or any
regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result AUSA Life determines that it is
permitted to vote the Endeavor Series Trust shares in its own right, it may
elect to do so.
Before the annuity commencement date, you hold the voting interest in the
selected portfolios. The number of votes that you have the right to instruct
will be calculated separately for each subaccount. The number of votes that you
have the right to instruct for a particular subaccount will be determined by
dividing your policy value in the subaccount by the net asset value per share
of the corresponding portfolio in which the subaccount invests. Fractional
shares will be counted.
After the annuity commencement date, the person receiving annuity payments has
the voting interest, and the number of votes decreases as annuity payments are
made and as the reserves for the policy decrease. The person's number of votes
will be determined by dividing the reserve for the policy allocated to the
applicable subaccount by the net asset value per share of the corresponding
portfolio. Fractional shares will be counted.
The number of votes that you or the person receiving income payments has the
right to instruct will be determined as of the date established by the
underlying fund for determining shareholders eligible to vote at the meeting of
the underlying fund. AUSA Life will solicit voting instructions by sending you,
or other persons entitled to vote, written requests for instructions prior to
that meeting in accordance with procedures established by the underlying fund.
Portfolio shares as to which no timely instructions are received and shares
held by AUSA Life in which you, or other persons entitled to vote, have no
beneficial interest will be voted in proportion to the voting instructions that
are received with respect to all policies participating in the same subaccount.
Each person having a voting interest in a subaccount will receive proxy
material, reports, and other materials relating to the appropriate portfolio.
The Target Account
The target account is the legal owner of the common stock held in the
subaccounts and as such has the right to vote upon any matter that may be voted
by shareholders. However, you or persons receiving income payments may vote on
certain aspects of the governance of the subaccounts. Matters on which persons
holding voting interests may vote include the following: (1) approval of any
change in the investment advisory agreement corresponding to a subaccount; (2)
any change in the fundamental investment policies of a subaccount; or (3) any
other matter requiring a vote of persons holding voting interests in the
subaccount. With respect to approval of the investment advisory
-36-
<PAGE>
agreements or any change in a fundamental investment policy, owners
participating in that subaccount will vote separately on the matter pursuant to
the requirements of Rule 18f-2 under the 1940 Act.
Before the annuity commencement date, you hold the voting interest in the
selected subaccounts. The number of votes that you have will be calculated
separately for each subaccount. The number of votes that you have for a
subaccount will be determined by dividing your policy value in the subaccount
into the total assets of the subaccount and multiplying this by the total
number of votes.
After the annuity commencement date, the person receiving annuity payments has
the voting interest, and the number of votes decreases as annuity payments are
made and as the reserves for the policy decrease. The person's number of votes
will be determined by dividing the reserve for the policy allocated to the
applicable subaccount into the total assets of the subaccount and multiplying
this by the total number of votes.
AUSA Life does not intend to hold annual or other periodic meetings of owners.
AUSA Life will solicit proxies by sending you or other persons entitled to vote
written requests for proxies prior to the vote. Where timely proxies are not
received, the voting interests will be voted in proportion to the proxies that
are received with respect to all policies participating in the same subaccount.
AUSA Life may, if required by state insurance officials, disregard proxies
which would require voting to cause a change in the subclassification or
investment objectives or policies of one or more of the subaccounts, or to
approve or disapprove an investment adviser or principal underwriter for one or
more of the subaccounts. In addition, AUSA Life may disregard proxies that
would require changes in the investment objectives or policies of any
subaccount or in an investment adviser or principal underwriter, if AUSA Life
reasonably disapproves those changes in accordance with applicable federal
regulations. If AUSA Life disregards proxies, it will advise those persons who
may give proxies of that action and its reasons for the action in the next
semiannual report.
OTHER PRODUCTS
AUSA Life makes other variable annuity policies available that may also be
funded through the mutual fund account and/or the target account. These
variable annuity policies may have different features, such as different
investment options or charges.
CUSTODY OF ASSETS
The assets of each of the mutual fund subaccounts and the target series
subaccounts are held by AUSA Life. The assets of each of the subaccounts are
segregated and held separate and apart from the assets of the other subaccounts
and from AUSA Life's general account assets. AUSA Life maintains records of all
purchases and redemptions of shares of the underlying portfolios held by each
of the mutual fund subaccounts, and of all purchases and sales of common stock
held by each of the target series subaccounts. Additional protection for the
assets of the mutual fund account and the target account is afforded by AUSA
Life's fidelity bond, presently in the amount of $5,000,000, covering the acts
of officers and employees of AUSA Life.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the policies has been provided to AUSA Life
by Sutherland Asbill & Brennan LLP, of Washington D.C.
-37-
<PAGE>
INDEPENDENT AUDITORS
The statutory-basis financial statements of AUSA Life at December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
and the financial statements of subaccounts of the AUSA Endeavor Variable
Annuity Account, which are available for investment by The Endeavor Variable
Annuity contract owners as of December 31, 1998, and for each of the two years
in the period then ended, included in this Statement of Additional Information
have been audited by Ernst & Young LLP, Independent Auditors, 801 Grand Avenue,
Suite 3400, Des Moines, Iowa, 50309-2764.
There are no financial statements of the target account because it had not
commenced operations as of the date of this prospectus.
OTHER INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the prospectus or this Statement of Additional
Information. Statements contained in the prospectus and this Statement of
Additional Information concerning the content of the policies and other legal
instruments are intended to be summaries. For a complete statement of the terms
of these documents, reference should be made to the instruments filed with the
Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of the interest of owners in the mutual fund account or the target
account will be affected solely by the investment results of the selected
subaccount(s). Financial statements of certain subaccounts of the AUSA Endeavor
Variable Annuity Account, which are available for investment by The Endeavor
Variable Annuity contract owners, are contained herein. There are no financial
statements of the target account because it had not commenced operations as of
the date of this prospectus. The statutory-basis financial statements of AUSA
Life, which are included in this Statement of Additional Information, should be
considered only as bearing on the ability of AUSA Life to meet its obligations
under the policies. They should not be considered as bearing on the investment
performance of the assets held in the mutual fund account or the target
account.
-38-
<PAGE>
Financial Statements - Statutory Basis
AUSA Life Insurance Company, Inc.
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
<PAGE>
AUSA Life Insurance Company, Inc.
Financial Statements - Statutory Basis
Years ended December 31, 1998, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors...............................................1
Audited Financial Statements
Balance Sheets - Statutory Basis.............................................2
Statements of Operations - Statutory Basis...................................4
Statements of Changes in Capital and Surplus - Statutory Basis...............5
Statements of Cash Flows - Statutory Basis...................................6
Notes to Financial Statements - Statutory Basis..............................7
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
The Board of Directors
AUSA Life Insurance Company, Inc.
We have audited the accompanying statutory-basis balance sheets of AUSA Life
Insurance Company, Inc. as of December 31, 1998 and 1997 and the related
statutory-basis statements of operations, changes in capital and surplus, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Department of Insurance of the State of New York, which
practices differ from generally accepted accounting principles. The variances
between such practices and generally accepted accounting principles also are
described in Note 1. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of AUSA Life Insurance Company, Inc. at December 31, 1998 and 1997, or the
results of its operations or its cash flows for each of the three years in the
period ended December 31, 1998.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AUSA Life Insurance
Company, Inc. at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with accounting practices prescribed or permitted by the
Department of Insurance of the State of New York.
Ernst & Young LLP
Des Moines, Iowa
February 19, 1999
1
<PAGE>
AUSA Life Insurance Company, Inc.
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
----------------------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 61,065 $ 68,131
Bonds 4,151,780 3,988,635
Stocks:
Preferred 2,582 1,792
Common, at market (cost: $14 in 1998 and
$118 in 1997) 2 144
Mortgage loans on real estate 413,107 495,009
Real estate acquired in satisfaction of debt, at cost
less accumulated depreciation ($2,474 in 1998 and
$1,816 in 1997) 33,986 45,695
Policy loans 3,181 3,046
Other invested assets 30,795 22,414
----------------------------
Total cash and invested assets 4,696,498 4,624,866
Short-term note receivable from affiliate 10,400 8,800
Receivable from affiliates 14,731 794
Premiums deferred and uncollected 6,408 6,316
Accrued investment income 64,859 69,989
Federal income taxes recoverable 527 -
Other assets 12,567 7,609
Separate account assets 6,517,152 5,630,093
----------------------------
Total admitted assets $11,323,142 $10,348,467
============================
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
----------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 109,132 $ 103,370
Annuity 868,294 911,075
Accident and health 16,416 16,547
Policy and contract claim reserves:
Life 4,927 5,456
Accident and health 10,302 11,125
Other policyholders' funds 3,267,417 3,181,719
Remittances and items not allocated 58,724 35,267
Asset valuation reserve 84,077 67,324
Interest maintenance reserve 37,253 25,882
Payable to affiliates - 2,247
Deferred income 5,230 13,421
Payable under assumption reinsurance agreement 52,837 56,952
Other liabilities 7,422 8,400
Federal income taxes payable - 1,010
Separate account liabilities 6,497,865 5,608,364
----------------------------
Total liabilities 11,019,896 10,048,159
Commitments and contingencies
Capital and surplus:
Common stock, $125 par value, 20,000 shares authorized,
issued and outstanding 2,500 2,500
Paid-in surplus 319,180 319,180
Special surplus funds 1,827 1,607
Unassigned surplus (deficit) (20,261) (22,979)
----------------------------
Total capital and surplus 303,246 300,308
----------------------------
Total liabilities and capital and surplus $11,323,142 $10,348,467
============================
</TABLE>
See accompanying notes.
3
<PAGE>
AUSA Life Insurance Company, Inc.
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life $ 22,664 $ 71,899 $ 21,120
Annuity 1,132,120 1,199,470 1,092,033
Accident and health 32,869 39,999 52,831
Net investment income 345,660 341,540 339,460
Amortization of interest maintenance reserve 6,116 3,392 2,326
Commissions and expense allowances on
reinsurance ceded 302 374 438
Other income - 17,240 10,739
------------------------------------------------
1,539,731 1,673,914 1,518,947
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 32,464 39,045 50,647
Surrender benefits 1,117,653 1,175,051 864,643
Other benefits 20,886 14,316 11,699
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 5,762 52,500 2,492
Annuity (42,781) 65,982 53,136
Accident and health (131) (1,357) (1,063)
Other (67) 580 609
Increase in liability for premium and other
deposit type funds 85,461 92,280 93,893
------------------------------------------------
1,219,247 1,438,397 1,076,056
Insurance expenses:
Commissions 69,009 79,099 87,938
General insurance expenses 95,169 92,613 83,885
Taxes, licenses and fees 1,466 3,717 3,335
Net transfers to separate accounts 130,910 42,490 255,672
Other expenses 978 181 145
------------------------------------------------
297,532 218,100 430,975
------------------------------------------------
1,516,779 1,656,497 1,507,031
------------------------------------------------
Gain from operations before federal income tax
expense and net realized capital gains 22,952 17,417 11,916
(losses) on investments
Federal income tax expense 4,021 5,247 5,719
------------------------------------------------
Gain from operations before net realized
capital gains (losses) on investments 18,931 12,170 6,197
Net realized capital gains (losses) on
investments (net of related federal income
taxes and amounts transferred to interest
maintenance reserve) 3,770 831 (12,107)
------------------------------------------------
Net income (loss) $ 22,701 $ 13,001 $ (5,910)
================================================
</TABLE>
See accompanying notes.
