<PAGE> 1
THE VARIABLE ANNUITY LIFE INSURANCE
COMPANY
UNITS OF INTEREST UNDER
GROUP AND INDIVIDUAL VARIABLE
ANNUITY CONTRACTS
(INDEPENDENCE PLUS CONTRACT SERIES)
SEPARATE ACCOUNT A
PROSPECTUS MAY 1, 1996
The group and individual Variable Annuity Contracts (the "Contracts") offered by
The Variable Annuity Life Insurance Company ("the Company") in connection with
this prospectus are available to the public primarily through participation in
retirement programs which receive favorable tax deferred treatment under Federal
income tax law but include non-qualified contracts as well. The Contracts are
available on a flexible payment deferred, single payment deferred, or single
payment immediate annuity basis. The Independence Plus Contract Series is
composed of Contract forms UIT-585 and UITG-585.
The Contracts provide benefits related to the Company's General Account and to
the Divisions of the Company's Separate Account A (the "Separate Account"). The
Divisions of the Separate Account available under the Contracts are invested in
the Stock Index Fund, the MidCap Index Fund, the Small Cap Index Fund, the
International Equities Fund, the Social Awareness Fund, the Timed Opportunity
Fund, the Capital Conservation Fund, the Government Securities Fund, the
International Government Bond Fund and the Money Market Fund, which are separate
portfolios of American General Series Portfolio Company (the "Series Company").
- --------------------------------------------------------------------------------
This prospectus provides investors the information they should know before
investing in the Contracts. Investors should read and retain this prospectus for
future reference.
Additional information, including a Statement of Additional Information dated
May 1, 1996, has been filed with the Securities and Exchange Commission and
contains further information about Separate Account A. The Statement of
Additional Information is incorporated herein by reference. A copy may be
obtained without charge by completing and returning the form at the back of this
prospectus or by calling 1-800-44-VALIC.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION TO ANY PERSON TO
WHOM SUCH OFFER WOULD BE UNLAWFUL THEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE FUNDS BEING
CONSIDERED. EACH OF THESE PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
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TABLE OF CONTENTS
<TABLE>
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Definitions................................ 4
Fee Table.................................. 6
Selected Accumulation Unit Data............ 8
Introduction............................... 10
The Company and the Separate Account....... 11
The Funds.................................. 12
Performance Information.................... 13
Average Annual Total Return with
Surrender Charge and Maintenance
Fee Imposed.......................... 15
Average Annual Total Return with No
Surrender Charge and Maintenance
Fee Imposed.......................... 15
Cumulative Return...................... 16
Annual and Cumulative Change in
Accumulation Unit Value.............. 17
Hypothetical $10,000 Account Value
Invested at Inception of Division.... 18
Endorsements and Published Ratings......... 24
Transfers Among Investment Options......... 25
Transfers During the Accumulation Period... 25
Transfers During the Annuity Period.... 25
Other Requirements..................... 25
Charges Under Variable Annuity Contracts... 27
Charge for Premium Taxes............... 27
Charge for Partial and Total
Surrenders........................... 27
Charge for Annual Account
Maintenance.......................... 28
Charge to the Separate Account......... 29
Miscellaneous.......................... 29
Charge for Income Taxes................ 30
Accumulation Period........................ 30
Death Benefits During Accumulation
Period............................... 31
Suspension of Purchase Payments........ 32
Annuity Period............................. 32
Fixed or Variable Annuity Payments..... 32
Annuity Date........................... 33
Annuity Payment Options................ 33
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Enhancements Under Annuity Options..... 34
Death of Annuitant During Annuity
Period............................... 34
Surrender.................................. 34
Other Contract Features.................... 35
Change of Beneficiary.................. 35
Revocation............................. 35
Reservation of Rights.................. 35
Relationship to Employer's Plan........ 36
Federal Tax Matters........................ 36
General................................ 36
Taxes Payable by Participants and
Annuitants........................... 36
Section 403(b) Annuities for Employees
of Certain Tax-Exempt Organizations
or Public Educational Institutions... 36
Section 401 Qualified Pension,
Profit-Sharing or Annuity Plans...... 37
Individual Retirement Annuities........ 38
Simplified Employee Pension Plans...... 38
Section 457 Unfunded Deferred
Compensation Plans of Public
Employers and Tax-Exempt
Organizations........................ 39
Private Employer Unfunded Deferred
Compensation Plans................... 39
Non-Qualified Contracts................ 39
Effect of Tax-Deferred Accumulations... 41
Fund Diversification................... 41
Voting Rights.............................. 42
Other Variable Annuity Contracts........... 42
Exchange Offers............................ 42
General................................ 42
Differences Between New and Existing
Contracts............................ 43
Agents' and Managers' Retirement Plan
Exchange Offer....................... 45
Taxes and Conversion Costs............. 46
Availability of Offer.................. 46
Appendix................................... 47
</TABLE>
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DEFINITIONS
Accumulation Period -- the time between the date of the first Purchase
Payment with respect to an Annuitant and the Annuity Date.
Accumulation Unit ("Unit") -- a unit of interest in a Separate Account
Division which is accumulated in a Variable Subaccount before annuity payments
begin. The value of a Unit will vary with the net investment experience of the
respective Separate Account Division.
Accumulation Value -- the sum of the values of the Fixed Subaccounts and
the Variable Subaccounts allocated to a Participant Account.
Annuitant -- the Participant on whose life annuity payments will be based
under a group Contract; the individual named in the application for whom
Purchase Payments are made and on whose life annuity payments will be based
under an individual Contract. Annuity payments will be paid to the Annuitant. If
the Annuitant dies before the Annuity Date, the Beneficiary may receive
payments.
Annuity Date -- the date elected by a Contract Owner on which annuity
payments start.
Annuity Period -- the time during which annuity payments are made.
Annuity Unit -- a measuring unit used in calculating the amount of annuity
payments. The value of an Annuity Unit for a Variable Subaccount will vary with
the net investment experience of the Separate Account Division selected. The
value will be adjusted according to the Assumed Investment Rate chosen by the
Annuitant.
Assumed Investment Rate -- the rate used to determine the first monthly
annuity payment per thousand dollars of Accumulation Value in the Variable
Subaccount(s). (See the Statement of Additional Information for a description of
the effect of the Assumed Investment Rate on the level of payments.)
Beneficiary -- the person who will receive payments, if any, on the
Annuitant's death.
Contract -- an individual or group variable annuity contract offered by
this prospectus.
Contract Owner -- the employer, or other organization, which makes
application for a group Contract; the Annuitant under an individual Contract
unless otherwise stated in the application.
Fixed Subaccount -- a particular subaccount under a Participant Account
into which net Purchase Payments and Accumulation Value under a fixed annuity
Contract may be allocated during the Accumulation Period. Allocations to the
Fixed Subaccounts are guaranteed to earn interest of at least 4 1/2% per annum.
Reserves for these allocations are held in the Company's General Account.
Fixed Subaccount One (Fixed Account Plus) -- a Fixed Subaccount which is
suitable for those wishing to make more than a short-term commitment to a fixed
return option. Up to 20% of the Accumulation Value under Fixed Account Plus may
be transferred during each Participant Year. VALIC may permit transfers in
excess of this limit by prior written notice to all Contract Owners. (For a more
complete discussion of transfers and the limitations thereon, see "Transfers
Among Investment Options.") The total interest rates paid by the Company from
time to time on amounts deposited in Fixed Account Plus are expected to more
closely resemble the then-current returns available on intermediate-term debt
investments than would be the case with respect to the Short Term Fixed Account.
Fixed Subaccount Two (Short Term Fixed Account) -- a Fixed Subaccount which
is suitable primarily for those wishing to make only a shorter-term commitment
to a fixed return option. After a transfer to Short Term Fixed Account, no
further transfers from Short Term Fixed Account may be made for 90 days. (For a
more complete discussion of transfers and the limitations thereon, see
"Transfers Among Investment Options.")
Fund -- an investment portfolio which is the underlying investment medium
for net Purchase
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Payments credited to a Separate Account Division. (For a more complete
description of variable investment options, see "The Funds.")
General Account -- the assets of the Company other than those in the
Separate Account or any other separate account. Reserves for any fixed annuity
are maintained in the General Account.
Home Office -- the main office of the Company at 2929 Allen Parkway,
Houston, Texas 77019.
Participant -- an individual who makes Purchase Payments or for whom
Purchase Payments are made under a group Contract; the Contract Owner under an
individual Contract, usually the Annuitant, unless another person is provided
for in the application.
Participant Account -- an individual account which is established for a
Participant under a group Contract to record the Accumulation Value for the
Participant or, in the case of an individual Contract, the entire Contract.
Participant Year -- a twelve month period starting with the issue date of a
Participant's certificate under a group Contract or the issue date of an
individual Contract and each anniversary of that date.
Purchase Payment -- an amount paid to the Company by, or on behalf of, an
Annuitant.
Separate Account -- the segregated asset account referred to as Separate
Account A. Separate Account A was established by the Company under the Texas
Insurance Code to receive and invest the net Purchase Payments and Accumulation
Value allocated to variable annuity contracts.
Separate Account Divisions ("Divisions") -- subdivisions of the Separate
Account, each of which invests in a different Fund with a particular investment
objective and strategy, and into which the net Purchase Payments and
Accumulation Value under a variable annuity may be applied.
Surrender Value -- the Accumulation Value of a Participant Account less the
surrender charge, if any, which is the amount payable upon surrender of a
Participant Account.
Variable Subaccount -- a particular subaccount under a Participant Account
into which net Purchase Payments and accumulated value under a variable annuity
Contract may be allocated. Amounts in each Variable Subaccount are invested in
one of several Separate Account Divisions. (See "Accumulation Period.")
5
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FEE TABLE
<TABLE>
<S> <C>
CONTRACT OWNER/PARTICIPANT TRANSACTION EXPENSES(1)
Surrender Charge (as a % of the lesser of all purchase payments received during the last 60
months or the amount withdrawn(2)............................................................. 5%
ACCOUNT MAINTENANCE FEE (reduces to $15 after first contract year)(2)........................... $ 20
SEPARATE ACCOUNT ANNUAL EXPENSES (as a % of average account value)
Mortality Risk Fee.............................................................................. .80%
Administrative Expense Fee...................................................................... .20
Total Separate Account Annual Expenses.......................................................... 1.00%
</TABLE>
SERIES COMPANY ANNUAL EXPENSES (as a % of Fund average net assets)
<TABLE>
<CAPTION>
INTER-
NATIONAL
SMALL INTER- SOCIAL TIMED CAPITAL GOVERN- GOVERN-
STOCK MIDCAP CAP NATIONAL AWARE- OPPOR- CONSER- MENT MENT MONEY
INDEX INDEX INDEX EQUITIES NESS TUNITY VATION SECURITIES BOND MARKET
EXPENSES FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
- ----------------------- ----- ------ ----- -------- ------ ------ ------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees(3)..... .29% .35% .35% .35% .50% .50% .50% .50% .50% .50%
Other expenses(4)...... .09 .09 .09 .10 .08 .08 .08 .08 .09 .07
Company
Reduction of
Fund Expenses(5)..... .00 .00 .00 .00 .00 .00 .00 .00 .00 .00
---- ----
--
----- ---- -- ---- - ---- ---- ---- -- ---- -- ---- --- ---- ----
Total Fund Expenses
(after Reduction).... .38% .44% .44% .45% .58% .58% .58% .58% .59% .57%
</TABLE>
Example #1--Assuming surrender at the end of the period shown:
Total Expenses: You would pay the following expenses on a $1,000 investment
under a typical Independence Plus Contract invested in a Separate Account
Division as listed below, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Stock Index Division......................................... $ 61 $ 96 $ 130 $ 176
MidCap Index Division........................................ 62 98 133 182
Small Cap Index Division..................................... 62 98 133 182
International Equities Division.............................. 62 98 134 183
Social Awareness Division.................................... 63 102 141 197
Timed Opportunity Division................................... 63 102 141 197
Capital Conservation Division................................ 63 102 141 197
Government Securities Division............................... 63 102 141 197
International Government Bond Division....................... 64 103 141 199
Money Market Division........................................ 63 102 140 196
</TABLE>
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Example #2--Assuming no surrender at the end of the period shown:
Total Expenses. You would pay the following expenses on a $1,000 investment
under a typical Independence Plus Contract without a surrender charge imposed,
invested in a Separate Account Division as listed below, assuming a 5% annual
return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ---- ---- -----
<S> <C> <C> <C> <C>
Stock Index Division.......................................... $ 15 $ 46 $ 80 $ 176
MidCap Index Division......................................... 16 48 83 182
Small Cap Index Division...................................... 16 48 83 182
International Equities Division............................... 16 48 84 183
Social Awareness Division..................................... 17 53 91 197
Timed Opportunity Division.................................... 17 53 91 197
Capital Conservation Division................................. 17 53 91 197
Government Securities Division................................ 17 53 91 197
International Government Bond Division........................ 17 53 91 199
Money Market Division......................................... 17 52 90 196
</TABLE>
Additional Fee Table Examples are shown in the Appendix to this Prospectus.