4
<PAGE>
AUSA Life Insurance Company, Inc.
Statements of Changes in Capital and
Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
SPECIAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND
STOCK SURPLUS FUNDS (DEFICIT) SURPLUS
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $2,500 $319,180 $1,357 $ 5,217 $328,254
Net loss - - - (5,910) (5,910)
Change in net unrealized capital gains - - - (460) (460)
(losses)
Change in non-admitted assets - - - 437 437
Change in special surplus funds - - 116 - 116
Change in liability for reinsurance in
unauthorized companies - - - (42) (42)
Change in asset valuation reserve - - - (6,217) (6,217)
Seed money contributed to separate
account, net of redemptions - - - (12,500) (12,500)
Change in surplus in separate account - - - 14,783 14,783
Prior year federal income tax adjustment - - - 446 446
----------------------------------------------------------------------
Balance at December 31, 1996 2,500 319,180 1,473 (4,246) 318,907
Net income - - - 13,001 13,001
Change in net unrealized capital gains - - - (2,710) (2,710)
(losses)
Change in non-admitted assets - - - (8,617) (8,617)
Change in special surplus funds - - 134 - 134
Change in liability for reinsurance in
unauthorized companies - - - 29 29
Change in asset valuation reserve - - - (20,446) (20,446)
Seed money withdrawn from separate
account, net of redemptions - - - 11,700 11,700
Change in surplus in separate account - - - (11,749) (11,749)
Prior year federal income tax adjustment - - - 59 59
----------------------------------------------------------------------
Balance at December 31, 1997 2,500 319,180 1,607 (22,979) 300,308
Net income - - - 22,701 22,701
Change in net unrealized capital gains - - - 4,439 4,439
(losses)
Change in non-admitted assets - - - (511) (511)
Change in special surplus funds - - 220 - 220
Change in liability for reinsurance in
unauthorized companies - - - 18 18
Change in asset valuation reserve - - - (16,753) (16,753)
Seed money withdrawn from separate
account, net of redemptions - - - 1,818 1,818
Change in surplus in separate account - - - (994) (994)
Dividend to stockholder - - - (8,000) (8,000)
Balance at December 31, 1998 $2,500 $319,180 $1,827 $(20,261) $303,246
======================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
AUSA Life Insurance Company, Inc.
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance $ 1,191,035 $ 1,340,757 $ 1,177,613
Net investment income 353,054 340,150 345,153
Life and accident and health claims (33,979) (40,151) (52,590)
Surrender benefits and other fund withdrawals (1,117,653) (1,175,051) (864,643)
Other benefits to policyholders (20,876) (14,290) (11,697)
Commissions, other expenses and other taxes (169,784) (184,457) (193,405)
Net transfers to separate account (130,976) (43,309) (257,467)
Federal income taxes paid (5,558) (4,704) (4,490)
Other, net (3,806) (3,744) (14,431)
--------------------------------------------------
Net cash provided by operating activities 61,457 215,201 124,043
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 1,381,784 968,184 777,107
Common stocks 164 - 5,288
Mortgage loans on real estate 138,723 179,810 165,460
Real estate 22,067 25,104 -
Policy loans - 16 4
Other (21) - -
--------------------------------------------------
1,542,717 1,173,114 947,859
Cost of investments acquired:
Bonds and preferred stocks (1,554,838) (1,260,122) (1,101,918)
Common stocks - (103) (589)
Mortgage loans on real estate (51,862) (60,722) (42,118)
Real estate (561) - (521)
Policy loans (135) (146) (153)
Other 5,756 (17,805) (2,695)
--------------------------------------------------
(1,601,640) (1,338,898) (1,147,994)
--------------------------------------------------
Net cash used in investing activities (58,923) (165,784) (200,135)
FINANCING ACTIVITIES
Payment of intercompany notes, net (1,600) (9,400) (19,200)
Dividends to stockholders (8,000) - -
--------------------------------------------------
Net cash used in financing activities (9,600) (9,400) (19,200)
--------------------------------------------------
Increase (decrease) in cash and short-term investments (7,066) 40,017 (95,292)
Cash and short-term investments at beginning of year 68,131 28,114 123,406
--------------------------------------------------
Cash and short-term investments at end of year $ 61,065 $ 68,131 $ 28,114
==================================================
</TABLE>
See accompanying notes.
6
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
AUSA Life Insurance Company, Inc. ("the Company") is a stock life insurance
company and is 82 percent owned by First AUSA Life Insurance Company ("First
AUSA"), a wholly-owned subsidiary of AEGON USA, Inc. ("AEGON"), and 18 percent
owned by Veterans Life Insurance Company, an indirect wholly-owned subsidiary of
AEGON. AEGON is a wholly-owned subsidiary of AEGON N.V., a holding company
organized under the laws of The Netherlands. Effective September 24, 1993, First
AUSA purchased from The Dreyfus Corporation ("Dreyfus"), its entire interest in
Dreyfus Life Insurance Company and subsequently changed the name to AUSA Life
Insurance Company, Inc. On December 31, 1993, the Company entered into an
assumption reinsurance agreement with Mutual of New York ("MONY") to transfer
certain group pension business of MONY to the Company.
In July 1996, the Company completed a merger with International Life Investors
Insurance Company ("ILI"), a wholly-owned subsidiary of Life Investors Insurance
Company of America, another wholly-owned subsidiary of First AUSA, whereby ILI
was merged directly into the Company. The Company received assets of $688,233
and liabilities of $635,189. The difference between assets and liabilities was
transferred directly to capital and surplus. In accordance with National
Association of Insurance Commissioners ("NAIC") statutory accounting principles,
all prior period financial statements presented have been restated as if the
merger took place at the beginning of such periods. Historical book values
carried over from the separate companies to the combined entity.
On October 1, 1998, the Company completed a merger with First Providian Life and
Health Insurance Company ("FPLH"), an indirect wholly-owned subsidiary of
Commonwealth General Corporation which, in turn, is an indirect wholly-owned
subsidiary of AEGON, whereby FPLH was merged directly into the Company. The
accompanying financial statements give retroactive effect as if the merger had
occurred on January 1, 1996 in conformity with the practices of the NAIC and
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York. This merger was accounted for under the pooling of
interests method of accounting and, accordingly, the historical book values
carried over from the separate companies to the Company.
7
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Summarized financial information for the Company and FPLH prior to the merger
are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
The Company $1,155,265 $1,585,260 $1,454,207
FPLH 75,929 88,654 64,740
------------------------------------------------
As restated $1,231,194 $1,673,914 $1,518,947
================================================
Net income (loss):
The Company $ 3,944 $ 3,503 $ (13,714)
FPLH 6,911 9,498 7,804
------------------------------------------------
As restated $ 10,855 $ 13,001 $ (5,910)
================================================
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------------
(UNAUDITED)
<S> <C> <C>
Assets:
The Company $10,411,596 $ 9,951,625
FPLH 445,873 396,842
-----------------------------------
As restated $10,857,469 $10,348,467
===================================
Liabilities:
The Company $10,208,203 $ 9,745,504
FPLH 352,184 302,655
-----------------------------------
As restated $10,560,387 $10,048,159
===================================
Capital and surplus:
The Company $ 203,393 $ 206,121
FPLH 93,689 94,187
-----------------------------------
As restated $ 297,082 $ 300,308
===================================
</TABLE>
NATURE OF BUSINESS
The Company primarily sells group fixed and variable annuities and group life
coverages. The Company is licensed in 49 states and the District of Columbia and
is actively in the process of becoming licensed in all 50 states. Sales of the
Company's products are primarily through brokers.
8
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract reserves, guarantee fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York ("Insurance Department"), which practices differ in some
respects from generally accepted accounting principles. The more significant of
these differences are as follows: (a) bonds are generally reported at amortized
cost rather than segregating the portfolio into held-to-maturity (reported at
amortized cost), available-for-sale (reported at fair value), and trading
(reported at fair value) classifications; (b) acquisition costs of acquiring new
business are charged to current operations as incurred rather than deferred and
amortized over the life of the policies; (c) policy reserves on traditional life
products are based on statutory mortality rates and interest which may differ
from reserves based on reasonable assumptions of expected mortality, interest,
and withdrawals which include a provision for possible unfavorable deviation
from such assumptions; (d) policy reserves on certain investment products use
discounting methodologies utilizing statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) declines in the estimated realizable value of
investments are provided for through the establishment of a formula-determined
statutory investment reserve (reported as a liability), changes to which are
charged directly to surplus, rather than through recognition in the statement of
operations for declines in value, when such declines are judged to be other than
temporary; (i) certain assets designated as "non-admitted assets" have been
charged to surplus rather than being reported as assets; (j) revenues for
universal life and investment products consist of premiums received rather than
policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed; (k)
pension expense is recorded as amounts are paid; (l) stock options settled in
cash are recorded as an expense of the Company's indirect parent rather than
charged to current operations; (m) adjustments to federal income taxes of prior
years
9
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are charged or credited directly to unassigned surplus, rather than reported as
a component of expense in the statement of operations; and (n) gains or losses
on dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations. The effects
of these variances have not been determined by the Company.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted
codified statutory accounting principles ("Codification"). Codification will
likely change, to some extent, prescribed statutory accounting practices and may
result in changes to the accounting practices that the Company uses to prepare
its statutory-basis financial statements. Codification will require adoption by
the various states before it becomes the prescribed statutory basis of
accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State of
New York must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Department. At this time, it is unclear whether the State of New York will adopt
Codification. However, based on current guidance, management believes that the
impact of Codification will not be material to the Company's statutory-basis
financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased to
be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortized costs for bonds and mortgage loans on real
estate that were acquired through the reinsurance agreement described earlier
were initially recorded at market value, consistent with the aforementioned
agreement and as prescribed by the Department of Insurance of the State of New
York. Amortization is computed using methods which result in a level yield over
the expected life of the security. The Company reviews its prepayment
assumptions on mortgage and other asset-backed securities at regular intervals
and adjusts amortization rates retrospectively when such assumptions are changed
due to experience and/or expected future patterns. Investments in preferred
stocks in good standing are reported at cost. Investments in preferred stocks
not in good standing are reported at the lower of cost or market. Common stocks
are carried at market. Real estate is reported at cost less allowances for
depreciation. Depreciation is computed principally by the straight-line method.
Policy loans are reported at unpaid
10
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
principal. Other invested assets consist principally of investments in various
joint ventures and are recorded at equity in underlying net assets. Other
"admitted assets" are valued, principally at cost, as required or permitted by
New York Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1998, 1997 and 1996, the
Company excluded investment income due and accrued of $216, $473 and $469,
respectively, with respect to such practices.
The Company uses interest rate swaps as part of its overall interest rate risk
management strategy for certain life insurance and annuity products. The net
interest effect of such swap transactions is reported as an adjustment of
interest income from the hedged items as incurred.
Deferred income for unrealized gains and losses on the securities valued at
market at the time of the assumption reinsurance agreement (described in Note 4)
are returned to MONY at the time of realization pursuant to the agreement.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using statutorily
specified interest rates and valuation methods that will provide, in the
aggregate, reserves that are greater than or equal to the minimum required by
law.
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality Tables.
The reserves are calculated using interest rates ranging from 2.50 to 6.50
percent and are computed principally on the Net Level Premium Valuation and the
Commissioners' Reserve Valuation Method. Reserves for universal life policies
are based on account balances adjusted for the Commissioners' Reserve Valuation
Method.
11
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with life contingencies are equal to the
present value of future payments assuming interest rates ranging from 3.00 to
8.50 percent and mortality rates, where appropriate, from a variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. These estimates are subject to the effects of
trends in claim severity and frequency. The estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of separate account contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. Income and gains and losses with respect to these assets
accrue to the benefit of the policyholders and, accordingly, the operations of
the separate accounts are not included in the accompanying financial statements.
Certain separate account assets and liabilities reported in the accompanying
financial statements contain contractual guarantees. Guaranteed separate
accounts represent funds invested by the Company for the benefit of individual
contract holders who are guaranteed certain returns as specified in the
contracts. Separate account asset performance different than guaranteed
requirements is either transferred to or received from the general account and
reported in the statements of operations. Guaranteed separate account assets and
liabilities are reported at estimated fair value except for certain government
and fixed-rate separate accounts, which are carried at amortized cost. The
assets and liabilities of the nonguaranteed separate accounts are carried at
estimated fair value.
12
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTION PLAN
AEGON N.V. sponsors a stock option plan for eligible employees of the Company.
Under this plan, certain employees have indicated a preference to immediately
sell shares received as a result of their exercise of the stock options; in
these situations, AEGON N.V. has settled such options in cash rather than
issuing stock to these employees. These cash settlements are paid by the
Company, and AEGON N.V. subsequently reimburses the Company for such payments.
Under statutory accounting principles, the Company does not record any expense
related to this plan, as the expense is recognized by AEGON N.V. However, the
Company is allowed to record a deduction in the consolidated tax return filed by
the Company and certain affiliates.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments, requires additional disclosures about
derivatives. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 and No. 119 exclude certain financial instruments and
all nonfinancial instruments from their disclosure requirements and allow
companies to forego the disclosures when those estimates can only be made at
excessive cost. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained
13
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
from independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities are based on quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal its carrying value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
Interest rate swaps: Estimated fair value of interest rate swaps are based
upon the pricing differential for similar swap agreements.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of SFAS No. 107
and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------- ------------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Cash and short-term investments $ 61,065 $ 61,065 $ 68,131 $ 68,131
Bonds 4,151,780 4,246,901 3,988,635 4,083,280
Preferred stock 2,582 2,529 1,792 1,892
Common stock 2 2 144 144
Mortgage loans on real estate 413,107 429,716 495,009 504,947
Interest rate swap - - 391
Policy loans 3,181 3,181 3,046 3,046
Separate account assets 6,517,152 6,527,180 5,630,093 5,640,386
LIABILITIES
Investment contract liabilities 4,134,507 4,057,004 4,091,938 4,011,465
Separate account annuities 6,408,436 6,387,445 5,594,880 5,577,854
</TABLE>
14
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds:
United States Government and agencies $ 99,834 $ 1,776 $ 285 $ 101,325
State, municipal and other government 38,387 1,427 1,625 38,189
Public utilities 355,719 10,239 825 365,133
Industrial and miscellaneous 2,398,132 88,051 25,538 2,460,645
Mortgage-backed and asset-backed securities
1,259,708 27,387 5,486 1,281,609
--------------------------------------------------------
4,151,780 128,880 33,759 4,246,901
Preferred stocks 2,582 - 53 2,529
--------------------------------------------------------
$4,154,362 $128,880 $33,812 $4,249,430
========================================================
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 102,628 $ 943 $ 255 $ 103,316
State, municipal and other government 60,427 1,413 1,761 60,079
Public utilities 251,071 4,943 892 255,122
Industrial and miscellaneous 2,324,342 66,883 6,424 2,384,801
Mortgage-backed and asset-backed securities
1,250,167 32,779 2,984 1,279,962
--------------------------------------------------------
3,988,635 106,961 12,316 4,083,280
Preferred stocks 1,792 100 - 1,892
--------------------------------------------------------
$3,990,427 $107,061 $12,316 $4,085,172
========================================================
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1998, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
15
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
--------------------------
<S> <C> <C>
Due in one year or less $ 262,288 $ 263,578
Due after one year through five years 1,553,746 1,582,380
Due after five years through ten years 825,886 849,510
Due after ten years 250,152 269,824
--------------------------
2,892,072 2,965,292
Mortgage-backed and asset-backed securities 1,259,708 1,281,609
--------------------------
$4,151,780 $4,246,901
==========================
</TABLE>
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Interest on bonds and notes $290,967 $285,730 $267,510
Mortgage loans 46,027 57,659 83,511
Real estate 12,741 13,976 7,225
Dividends on equity investments 254 223 220
Interest on policy loans 317 168 154
Derivative instruments (3,265) 100 -
Other investment gain (loss) 9,568 1,543 (5,482)
-------------------------------------------
Gross investment income 356,609 359,399 353,138
Investment expenses 10,949 17,859 13,678
-------------------------------------------
Net investment income $345,660 $341,540 $339,460
===========================================
</TABLE>
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Proceeds $1,381,784 $968,184 $777,107
=============================================
Gross realized gains $ 19,871 $ 19,165 $ 9,697
Gross realized losses (5,974) (11,997) (12,291)
---------------------------------------------
Net realized gains (losses) $ 13,897 $ 7,168 $ (2,594)
=============================================
</TABLE>
16
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
At December 31, 1998, investments with an aggregate carrying value of $4,378
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required by
statute.
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
------------------------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Debt securities $ 13,897 $ 7,168 $ (2,594)
Common stock 60 - 244
Preferred stock 170 (7) (44)
Short-term investments (41) (6) (115)
Mortgage loans on real estate 325 287 (12,415)
Real estate 3,967 4,059 -
Other invested assets 2,859 5,035 6,872
-------------------------------------------
21,237 16,536 (8,052)
Tax effect 20 (747) 87
Transfer to interest maintenance reserve (17,487) (14,958) (4,142)
-------------------------------------------
Total realized gains (losses) $ 3,770 $ 831 $(12,107)
===========================================
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
-------------------------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Debt securities $ 323 $56,129 $(87,888)
Equity securities (38) 21 (190)
------------------------------------------
Change in unrealized appreciation
(depreciation) $ 285 $56,150 $(88,078)
==========================================
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities at
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Unrealized gains $ - $ 38 $ 16
Unrealized losses (12) (12) (11)
-------------------------------------------
Net unrealized gains (losses) $ (12) $ 26 $ 5
===========================================
</TABLE>
17
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1998, the Company issued mortgage loans with interest rates ranging from
6.55% to 8.49%. The maximum percentage of any one loan to the value of the
underlying real estate at origination was 79%. No mortgage loans were non-income
producing for the previous twelve months and, accordingly, no accrued interest
related to these mortgage loans was excluded from investment income. The Company
requires all mortgage loans to carry fire insurance equal to the value of the
underlying property.
During 1998, 1997 and 1996, there were $2,796, $4,427 and $28,929, respectively,
in foreclosed mortgage loans that were transferred to real estate. At December
31, 1998 and 1997, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $34,083 and $20,191, respectively. The mortgage loan
portfolio is diversified by geographic region and specific collateral property
type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION Property Type Distribution
- -------------------------------------------------- -------------------------------------------
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
------------------- -------------------
<S> <C> <C> <C> <C> <C>
South Atlantic 22% 20% Office 37% 30%
Mid-Atlantic 20 16 Industrial 29 13
E. North Central 20 16 Retail 24 19
Pacific 9 20 Apartment 4 23
W. South Central 9 2 Agricultural 2 -
New England 8 7 Other 4 15
Mountain 7 15
E. South Central 3 2
W. North Central 2 2
</TABLE>
At December 31, 1998, the Company had no investments, excluding U. S. Government
guaranteed or insured issues, which individually represented more than ten
percent of capital and surplus and the asset valuation reserve.
The Company utilized an interest rate swap agreement as part of its efforts to
hedge and manage fluctuations in the market value of its investment portfolio
attributable to changes in general interest rate levels and to manage duration
mismatch of assets and liabilities. The contract or notional amounts of those
instruments reflect the extent of involvement in the various types of financial
instruments.
18
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance by
a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
At December 31, 1998, the Company held no derivative instruments. At December
31, 1998 and 1997, the Company's outstanding financial instruments with on and
off-balance sheet risks, shown in notional amounts, are summarized as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed - pay floating $74,588 $50,800
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty.
Premiums earned reflect the following reinsurance assumed and ceded amounts for
the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Direct premiums $1,183,777 $1,309,731 $1,185,163
Reinsurance assumed 6,415 6,905 9,962
Reinsurance ceded (2,539) (5,268) (29,141)
--------------------------------------------
Net premiums earned $1,187,653 $1,311,368 $1,165,984
============================================
</TABLE>
19
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
The Company received reinsurance recoveries in the amounts of $2,493, $1,992 and
$1,758 during 1998, 1997 and 1996, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1998 and 1997 of $143,819 and
$153,092, respectively.
On December 31, 1993, the Company and MONY entered into an assumption
reinsurance agreement whereby all of the general account liabilities were
novated to the Company from MONY as state approvals were received.
In accordance with the agreement, MONY will receive payments relating to the
performance of the assets and liabilities that exist at the date of closing for
a period of nine years. These payments will be reduced for certain
administrative expenses as defined in the agreement. The Company will recognize
operating gains and losses on renewal premiums received after December 31, 1993
of the business in-force at December 31, 1993, and on all new business written
after that date. At the end of nine years from the date of closing, the Company
will purchase from MONY the remaining transferred business inforce based upon a
formula described in the agreement. At December 31, 1998 and 1997, the Company
owed MONY $52,837 and $56,952, respectively, which represents the amount earned
by MONY under the gain sharing calculation and certain fees for investment
management services for the respective years.