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(1) Premium taxes are not shown here, but may be charged by some states either
on purchase payments or on amounts annuitized. See "Charge for Premium
Taxes."
(2) Reductions in the surrender charge and account maintenance fee are available
if certain conditions are met. See "Appendix." The surrender charge will
disappear after the 15th Participant Year or after the 7th Participant Year
for an individual aged 59 1/2 years. There will be no surrender charge
incurred if no purchase payments were received during the 60 months
immediately prior to the date of surrender. No annual account maintenance
fee will be assessed during the Annuity Period. The first partial surrender
per Participant Year of 10% or less of Accumulation Value with respect to a
Participant Account will not be subject to a surrender charge. See "Charge
for Total and Partial Surrenders" and "Charge for Annual Account
Maintenance".
(3) The annual management fees for the MidCap Index Fund, Stock Index Fund,
Small Cap Index Fund and International Equities Fund are based on each
Fund's average daily net asset value at the following rates: .35% of the
first $500 million and .25% on the excess over $500 million. The annual
management fees for Social Awareness Fund, Timed Opportunity Fund, Capital
Conservation Fund, Government Securities Fund, International Government Bond
Fund and Money Market Fund are flat rates as shown regardless of the amount
of Fund assets.
(4) Includes custody, accounting, reports to shareholders, audit, legal, and
other miscellaneous expenses.
(5) To the extent that any of the Series Company Funds accrued expenses for a
given month exceed on an annualized basis 2% of estimated average daily net
assets, calculated on a monthly basis, the Company has voluntarily
undertaken to reduce expenses of any such Fund, in an amount equal to the
difference between such accrued expenses and 2% of the Fund's average daily
net assets for that month. The Company may withdraw this voluntary
undertaking upon 30 days' written notice to the Series Company.
Note: These examples should not be considered representations of past or future
expenses for the Separate Account or for any Fund. Actual expenses may be
greater or less than those shown above. Similarly, the 5% annual rate of return
assumed in the examples is not an estimate or guarantee of future investment
performance. The purpose of the Fee Table above is to help Contract Owners and
Participants understand the various expenses of the Separate Account and the
Funds which are, in effect, passed on to the Contract Owners and Participants.
This Fee Table, including the examples above, shows all charges and expenses
which are deducted from purchase payments, from the assets of the Separate
Account and from the Funds in which the Separate Account invests. For a further
description of these charges and expenses, see "Charges Under Variable Annuity
Contracts" in this prospectus and "Investment Adviser" in the Series Company
prospectus. Any and all limitations on total charges and expenses are reflected
in this Fee Table.
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SELECTED ACCUMULATION UNIT DATA
<TABLE>
<CAPTION>
STOCK MIDCAP
INDEX INDEX
DIVISION 10(2) DIVISION 4(1)
------------ ------------
<S> <C> <C>
December 31, 1995
Accumulation Units in Force.............................................. 455,255,243 172,613,690
Accumulation Unit Value.................................................. $2.343900 $2.782677
December 31, 1994
Accumulation Units in Force.............................................. 416,234,288 171,442,018
Accumulation Unit Value.................................................. $1.724134 $2.153183
December 31, 1993
Accumulation Units in Force.............................................. 369,550,060 134,621,879
Accumulation Unit Value.................................................. $1.729327 $2.259378
December 31, 1992
Accumulation Units in Force.............................................. 283,808,045 81,007,871
Accumulation Unit Value.................................................. $1.589718 $2.021271
May 1, 1992
Accumulation Unit Value(3)............................................... -- --
December 31, 1991
Accumulation Units in Force.............................................. 90,526,907 49,106,844
Accumulation Unit Value.................................................. $1.505641 $1.858030
October 1, 1991
Accumulation Unit Value(3)............................................... -- --
December 31, 1990
Accumulation Units in Force.............................................. 46,016,297 42,958,640
Accumulation Unit Value.................................................. $1.179000 $1.538017
December 31, 1989
Accumulation Units in Force.............................................. 22,325,990 40,618,028
Accumulation Unit Value.................................................. $1.238782 $1.712671
October 2, 1989
Accumulation Unit Value(3)............................................... -- --
December 31, 1988
Accumulation Units in Force.............................................. 9,213,178 38,747,706
Accumulation Unit Value.................................................. $.968670 $1.450217
December 31, 1987
Accumulation Units in Force.............................................. 4,326,102 35,297,367
Accumulation Unit Value.................................................. $0.856238 $1.282662
April 20, 1987
Accumulation Unit Value(3)............................................... $1.000000 --
December 31, 1986
Accumulation Units in Force.............................................. -- 28,360,188
Accumulation Unit Value.................................................. -- $1.351553
January 16, 1986
Accumulation Unit Value(3)............................................... -- --
December 31, 1985
Accumulation Units in Force.............................................. -- 21,817,139
Accumulation Unit Value.................................................. -- $1.319494
</TABLE>
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(1) Effective October 1, 1991, the Fund underlying this Division changed its
name from the Capital Accumulation Fund to the MidCap Index Fund and amended
its investment objective, investment program and investment restrictions
accordingly. Historical Accumulation Unit values prior to October 1, 1991
reflect investment experience prior to these changes.
(2) Effective with the merger of Quality Growth Fund into Stock Index Fund on
May 1, 1992, Quality Growth Division 9 was merged into Stock Index Division
10. The merger of Divisions was accomplished by an exchange of units of
Quality Growth Division 9 for units of Stock Index Division 10 of equivalent
value as calculated at the close of business on April 30, 1992.
(3) Accumulation Unit Value At Date Of Inception.
The information presented reflects the Accumulation Unit Information
through December 31, 1995 for Divisions of the Separate Account available under
these Contracts.
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<TABLE>
<CAPTION>
INTER- SOCIAL INTERNATIONAL
SMALL CAP NATIONAL AWARE- TIMED CAPITAL GOVERNMENT GOVERNMENT MONEY
INDEX EQUITIES NESS OPPORTUNITY CONSERVATION SECURITIES BOND MARKET
DIVISION 14 DIVISION 11 DIVISION 12 DIVISION 5 DIVISION 7 DIVISION 8 DIVISION 13 DIVISION 6
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
98,335,995 172,564,018 32,750,120 75,851,431 29,573,808 39,847,053 73,369,250 51,907,757
$1.544896 $1.156454 $1.835102 $2.411022 $1.812011 $1.799475 $1.530780 $1.545802
100,383,839 187,749,916 29,015,764 89,377,860 26,859,219 26,667,073 25,691,713 75,765,781
$1.222329 $1.054460 $1.333899 $1.951533 $1.515278 $1.547150 $1.301357 $1.479129
56,159,647 117,215,227 26,230,566 93,899,802 24,628,606 26,563,166 18,155,381 24,799,810
$1.277199 $0.986387 $1.366979 $1.997266 $1.630069 $1.636228 $1.258340 $1.439327
9,723,477 52,524,165 16,956,437 80,637,090 14,922,749 16,609,444 6,245,713 23,414,474
$1.112790 $0.767135 $1.279516 $1.846025 $1.470167 $1.491537 $1.112826 $1.415690
$1.000000 -- -- -- -- -- -- --
-- 27,011,169 8,447,711 76,624,765 11,069,044 11,694,890 953,038 25,545,494
-- $0.895250 $1.250634 $1.878219 $1.366905 $1.405236 $1.090499 $1.384882
-- -- -- -- -- -- $1.000000 --
-- 13,776,769 2,947,418 72,284,139 9,321,049 8,460,327 -- 25,246,481
-- $0.813423 $0.987666 $1.563444 $1.178361 $1.237104 -- $1.325393
-- 2,247,450 212,636 68,361,149 7,502,717 5,556,464 -- 15,949,534
-- $1.028405 $1.010003 $1.618165 $1.193583 $1.179231 -- $1.240599
-- $1.000000 $1.000000 -- -- -- -- --
-- -- -- 65,817,325 3,996,455 3,408,919 -- 9,429,191
-- -- -- $1.397280 $1.078919 $1.062082 -- $1.149516
-- -- -- 59,631,901 2,343,021 2,074,588 -- 4,121,853
-- -- -- $1.286227 $1.018629 $1.011978 -- $1.087299
-- -- -- -- -- -- -- --
-- -- -- 41,290,244 1,153,481 1,163,907 -- 914,106
-- -- -- $1.198662 $1.047718 $1.046062 -- $1.040484
-- -- -- -- $1.000000 $1.000000 -- $1.000000
-- -- -- 30,770,485 -- -- -- --
-- -- -- $1.100420 -- -- -- --
</TABLE>
Financial statements of the Separate Account are included in the Statement
of Additional Information, which is available upon request. Accumulation units
shown are for an Accumulation Unit outstanding throughout the year under a
representative contract of the type invested in each column shown. The unit
value of each Division of the Separate Account will not be the same on any given
day as the net asset value per share of the underlying Fund of American General
Series Portfolio Company in which that Division invests. This is because each
unit value consists of the underlying share's net asset value minus the charges
to the Separate Account. In addition, dividends declared by the underlying Fund
are reinvested by the Division in additional shares. These distributions have
the effect of reducing the value of each share of the Fund and increasing the
number of Fund shares outstanding. However, the total cash value in the Separate
Account does not change as a result of such distribution.
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INTRODUCTION
THIS PROSPECTUS DESCRIBES BOTH GROUP AND INDIVIDUAL CONTRACTS THROUGH WHICH
UNITS OF INTEREST IN THE COMPANY'S SEPARATE ACCOUNT A ARE OFFERED. BOTH GROUP
AND INDIVIDUAL CONTRACTS ARE COMBINATION FIXED/VARIABLE CONTRACTS OFFERING
VARIABLE OR FIXED ACCUMULATIONS AND VARIABLE OR FIXED BENEFITS OR A COMBINATION
OF BOTH. THIS PROSPECTUS DESCRIBES ONLY THE VARIABLE ASPECTS OF THE CONTRACTS,
EXCEPT WHERE FIXED ASPECTS ARE SPECIFICALLY MENTIONED.
The Contracts are designed to provide individuals with retirement benefits
through the accumulation of net Purchase Payments on a fixed or variable basis,
and by the application of such accumulations to provide fixed or variable
annuity payments. The purpose of variable accumulations and annuity payments is
to provide returns to investors which offset or exceed the effects of inflation.
There is, however, no guarantee that this objective will in fact be achieved.
Certain Fund options are indexed funds, a popular approach to investing among
individuals saving for retirement.
The Funds. Ten Separate Account Divisions investing in separate portfolios
(the "Funds") of American General Series Portfolio Company are available under
the Contracts in addition to the Company's General Account. The ten Funds
underlying the available Separate Account Divisions are Stock Index Fund, MidCap
Index Fund, Small Cap Index Fund, International Equities Fund, Social Awareness
Fund, Timed Opportunity Fund, Capital Conservation Fund, Government Securities
Fund, International Government Bond Fund and Money Market Fund.
Accumulation of Purchase Payments. Prior to retirement, the Participant
pursues various investment options on a variable or fixed basis by directing net
Purchase Payments to various Variable or Fixed Subaccounts. Variable investments
are accomplished by allocating or transferring amounts to Variable Subaccounts.
Fixed investments are accomplished by allocating or transferring amounts to
Fixed Subaccounts. Amounts in each of the ten Variable Subaccounts are invested
in a corresponding Separate Account Division which invests, in turn, in an
underlying Fund. As the value of the investment in the Funds increases or
decreases, the value of the Variable Subaccounts accumulations will increase or
decrease. The value of such accumulations is subject to deduction for charges
summarized below. Amounts in each of the two Fixed Subaccounts earn various
rates of interest, with the minimum being the guaranteed rate. The Participant
may pursue up to seven investment options at any one time by allocating and/or
accumulating amounts in up to seven of the twelve available subaccounts. (For
information as to how the Contracts may be purchased, and certain minimums that
apply to Purchase Payments and Accumulation Values, see "Accumulation Period.")
Owners of individual Contracts may exercise a 10-day revocation right (in some
states this may be a 20-day revocation right). (See "Revocation.")
Surrenders. The Participant may, subject to applicable law and the terms of
the employer's plan, make a total or partial surrender at any time during the
Accumulation Period by giving a written request to the Company. (See "Surrender"
and "Federal Tax Matters.") An individual Contract must be returned to the
Company before a total surrender can be effected. A surrender charge may be
assessed.
Surrender Charge. A surrender charge of up to 5% of Purchase Payments
received during the most recent 60 months may be assessed for a partial or total
surrender. The surrender charge is designed to help defray sales and
distribution expenses incurred by the Company. The Company intends to decrease
or eliminate the surrender charge applicable to a particular Contract if it
estimates that its sales expenses will be lower. (See "Charge for Partial and
Total Surrenders.")
Fixed and Variable Annuity Payments. On the Annuity Date, the Accumulation
Value, at the Annuitant's option, may be applied to purchase any combination of
fixed and/or variable annuities, subject to the Company's minimum annuity
payment and other requirements for any one annuity form. (See "Fixed or Variable
Annuity Payments" and "Annuity Payment Options.") Up to seven Divisions, or six
Divisions if a fixed annuity is also selected, may be utilized to provide
annuity payments.