In connection with the transaction, MONY purchased $150,000 and $50,000 in
Series A and Series B notes, respectively, of AEGON. The proceeds were used to
enhance the surplus of the Company. Both the Series A and Series B notes bear a
market rate of interest and mature in nine years from the date of closing.
AEGON provides general and administrative services for the transferred business
under a related agreement with MONY. The agreement specifies prescribed rates
for expenses to administer the business up to certain levels. In addition, AEGON
also provides investment management services on the assets underlying the new
business written by the Company while MONY continues to provide investment
management services for assets supporting the remaining policy liabilities which
were transferred at December 31, 1993.
20
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before federal income
tax expense and net realized capital gains (losses) on investments primarily due
to differences in the statutory and tax treatment of certain investments,
deferred policy acquisition costs, stock options exercised, dividends received
deduction, carryforward (utilization) of operating loss, IMR amortization, and
certain adjustments related to the agreement between MONY and the Company. These
adjustments caused the Company to calculate federal income tax expense using
alternative minimum tax requirements in 1998.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to net realized capital gains (losses) on
investments due to the agreement between MONY and the Company, as discussed in
Note 4 to the financial statements. In accordance with this agreement, these
gains and losses are included in the net payments MONY will receive relating to
the performance of the assets that existed at the date of closing. Accordingly,
income taxes relating to gains and losses on such assets are not provided for on
the income tax return filed by the Company.
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($2,427 at December 31, 1998). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $849.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $8,514 which expire through 2011.
In 1998, the Company reached a final settlement with the Internal Revenue
Service for years 1993 through 1995 resulting in no tax due or refunded.
21
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds relate
to liabilities established on a variety of the Company's products that are not
subject to significant mortality or morbidity risk; however, there may be
certain restrictions placed upon the amount of funds that can be withdrawn
without penalty. The amount of reserves on these products, by withdrawal
characteristics, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------------------- ----------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 912,692 9% $ 910,528 9%
Subject to discretionary withdrawal at book
value less surrender charge 1,013,495 10 1,045,807 11
Subject to discretionary withdrawal at
market value 3,678,649 34 2,950,639 30
Subject to discretionary withdrawal at book
value (minimal or no charges or adjustments) 2,666,670 25 2,616,308 27
Not subject to discretionary withdrawal
provision 2,416,602 22 2,317,823 23
-------------------------- -------------------------
10,688,108 100% 9,841,105 100%
========= ========
Less reinsurance ceded 143,475 152,726
---------- ----------
Total policy reserves on annuities and
deposit fund liabilities $10,544,633 $9,688,379
=========== ==========
</TABLE>
Separate and variable account assets held by the Company represent contracts
where the benefit is determined by the performance of the investments held in
the separate account. Information regarding the separate accounts of the Company
as of and for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
----------------------------------------------
<S> <C> <C> <C>
Premiums, deposits and other
considerations for the year ended
December 31, 1998 $ 84,150 $ 767,676 $ 851,826
==============================================
Reserves for separate accounts with
assets as of December 31, 1998 at:
Fair value $2,350,983 $3,461,715 $5,812,698
Amortized cost 595,738 - 595,738
----------------------------------------------
Total $2,946,721 $3,461,715 $6,408,436
==============================================
</TABLE>
22
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
----------------------------------------------
<S> <C> <C> <C>
Premiums, deposits and other
considerations for the year ended
December 31, 1997 $ 147,638 $ 648,056 $ 795,694
==============================================
Reserves for separate accounts with
assets as of December 31, 1997 at:
Fair value $2,204,931 $2,767,245 $4,972,176
Amortized cost 622,703 - 622,703
----------------------------------------------
Total $2,827,634 $2,767,245 $5,594,879
==============================================
Premiums, deposits and other
considerations for the year ended
December 31, 1996 $ - $ 747,506 $ 747,506
==============================================
Reserves for separate accounts with
assets as of December 31, 1996 at:
Fair value $2,022,843 $2,178,445 $4,201,288
Amortized cost 613,565 - 613,565
----------------------------------------------
Total $2,636,408 $2,178,445 $4,814,853
==============================================
</TABLE>
There may be certain restrictions placed upon the amount of funds that can be
withdrawn without penalty. The amount of separate account liabilities on these
products, by withdrawal characteristics, is summarized as follows:
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
----------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Subject to discretionary withdrawal
with market value adjustment $ 345,379 $ - $ 345,379
Subject to discretionary withdrawal at
book value less surrender charge 250,359 - 250,359
Subject to discretionary withdrawal at
market value 216,935 3,461,715 3,678,650
Not subject to discretionary withdrawal 2,134,048 - 2,134,048
----------------------------------------------
$2,946,721 $3,461,715 $6,408,436
==============================================
</TABLE>
23
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
-----------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Subject to discretionary withdrawal
with market value adjustment $ 358,061 $ - $ 358,061
Subject to discretionary withdrawal at
book value less surrender charge 264,642 - 264,642
Subject to discretionary withdrawal at
market value 180,802 2,767,245 2,948,047
Not subject to discretionary withdrawal 2,024,129 - 2,024,129
------------------------------------------------
$2,827,634 $2,767,245 $5,594,879
================================================
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Transfers as reported in the summary of operations of
the separate accounts annual statement:
Transfers to separate accounts $851,826 $795,663 $747,677
Transfers from separate accounts 723,321 767,049 505,592
--------------------------------------
Net transfers to separate accounts 128,505 28,614 242,085
Reconciling adjustments - HUB level fees not paid to
AUSA general account 1,317 13,756 13,520
Fees paid to external fund manager - 120 67
Assumption of liabilities via merger of FPLH 1,088 - -
--------------------------------------
Net adjustments 2,405 13,876 13,587
--------------------------------------
Transfers as reported in the summary of operations of
the life, accident and health annual statement $130,910 $ 42,490 $255,672
======================================
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1998 and 1997, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
24
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
GROSS LOADING NET
--------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Ordinary direct first year business $ 351 $ 339 $ 12
Ordinary direct renewal business 6,760 1,087 5,673
Group life direct business 851 482 369
Credit life 37 - 37
Reinsurance ceded (6) - (6)
--------------------------------
7,993 1,908 6,085
Accident and health:
Direct 363 - 363
Reinsurance ceded (40) - (40)
--------------------------------
Total accident and health 323 - 323
--------------------------------
$8,316 $1,908 $6,408
================================
DECEMBER 31, 1997
Ordinary direct first year business $ 460 $ 336 $ 124
Ordinary direct renewal business 6,138 1,081 5,057
Group life direct business 1,267 433 834
Credit life 41 - 41
Reinsurance ceded (14) - (14)
--------------------------------
7,892 1,850 6,042
Accident and health:
Direct 325 - 325
Reinsurance ceded (51) - (51)
--------------------------------
Total accident and health 274 - 274
--------------------------------
$8,166 $1,850 $6,316
================================
</TABLE>
At December 31, 1998 and 1997, the Company had insurance in force aggregating
$474,471 and $597,855, respectively, in which the gross premiums are less than
the net premiums required by the valuation standards established by the
Department of Insurance of the State of New York. The Company established policy
reserves of $1,348 and $1,476 to cover these deficiencies at December 31, 1998
and 1997, respectively.
7. DIVIDEND RESTRICTIONS
The Company is subject to certain limitations relative to statutory surplus,
imposed by the State of New York, on the payment of dividends to its parent
company.
The Company paid dividends to its parent of $8,000 in 1998. The Company is not
entitled to pay out any dividends in 1999 without prior approval.
25
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
87 expense as a percent of salaries. The benefits are based on years of service
and the employee's compensation during the highest five consecutive years of
employment. The Company was allocated $4, $0 and $13 of pension expense for the
years ended December 31, 1998, 1997 and 1996, respectively. The plan is subject
to the reporting and disclosure requirements of the Employee Retirement Income
Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement Income Security Act of 1974. The Company
was allocated $9, $12 and $21 of expense for the years ended December 31, 1998,
1997 and 1996, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also sponsors
an employee stock option plan for individuals employed at least three years and
a stock purchase plan for its producers, with the participating affiliated
companies establishing their own eligibility criteria, producer contribution
limits and company matching formula. These plans have been accrued or funded as
deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $4, $2 and
$2 for the years ended December 31, 1998, 1997 and 1996, respectively.
26
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
9. RELATED PARTY TRANSACTIONS
In accordance with an agreement between AEGON and the Company, AEGON will ensure
the maintenance of certain minimum tangible net worth, operating leverage and
liquidity levels of the Company, as defined in the agreement, through the
contribution of additional capital by the Company's parent as needed.
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1998, 1997
and 1996, the Company paid $5,650, $7,330 and $5,739, respectively, for these
services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the thirty-
day commercial paper rate of 4.95% at December 31, 1998. During 1998, 1997 and
1996, the Company paid net interest of $232, $142 and $29, respectively, to
affiliates.
10. COMMITMENTS AND CONTINGENCIES
The Company has issued Trust GIC contracts to plan sponsors totaling $153,146 at
December 31, 1998, pursuant to terms under which the plan sponsor retains
ownership of the assets related to these contracts. The Company guarantees
benefit responsiveness in the event that plan benefit requests and other
contractual commitments exceed plan cash flows. The plan sponsor agrees to
reimburse the Company for such benefit payments with interest, either at a fixed
or floating rate, from future plan and asset cash flows. In return for this
guarantee, the Company receives a premium which varies based on such elements as
benefit responsive exposure and contract size. The Company underwrites the plans
for the possibility of having to make benefit payments and also must agree to
the investment guidelines to ensure appropriate credit quality and cash flow
matching. The assets and liabilities relating to such contracts are not
recognized in the Company's statutory-basis financial statements.
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages, in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
27
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. In accordance with the purchase agreement,
assessments related to periods prior to the purchase of the Company will be paid
by Dreyfus and assessments attributable to business reinsured from MONY for
premiums received prior to the date of the transaction will be paid by MONY (see
Note 1). The Company will be responsible for assessments, if any, attributable
to premium income after the date of purchase. Assessments are charged to
operations when received by the Company except where right of offset against
other taxes paid is allowed by law; amounts available for future offsets are
recorded as an asset on the Company's balance sheet. Potential future
obligations for unknown insolvencies are not determinable by the Company. The
future obligation has been based on the most recent information available from
the National Organization of Life and Health Insurance Guaranty Associations.
The guaranty fund expense was $126, $586 and $246 for the years ended December
31, 1998, 1997 and 1996, respectively.
11. YEAR 2000 (UNAUDITED)
The term Year 2000 issue generally refers to the improper processing of dates
and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations and
decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
The Company has developed a Year 2000 Project Plan (the Plan) to address the
Year 2000 issue as it affects the Company's internal Information Technology
("IT") and non-IT systems, and to assess Year 2000 issues relating to third
parties with whom the Company has critical relationships.