Transfers. During the Accumulation Period, all or part of the Accumulation
Value may be transferred among variable investment options or
10
<PAGE> 11
from variable investment options to fixed investment options. Transfers may be
made from fixed investment options subject to certain conditions. (See
"Transfers Among Investment Options.")
During the Annuity Period, an Annuitant may also transfer amounts among the
variable investment options underlying a variable annuity, or all or part of
amounts underlying a variable annuity to provide a fixed annuity, once every 365
days. Transfers of amounts providing a fixed annuity may not be made to provide
a variable annuity during the Annuity Period.
Transfers are not subject to any charge. (See "Transfers Among Investment
Options" for additional conditions and limitations regarding transfers.) The
transfer privilege may be suspended or terminated at any time.
Other Charges. An annual account maintenance charge, which is currently $20
for the first Participant Year and $15 per Participant Year thereafter during
the Accumulation Period, is due in quarterly installments beginning the first
day of the calendar quarter following the first date a Purchase Payment is
credited to the Participant Account; however, it is not deducted until the last
day of the calendar quarter in which it is due. A full quarterly charge will be
assessed if the Participant Account is surrendered during a calendar quarter.
This charge will reduce the Surrender Value of the Participant Account. This
charge contributes to offsetting the cost of administrative expenses with
respect to each Contract and may be increased or decreased. Contract Owners will
be sent notice of any increase or decrease in this charge. No annual account
maintenance charge will be assessed during the Annuity Period.
The Company intends to decrease or eliminate the annual account maintenance
charge applicable to a particular Contract if it estimates that its
administrative expenses will be lower. (See "Charge for Annual Account
Maintenance.")
A daily fee is charged at the annual rate of 1% of the average daily net
asset value allocable to the Variable Subaccounts. This charge is imposed for
certain additional expenses and for assumption by the Company of certain
mortality risks. Additionally, in certain states a deduction for premium tax is
made. (See "Charge to the Separate Account" and "Charge for Premium Taxes.")
A daily charge, based on a percentage of average daily net assets, is paid
by each Fund to its investment adviser for investment management. These charges,
and other Fund charges and expenses more fully described in the prospectuses for
the Funds and summarized in the preceding Fee Table, are borne indirectly by the
Contract Owners.
THE COMPANY AND THE
SEPARATE ACCOUNT
The Company is a stock life insurance company organized under the laws of
the State of Texas as the successor to Variable Annuity Life Insurance Company
of America, a District of Columbia life insurance company organized in 1955. The
Company is engaged primarily in the offering and issuance of fixed and variable
retirement annuity contracts and combinations thereof. The Company's executive
office is located at 2929 Allen Parkway, Houston, Texas 77019; its mailing
address is P.O. Box 3206, Houston, Texas 77253.
The Company is an indirect wholly-owned subsidiary of American General
Corporation. However, the assets of American General Corporation do not support
the obligations of the Company under the Contracts. Members of the American
General Corporation group of companies operate in each of the 50 states and
Canada, and collectively are engaged in substantially all forms of financial
services, with activities heavily weighted toward insurance.
On April 18, 1979, the Board of Directors of the Company established the
Separate Account in accordance with the Texas Insurance Code. The Separate
Account is registered with the U.S. Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act").
Units of interest in the Separate Account under the Contracts are registered as
securities under the Securities Act of 1933 (the "1933 Act"). Under the Texas
Insurance Code and the Contracts, the assets of the Separate Account will not be
chargeable with liabilities arising out of any other business which the Company
may conduct, but will be held exclusively for the benefit of the Contract
Owners, Participants, Annuitants, and the Beneficiaries of the Contracts.
11
<PAGE> 12
Each Division of the Separate Account is administered and accounted for as
part of the general business of the Company, however, the income, capital gains,
or capital losses of each Division of the Separate Account are credited to or
charged against the assets held in that Division in accordance with the terms of
each Contract without regard to the income, capital gains, or capital losses of
any other Division or arising out of any other business the Company may conduct.
Each Division of the Separate Account available under the Contracts will
invest in the shares of a specific Fund. The Separate Account currently is made
up of eighteen Divisions, ten of which are available as variable investment
options under the Contracts to receive net Purchase Payments (Divisions Four,
Five, Six, Seven, Eight, Ten, Eleven, Twelve, Thirteen and Fourteen). All of the
investment portfolios underlying these Divisions are also available under other
variable annuity contracts issued by the Company. (For a description of the
Divisions available under the Contracts and the specific Fund in which each
respective Division invests, see "The Funds.")
The above listed Funds are one of thirteen investment portfolios of
American General Series Portfolio Company (the "Series Company"), a diversified,
open-end, management investment company registered under the 1940 Act.
THE FUNDS
The Company serves as the investment adviser to American General Series
Portfolio Company (the "Series Company"), ten of whose investment portfolios
(the "Funds") act as investment media for Divisions Four, Five, Six, Seven,
Eight, Ten, Eleven, Twelve, Thirteen and Fourteen of the Separate Account.
Certain Funds act as investment media for other variable annuity contracts
issued by the Company and not offered pursuant to this prospectus. Also, certain
of the Funds act as investment media for variable annuity contracts issued by
affiliates of the Company. Each investment portfolio is, in effect, a separate
"fund" for which the Series Company issues a separate series (class) of stock.
A brief summary of the investment objectives of each Fund appears below.
For more complete information about these Funds, including charges and expenses,
refer to your American General Series Portfolio Company prospectus, additional
copies of which are available from The Variable Annuity Marketing Company, P.O.
Box 3206, Houston, Texas 77253 or contact any Regional Office at 1-800-44-VALIC
or at the address shown on the inside back cover of this prospectus. Read the
prospectus carefully before you invest or send money.
STOCK INDEX FUND (DIVISION TEN). This Fund seeks long-term capital growth
through investment in common stocks that, as a group, are expected to provide
investment results closely corresponding to the performance of the S&P 500(R)
Index.
MIDCAP INDEX FUND (DIVISION FOUR). This Fund seeks to provide growth of
capital through investments primarily in a diversified portfolio of common
stocks that, as a group, are expected to provide investment results closely
corresponding to the performance of the Standard & Poor's(R) Corporation
(S&P(R)) MidCap 400 Index. Effective October 1, 1991, the Capital Accumulation
Fund changed its name to the MidCap Index Fund and revised its investment
objective, investment program and investment restrictions accordingly, pursuant
to contract owner vote.
SMALL CAP INDEX FUND (DIVISION FOURTEEN). This Fund seeks to provide growth
of capital through investments primarily in a diversified portfolio of common
stocks that, as a group, are expected to provide investment results closely
corresponding to the performance of the Russell 2000(R)** Index.
INTERNATIONAL EQUITIES FUND (DIVISION ELEVEN). The Fund seeks to provide
long-term growth of capital through investments primarily in a diversified
portfolio of equity and equity related securities of foreign issuers that, as a
group, are
- ---------------
* "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)" and "S&P MidCap 400 Index" are
trademarks of Standard and Poor's Corporation. Neither the MidCap Index Fund
nor the Stock Index Fund is sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in these
Funds.
** The Russell 2000 Index is a trademark/service mark of the Frank Russell
Company. RussellTM is a trademark of the Frank Russell Company.
12
<PAGE> 13
expected to provide investment results closely corresponding to the performance
of the Morgan Stanley Capital International Europe, Australia and Far East Index
("EAFE Index").
SOCIAL AWARENESS FUND (DIVISION TWELVE). This Fund seeks growth of capital
through investment, primarily in common stocks, in companies which meet the
social criteria established for the Fund.
TIMED OPPORTUNITY FUND (DIVISION FIVE). This Fund seeks maximum aggregate
rate of return over the long-term through controlled investment risk by
adjusting its investment mix among stocks, long-term debt securities and
short-term money market securities.
CAPITAL CONSERVATION FUND (DIVISION SEVEN). This Fund seeks the highest
possible total return consistent with preservation of capital through current
income and capital gains on investments in intermediate and long-term debt
instruments and other income producing securities.
GOVERNMENT SECURITIES FUND (DIVISION EIGHT). This Fund seeks high current
income and protection of capital through investments in intermediate and
long-term U.S. Government debt securities.
INTERNATIONAL GOVERNMENT BOND FUND
(DIVISION THIRTEEN). This Fund seeks high current income through investments
primarily in high quality debt securities issued or guaranteed by foreign
governments.
MONEY MARKET FUND (DIVISION SIX). This Fund seeks liquidity, protection of
capital and current income through investments in short-term money market
instruments. Shares of the Money Market Fund are neither insured nor guaranteed
by the U.S. Government. There is no assurance that this Fund will be able to
maintain a stable net asset value of $1.00 per share.
PERFORMANCE INFORMATION
The Separate Account may from time to time advertise certain performance
information concerning its various Divisions. The Separate Account and certain
Divisions have been offering contracts for periods prior to the commencement of
the offering of the Contracts described in this Prospectus. The performance
information is based on historical results and is not intended to indicate past
performance under an actual Contract or future performance. Each Division may
also, from time to time, advertise its performance relative to certain
performance rankings and indices compiled by independent organizations. More
detailed information as to the calculation of performance information, as well
as comparisons with unmanaged market indices, appears in the Statement of
Additional Information.
Each Division may advertise total return performance information for
various periods of time. Total return performance information is based on the
overall dollar or percentage change in value of a hypothetical investment in the
specific Division over a given period of time. In general, a Division's total
return reflects the overall change in value of the Division from the beginning
of the relevant period to the end of that period.
Average annual total return information shows the average percentage change
in the value of an investment in the Division from the beginning date of the
measuring period to the end of that period. This standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Division (including any maintenance charge
and surrender charge that would apply if a Contract Owner terminated the
Contract at the end of each period indicated, but excluding any deductions for
premium taxes). The rate is computed for each Division comparing an initial
hypothetical investment of $1,000 in the Division to the redeemable value of
that investment at the end of specifically identified 1, 3, 5 and 10 year
periods. In order to calculate average annual total return, the Company divides
the value of a Division under a Contract terminated on a particular date by a
hypothetical $1,000 investment in the Division made by the Contract Owner at the
beginning of the period illustrated. The resulting total growth rate for the
period is then annualized to obtain the average annual percentage increase (or
decrease) during the period. Annualization assumes that the application of a
single rate of return each year during the period will produce the ending value,
taking into account the effect of compounding.
The Divisions may advertise total return performance information computed
on different bases. First, the Divisions may present total return
13
<PAGE> 14
as described above, except deductions will not include the surrender charge or
the maintenance charge. (The Company refers to this presentation as "Cumulative
Return.") This presentation assumes that the investment in the Contract persists
beyond the period when the surrender charge applies, consistent with the
long-term investment and retirement objectives of the Contract. This
presentation may assume 1, 3, 5 and 10 year periods and is based on a
hypothetical $10,000 initial investment.
Second, the Divisions may present a nonstandardized average annual total
return that reflects all historical investment results without deduction for
surrender charges, premium taxes or account maintenance charges. The rate for
the nonstandardized version of average annual total return is otherwise computed
for each Division in the same manner as stated above for the standardized
version of average annual total return.
Third, the Divisions may also advertise total return performance
information computed on different bases. For example, the Divisions may present
cumulative total return information computed on the same basis as described
above for total return performance information, except deductions will not
include the surrender charge. (The Company refers to this presentation as
"Cumulative Return.") This presentation assumes that the investment in the
Contract persists beyond the period when the Surrender Charge applies,
consistent with the long-term investment and retirement objectives of the
Contract. This presentation may assume 1, 3, 5 and 10 year periods and is based
on a hypothetical $10,000 initial investment.
Fourth, the Divisions may present total return information calculated by
subtracting a Division's Accumulation Unit value at the beginning of a year from
the Accumulation Unit value of that Division at the end of the year and dividing
the difference by the Accumulation Unit value at the beginning of the year. (The
Company refers to this presentation as "Annual Change in Accumulation Unit
Value.") This computation results in a total growth rate for the period which
the Company annualizes (as described above) in order to obtain the average
annual percentage change in the Accumulation Unit value for that period.
Surrender charges, premium taxes, and maintenance charges are not deducted from
the Accumulation Unit values. These charges, if applicable, are imposed by the
cancellation of Accumulation Units attributable to an individual Contract
Owner's account. The effect of these charges is to reduce total return to the
Contract Owner.
Fifth, the Divisions may present aggregate total return figures for various
periods, reflecting the cumulative change in value of an investment in the
Division for the specified period. This calculation is the same as that for the
Annual Change in Accumulation Unit Value but is based on the Accumulation Unit
value at the beginning and end of a period of years in excess of one year. (The
Company refers to this presentation as "Cumulative Change in Accumulation Unit
Value.")
Sixth, the Divisions may present total return information based on
different amounts of periodic investments into the Division. For example the
Division may present total return information based on a $100 a month investment
for a specified period into the Division.
Finally, the Divisions may present a hypothetical example that applies the
Annual Change in Accumulation Unit Value to an initial investment of $10,000.