The Plan for addressing internal systems generally includes an assessment of
internal IT and non-IT systems and equipment affected by the Year 2000 issue;
definition of strategies to address affected systems and equipment; remediation
of identified systems and equipment; internal testing and certification that
each internal system is Year 2000 compliant; and a review of existing and
revised business resumption and contingency plans to address potential Year 2000
issues. The Company has remediated and tested substantially all of its mission-
critical internal IT systems as of December 31, 1998. The Company continues to
remediate and test certain non-critical internal IT systems, internal non-IT
systems and will continue with a revalidation testing program throughout 1999.
28
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. YEAR 2000 (UNAUDITED) (CONTINUED)
The Company's Year 2000 issues are more complex because a number of its systems
interface with other systems not under the Company's control. The Company's most
significant interfaces and uses of third-party vendor systems are in the bank,
financial services and trust areas. The Company utilizes various banks to handle
numerous types of financial and sales transactions. Several of these banks also
provide trustee and custodial services for the Company's investment holdings and
transactions. These services are critical to a financial services company such
as the Company as its business centers around cash receipts and disbursements to
policyholders and the investment of policyholder funds. The Company has received
written confirmation from its vendor banks regarding their status on Year 2000.
The banks indicate their dedication to resolving any Year 2000 issues related to
their systems and services prior to December 31, 1999. The Company anticipates
that a considerable effort will be necessary to ensure that its corrected or new
systems can properly interface with those business partners with whom it
transmits and receives data and other information (external systems). The
Company has undertaken specific testing regimes with these third-party business
partners and expects to continue working with its business partners on any
interfacing of systems. However, the timing of external system compliance cannot
currently be predicted with accuracy because the implementation of Year 2000
readiness will vary from one company to another.
The Company does have some exposure to date-sensitive embedded technology such
as micro-controllers, but the Company views this exposure as minimal. Unlike
other industries that may be equipment intensive, like manufacturing, the
Company is a life insurance and financial services organization providing
insurance, annuities and pension products to its customers. As such, the primary
equipment and electronic devices in use are computers and telephone related
equipment. This type of hardware can have date-sensitive embedded technology
which could have Year 2000 problems. Because of this exposure, the Company has
reviewed its computer hardware and telephone systems, with assistance from the
applicable vendors, and has upgraded, or replaced, or is in the process of
replacing any equipment that will not properly process date-sensitive data in
the Year 2000 or beyond.
For the Company, a reasonably likely worst case scenario might include one or
more of the Company's significant policyholder systems being non-compliant. Such
an event could result in a material disruption of the Company's operations.
Specifically, a number of the Company's operations could experience an
interruption in the ability to collect and process premiums or deposits, process
claim payments, accurately maintain policyholder information, accurately
maintain accounting records, and/or perform adequate customer service. Should
the worst case scenario occur, it could, dependent upon its duration, have a
material impact on the Company's business and financial condition. Simple
failures can
29
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. YEAR 2000 (UNAUDITED) (CONTINUED)
be repaired and returned to production within a matter of hours with no material
impact. Unanticipated failures with a longer service disruption period could
have a more serious impact. For this reason, the Company is placing significant
emphasis on risk management and Year 2000 business resumption contingency
planning in 1999 by modifying its existing business resumption and disaster
recovery plans to address potential Year 2000 issues.
The actions taken by management under the Year 2000 Project Plans are intended
to significantly reduce the Company's risk of a material business interruption
based on the Year 2000 issues. It should be noted that the Year 2000 computer
problem, and its resolution, is complex and multifaceted, and any company's
success cannot be conclusively known until the Year 2000 is reached. In spite of
its efforts or results, the Company's ability to function unaffected to and
through the Year 2000 may be adversely affected by actions (or failure to act)
of third parties beyond our knowledge or control. It is anticipated that there
may be problems that will have to be resolved in the ordinary course of business
on and after the Year 2000. However, the Company does not believe that the
problems will have a material adverse affect on the Company's operations or
financial condition.
30
<PAGE>
Financial Statements
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Year ended December 31, 1998
with Report of Independent Auditors
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Financial Statements
Year ended December 31, 1998
Contents
Report of Independent Auditors.................................................1
Financial Statements
Balance Sheet..................................................................2
Statement of Operations........................................................6
Statements of Changes in Contract Owners' Equity..............................10
Notes to Financial Statements.................................................14
<PAGE>
Report of Independent Auditors
The Board of Directors and Contract Owners
of The Endeavor Variable Annuity,
AUSA Life Insurance Company, Inc.
We have audited the accompanying balance sheet of the subaccounts of AUSA
Endeavor Variable Annuity Account, which are available for investment by The
Endeavor Variable Annuity contract owners, as of December 31, 1998, and the
related statements of operations for the year then ended and changes in contract
owners' equity for each of the two years in the period then ended. These
financial statements are the responsibility of the Variable Account's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of mutual fund shares owned as of December 31, 1998 by
correspondence with the mutual funds' transfer agent. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the subaccounts of the AUSA
Endeavor Variable Annuity Account, which are available for investment by The
Endeavor Variable Annuity contract owners, at December 31, 1998, and the results
of its operations for the year then ended and changes in its contract owners'
equity for each of the two years in the period then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 29, 1999
1
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Balance Sheet
December 31, 1998
Total
---------------
Assets
Investments in mutual funds, at current market value:
Endeavor Series Trust:
Endeavor Money Market Portfolio $ 1,326,568
Endeavor Asset Allocation Portfolio 5,652,912
T. Rowe Price International Stock Portfolio 7,661,121
Endeavor Value Equity Portfolio 8,353,188
Dreyfus Small Cap Value Portfolio 5,420,157
Dreyfus U. S. Government Securities Portfolio 2,273,520
T. Rowe Price Equity Income Portfolio 7,949,358
T. Rowe Price Growth Stock Portfolio 7,381,845
Endeavor Opportunity Value Portfolio 1,149,335
Endeavor Enhanced Index Portfolio 1,908,702
WRL Series Fund, Inc.:
Growth Portfolio 20,890,222
---------------
Total investments in mutual funds 69,966,928
---------------
Total assets $69,966,928
===============
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 1,118
---------------
Total liabilities 1,118
Contract owners' equity:
Deferred annuity contracts terminable by owners 69,965,810
---------------
Total liabilities and contract owners' equity $69,966,928
===============
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
Endeavor Money Endeavor Asset T. Rowe Price
Market Allocation International
Subaccount Subaccount Stock Subaccount
<S> -------------------------------------------------------
Assets <C> <C> <C>
Investments in mutual funds, at current market value:
Endeavor Series Trust:
Endeavor Money Market Portfolio $1,326,568 $ - $ -
Endeavor Asset Allocation Portfolio - 5,652,912 -
T. Rowe Price International Stock Portfolio - - 7,661,121
Endeavor Value Equity Portfolio - - -
Dreyfus Small Cap Value Portfolio - - -
Dreyfus U. S. Government Securities Portfolio - - -
T. Rowe Price Equity Income Portfolio - - -
T. Rowe Price Growth Stock Portfolio - - -
Endeavor Opportunity Value Portfolio - - -
Endeavor Enhanced Index Portfolio - - -
WRL Series Fund, Inc.:
Growth Portfolio - - -
-------------------------------------------------------
Total investments in mutual funds 1,326,568 5,652,912 7,661,121
-------------------------------------------------------
Total assets $1,326,568 $5,652,912 $7,661,121
=======================================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 8 $ 62 $ 76
-------------------------------------------------------
Total liabilities 8 62 76
Contract owners' equity:
Deferred annuity contracts terminable by owners 1,326,560 5,652,850 7,661,045
=======================================================
Total liabilities and contract owners' equity $1,326,568 $5,652,912 $7,661,121
=======================================================
<CAPTION>
Endeavor Dreyfus Small
Value Equity Cap Value
Subaccount Subaccount
<S> ----------------------------------
Assets <C> <C>
Investments in mutual funds, at current market value:
Endeavor Series Trust:
Endeavor Money Market Portfolio $ - $ -
Endeavor Asset Allocation Portfolio - -
T. Rowe Price International Stock Portfolio - -
Endeavor Value Equity Portfolio 8,353,188 -
Dreyfus Small Cap Value Portfolio - 5,420,157
Dreyfus U. S. Government Securities Portfolio - -
T. Rowe Price Equity Income Portfolio - -
T. Rowe Price Growth Stock Portfolio - -
Endeavor Opportunity Value Portfolio - -
Endeavor Enhanced Index Portfolio - -
WRL Series Fund, Inc.:
Growth Portfolio - -
----------------------------------
Total investments in mutual funds 8,353,188 5,420,157
----------------------------------
Total assets $8,353,188 $5,420,157
==================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 237 $ 302
----------------------------------
Total liabilities 237 302
Contract owners' equity:
Deferred annuity contracts terminable by owners 8,352,951 5,419,855
==================================
Total liabilities and contract owners' equity $8,353,188 $5,420,157
==================================
</TABLE>
3
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Balance Sheet (continued)
Dreyfus U. S.