(The Company refers to this presentation as "Hypothetical $10,000 Account
Value.")
Each Division other than the Money Market Division may advertise
standardized yield performance in addition to total return information. A
Division's yield is one way of showing the rate of income the Division earns as
a percentage of the value of the Division's Accumulation Units. The yield of
each Division is computed by dividing the average daily net investment income
per Accumulation Unit of the Division earned during a specifically identified
30-day base period, less a maintenance charge, by the Accumulation Unit value on
the last day of the period, and annualizing that result. This calculation takes
into account the average daily number of Accumulation Units outstanding during
the period. The yield of each Division reflects the deduction of all charges,
expenses and fees applicable against the Division, but does not take into
account the surrender charge and premium taxes.
The Money Market Division may advertise current yield and effective yield
performance information. The yield of the Money Market Division refers to the
income generated by an investment
14
<PAGE> 15
in the Money Market Division over a specifically identified 7-day period. (The
yield does not take into account the surrender charge, the maintenance charge or
premium taxes.) This income is annualized by assuming that the amount of income
generated by the investment during that week is generated each week over a
52-week period and is shown as a percentage of the investment. The 7 day current
yield for the seven days ended December 31, 1995 was 4.15%. The effective yield
of the Money Market Division is calculated in a similar manner but, when
annualizing such yield, income earned by the Money Market Division is assumed to
be reinvested. This compounding effect will cause effective yield to be higher
than current yield. The 7 day effective yield for the seven days ended December
31, 1995 was 4.24%.
Certain performance data related to each Division is printed in the tables
below. (See "Performance Calculation" in the Statement of Additional Information
for certain other performance data.)
The information presented does not reflect the advantage under the
Contracts of deferring Federal income tax on increases in Account Value due to
earnings attributable to Purchase Payments. (See "Federal Tax Matters -- Effect
of Tax Deferred Accumulation.") The information presented also does not reflect
the advantage under Qualified Contracts of deferring federal income tax on
Purchase Payment Contributions (See "Federal Tax Matters -- Effect of Tax
Deferred Accumulation.")
The performance results shown in this section are not an estimate or
guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Participant.
AVERAGE ANNUAL TOTAL RETURN
WITH SURRENDER CHARGE AND MAINTENANCE FEE IMPOSED
(FOR PERIOD ENDED DECEMBER 31, 1995)
<TABLE>
<CAPTION>
NO.
OF YEARS DIV 4 DIV 5 DIV 6 DIV 7 DIV 8 DIV 10 DIV 11 DIV 12 DIV 13 DIV 14
- ------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year............ 24.03% 18.35% (0.36)% 14.39% 11.12% 30.73% 4.57% 32.35% 12.44% 21.19%
3 Years........... 9.73 7.75 1.27 5.60 4.82 12.36 13.23 11.30 9.70 10.05
5 Years........... 11.84 8.19 2.09 8.12 6.89 13.99 6.38 12.42 -- --
10 Years........... 7.63 8.02 -- -- -- -- -- -- -- --
Since
Inception*....... 7.94 7.26 4.33 6.01 5.94 10.14 2.22 10.06 9.52 11.42
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
WITH NO SURRENDER CHARGE AND MAINTENANCE FEE IMPOSED
(FOR PERIOD ENDED DECEMBER 31, 1995)
<TABLE>
<CAPTION>
NO.
OF YEARS DIV 4 DIV 5 DIV 6 DIV 7 DIV 8 DIV 10 DIV 11 DIV 12 DIV 13 DIV 14
- ------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year............ 29.24% 23.55% 4.51% 19.58% 16.31% 35.95% 9.67% 37.57% 17.63% 26.39%
3 Years........... 11.24 9.31 2.97 7.22 6.46 13.82 14.66 12.77 11.21 11.56
5 Years........... 12.59 9.04 3.12 8.98 7.78 14.72 7.29 13.18 -- --
10 Years........... 7.75 8.15 -- -- -- -- -- -- -- --
Since
Inception*....... 8.04 7.40 4.47 6.15 6.07 10.28 2.35 10.20 10.52 12.58
</TABLE>
- ---------------
* Division Four was initiated on October 13, 1982. Effective October 1, 1991 the
Capital Accumulation Fund changed its name to the MidCap Index Fund and
revised its investment objective, investment program and investment
restrictions accordingly, pursuant to contract owner vote. Division Five was
initiated on September 6, 1983. Divisions Six, Seven and Eight were initiated
on January 16, 1986. Division Ten was initiated on April 20, 1987. Divisions
Eleven and Twelve were initiated on October 2, 1989. Division Thirteen was
initiated on October 1, 1991. Division Fourteen was initiated on May 1, 1992.
15
<PAGE> 16
CUMULATIVE RETURN
(PERIOD ENDED DECEMBER 31, 1995)
<TABLE>
<CAPTION>
SINCE 10 5 3
DIVISION INCEPTION* YEARS YEARS YEARS 1 YEAR
- ----------------------------------------------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Stock Index Fund (Division 10)................. 134.39% -- 98.80% 47.44% 35.95%
MidCap Index Fund (Division 4)
Period from 10/01/91 through 12/31/95........ 67.18 -- -- 37.67 29.24
Period from 10/13/82 through 12/31/95........ 178.27 110.89% 80.93 37.67 29.24
Small Cap Index Fund (Division 14)............. 54.49 -- -- 38.83 26.39
International Equities Fund (Division 11)...... 15.65 -- 42.17 50.75 9.67
Social Awareness Fund (Division 12)............ 83.51 -- 85.80 43.42 37.57
Timed Opportunity Fund (Division 5)............ 141.10 119.10 54.21 30.61 23.55
Capital Conservation Fund (Division 7)......... 81.20 -- 53.77 23.25 19.58
Government Securities Fund (Division 8)........ 79.95 -- 45.46 20.65 16.31
International Government Bond Fund (Division
13).......................................... 53.08 -- -- 37.56 17.63
Money Market Fund (Division 6)................. 54.58 -- 16.63 9.19 4.51
</TABLE>
- ---------------
* See footnote for Average Annual Total Return for the inception date of each
Division.
16
<PAGE> 17
ANNUAL AND CUMULATIVE CHANGE IN ACCUMULATION UNIT VALUE
<TABLE>
<CAPTION>
INTER-
SMALL INTER- NATIONAL
STOCK MIDCAP CAP NATIONAL SOCIAL TIMED CAPITAL GOVERNMENT GOVERNMENT MONEY
INDEX INDEX INDEX EQUITIES AWARENESS OPPORTUNITY CONSERVATION SECURITIES BOND MARKET
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
10(1) 4(2) 14(3) 11(4) 12(4) 5(5) 7(6) 8(6) 13(7) 6(6)
------- ------- ------ ------- ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL
CHANGE
Year
Ended:
12/31/95... 35.95% 29.24% 26.39% 9.67% 37.57% 23.55% 19.58% 16.31% 17.63% 4.51%
12/31/94... (0.30) (4.70) (4.30) 6.90 (2.42) (2.29) (7.04) (5.44) 3.42 2.77
12/31/93... 8.78 11.78 14.77 28.58 6.84 8.19 10.88 9.70 13.08 1.67
12/31/92... 5.58 8.79 11.28 (14.31) 2.31 (1.71) 7.55 6.14 2.05 2.22
12/31/91... 27.70 20.81 -- 10.06 26.63 20.13 16.00 13.59 9.05 4.49
12/31/90... (4.83) (10.20) -- (20.90) (2.21) (3.38) (1.28) 4.91 -- 6.83
12/31/89... 27.88 18.10 -- 2.84 1.00 15.81 10.63 11.03 -- 7.92
12/31/88... 13.13 13.06 -- -- -- 8.63 5.92 4.95 -- 5.72
12/31/87... (14.38) (5.10) -- -- -- 7.31 (2.78) (3.26) -- 4.50
12/31/86... -- 2.43 -- -- 8.93 4.77 4.61 -- 4.05
CUMULATIVE
CHANGE
For
each
period
end
since
12/31/85
12/31/95... 134.39% 110.89% 54.49% 15.65% 83.51% 119.10% 81.20% 79.95% 53.08% 54.58%
12/31/94... 72.41 63.18 22.23 5.45 33.39 77.34 51.53 54.72 30.14 47.91
12/31/93... 72.93 71.23 27.72 (1.36) 36.70 81.50 63.01 63.62 25.83 43.93
12/31/92... 58.97 53.19 11.28 (23.29) 27.95 67.76 47.02 49.15 11.28 41.57
12/31/91... 50.56 40.81 -- (10.48) 25.06 70.68 36.69 40.52 9.05 38.49
12/31/90... 17.90 16.56 -- (18.66) (1.23) 42.08 17.84 23.71 -- 32.54
12/31/89... 23.88 29.80 -- 2.84 1.00 47.05 19.36 17.92 -- 24.06
12/31/88... (3.13) 9.91 -- -- -- 26.98 7.89 6.21 -- 14.95
12/31/87... (14.38) (2.79) -- -- -- 16.89 1.86 1.20 -- 8.73
12/31/86... -- 2.43 -- -- -- 8.93 4.77 4.61 -- 4.05
</TABLE>
- ---------------
For the year in which a Division was initiated, less than a full year's
performance has been reflected. Actual, not annualized, performance is
reflected.
(1) Initiated 4/20/87.
(2) Initiated 10/13/82 (formerly the Capital Accumulation Division). Effective
October 1, 1991, the Fund underlying this Division changed its name from the
Capital Accumulation Fund to the MidCap Index Fund and amended its
investment objective, investment program and investment restrictions
accordingly. Historical data prior to October 1, 1991 reflect investment
experience prior to these changes. Investment experience, for MidCap Index
Division 4 subsequent to October 1, 1991 has been as follows: for the period
from October 1, 1991 to December 31, 1991 the change in accumulation unit
value was 11.63%, for the period from October 1, 1991 to December 31, 1992
the cumulative change in accumulation unit value was 21.43%, for the period
from October 1, 1991 to December 31, 1993 the cumulative change in
accumulation unit value was 35.74%; for the period from October 1, 1991 to
December 31, 1994 the cumulative change in accumulation unit value was
29.36% and for the period from October 1, 1991 to December 31, 1995 the
cumulative change in accumulation unit value was 67.18%.
(3) Initiated 5/1/92.
(4) Initiated 10/2/89.
(5) Initiated 9/6/83.
(6) Initiated 1/16/86.
(7) Initiated 10/1/91.
17
<PAGE> 18
HYPOTHETICAL $10,000 ACCOUNT VALUE
INVESTED AT INCEPTION OF DIVISION
The tables and graphs below show the change in accumulation value of a
hypothetical $10,000 investment in each of the Divisions since the inception of
the Division (or the last 10 fiscal years, in the case of MidCap Index Fund and
Timed Opportunity Fund.)
STOCK INDEX FUND (DIVISION 10)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
APRIL 20, 1987 STIPULATED PAYMENT MADE APRIL 20, 1987
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
04/20/87............... $ 10,000
12/31/87............... 8,562
12/31/88............... 9,687
12/31/89............... 12,388
12/31/90............... 11,790 [Line Graph]
12/31/91............... 15,056
12/31/92............... 15,897
12/31/93............... 17,293
12/31/94............... 17,241
12/31/95............... 23,439
</TABLE>
18
<PAGE> 19
MIDCAP INDEX FUND (DIVISION 4)
The performance information for the MidCap Index Division is shown in two
separate sets of tables and graphs for the ten year period beginning January 1,
1985 and for the period beginning October 1, 1991. The latter period shows the
performance of the MidCap Index Division since the change in investment
objectives, investment program and investment restrictions of the underlying
Fund. Selected accumulation unit data for the last ten years for the MidCap
Index Division appears on page 8 of this Prospectus.
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
OCTOBER 1, 1991 STIPULATED PAYMENT MADE OCTOBER 1, 1991
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
10/01/91............... $ 10,000
12/31/91............... 11,163
12/31/92............... 12,143 [Line Graph]
12/31/93............... 13,574
12/31/94............... 12,936
12/31/95............... 16,718
</TABLE>
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
JANUARY 1, 1986 STIPULATED PAYMENT MADE JANUARY 1, 1986
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
01/01/86............... $ 10,000
12/31/86............... 10,243
12/31/87............... 9,721
12/31/88............... 10,991
12/31/89............... 12,980 [Line Graph]
12/31/90............... 11,656
12/31/91............... 14,081
12/31/92............... 15,319
12/31/93............... 17,123
12/31/94............... 16,318
12/31/95............... 21,089
</TABLE>
19
<PAGE> 20
SMALL CAP INDEX FUND (DIVISION 14)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
MAY 1, 1992 PAYMENT MADE MAY 1, 1992
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
05/01/92............... $ 10,000
12/31/92............... 11,128
12/31/93............... 12,772 [Line Graph]
12/31/94............... 12,223
12/31/95............... 15,449
</TABLE>
INTERNATIONAL EQUITIES FUND (DIVISION 11)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
OCTOBER 2, 1989 STIPULATED PAYMENT MADE OCTOBER 2, 1989
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
10/02/89............... $ 10,000
12/31/89............... 10,284
12/31/90............... 8,134
12/31/91............... 8,952 [Line Graph]
12/31/92............... 7,671
12/31/93............... 9,864
12/31/94............... 10,545
12/31/95............... 11,565
</TABLE>
20
<PAGE> 21
SOCIAL AWARENESS FUND (DIVISION 12)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
OCTOBER 2, 1989 STIPULATED PAYMENT MADE OCTOBER 2, 1989
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
10/02/89............... $ 10,000
12/31/89............... 10,100
12/31/90............... 9,877
12/31/91............... 12,506 [Line Graph]
12/31/92............... 12,795
12/31/93............... 13,670
12/31/94............... 13,339
12/31/95............... 18,351
</TABLE>
TIMED OPPORTUNITY FUND (DIVISION 5)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
JANUARY 1, 1986 STIPULATED PAYMENT MADE JANUARY 1, 1986
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
01/01/86............... $ 10,000
12/31/86............... 10,893
12/31/87............... 11,689
12/31/88............... 12,698
12/31/89............... 14,705
12/31/90............... 14,208 [Line Graph]
12/31/91............... 17,068
12/31/92............... 16,776
12/31/93............... 18,150
12/31/94............... 17,734
12/31/95............... 21,910
</TABLE>
21
<PAGE> 22
CAPITAL CONSERVATION FUND (DIVISION 7)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
JANUARY 16, 1986 STIPULATED PAYMENT MADE JANUARY 16, 1986
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
01/16/86............... $ 10,000
12/31/86............... 10,477
12/31/87............... 10,186
12/31/88............... 10,789
12/31/89............... 11,936
12/31/90............... 11,784 [Line Graph]
12/31/91............... 13,669
12/31/92............... 14,702
12/31/93............... 16,301
12/31/94............... 15,153
12/31/95............... 18,120
</TABLE>
GOVERNMENT SECURITIES FUND (DIVISION 8)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
JANUARY 16, 1986 STIPULATED PAYMENT MADE JANUARY 16, 1986
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
01/16/86............... $ 10,000
12/31/86............... 10,461
12/31/87............... 10,120
12/31/88............... 10,621
12/31/89............... 11,792
12/31/90............... 12,371 [Line Graph]
12/31/91............... 14,052
12/31/92............... 14,915
12/31/93............... 16,362
12/31/94............... 15,472
12/31/95............... 17,995
</TABLE>
22
<PAGE> 23
INTERNATIONAL GOVERNMENT BOND FUND (DIVISION 13)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
OCTOBER 1, 1991 STIPULATED PAYMENT MADE OCTOBER 1, 1991
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
10/01/91............... $ 10,000
12/31/91............... 10,905
12/31/92............... 11,128 [Line Graph]
12/31/93............... 12,583
12/31/94............... 13,014
12/31/95............... 15,308
</TABLE>
MONEY MARKET FUND (DIVISION 6)
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
JANUARY 16, 1986 STIPULATED PAYMENT MADE JANUARY 16, 1986
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
01/16/86............... $ 10,000
12/31/86............... 10,405
12/31/87............... 10,873
12/31/88............... 11,495
12/31/89............... 12,406
12/31/90............... 13,254 [Line Graph]
12/31/91............... 13,849
12/31/92............... 14,157
12/31/93............... 14,393
12/31/94............... 14,791
12/31/95............... 15,458
</TABLE>
23
<PAGE> 24
ENDORSEMENTS AND PUBLISHED RATINGS
From time to time, in advertisements or in reports to Contract Owners, the
Company may refer to endorsements. Endorsements are often in the form of a list
of organizations, individuals or other parties which recommend the Company or
the Contracts. The endorser's name will be used only with the endorser's
consent. It should be noted that the list of endorsements may change from time
to time.
Also from time to time, the rating of the Company as an insurance company
by A. M. Best may be referred to in advertisements or in reports to Contract
Owners. 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. Best's Ratings range from A++ to F. The
Company's rating is A++. An A++ rating means, in the opinion of A. M. Best, that
the insurer has demonstrated the strongest ability to meet its respective
policyholder and other contractual obligations.
In addition, the claims-paying ability of the Company as measured by the
Standard and Poor's Ratings Group may be referred to in advertisements or in
reports to Contract Owners. A Standard and Poor's insurance claims-paying
ability rating is an assessment of an operating insurance company's financial
capacity to meet the obligations of its insurance policies in accordance with
their terms. Standard and Poor's ratings range from AAA to D. The Company's
claims-paying ability rating is AAA, which is defined as superior.
Further, from time to time the Company may refer to Moody's Investor's
Service's rating of the Company. Moody's Investor's Service's financial strength
ratings indicate an insurance company's ability to discharge senior policyholder
obligations and claims and are based on an analysis of the insurance company and
its relationship to its parent, subsidiaries and affiliates. Moody's Investor's
Service's ratings range from Aaa to C. The Company's rating is Aa2 which is
defined as excellent.
The Company will additionally refer to its Duff & Phelp's rating. A Duff &
Phelp's rating is an assessment of a Company's insurance claims-paying ability.
Duff & Phelp's ratings range from AAA to CCC. Duff & Phelp's rates the claims-
paying ability of the Company as AAA. An AAA rating reflects that the Company
has the highest claims-paying ability.
The Company may from time to time, refer to Lipper Analytical Services
Incorporated ("Lipper"), Morningstar, Inc. ("Morningstar") and CDA/Wiesenberger
Investment Companies ("CDA/Wiesenberger") when discussing the performance of its
Divisions. Lipper, Morningstar and CDA/Wiesenberger are leading publishers of
statistical data about the investment company industry in the United States.
Additionally, the Company may compare the performance of the Divisions to
categories published by Lipper and Morningstar. The published categories which
may be utilized in comparison with the performance of the Divisions include the
Morningstar Growth and Income Mutual Fund Category, Morningstar Aggressive
Growth Mutual Fund Category, Morningstar Growth Mutual Fund Category,
Morningstar International Stock Mutual Fund Category, Lipper Growth and Income
Mutual Fund Category, Lipper Small Company Growth Mutual Fund Category, Lipper
Growth Mutual Fund Category and Lipper International Mutual Fund Category.
Additional Lipper or Morningstar categories may be utilized if they are deemed
by the Company relevant to the performance of the Company's Divisions.
The Company may, from time to time, refer to The Variable Annuity Research
& Data Services (VARDS) Report. The VARDS Report offers monthly analysis of the
variable annuity industry, including marketing and performance information.
VARDS currently tracks over 900 variable separate accounts totaling over $260
Billion in variable annuity assets.
The Company may, from time to time, refer to Bankers Trust Company's
Tactical Asset Allocation Model's historical performance and compare such
performance to that of the S&P 500 Index. Neither the Model nor the S&P 500
Index is a managed fund and neither have identifiable investment objectives.
The Company may, from time to time, refer to a general investment strategy
known as indexing. Several of the Divisions employ this investment strategy. The
Company may compare the per-
24
<PAGE> 25
formance of these Divisions to the S&P 500 Index, S&P MidCap 400 Index, Russell
2000 Index, Morgan Stanley Capital International Europe, Australia and Far East
(EAFE) Index, or any other appropriate market index. The indexes are not managed
funds and have no identifiable investment objectives.
Finally the Company will utilize as a comparative measure for the
performance of its Funds the Consumer Price Index ("CPI"). The CPI is a measure
of change in consumer prices, as determined in a monthly survey of the U.S.
Bureau of Labor Statistics. Housing costs, transportation, food, electricity,
changes in taxes and labor costs are among the CPI components. The CPI provides
a tool for determining the impact of inflation on an individual's purchasing
power.
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers of Accumulation Value and Annuity Units among investment options
are permitted subject to the conditions discussed below. The right to make
transfers is exercisable by the Participant during the Accumulation Period and
by the Annuitant during the Annuity Period. The Company reserves the right to
limit or restrict transfers to the extent such limitation or restriction is
allowed by the Contract.
TRANSFERS DURING THE ACCUMULATION PERIOD
Transfers among investment options during the Accumulation Period are
accomplished by transferring Accumulation Value among Variable Subaccounts
(which are invested in Divisions) or Fixed Subaccounts.
The Company has the right to limit transfers. The Company's current policy
is that transfers among Variable Subaccounts or from Variable Subaccount(s) to
Fixed Subaccount(s) currently may be made at any time during the Accumulation
Period.
Transfers from a Fixed Subaccount to one or more Variable Subaccounts or
another Fixed Subaccount may be made during the Accumulation Period, subject to
restrictions. Specifically, during the Accumulation Period, transfers of up to
20% of the Accumulation Value allocated to Fixed Account Plus may be made each
Participant Year. VALIC may permit transfers in excess of this limit by prior
written notice to all Contract Owners. However, if the transfer would result in
a Fixed Account Plus Accumulation Value of less than $500, the entire Fixed
Account Plus Accumulation Value may be transferred at that time. A transfer to
Short Term Fixed Account currently will result in no further transfers from
Short Term Fixed Account being permitted for a period of 90 days. Otherwise,
transfers from Short Term Fixed Account may be made at any time during the
Accumulation Period provided, however, that the 90 day transfer period may be
changed at any time. However, the transfer period may not exceed 180 days.
Plan loans from the Fixed Subaccounts may be permitted by your employer's
plan. Refer to your plan for a description of charges and further information.
TRANSFERS DURING THE ANNUITY PERIOD
During the Annuity Period, transfers among investment options are
accomplished by transferring Annuity Units among the Separate Account's
Divisions or to a fixed annuity. These transfers may be made at intervals of at
least 365 days. During the Annuity Period, transfers from a fixed annuity are
not permitted.
OTHER REQUIREMENTS
Transfers among investment options or changes of future allocation of
Purchase Payments ("reallocations") may be made upon receipt by the Company, at
its Home Office, of written instructions or by telephone at 1-800-621-7792.
Requests for transfers or reallocations by telephone will be automatically
permitted unless the Company has been notified otherwise in writing or by
telephone at 1-800-621-7792. If, after notifying the Company that telephone
transfers or reallocations are not to be allowed, the Contract Owner or
Participant wishes to have the right to effect telephone transfers or
reallocations reactivated, he or she must notify the Company in writing.
Prior to the Company's effecting a transfer request or reallocation by
telephone instruction, the Company will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine by requiring certain
identifying information about the Contract Owner or Participant. Unless the
Contract Owner or Participant has instructed the Company not to accept telephone
transfers or reallocations, anyone who represents that he or she is authorized
by the
25
<PAGE> 26
Contract Owner or Participant to effect a transfer or reallocation may do so if
they have the requisite Contract Owner or Participant account information.
Officers, directors, agents, representatives and employees of the Company may
not give or be authorized to give telephone instructions on behalf of Contract
Owners or Participants (other than for contracts within their immediate family)
without prior written permission of the Company.
It is the responsibility of the Contract Owner or Participant to verify the
accuracy of all confirmations of transfers and to promptly advise the Company of
any inaccuracies within one business day of receipt of the confirmation. The
Company will send to the Contract Owner or Participant a confirmation of the
transfer within five (5) days from the date of any instruction.
Any telephone instructions reasonably believed by the Company to be genuine
will be the Contract Owner's or Participant's responsibility, including losses
arising from any errors in the communication of instructions. As a result of
this policy, the Contract Owner or Participant will bear the risk of loss. If
the Company does not employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, it may be liable for any losses due to
unauthorized or fraudulent instructions.
Transfers or reallocations will be effected pursuant to the Contract
Owner's or Participant's written or telephone transfer request as of the day
when received by the Company if received by the Company's Home Office before the
close of regular trading of the New York Stock Exchange, generally 4:00 p.m. New
York time, on a day Accumulation Unit values are calculated; otherwise the next
calculated Accumulation Unit or Annuity Unit value will be used. Telephone
transfer requests will not be accepted during the Annuity Period. The Company
reserves the right to discontinue the telephone transfer facility at any time.
Up to seven fixed or variable investment options may be used by a
Participant at any one time during the Accumulation Period or the Annuity
Period. (For additional requirements with respect to investment options during
the Annuity Period, see "Fixed or Variable Annuity Payments," "Annuity Payment
Options" and "Death of Annuitant During Annuity Period.")
26
<PAGE> 27
CHARGES UNDER VARIABLE ANNUITY CONTRACTS
All charges under the Contracts are described below.
CHARGE FOR PREMIUM TAXES
Premium taxes ranging from zero to 3% are currently imposed by certain
states and municipalities on Purchase Payments made under the Contracts.
Under deferred Contracts subject to premium tax, an amount for the tax will
be deducted, either from Purchase Payments when received, or from the amount
applied to effect an annuity at the time annuity payments commence, depending on
applicable state law. If an amount for any premium taxes is deducted but
subsequently is determined not to be due, the Company will adjust the excess
amount to reflect investment experience from the date of the deduction to the
date the determination is made. The Company will then apply the excess amount
deducted, as adjusted, to increase the number of Accumulation Units or Annuity
Units under the Participant Account at the time such determination is made.