Government
Securities
Subaccount
--------------
Assets
Investments in mutual funds, at current market value:
Endeavor Series Trust:
Endeavor Money Market Portfolio $ -
Endeavor Asset Allocation Portfolio -
T. Rowe Price International Stock Portfolio -
Endeavor Value Equity Portfolio -
Dreyfus Small Cap Value Portfolio -
Dreyfus U. S. Government Securities Portfolio 2,273,520
T. Rowe Price Equity Income Portfolio -
T. Rowe Price Growth Stock Portfolio -
Endeavor Opportunity Value Portfolio -
Endeavor Enhanced Index Portfolio -
WRL Series Fund, Inc.:
Growth Portfolio -
--------------
Total investments in mutual funds 2,273,520
==============
Total assets $2,273,520
==============
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 10
--------------
Total liabilities 10
Contract owners' equity:
Deferred annuity contracts terminable by owners 2,273,510
==============
Total liabilities and contract owners' equity $2,273,520
==============
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
T. Rowe Price T. Rowe Price Endeavor
Equity Income Growth Stock Opportunity Value
Subaccount Subaccount Subaccount
----------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments in mutual funds, at current market value:
Endeavor Series Trust:
Endeavor Money Market Portfolio $ - $ - $ -
Endeavor Asset Allocation Portfolio - - -
T. Rowe Price International Stock Portfolio - - -
Endeavor Value Equity Portfolio - - -
Dreyfus Small Cap Value Portfolio - - -
Dreyfus U. S. Government Securities Portfolio - - -
T. Rowe Price Equity Income Portfolio 7,949,358 - -
T. Rowe Price Growth Stock Portfolio - 7,381,845 -
Endeavor Opportunity Value Portfolio - - 1,149,335
Endeavor Enhanced Index Portfolio - - -
WRL Series Fund, Inc.:
Growth Portfolio - - -
----------------------------------------------------------
Total investments in mutual funds 7,949,358 7,381,845 1,149,335
==========================================================
Total assets $7,949,358 $7,381,845 $1,149,335
==========================================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 74 $ 126 $ 19
----------------------------------------------------------
Total liabilities 74 126 19
Contract owners' equity:
Deferred annuity contracts terminable by owners 7,949,284 7,381,719 1,149,316
==========================================================
Total liabilities and contract owners' equity $7,949,358 $7,381,845 $1,149,335
==========================================================
<CAPTION>
Endeavor
Enhanced Index Growth
Subaccount Subaccount
-----------------------------------
<S> <C> <C>
Assets
Investments in mutual funds, at current market value:
Endeavor Series Trust: $ - $
Endeavor Money Market Portfolio - -
Endeavor Asset Allocation Portfolio - -
T. Rowe Price International Stock Portfolio - -
Endeavor Value Equity Portfolio - -
Dreyfus Small Cap Value Portfolio - -
Dreyfus U. S. Government Securities Portfolio - -
T. Rowe Price Equity Income Portfolio - -
T. Rowe Price Growth Stock Portfolio - -
Endeavor Opportunity Value Portfolio - -
Endeavor Enhanced Index Portfolio 1,908,702 -
WRL Series Fund, Inc.:
Growth Portfolio - 20,890,222
-----------------------------------
Total investments in mutual funds 1,908,702 20,890,222
===================================
Total assets $1,908,702 $20,890,222
===================================
Liabilities and contract owners' equity
Liabilities:
Contract terminations payable $ 17 $ 187
-----------------------------------
Total liabilities 17 187
Contract owners' equity:
Deferred annuity contracts terminable by owners 1,908,685 20,890,035
===================================
Total liabilities and contract owners' equity $1,908,702 $20,890,222
===================================
</TABLE>
5
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Statement of Operations
Year ended December 31, 1998
Total
-----------
Net investment income (loss)
Income:
Dividends $ 2,278,713
Expenses:
Administrative fee 29,892
Mortality and expense risk charge 787,827
-----------
Net investment income (loss) 1,460,994
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain from sales of investments:
Proceeds from sales 8,259,766
Cost of investments sold 6,075,818
-----------
Net realized capital gain from sales of investments 2,183,948
Net change in unrealized appreciation (depreciation) of investments:
Beginning of the period 4,604,053
End of the period 12,505,236
-----------
Net change in unrealized appreciation (depreciation) of investments 7,901,183
-----------
Net realized and unrealized capital gain (loss) from investments 10,085,131
-----------
Increase (decrease) from operations $11,546,125
===========
See accompanying notes.
6
<PAGE>
<TABLE>
<CAPTION>
Endeavor Money Endeavor Asset T. Rowe Price
Market Allocation International
Subaccount Subaccount Stock Subaccount
-------------------------------------------------------
<S> <C> <C> <C>
Net investment income (loss)
Income:
Dividends $ 44,168 $481,730 $ 97,670
Expenses:
Administrative fee 372 2,644 3,505
Mortality and expense risk charge 12,567 67,293 95,343
-------------------------------------------------------
Net investment income (loss) 31,229 411,793 (1,178)
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain from sales of investments:
Proceeds from sales 473,509 588,460 909,942
Cost of investments sold 473,509 369,236 722,979
-------------------------------------------------------
Net realized capital gain from sales of investments - 219,224 186,963
Net change in unrealized appreciation (depreciation) of investments:
Beginning of the period - 710,551 159,780
End of the period - 822,028 812,805
-------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments - 111,477 653,025
-------------------------------------------------------
Net realized and unrealized capital gain (loss) from investments - 330,701 839,988
-------------------------------------------------------
Increase (decrease) from operations $ 31,229 $742,494 $838,810
=======================================================
<CAPTION>
Endeavor Dreyfus Small
Value Equity Cap Value
Subaccount Subaccount
--------------------------------
<S> <C> <C>
Net investment income (loss)
Income:
Dividends $ 211,884 $ 646,835
Expenses:
Administrative fee 3,917 2,915
Mortality and expense risk charge 105,117 67,416
--------------------------------
Net investment income (loss) 102,850 576,504
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain from sales of investments:
Proceeds from sales 997,731 550,950
Cost of investments sold 670,049 502,881
--------------------------------
Net realized capital gain from sales of investments 327,682 48,069
Net change in unrealized appreciation (depreciation) of investments:
Beginning of the period 1,057,390 504,537
End of the period 958,553 (325,370)
--------------------------------
Net change in unrealized appreciation (depreciation) of investments (98,837) (829,907)
--------------------------------
Net realized and unrealized capital gain (loss) from investments 228,845 (781,838)
--------------------------------
Increase (decrease) from operations $ 331,695 $(205,334)
================================
</TABLE>
7
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Statement of Operations (continued)
Dreyfus U. S.
Government
Securities
Subaccount
----------
Net investment income (loss)
Income:
Dividends $ 56,102
Expenses:
Administrative fee 890
Mortality and expense risk charge 24,291
----------
Net investment income (loss) 30,921
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain from sales of investments:
Proceeds from sales 125,201
Cost of investments sold 118,550
----------
Net realized capital gain from sales of investments 6,651
Net change in unrealized appreciation (depreciation) of investments:
Beginning of the period 65,432
End of the period 126,060
----------
Net change in unrealized appreciation (depreciation) of investments 60,628
----------
Net realized and unrealized capital gain (loss) from investments 67,279
----------
Increase (decrease) from operations $ 98,200
==========
See accompanying notes.
8
<PAGE>
<TABLE>
<CAPTION>
T. Rowe Price T. Rowe Price Endeavor
Equity Income Growth Stock Opportunity Value
Subaccount Subaccount Subaccount
---------------------------------------------------------
<S> <C> <C> <C>
Net investment income (loss)
Income:
Dividends $ 324,655 $ 235,873 $ 10,421
Expenses:
Administrative fee 3,390 2,650 422
Mortality and expense risk charge 95,214 76,708 14,779
---------------------------------------------------------
Net investment income (loss) 226,051 156,515 (4,780)
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain from sales of investments:
Proceeds from sales 830,323 807,578 583,296
Cost of investments sold 561,233 507,697 460,984
---------------------------------------------------------
Net realized capital gain from sales of investments 269,090 299,881 122,312
Net change in unrealized appreciation (depreciation) of investments:
Beginning of the period 1,045,433 762,948 80,372
End of the period 1,032,364 1,627,770 40,842
---------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (13,069) 864,822 (39,530)
---------------------------------------------------------
Net realized and unrealized capital gain (loss) from investments 256,021 1,164,703 82,782
---------------------------------------------------------
Increase (decrease) from operations $ 482,072 $1,321,218 $ 78,002
=========================================================
<CAPTION>
Endeavor
Enhanced Index Growth
Subaccount Subaccount
---------------------------------
<S> <C> <C>
Net investment income (loss)
Income:
Dividends $ 4,701 $ 164,674
Expenses:
Administrative fee 385 8,802
Mortality and expense risk charge 18,116 210,983
--------------------------------
Net investment income (loss) (13,800) (55,111)
Net realized and unrealized capital gain (loss) from investments
Net realized capital gain from sales of investments:
Proceeds from sales 462,884 1,929,892
Cost of investments sold 380,349 1,308,351
--------------------------------
Net realized capital gain from sales of investments 82,535 621,541
Net change in unrealized appreciation (depreciation) of investments:
Beginning of the period 17,739 199,871
End of the period 266,268 7,143,916
--------------------------------
Net change in unrealized appreciation (depreciation) of investments 248,529 6,944,045
--------------------------------
Net realized and unrealized capital gain (loss) from investments 331,064 7,565,586
--------------------------------
Increase (decrease) from operations $317,264 $7,510,475
================================
</TABLE>
9
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Statements of Changes in Contract Owners' Equity
Years ended December 31, 1998 and 1997, except as noted
<TABLE>
<CAPTION>
Endeavor Money Market Endeavor Asset
Total Subaccount Allocation Subaccount
----------------------------- ----------------------------- ------------------------------
1998 1997 1998 1997 1998 1997
----------------------------- ----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 1,460,994 $ 1,324,362 $ 31,229 $ 31,716 $ 411,793 $ (6,560)
Net realized capital gain 2,183,948 537,309 - - 219,224 103,940
Net change in unrealized
appreciation (depreciation)
of investments 7,901,183 2,841,460 - - 111,477 411,330
----------------------------- ----------------------------- ------------------------------
Increase (decrease) from operations 11,546,125 4,703,131 31,229 31,716 742,494 508,710
Contract transactions:
Net contract purchase payments 3,911,835 9,220,861 99,464 333,392 133,924 476,507
Transfer payments from (to)
other subaccounts or general
account 13,499,242 11,407,256 463,681 (400,679) 1,084,068 1,090,186
Contract terminations,
withdrawals and other
deductions (3,590,513) (558,344) - - (373,106) (69,404)
----------------------------- ----------------------------- ------------------------------
Increase (decrease) from contract
transactions 13,820,564 20,069,773 563,145 (67,287) 844,886 1,497,289
----------------------------- ----------------------------- ------------------------------
Net increase (decrease) in
contract owners' equity 25,366,689 24,772,904 594,374 (35,571) 1,587,380 2,005,999
Contract owners' equity:
Beginning of the period 44,599,121 19,826,217 732,186 767,757 4,065,470 2,059,471
----------------------------- ----------------------------- ------------------------------
End of the period $69,965,810 $44,599,121 $1,326,560 $732,186 $5,652,850 $4,065,470
============================= ============================= ==============================
</TABLE>
(1) Commencement of operations, May 1, 1997.
See accompanying notes.