CHARGE FOR PARTIAL AND TOTAL SURRENDERS
Except as provided below, a total or partial surrender is subject to a
surrender charge calculated as a percentage of the dollar amount of previous
Purchase Payments with respect to a Participant Account which are withdrawn, or
the dollar amount of the surrender, if less. Except as provided below it is
assumed that the most recent Purchase Payments are withdrawn first, and no
surrender charge is ever imposed on any amount not actually withdrawn.
Amounts exchanged to this Contract from other variable annuity contracts
issued by the Company are not considered to be Purchase Payments for purposes of
calculating the surrender charge. For such Contract exchanges, exchanged amounts
shall be deemed to be withdrawn only after all subsequent Purchase Payments have
been withdrawn. See "Exchange Offers" for more complete information about these
exchanges and surrender charges on exchanged amounts.
The surrender charge with respect to any Participant Account may not exceed
5% of the lesser of (a) all Purchase Payments received during the most recent 60
months prior to the receipt of the surrender request by the Company at its Home
Office, or (b) the amount withdrawn. For purposes of this charge, the Company
treats withdrawals of Purchase Payments before any earnings. Additionally, the
most recent Purchase Payments are treated as withdrawn first.
The first partial surrender per Participant Year of 10% or less of
Accumulation Value with respect to a Participant Account will not be subject to
a surrender charge. These 10% withdrawals without charge do not reduce Purchase
Payments for purposes of computing the charge. However, if the first partial
surrender (or total surrender, if there have been no partial surrenders within
the current Participant Year) exceeds 10% of Accumulation Value, the surrender
charge will be applied to the lesser of (a) the amount in excess of 10%, or (b)
the amount of the surrender attributable to Purchase Payments received during
the most recent 60 months. The second or any subsequent surrenders during a
Participant Year may be subject to a surrender charge.
If a surrender charge is assessed against any Purchase Payment, that
Purchase Payment (or, if the surrender charge is assessed against less than the
entire Purchase Payment, that portion against which such charge is assessed)
will not be subject to any further surrender charge in the event of a subsequent
withdrawal.
The surrender charge is not imposed upon annuitization at the Annuity Date
or upon any payments received by an Annuitant or Beneficiary in lieu of annuity
payments during the Annuity Period. Nor is the surrender charge imposed on the
payment of benefits to a Beneficiary or an Annuitant when a Participant dies
during the Accumulation Period. (See "Death Benefits During Accumulation
Period.") There is no surrender charge in any of the following situations: (a)
if no Purchase Payments have been received during the 60 months immediately
prior to surrender; (b) if the Participant Account has been in effect for 15
years or longer: or (c) if the Participant Account has been in effect for 5
years or longer and the Annuitant has attained age 59 1/2. No surrender charge
is imposed if the Annuitant has qualified to receive Social Security disability
benefits as evidenced by a certified copy of a Social
27
<PAGE> 28
Security Administration determination or a doctor's verification of such
disability. For employer sponsored groups, i.e. in the case of Contracts other
than Non-Qualified contracts or IRA contracts, no surrender charges will apply
if the Participant has been in the Contract for 5 or more years, the Participant
has separated from service of his or her employer and the Participant has
attained age 55.
The amount of surrender charges for a particular Contract may be reduced or
eliminated when the Contract is issued pursuant to a retirement plan or similar
arrangement and sales are made to individuals or groups of individuals in a
manner that results in savings of sales expenses. The entitlement to such a
reduction or elimination of surrender charges will be determined by the Company
in the following manner:
1. The size of the group to which such sales are to be made will be
considered. Generally, the sales expenses for a larger group are smaller
than for a smaller group because of the ability to establish a larger
number of Participant Accounts with fewer sales contacts.
2. The total amount of Purchase Payments to be received from a group will
be considered. Per Participant Account sales expenses are likely to be
less on larger Purchase Payments than on smaller ones.
3. The purpose for which the Contracts are being purchased will be
considered. Certain types of qualified plans are more likely to be
stable than are others. Such stability reduces the number of sales
contracts required, reduces sales administration and results in fewer
Participant Account terminations. As a result, sales expenses can be
reduced.
4. The nature of the group for which the Contracts are being purchased will
be considered. Certain types of employee and professional groups are
more likely to continue Contract participation for longer periods than
are other groups with more mobile membership. If fewer Participant
Accounts are surrendered in a given group, the Company's sales expenses
are reduced.
5. The use of mass enrollment procedures or the performance of sales or
related administrative functions by the employer will be considered.
Sales expenses are likely to be lower on Contracts where the need for
individual sales contacts is minimized.
6. There may be other circumstances of which the Company is not presently
aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines
that a group purchase would result in reduced or eliminated sales expenses, such
a group would be entitled to a reduction or elimination of the charge.
In no event will reduction or elimination of the charge be permitted where
such reduction or elimination will be unfairly discriminatory to any person.
The surrender charge reimburses the Company for part or all of its expenses
related to distributing the Contracts. The Company believes, however, that the
amount of such expenses will exceed the amount of revenues generated by the
surrender charge. The Company will pay such excess out of its general surplus
which, among other things, would include any gains from the asset charge
described below under "Charge to the Separate Account."
Examples of calculation of the surrender charge upon partial and total
surrender are set forth in the Statement of Additional Information--"Calculation
of Surrender Charge."
CHARGE FOR ANNUAL ACCOUNT MAINTENANCE
An annual account maintenance charge of $20 will be assessed each Contract
by the Company for the first Participant Year. The charge will be reduced to $15
for the second and later years during the Accumulation Period. The charge is due
in quarterly installments beginning on the first day of the calendar quarter
following the first date a Purchase Payment is credited to the Participant
Account. The charge is assessed on the last day of the calendar quarter in which
it is due. This charge will be assessed proportionately among the Variable and
Fixed Subaccounts which make up the Accumulation Value. The maintenance charge
is not guaranteed and may, with prior regulatory approval if required, be
changed for
28
<PAGE> 29
future years. Any change to this charge will apply to Contracts purchased both
before and after such change. This charge is to reimburse the Company for the
cost of administrative expenses, including the expenses incurred in establishing
and maintaining the records relating to the Contract. The Company does not
expect that the revenues it will derive from this charge will exceed such
expenses.
The annual account maintenance charge may be reduced or waived on Contracts
issued under a retirement plan or similar arrangement which does not occasion
all the administrative expenses that otherwise would be incurred. The
entitlement to such a reduction in maintenance charge will be determined by the
Company in the following manner:
1. The purposes for which the Contracts are being purchased will be
considered. Certain types of qualified plans are more likely to be
stable than are others. Such stability reduces sales administration and
results in fewer Participant Account terminations. As a result,
administrative expenses can be reduced.
2. The nature of the group for which the Contracts are being purchased will
be considered. Certain types of employees and professional groups are
more likely to continue Contract participation for longer periods than
are other groups with more mobile membership. If fewer Participant
Accounts are surrendered in a given group, the Company's administrative
expenses are reduced.
3. The frequency of Purchase Payments will be considered. If Participant
Accounts are established or Purchase Payments are received in large
numbers only once a year, administrative costs are dramatically reduced.
4. The performance of administrative functions by the employer or the use
by an employer of automated techniques in submitting Purchase Payments
or information related to Purchase Payments on behalf of its employees
can reduce the Company's administrative expenses associated with a
Contract.
5. There may be other circumstances of which the Company is not presently
aware, which could result in reduced administrative expenses.
If, after consideration of the foregoing factors, the Company determines
that a group purchase would result in reduced administrative expenses, such a
group would be entitled to a reduction of the charge. In no event will
reductions of the charges be permitted where such reductions will be unfairly
discriminatory to any person.
If two or more Participant Accounts are established for the same Annuitant
under the same group Contracts, the Company and the Contract Owner may agree to
assess the maintenance charges related to some or all such Participant Accounts
against one such account.
CHARGE TO THE SEPARATE ACCOUNT
To cover administrative expenses not covered by the maintenance charge
discussed above, and to compensate the Company for assuming mortality risks
under the Contracts, the Separate Account will incur a daily charge at an
annualized rate of 1% on the average daily net asset value of the Separate
Account attributable to the Contracts. Of this charge, the Company estimates
.20% is for administrative expenses and .80% is for mortality risks. This charge
is guaranteed and may not be increased by the Company.
In assuming the mortality risks, the Company is taking the risk that its
actuarial estimate of mortality rates during the Annuity Period may prove
erroneous and that the Annuitant will live longer than expected or that the
Annuitant will die during the Accumulation Period at a time when the death
benefit guaranteed by the Company is higher than the Accumulation Value of the
Participant Account. The Company does not expect to earn a profit on that
portion of the charge which is for administrative expenses, but the Company does
expect to derive a profit from the portion which is for assumption of mortality
risks. There is no necessary relationship between the amount of administrative
charges imposed on a given Contract and the amount of expenses actually
attributable to that Contract.
29
<PAGE> 30
MISCELLANEOUS
A daily charge based on a percentage of average daily net assets is payable
by each Fund to the Company for investment management. These charges, and other
Fund charges and expenses more fully described in the prospectus for the Series
Company, are borne indirectly by Participants.
CHARGE FOR INCOME TAXES
Currently, no charge is made against the Separate Account for the Company's
Federal income taxes, or provisions for such taxes that may be attributable to
the Separate Account. The Company may charge each Division in the Separate
Account for its portion of any income tax charged to the Company or the Division
on its assets. Under present laws, the Company may incur state and local taxes
(in addition to premium taxes) in several states. At present, these taxes are
not significant. If they increase, however, the Company may decide to make
charges for such taxes or provisions for such taxes against the Separate
Account. Any such charges against the Separate Account or its Divisions could
have an adverse effect on the investment performance of such Division.
ACCUMULATION PERIOD
During the period before the commencement of annuity payments (the
"Accumulation Period"), the Participant or employer may make Purchase Payments
from time to time, and on such dates and in such amounts as may be determined
pursuant to the retirement plan for which the Contract has been purchased.
In all cases, the initial Purchase Payment must be preceded or accompanied
by a properly completed application. Except in the case of IRAs and some
Non-Qualified Contracts, Purchase Payments are generally remitted through or by
an employer and the Company must also receive a premium flow report which
identifies the amount to be credited to each Participant Account held pursuant
to the employer's retirement plan.
The initial and subsequent Purchase Payments for a periodic payment
Contract must be at least $30 per Participant Account. This minimum applies
separately to the amount of each Purchase Payment directed to each Variable
Subaccount or Fixed Subaccount. For single payment Contracts, the minimum
Purchase Payment is $1,000 per Participant Account. However, these minimums may
be waived where one purchaser, such as an employer, purchases a number of
Contracts.
When an initial Purchase Payment accompanies an application (and, if
required, a premium flow report) the Company will, within two business days
after receipt of the application at its Home Office, either (a) process and
accept the application, issue the Contract to the Contract Owner, establish
Participant Accounts and credit amounts or Accumulation Units to those accounts
as of the date of acceptance; (b) reject the application and return the Purchase
Payment; or (c) request additional documents or information if the application
is not complete or is incorrectly completed. With respect to (c), a Purchase
Payment will be returned if a correctly completed application is not received
within five business days unless the Contract Owner agrees otherwise. For
initial and subsequent payments, Accumulation Units will be credited at the
Accumulation Unit value calculated as of the day the Purchase Payment was
received by the Company if received at the Company's Home Office before the
close of regular trading of the New York Stock Exchange, generally 4:00 p.m. New
York Time on a day Accumulation Unit values are calculated; otherwise, the next
calculated Accumulation Unit value is used. As a result, the Participant Account
will be credited with the investment experience of the Separate Account from the
date of the Company's receipt of the Purchase Payment.
Unless otherwise restricted by the Contract, a Participant may allocate
and/or accumulate amounts in up to seven of the fifteen available subaccounts
(the thirteen Variable Investment Options and the two Fixed Interest Options).
The Accumulation Value of a Participant's Account or Contract during the
Accumulation Period is the sum of values of the Fixed Interest Options and the
Variable Investment Options.
A Participant may allocate all or a portion of Purchase Payments to the
Fixed Subaccount. The Fixed Subaccount consists of two Fixed Interest Options
which are part of the Company's General Account. Each Fixed Interest Option pays
interest at a declared rate which may differ depending upon the Fixed Interest
Option selected. The Company bears the full amount of the investment
30
<PAGE> 31
risk for amounts allocated to either of the Fixed Interest Options. Earned
interest on amounts allocated to the Fixed Subaccount will be paid regardless of
the actual investment experience of the General Account. Because of exemptive
and exclusionary provisions, interests in the Fixed Subaccount have not been
registered under the Securities Act of 1933, and neither the Fixed Subaccount
nor the General Account has been registered as an investment company under the
Investment Company Act of 1940. Accordingly, interests in the Fixed Subaccount
are not subject to regulation under these Acts. As a result, the staff of the
SEC has not reviewed the disclosures which are included in this Prospectus and
which relate to the General Account and the Fixed Subaccount. These disclosures,
however, may be subject to certain provisions of federal securities law relating
to the accuracy and completeness statements made in this Prospectus.
The value of a Participant's Account attributable to the Fixed Subaccount
during the Accumulation Period is the sum of all net Purchase Payments allocated
to either of the Fixed Interest Options in the Fixed Subaccount, amounts
transferred from the Separate Account's Variable Investment Options to any Fixed
Interest Option, and all earned interest. This amount is reduced by amounts
transferred out or withdrawn and may be further reduced by the deduction of
certain charges.
A Participant may allocate all or a portion of Purchase Payments to the
Variable Investment Options. The value of the Contract and of a Participant's
Account attributable to the Variable Investment Options can be determined at any
time by multiplying the number of Accumulation Units outstanding under the
Contract or account by the current Accumulation Unit value. During the
Accumulation Period, the value of the Contract varies with the performance of
the investments of the Separate Account, and there is no assurance that such
value will equal or exceed Purchase Payments. The number of Accumulation Units
credited will not be changed by any subsequent change in the value of an
Accumulation Unit, but the dollar value of an Accumulation Unit may vary from
day to day depending upon the investment experience of the Separate Account.
The Accumulation Unit value is calculated as follows. First, a gross
investment rate is determined from the investment performance of the Separate
Account. The gross investment rate is calculated as of 4:00 p.m. New York time
on each business day when the New York Stock Exchange is open (except the Friday
following Thanksgiving, the Friday following Christmas if Christmas falls on a
Thursday and the Monday before Christmas if Christmas falls on a Tuesday). Such
rate is (i) the Separate Account's investment income and capital gains and
losses, whether realized or unrealized on such day, from the assets attributable
to each Separate Account Division, divided by (ii) the value of the Separate
Account Division for the immediately preceding day on which such values were
calculated. The net investment rate for any day is determined by deducting from
the gross investment rate, a factor representing the mortality risk and expense
charges described herein (see "Charge to the Separate Account"), and any
applicable income taxes. The Accumulation Unit value for a given day is then
determined by multiplying the Accumulation Unit value for the preceding day by a
net investment factor equal to the net investment rate plus 1.00.
Illustrations showing the calculation of an Accumulation Unit value and the
purchase of Accumulation Units (using hypothetical examples) are contained in
the Statement of Additional Information -- "Accumulation Unit Value."
DEATH BENEFITS DURING ACCUMULATION PERIOD
If an Annuitant under a Contract dies during the Accumulation Period, there
will be an amount payable to the Beneficiary equal to the greater of (a) the
Accumulation Value of the Participant Account on the date proof of death is
received by the Company; or (b) 100% of Purchase Payments, reduced by the amount
deducted in connection with any partial surrenders. (See "Surrender.") The
Beneficiary may exercise the right to receive the death benefit as a lump-sum
settlement or in the form of any of the annuity options provided in the Contract
(within such time limits required by Federal tax law). (See "Annuity Payment
Options.") Beneficiaries other than the spouse of an Annuitant must receive the
death benefit in full by the date five years after the Annuitant's death unless
payments commence within one year of the Annuitant's death under a life annuity,
a life annuity with payments certain or payments for a designated period. Pay-
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ments certain or payments for a designated period in any case cannot be selected
for a period exceeding the Beneficiary's life expectancy. The Beneficiary
thereafter will be entitled to exercise many of the investment options and other
rights an Annuitant would have under the Contract.
SUSPENSION OF PURCHASE PAYMENTS
Flexible payment Contracts contain provisions protecting against
forfeiture. If, at any time, additional Purchase Payments are not made, the
number of Accumulation Units outstanding under the Participant Account at that
time will remain constant (so long as no transfer election is made), and the
value of the Units will continue to vary. The Accumulation Value will continue
to be subject to charges during the period of suspension. The Contract Owner may
resume making Purchase Payments at any time during the Accumulation Period, so
long as the Participant Account (or Contract) has not been surrendered and the
Contract has not otherwise been terminated.
Under group Contracts, if the Accumulation Value of a Participant Account
falls below $300, the Company, at its option, may cause the Participant Account
to be automatically surrendered, in which case a surrender charge may be
deducted from the amount paid to the Participant. Under individual Contracts,
the Company may cause such automatic surrender if all of the following
conditions are satisfied: (1) The total of Purchase Payments, reduced by amounts
deducted in connection with any partial surrenders, falls below $300; (2) the
total of Accumulation Value, reduced by amounts deducted in connection with any
partial surrenders, falls below $300; and (3) no Purchase Payments have been
made for two Participant Years.
ANNUITY PERIOD
FIXED OR VARIABLE ANNUITY PAYMENTS
If the plan so permits, the Annuitant may elect to have any portion of the
Accumulation Value applied to provide either a variable annuity or a fixed
annuity, or a combination of both.
Fixed annuity payments are monthly payments from the Company to an
individual, the amount of which is fixed and guaranteed by the Company. The
amount of the monthly payments will depend only on the form and duration of
annuity payments chosen, the age of the Annuitant or the Beneficiary (and sex,
under individual retirement annuity ("IRA") contracts), the total Accumulation
Value applied to purchase the annuity, and the applicable annuity rate. If it
would produce greater benefits, the amount of the monthly payment will be that
produced by a then currently issued immediate annuity of the same form.
Variable annuity payments are similar to fixed annuity payments, except
that the amount of each monthly payment from the Company will vary reflecting
the net investment experience of each Division of the Separate Account in which
the net Purchase Payments are accumulated. (For an illustration of the
calculation of annuity payments and Annuity Unit value see the Statement of
Additional Information -- "Amount of Annuity Payments" and "Annuity Unit
Value.") The value of an Annuity Unit is calculated at the same time that the
value of an Accumulation Unit is calculated and is based on the same values for
Fund shares and other assets and liabilities. (See "Accumulation Period.") If
the net investment experience for a given month, after all charges summarized
below, exceeds the Assumed Investment Rate (3 1/2% per annum unless a different
rate is selected), the monthly payment will be greater than the previous
payment. If the net investment experience for a month is less than such Assumed
Investment Rate, the monthly payment will be less than the previous monthly
payment. (See the Statement of Additional Information -- "Assumed Investment
Rate.")
The use of an Assumed Investment Rate higher than 3 1/2% per annum would
cause the first annuity payment to be larger, but subsequent payments would
increase more slowly or decrease more quickly and ultimately be less than they
would under a 3 1/2% Assumed Investment Rate, provided that annuity payments
continue for a sufficient period of time. A 3 1/2% Assumed Investment Rate will
be used in the absence of a selection otherwise.
Up to seven Divisions may be applied to provide a variable annuity, or up
to six Divisions if a fixed annuity is also selected. The first payment provided
under a fixed annuity and each portion of a variable annuity based on a Division
must each be at least $25.
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ANNUITY DATE
Annuity payments under deferred Contracts may begin on the first day of any
month before the Annuitant's 75th birthday, as selected by the Contract Owner on
a form approved by the Company. However, special rules apply to payments under
403(b), 401, 403(a) and 457 plans or simplified employee plans ("SEPs"). (See
the discussion of required distributions for each plan type under "Federal Tax
Matters.")
ANNUITY PAYMENT OPTIONS
The Annuitant may elect to have the Accumulation Value of the Participant
Account applied on the Annuity Date to any one of the options listed below. The
amount applied to effect an annuity will be the Accumulation Value on the tenth
day preceding the Annuity Date.
In most cases, if the Annuitant does not specify one of the options at
least thirty days prior to the Annuity Date, annuity payments are made in
accordance with the second option, with payments being guaranteed for a ten year
period. If the Contract is issued under certain retirement plans, however,
federal pension law may require that payments be made pursuant to the fourth
option unless otherwise elected. Tax laws and regulations may impose further
restrictions to assure that the primary purpose of the plan is distribution of
the accumulated funds to the employee. Absent a contrary election at least
thirty days in advance, Fixed Subaccount accumulations will be used to provide a
fixed annuity, and Variable Subaccount accumulations will be used to provide a
variable annuity based on the same Divisions in which the Variable Subaccount(s)
were invested immediately prior thereto. If the fifth annuity option is
selected, annuity payments must be made on a fixed basis. An Annuitant wishing
to receive a lump sum rather than an annuity may surrender the Contract as
described below under "Surrender."
Once annuity payments have begun, an annuity option may not be terminated.
First Option -- Life Annuity. Variable annuity payments are payable monthly
during the lifetime of the Annuitant, and the annuity terminates with the last
payment preceding death. This option offers the maximum amount per variable
annuity payment since there is no provision for a death benefit for
Beneficiaries. It would be possible under this option for the annuitant to
receive only one annuity payment if he died prior to the date of the second
payment, two if he died before the third annuity payment date, etc.
Second Option -- Life Annuity With 60, 120, 180 or 240 Monthly Payments
Certain. Variable annuity payments are payable monthly during the lifetime of an
Annuitant with the provision that, if the Annuitant dies during the certain
period, the Beneficiary may receive monthly payments for the remainder of the
certain period.
Third Option -- Unit Refund Life Annuity. Variable annuity payments are
payable monthly during the lifetime of the Annuitant with an additional payment
to the Beneficiary at the death of the Annuitant equal to the then-current value
of any Annuity Units credited to the Participant Account at the Annuity Date
which have not theretofore been paid out in the form of annuity payments. For
this purpose, the number of Annuity Units credited to the Participant Account at
the Annuity Date will be the total value applied to this option divided by the
Annuity Unit value at the date used to calculate the first annuity payment.
Fourth Option -- Joint and Last Survivor Life Annuity. Variable annuity
payments are payable monthly during the joint lifetimes of two Annuitants and
continue during the lifetime of the surviving Annuitant. This option is designed
primarily for couples who require maximum possible variable annuity payments
during their joint lives and who are not concerned with providing for
Beneficiaries at the death of the last to survive. It would be possible under
this option for the joint Annuitants to receive only one payment if both
Annuitants died prior to the date of the second payment, or for the joint
Annuitants to receive only one payment and the surviving Annuitant to receive
only one payment if one Annuitant died prior to the date of the second payment
and the surviving Annuitant died prior to the date of the third payment, etc.
Fifth Option -- Payments for Designated Period. Annuity payments are
payable monthly for a selected number of years between three and thirty.
Payments under this option may be made on a fixed basis only. If payments would
amount
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to less than $25 each, the Company may make payments less frequently than
monthly.
ENHANCEMENTS UNDER ANNUITY OPTIONS
Enhancements of the annuity options described above recently are available
under the Contracts. These include partial annuitization, flexible payments of
varying amounts and inflation protection payments. To the extent some or all of
these options do not result in "substantially equal payments" over the life
expectancy of the Annuitant, electing such options may result in unfavorable tax
consequences to Annuitants under age 59 1/2. (See "Federal Tax Matters.")
Additionally certain options may be available with a one to twenty payment
certain period. The Fourth Option also may be available with a one to twenty
payment certain option. Not all of the enhancements are available under each
option.
DEATH OF ANNUITANT DURING ANNUITY PERIOD
If the Annuitant dies during the Annuity Period, the Beneficiary may be
entitled to payment of an additional amount or amounts, and may be entitled to
certain alternatives discussed below. If, prior to death, the Annuitant had been
receiving payments under the first or fourth options, no additional amounts
would be due. If, however, the Annuitant had been receiving payments under the
second, the third or the fifth options, the Beneficiary may:
1. elect to receive in a lump sum the present value, discounted at the
Assumed Investment Rate, of any remaining annuity payments owed under
the Contract based on the then-current Annuity Unit value;
2. elect to continue receiving annuity payments under the terms of the
Contract, in which case the Beneficiary would be entitled, any time
thereafter, to receive the present value of remaining variable annuity
payments, discounted at the Assumed Investment Rate, based on the
Annuity Unit value next determined after request for such payment is
received at the Company's Home Office; or
3. elect to have the present value, discounted at the Assumed Investment
Rate, of any annuity payments owed on the Contract, based on the
then-current Annuity Unit value, applied to the fifth option for a
period shorter than the period remaining under the annuity option
selected by the Annuitant.
Under the Federal tax laws, the election of alternative (2) above on a
variable basis may be treated in the same manner as a surrender of the Contract.
If the Contract is surrendered, usually the full amount received would be
includable in income for that year, and, to the extent so included, would be
taxed at ordinary rates.
SURRENDER
All or part of the Surrender Value of a Participant Account may be
withdrawn by the Participant at any time before the commencement of annuity
payments, provided that the Annuitant is alive at the time of surrender. This
right is subject to any restrictions on surrender under applicable law and the
employer's plan. An individual Contract must be returned to and be received by
the Company before a total surrender will be effected. (See "Charge for Partial
and Total Surrenders" for an explanation of charges which may be assessed upon
surrender.)
The Surrender Value of a Participant Account at any time is equal to the
Accumulation Value under the Participant Account at the time of surrender, less
any surrender charge. For this purpose, the value of an Accumulation Unit is
that next computed after the request for surrender is received at the Company's
Home Office. There is no assurance that the Surrender Value under Variable
Subaccounts will equal or exceed the aggregate amount of Purchase Payments at
any time.