10
<PAGE>
<TABLE>
<CAPTION>
T. Rowe Price International Endeavor Value Dreyfus Small Cap
Stock Subaccount Equity Subaccount Value Subaccount
-------------------------------- ------------------------------ -----------------------------
1998 1997 1998 1997 1998 1997
-------------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (1,178) $ (36,623) $ 102,850 $ 80,572 $ 576,504 $ 242,637
Net realized capital gain 186,963 67,267 327,682 95,546 48,069 42,516
Net change in unrealized
appreciation (depreciation)
of investments 653,025 (76,798) (98,837) 708,617 (829,907) 225,752
-------------------------------- ------------------------------ -----------------------------
Increase (decrease) from operations 838,810 (46,154) 331,695 884,735 (205,334) 510,905
Contract transactions:
Net contract purchase payments 236,000 1,358,284 352,811 1,004,197 289,404 847,169
Transfer payments from (to)
other subaccounts or general
account 1,092,159 1,831,294 1,879,751 1,750,664 1,356,749 1,086,084
Contract terminations,
withdrawals and other
deductions (342,661) (80,849) (431,951) (72,413) (268,863) (50,547)
-------------------------------- ------------------------------ -----------------------------
Increase (decrease) from contract
transactions 985,498 3,108,729 1,800,611 2,682,448 1,377,290 1,882,706
-------------------------------- ------------------------------ -----------------------------
Net increase (decrease) in
contract owners' equity 1,824,308 3,062,575 2,132,306 3,567,183 1,171,956 2,393,611
Contract owners' equity:
Beginning of the period 5,836,737 2,774,162 6,220,645 2,653,462 4,247,899 1,854,288
-------------------------------- ------------------------------ -----------------------------
End of the period $7,661,045 $5,836,737 $8,352,951 $6,220,645 $5,419,855 $4,247,899
================================ ============================== =============================
</TABLE>
11
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Statements of Changes in Contract Owners' Equity (continued)
<TABLE>
<CAPTION>
Dreyfus U. S. Government T. Rowe Price Equity T. Rowe Price Growth
Securities Subaccount Income Subaccount Stock Subaccount
----------------------------- ------------------------------ -----------------------------
1998 1997 1998 1997 1998 1997
------------- --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 30,921 $ 14,013 $ 226,051 $ 36,130 $ 156,515 $ (19,668)
Net realized capital gain 6,651 2,089 269,090 36,934 299,881 49,473
Net change in unrealized
appreciation (depreciation)
of investments 60,628 57,997 (13,069) 818,182 864,822 588,861
------------- --------------- -------------- --------------- -------------- --------------
Increase (decrease) from operations 98,200 74,099 482,072 891,246 1,321,218 618,666
Contract transactions:
Net contract purchase payments 58,235 189,291 653,419 1,328,455 511,952 799,864
Transfer payments from (to)
other subaccounts or general
account 852,781 415,951 1,474,782 1,479,634 1,984,283 980,121
Contract terminations,
withdrawals and other
deductions (64,873) (15,899) (402,387) (69,431) (369,688) (19,352)
------------- --------------- -------------- --------------- -------------- --------------
Increase (decrease) from contract
transactions 846,143 589,343 1,725,814 2,738,658 2,126,547 1,760,633
------------- --------------- -------------- --------------- -------------- --------------
Net increase (decrease) in
contract owners' equity 944,343 663,442 2,207,886 3,629,904 3,447,765 2,379,299
Contract owners' equity:
Beginning of the period 1,329,167 665,725 5,741,398 2,111,494 3,933,954 1,554,655
------------- --------------- -------------- --------------- -------------- --------------
End of the period $2,273,510 $1,329,167 $7,949,284 $5,741,398 $7,381,719 $3,933,954
============= =============== ============== =============== ============== ==============
</TABLE>
(1) Commencement of operations, May 1, 1997.
See accompanying notes.
12
<PAGE>
<TABLE>
<CAPTION>
Endeavor Opportunity Endeavor Enhanced
Value Subaccount Index Subaccount
------------------------------------ ---------------------------------
1998 1997 1998 1997 (1)
------------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (4,780) $ (8,601) $ (13,800) $ (2,004)
Net realized capital gain 122,312 1,784 82,535 2,767
Net change in unrealized
appreciation (depreciation)
of investments (39,530) 80,478 248,529 17,739
------------------------------------ ---------------------------------
Increase (decrease) from operations 78,002 73,661 317,264 18,502
Contract transactions:
Net contract purchase payments 225,557 636,399 491,065 299,901
Transfer payments from (to)
other subaccounts or general
account (124,265) 127,025 915,841 197,261
Contract terminations,
withdrawals and other
deductions (36,368) (10,388) (329,609) (1,540)
------------------------------------ ---------------------------------
Increase (decrease) from contract
transactions 64,924 753,036 1,077,297 495,622
------------------------------------ ---------------------------------
Net increase (decrease) in
contract owners' equity 142,926 826,697 1,394,561 514,124
Contract owners' equity:
Beginning of the period 1,006,390 179,693 514,124 -
------------------------------------ ---------------------------------
End of the period $1,149,316 $1,006,390 $1,908,685 $514,124
==================================== =================================
<CAPTION>
Growth Subaccount
--------------------------------
1998 1997
--------------------------------
<S> <C> <C>
Operations:
Net investment income (loss) $ (55,111) $ 992,750
Net realized capital gain 621,541 134,993
Net change in unrealized
appreciation (depreciation)
of investments 6,944,045 9,302
--------------------------------
Increase (decrease) from operations 7,510,475 1,137,045
Contract transactions:
Net contract purchase payments 860,004 1,947,402
Transfer payments from (to)
other subaccounts or general
account 2,519,412 2,849,715
Contract terminations,
withdrawals and other
deductions (971,007) (168,521)
--------------------------------
Increase (decrease) from contract
transactions 2,408,409 4,628,596
--------------------------------
Net increase (decrease) in
contract owners' equity 9,918,884 5,765,641
Contract owners' equity:
Beginning of the period 10,971,151 5,205,510
--------------------------------
End of the period $20,890,035 $10,971,151
================================
</TABLE>
13
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Notes to Financial Statements
December 31, 1998
1. Organization and Summary of Significant Accounting Policies
Organization
The AUSA Endeavor Variable Annuity Account (the "Mutual Fund Account") is a
segregated investment account of AUSA Life Insurance Company, Inc. ("AUSA"), an
indirect, wholly-owned subsidiary of AEGON N.V., a holding company organized
under the laws of The Netherlands.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940. The Mutual Fund Account consists of eleven investment
subaccounts, ten of which are invested in specified portfolios of the Endeavor
Series Trust and one of which is invested in the WRL Series Fund, Inc. Activity
in these eleven investment subaccounts is available to contract owners of The
Endeavor Variable Annuity.
The Endeavor Enhanced Index Subaccount commenced operations on May 1, 1997.
Effective May 1, 1998, the names of the TCW Money Market, TCW Managed Asset
Allocation, Value Equity, Opportunity Value, and Enhanced Index portfolios and
subaccounts were changed to Endeavor Money Market, Endeavor Asset Allocation,
Endeavor Value Equity, Endeavor Opportunity Value, and Endeavor Enhanced Index
portfolios and subaccounts, respectively. The investment advisor of the Endeavor
Series Trust is Endeavor Management Co. The investment advisor for the WRL
Series Fund, Inc. is WRL Investment Management, Inc., an affiliate of AUSA.
Investments
Net purchase payments received by the Mutual Fund Account for The Endeavor
Variable Annuity are invested in the portfolios of the Endeavor Series Trust and
the Growth Portfolio of the WRL Series Fund, Inc. (collectively, the "Series
Funds"), as selected by the contract owner. Investments are stated at the
closing net asset values per share on December 31, 1998.
Realized capital gains and losses from the sale of shares in the Series Funds
are determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from the investments in the Series Funds are credited or charged to contract
owners' equity.
Dividend Income
Dividends received from the Series Funds' investments are reinvested to purchase
additional mutual fund shares.
14
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Notes to Financial Statements (continued)
2. Investments
A summary of the mutual fund investment at December 31, 1998 follows:
<TABLE>
<CAPTION>
Net Asset
Number of Value Per Market
Shares Held Share Value Cost
----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Endeavor Series Trust:
Endeavor Money Market Portfolio 1,326,567.640 $ 1.00 $ 1,326,568 $ 1,326,568
Endeavor Asset Allocation Portfolio 236,622.517 23.89 5,652,912 4,830,884
T. Rowe Price International Stock
Portfolio 473,200.825 16.19 7,661,121 6,848,316
Endeavor Value Equity Portfolio 385,294.689 21.68 8,353,188 7,394,635
Dreyfus Small Cap Value Portfolio 383,320.898 14.14 5,420,157 5,745,527
Dreyfus U. S. Government Securities
Portfolio 184,538.932 12.32 2,273,520 2,147,460
T. Rowe Price Equity Income Portfolio
396,674.562 20.04 7,949,358 6,916,994
T. Rowe Price Growth Stock Portfolio 288,353.338 25.60 7,381,845 5,754,075
Endeavor Opportunity Value Portfolio 94,053.598 12.22 1,149,335 1,108,493
Endeavor Enhanced Index Portfolio 118,700.356 16.08 1,908,702 1,642,434
WRL Series Fund, Inc.:
Growth Portfolio 348,523.429 59.939219 20,890,222 13,746,306
--------------- ----------------
$69,966,928 $57,461,692
=============== ================
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
Period ended December 31
1998 1997
----------------------------- ---------------------------
Purchases Sales Purchases Sales
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Endeavor Series Trust:
Endeavor Money Market Portfolio $ 1,067,902 $ 473,509 $ 478,323 $ 514,011
Endeavor Asset Allocation Portfolio 1,845,113 588,460 1,779,492 288,862
T. Rowe Price International Stock Portfolio 1,894,226 909,942 3,456,564 384,492
Endeavor Value Equity Portfolio 2,901,255 997,731 3,042,604 279,661
Dreyfus Small Cap Value Portfolio 2,504,908 550,950 2,254,509 128,984
Dreyfus U. S. Government Securities Portfolio 1,002,274 125,201 674,591 71,243
T. Rowe Price Equity Income Portfolio 2,782,124 830,323 2,894,969 120,095
T. Rowe Price Growth Stock Portfolio 3,090,633 807,578 1,892,220 151,150
Endeavor Opportunity Value Portfolio 643,438 583,296 759,976 15,519
Endeavor Enhanced Index Portfolio 1,526,385 462,884 538,368 44,737
WRL Series Fund, Inc.:
Growth Portfolio 4,282,983 1,929,892 6,020,425 399,047
-------------- -------------- ------------- -------------
$23,541,241 $8,259,766 $23,792,041 $2,397,801
============== ============== ============= =============
</TABLE>
15
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Notes to Financial Statements (continued)
3. Contract Owners' Equity
A summary of deferred annuity contracts terminable by owners at December 31,
1998 follows:
<TABLE>
<CAPTION>
Return of Premium Death Benefit
------------------------------------------------------------
Total
Accumulation Accumulation Contract
Subaccount Units Owned Unit Value Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Endeavor Money Market 1,017,991.339 $ 1.239556 $ 1,261,857
Endeavor Asset Allocation 2,197,971.735 2.535888 5,573,810
T. Rowe Price International Stock 4,958,037.992 1.533035 7,600,846
Endeavor Value Equity 3,668,656.747 2.212928 8,118,473
Dreyfus Small Cap Value 2,915,575.262 1.785929 5,207,010
Dreyfus U. S. Government Securities 1,728,824.679 1.286733 2,224,536
T. Rowe Price Equity Income 3,702,824.740 2.065623 7,648,640
T. Rowe Price Growth Stock 2,640,487.984 2.593121 6,847,105
Endeavor Opportunity Value 886,891.881 1.200101 1,064,360
Endeavor Enhanced Index 1,007,218.727 1.577775 1,589,165
Growth 636,917.148 31.898334 20,316,596
------------------
$67,452,398
==================
<CAPTION>
Annual Step-Up Death Benefit
------------------------------------------------------------
Total
Accumulation Accumulation Contract
Subaccount Units Owned Unit Value Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Endeavor Money Market 52,322.018 $1.236621 $ 64,703
Endeavor Asset Allocation 31,242.813 2.529863 79,040
T. Rowe Price International Stock 39,361.912 1.529380 60,199
Endeavor Value Equity 106,211.103 2.207657 234,478
Dreyfus Small Cap Value 119,463.216 1.781675 212,845
Dreyfus U. S. Government Securities 38,151.310 1.283673 48,974
T. Rowe Price Equity Income 145,891.829 2.060734 300,644
T. Rowe Price Growth Stock 206,657.078 2.586964 534,614
Endeavor Opportunity Value 70,958.668 1.197263 84,956
Endeavor Enhanced Index 202,995.681 1.574026 319,520
Growth 18,019.791 31.822714 573,439
------------------
$2,513,412
==================
</TABLE>
16
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Notes to Financial Statements (continued)
3. Contract Owners' Equity (continued)
At December 31, 1998 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
Endeavor Endeavor T. Rowe Price
Money Asset International
Market Allocation Stock
Total Subaccount Subaccount Subaccount
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions, accumulated net
investment income and realized capital gains $57,460,574 $1,326,560 $4,830,822 $6,848,240
Adjustment for appreciation (depreciation) to
market value 12,505,236 - 822,028 812,805
-----------------------------------------------------------------
Total contract owners' equity $69,965,810 $1,326,560 $5,652,850 $7,661,045
=================================================================
<CAPTION>
Endeavor Dreyfus Dreyfus U. S.
Value Small Cap Government T. Rowe Price
Equity Value Securities Equity Income
Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions, accumulated net
investment income and realized capital gains $7,394,398 $5,745,225 $2,147,450 $6,916,920
Adjustment for appreciation (depreciation) to
market value 958,553 (325,370) 126,060 1,032,364
-----------------------------------------------------------------
Total contract owners' equity $8,352,951 $5,419,855 $2,273,510 $7,949,284
=================================================================
<CAPTION>
Endeavor Endeavor
T. Rowe Price Opportunity Enhanced
Growth Stock Value Index Growth
Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions, accumulated net
investment income and realized capital gains $5,753,949 $1,108,474 $1,642,417 $13,746,119
Adjustment for appreciation (depreciation) to
market value 1,627,770 40,842 266,268 7,143,916
-----------------------------------------------------------------
Total contract owners' equity $7,381,719 $1,149,316 $1,908,685 $20,890,035
=================================================================
</TABLE>
17
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Notes to Financial Statements (continued)
3. Contract Owners' Equity (continued)
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
Endeavor Endeavor T. Rowe Price
Money Asset International Endeavor
Market Allocation Stock Value Equity
Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Units outstanding at January 1, 1997 665,174 1,123,469 2,084,833 1,565,599
Units purchased 287,198 241,650 976,337 539,580
Units redeemed and transferred (340,390) 506,689 1,273,384 876,728
-----------------------------------------------------------------
Units outstanding at December 31, 1997 611,982 1,871,808 4,334,554 2,981,907
Units purchased 81,621 57,867 163,951 158,049
Units redeemed and transferred 376,710 299,540 498,895 634,912
-----------------------------------------------------------------
Units outstanding at December 31, 1998 1,070,313 2,229,215 4,997,400 3,774,868
=================================================================
<CAPTION>
T. Rowe
Dreyfus Dreyfus U. S. T. Rowe Price Price
Small Cap Government Equity Growth
Value Securities Income Stock
Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Units outstanding at January 1, 1997 1,239,443 589,780 1,387,607 964,658
Units purchased 478,443 160,483 780,799 442,620
Units redeemed and transferred 576,751 343,672 814,105 517,840
-----------------------------------------------------------------
Units outstanding at December 31, 1997 2,294,637 1,093,935 2,982,511 1,925,118
Units purchased 156,808 46,241 330,034 231,910
Units redeemed and transferred 583,593 626,800 536,173 690,117
-----------------------------------------------------------------
Units outstanding at December 31, 1998 3,035,038 1,766,976 3,848,718 2,847,145
=================================================================
<CAPTION>
Endeavor Endeavor
Opportunity Enhanced
Value Index Growth
Subaccount Subaccount Subaccount
------------------------------------------------
<S> <C> <C> <C>
Units outstanding at January 1, 1997 178,913 - 306,855
Units purchased 584,681 257,278 105,365
Units redeemed and transferred 106,238 164,949 145,678
------------------------------------------------
Units outstanding at December 31, 1997 869,832 422,227 557,898
Units purchased 195,802 362,815 35,902
Units redeemed and transferred (107,783) 425,172 61,137
------------------------------------------------
Units outstanding at December 31, 1998 957,851 1,210,214 654,937
================================================
</TABLE>
18
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Notes to Financial Statements (continued)
4. Administrative, Mortality and Expense Risk Charge
Administrative charges include an annual charge of the lesser of 2% of the
policy value or $35 per contract which will commence on the first policy
anniversary of each contract owner's account. For policies issued on or after
May 1, 1995, this charge is waived if the sum of the premium payments made less
the sum of all partial withdrawals equals or exceeds $50,000 on the policy
anniversary. Charges for administrative fees to the variable annuity contracts
are an expense of the Mutual Fund Account. AUSA also deducts a daily charge
equal to an annual rate of .15% of the contract owner's account for
administrative expenses.
AUSA deducts a daily charge for assuming certain mortality and expense risks.
For policies sold prior to December 1, 1998, this charge is equal to an
effective annual rate of 1.25% of the value of the contract owner's individual
account. For policies sold on or after December 1, 1998, this fee depends on the
death benefit option selected and the number of policy years that have elapsed
since the date of issue. For the Annual Step-Up Death Benefit, the fee is 1.40%
in the first seven policy years and 1.25% thereafter. For the Return of Premium
Death Benefit, the fee is 1.25% in the first seven years and 1.10% thereafter.
5. Taxes
Operations of the Mutual Fund Account form a part of AUSA, which is taxed as a
life insurance company under Subchapter L of the Internal Revenue Code of 1986,
as amended (the "Code"). The operations of the Mutual Fund Account are accounted
for separately from other operations of AUSA for purposes of federal income
taxation. The Mutual Fund Account is not separately taxable as a regulated
investment company under Subchapter M of the Code and is not otherwise taxable
as an entity separate from AUSA. Under existing federal income tax laws, the
income of the Mutual Fund Account, to the extent applied to increase reserves
under the variable annuity contracts, is not taxable to AUSA.
6. Year 2000 (Unaudited)
The term Year 2000 Issue generally refers to the improper processing of dates
and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations and
decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
19
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Notes to Financial Statements (continued)
6. Year 2000 (Unaudited) (continued)
AUSA has developed a Year 2000 Project Plan (the Plan) to address the Year 2000
issue as it affects AUSA's internal IT and non-IT systems, and to assess Year
2000 issues relating to third parties with whom AUSA has critical relationships.
The Plan for addressing internal systems generally includes an assessment of
internal IT and non-IT systems and equipment affected by the Year 2000 issue;
definition of strategies to address affected systems and equipment; remediation
of identified systems and equipment; internal testing and certification that
each internal system is Year 2000 compliant; and a review of existing and
revised business resumption and contingency plans to address potential Year 2000
issues. AUSA has remediated and tested substantially all of its mission-critical
internal IT systems as of December 31, 1998. AUSA continues to remediate and
test certain non-critical internal IT systems, internal non-IT systems and will
continue with a revalidation testing program throughout 1999.
AUSA's Year 2000 issues are more complex because a number of its systems
interface with other systems not under AUSA's control. AUSA's most significant
interfaces and uses of third-party vendor systems are in the bank, financial
services and trust areas. AUSA utilizes various banks to handle numerous types
of financial and sales transactions. Several of these banks also provide trustee
and custodial services for AUSA's investment holdings and transactions. These
services are critical to a financial services company such as AUSA as its
business centers around cash receipts and disbursements to policyholders and the
investment of policyholder funds. AUSA has received written confirmation from
its vendor banks regarding their status on Year 2000. The banks indicate their
dedication to resolving any Year 2000 issues related to their systems and
services prior to December 31, 1999. AUSA anticipates that a considerable effort
will be necessary to ensure that its corrected or new systems can properly
interface with those business partners with whom it transmits and receives data
and other information (external systems). AUSA has undertaken specific testing
regimes with these third-party business partners and expects to continue working
with its business partners on any interfacing of systems. However, the timing of
external system compliance cannot currently be predicted with accuracy because
the implementation of Year 2000 readiness will vary from one company to another.
AUSA does have some exposure to date sensitive embedded technology such as
micro-controllers, but AUSA views this exposure as minimal. Unlike other
industries that may be equipment intensive, like manufacturing, AUSA is a life
insurance, and financial services organization providing insurance, annuities
and pension products to its customers. As such, the primary equipment and
electronic devices in use are computers and telephone related equipment. This
type of hardware can have date sensitive embedded technology which could have
Year 2000 problems. Because of this exposure, AUSA has reviewed its computer
hardware and telephone systems, with assistance from
20
<PAGE>
AUSA Endeavor Variable Annuity Account -
The Endeavor Variable Annuity
Notes to Financial Statements (continued)
6. Year 2000 (Unaudited) (continued)
the applicable vendors, and has upgraded, or replaced, or is in the process of
replacing any equipment that will not properly process date sensitive data in
the Year 2000 or beyond. This undertaking has been substantially completed for
all operations.
For AUSA, a reasonably likely worst case scenario might include one or more of
AUSA's significant policyholder systems being non-compliant. Such an event could
result in a material disruption of AUSA's operations. Specifically, a number of
AUSA's operations could experience an interruption in the ability to collect and
process premiums or deposits, process claim payments, accurately maintain
policyholder information, accurately maintain accounting records, and or perform
adequate customer service. Should the worst case scenario occur, it could,
dependent upon its duration, have a material impact on AUSA's business and
financial condition. Simple failures can be repaired and returned to production
within a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period could have a more serious impact. For this
reason, AUSA is placing significant emphasis on risk management and Year 2000
business resumption contingency planning in 1999 by modifying its existing
business resumption and disaster recovery plans to address potential Year 2000
issues.
The actions taken by management under the Year 2000 Project Plans are intended
to significantly reduce AUSA's risk of a material business interruption based on
the Year 2000 issues. It should be noted that the Year 2000 computer problem,
and its resolution, is complex and multifaceted, and any company's success
cannot be conclusively known until the Year 2000 is reached. In spite of its
efforts or results, AUSA's ability to function unaffected to and through the
Year 2000 may be adversely affected by actions (or failure to act) of third
parties beyond our knowledge or control. It is anticipated that there may be
problems that will have to be resolved in the ordinary course of business on and
after the Year 2000. However, AUSA does not believe that the problems will have
a material adverse affect on AUSA's operations or financial condition.
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<PAGE>
AUSA Endeavor Target Account
The AUSA Endeavor Target Account had not commenced operations as of
December 31, 1998, therefore there are no separate account financials to report
at this time.