A partial surrender under a Participant Account will result in a reduction
of the Accumulation Value credited to a Participant Account. The reduction will
equal the dollar amount surrendered plus the surrender charge, if any, and will
be allocated among subaccounts in the same proportion as the surrender requested
by the Participant. The reduction in the number of Accumulation Units credited
to a Variable Subaccount will equal the amount surrendered from that subaccount
plus the surrender charge allocable to that subaccount, if any, divided by the
applicable Accumulation Unit value next computed after the written request for
surrender is received at the Company's Home Office. If the entire value under a
subaccount is surrendered in a partial surrender, the dollar amount surrendered
will be
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reduced by the surrender charge allocable to that subaccount. The Surrender
Value will be reduced by a full quarterly maintenance charge assessment in the
case of a full surrender during a calendar quarter.
Under the Texas State Optional Retirement Program or in most Section 403(b)
contracts, no surrender or partial surrender by a Participant will be permitted
prior to termination of employment, retirement or death. (See "Federal Tax
Matters.")
Under the Florida State Optional Retirement Program no surrender or partial
surrender by a Participant of Accumulation Values attributable to Purchase
Payments contributed by the Participant's employer will be permitted. Benefits
based on employer contributions may only be paid upon the Participant's death,
retirement or termination of employment. Except in the case of the Participant's
death, and except for certain small amounts as approved by the State of Florida,
such benefit payments may not be paid in a lump sum or for a period certain, but
will only be paid through a life contingency option.
For an explanation of possible adverse tax consequences from a partial
redemption or surrender see "Federal Tax Matters."
Payments of Surrender Values as well as lump-sum payments available under
an annuity option will be made within seven calendar days after receipt of the
written request by the Company at its Home Office; however, payments
attributable to a Division may be suspended or postponed at any time when
redemption of the Fund's shares is suspended or postponed. See "Offering,
Purchase and Redemption of Fund Shares" in the Series Company's Statement of
Additional Information for a discussion of the circumstances under which the
Series Company may suspend or postpone redemption of its shares.
Occasionally, the Company may receive a request for total or partial
surrender which includes Accumulation Values derived from Purchase Payments
which have not cleared the banking system. The Company may delay mailing that
portion of the Surrender Value which relates to such amounts until the check for
the payment has cleared. The Accumulation Unit value used to determine the
remaining Surrender Value to be remitted will be on the basis of the valuation
next computed after receipt of the request for surrender.
OTHER CONTRACT FEATURES
CHANGE OF BENEFICIARY
Once a Participant Account has been established, the Contract Owner, the
Participant and the Annuitant may not be changed.
The Beneficiary is designated by the Participant. The Annuitant generally
may change the Beneficiary designation at any time unless such designation has
been made irrevocable. Under certain retirement programs, however, spousal
consent may be required to name or change a Beneficiary, and the right to name a
Beneficiary other than the spouse may be subject to applicable tax laws and
regulations. If no Beneficiary is living at the time of an Annuitant's death,
any benefits otherwise payable under the Contract to the Beneficiary will be
payable to the Annuitant's estate. If a Beneficiary dies while receiving
payments under the Contract, and if no other Beneficiary is then living, any
remaining benefits owed under the Contract will be paid to such Beneficiary's
estate.
REVOCATION
Individual Contracts allow the Contract Owner to revoke the Contract by
returning it to the Company within ten days of delivery or such longer
revocation period as is required by state law. The Company will refund any
Purchase Payments received for the Contract without regard to investment
results, unless a larger refund is required by state law.
RESERVATION OF RIGHTS
The Company reserves the right to amend the Contract to conform with
substitutions of investments or to comply with tax or other laws applicable to
these types of Contracts. The Company also reserves the right to operate the
Separate Account as a management investment company under the 1940 Act, in
consideration of receipt of an investment management fee, or in any other form
permitted by law, and to deregister the Separate Account under the 1940 Act, in
the event such registration is no longer required.
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RELATIONSHIP TO EMPLOYER'S PLAN
Since it is contemplated that most Contracts offered by this prospectus
will be used for retirement programs, reference should be made to specific plan
provisions and restrictions, if any, contained in the employer's plan in
connection with this description of the Contracts.
Plan loans from the Fixed Subaccounts may be permitted by your employer's
plan. Refer to your plan for a description of charges and further information.
FEDERAL TAX MATTERS
GENERAL
Major changes in federal income tax laws in the past several years may
affect the tax treatment of investments in the Contracts. It is not feasible to
comment on all of these changes, and Contract owners should consult a qualified
tax advisor for more complete information. Contract owners should also be aware
that future legislation may change some of the rules discussed in the following
materials.
TAXES PAYABLE BY PARTICIPANTS
AND ANNUITANTS
The Contracts offered in connection with this prospectus are primarily used
with retirement programs which receive favorable tax deferred treatment under
Federal income tax law, although deferred annuity contracts may be purchased
with after tax dollars.
Annuity payments or other amounts received under all Contracts generally
are subject to some form of federal income tax withholding. The withholding
requirement will vary among recipients depending on the type of program, the tax
status of the individual and the type of payments from which taxes are withheld.
Additionally, annuity payments or other amounts received under all Contracts may
be subject to state income tax withholding requirements.
SECTION 403(B) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS OR
PUBLIC EDUCATIONAL INSTITUTIONS
Purchase Payments. Under section 403(b) of the Code, payments made by
certain employers (i.e., tax-exempt organizations meeting the requirements of
section 501(c)(3) of the Code and public educational institutions) to purchase
annuity Contracts for their employees are excludable from the gross income of
employees to the extent that the aggregate Purchase Payments do not exceed the
limitations prescribed by section 402(g), section 403(b)(2) and section 415 of
the Code. This gross income exclusion applies to employer contributions and
voluntary salary reduction contributions.
An individual's voluntary salary reduction contributions under section
403(b) are generally limited to the lesser of $9,500 or 20 percent of salary;
additional catch-up contributions are permitted under certain circumstances.
Combined employer and salary reduction contributions are generally limited to
the lesser of $30,000 or approximately 20 percent of salary. In addition, for
plan years beginning after December 31, 1988, employer contributions must comply
with various nondiscrimination rules; these rules may have the effect of further
limiting the rate of employer contributions for highly compensated employees.
Taxation of Distributions. Distributions of voluntary salary reduction
amounts are restricted. The restrictions apply to amounts accumulated after
December 31, 1988 (including voluntary contributions after that date and
earnings on prior and current voluntary contributions). These restrictions
require that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3) death,
(4) disability, or (5) hardship (hardship distributions will be limited to the
amount of salary reduction contributions exclusive of earnings thereon).
Other distributions from a section 403(b) annuity Contract are taxed as
ordinary income to the recipient in accordance with section 72 of the Code.
Distributions received before the recipient attains age 59 1/2 generally are
subject to a 10% penalty tax in addition to regular income tax. Certain
distributions are excepted from this penalty tax, including distributions
following (1) death, (2) disability, (3) separation from service during or after
the year the participant reaches age 55, (4) separation from service at any age
if the distribution is in the form of substantially equal periodic payments over
the life (or life expectancy) of the Participant (or the Participant and
Beneficiary), and (5) distributions in excess of tax deductible medical
expenses.
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Required Distributions. Generally, distributions from section 403(b)
annuities must commence no later than April 1 of the calendar year following the
calendar year in which the Participant attains age 70 1/2 and such distributions
must be made over a period that does not exceed the life expectancy of the
Participant (or joint life expectancy of the Participant and Beneficiary).
Participants employed by governmental entities and certain church organizations
may delay the commencement of payments until April 1 of the calendar year
following retirement if they remain employed after attaining age 70 1/2.
Following the death of the Participant, the distribution requirements are
generally the same as those described with respect to Non-Qualified Contracts.
However, amounts accumulated under a Contract on December 31, 1986, are not
subject to these minimum distribution requirements. Pre-January 1, 1987 amounts
may be paid in a manner that meets the above rule or (i) must begin to be paid
when the Participant attains age 75; and (ii) the present value of payments
expected to be made over the life of the Participant under the option chosen
must exceed 50% of the present value of all payments expected to be made (the
"50% rule".) The 50% rule will not apply to joint Annuitant if a Participant's
spouse is the joint Annuitant. Notwithstanding these rules for pre-January 1,
1987 amounts held under 403(b) Contracts, the entire Contract balance must meet
the minimum distribution incidental benefit requirement of Section 403(b)(10). A
penalty tax of 50% will be imposed on the amount by which the minimum required
distribution in any year exceeds the amount actually distributed in that year.
Tax-Free Transfers and Rollovers. The IRS has ruled (Revenue Rulings 90-24)
that total or partial amounts may be transferred tax free between section 403(b)
annuity contracts and/or 403(b)(7) custodial accounts under certain
circumstances. In addition, section 403(b)(8) of the Code permits tax-free
rollovers from section 403(b) programs to IRAs or other section 403(b) programs
under certain circumstances. Such a rollover must be completed within 60 days of
receipt of the distribution. The portion of any distribution which is eligible
to be rolled over to an IRA or another 403(b) program is subject to 20% federal
income tax withholding unless the Participant elects a direct rollover of such
distribution to an IRA or other section 403(b) program.
SECTION 401 QUALIFIED PENSION, PROFIT-
SHARING OR ANNUITY PLANS
Purchase Payments. Purchase Payments made by an employer (or a
self-employed individual) under a pension, profit-sharing or annuity plan
qualified under section 401(a) or section 403(a) of the Code are excluded from
the gross income of the employee for Federal income tax purposes. Payments made
by an employee generally are made on an after-tax basis unless they are made on
a pre-tax basis by reason of sections 401(k) or 414(h) of the Code.
Taxation of Distributions. Distributions from Contracts purchased under
qualified plans are taxable as ordinary income, except to the extent allocable
to an employee's after-tax contributions (which constitute "investment in the
Contract.") However, if an employee or the Beneficiary receives a lump sum
distribution, as defined in the Code, from an exempt employees' trust, the
taxable portion of the distribution may be subject to special tax treatment. For
most individuals receiving lump sum distributions after attainment of age
59 1/2, the rate of tax may be determined under a special 5-year income
averaging provision. Those who attained age 50 by January 1, 1986 may instead
elect to use a 10-year income averaging provision based on the income tax rates
in effect for 1986. In addition, individuals who attained age 50 by January 1,
1986 may elect capital gains treatment (at a 20% rate) for the taxable portion
of a lump sum distribution attributable to years of service before 1974; such
capital gains treatment has otherwise been repealed. Taxable distributions
received under a Contract purchased under a qualified plan prior to attainment
of age 59 1/2 are subject to the same 10% penalty tax (and the same exceptions)
as described with respect to section 403(b) annuity Contracts.
Required Distributions. The minimum distribution requirements for qualified
plans are generally the same as described with respect to section 403(b) annuity
Contracts, except that no amounts are exempted from the minimum distribution
requirements.
Tax-Free Rollovers. The taxable portion of certain distributions from a
plan qualified under section 401 or 403(a) may be transferred in a tax-free
rollover to an individual retirement account or annuity or to another such plan.
Such a rollover must be completed within 60 days of
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receipt of the qualifying distribution. The portion of any distribution which is
eligible to be rolled over to an IRA or another section 401(a) or 403(a) plan is
subject to 20% federal income tax withholding unless the Participant elects a
direct rollover of such distribution to an IRA or other section 401(a) or 403(a)
plan.
INDIVIDUAL RETIREMENT ANNUITIES
Purchase Payments. The Tax Reform Act of 1986 has limited the extent to
which individuals may make tax-deductible contributions for IRA Contracts.
Deductible contributions equal to the lesser of $2,000 or 100% of compensation
are permitted only for individuals who (i) are not (and whose spouses are not)
active participants in another retirement plan; (ii) are active participants in
another retirement plan, but are unmarried and have adjusted gross income of
$25,000 or less; or (iii) are active participants (or have spouses who are) in
another retirement plan, but are married and have adjusted gross income of
$40,000 or less. Such individuals may also establish an IRA for a nonworking
spouse who receives no compensation during the tax year; the annual
tax-deductible Purchase Payments for both spouses' Contracts cannot exceed the
lesser of $2,250 or 100% of the working spouse's earned income; no more than
$2,000 may be contributed to either spouse's IRA for any year. Individuals who
are active participants in other retirement plans and whose adjusted gross
income exceeds the cut-off point ($25,000 for unmarried and $40,000 for married)
by less than $10,000 are entitled to make deductible IRA contributions in
proportionately reduced amounts.
An individual may make nondeductible IRA contributions to the extent of the
excess of (i) the lesser of $2,000 ($2,250 in the case of contributions to both
the individual's IRA and spousal IRA) or 100% of compensation over (ii) the IRA
deduction limit with respect to the individual.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient. In addition, a 10% penalty tax will be imposed
on taxable distributions received before the year in which the recipient attains
age 59 1/2, except that distributions made on account of death, disability or in
the form of substantially equal periodic payments over the life (or life
expectancy) of the Participant (or the Participant and Beneficiary) are not
subject to the penalty tax.
Required Distributions. The minimum distribution requirements for IRA
Contracts are generally the same as described with respect to Section 403(b)
annuity Contracts, except that no amounts are exempted from the minimum
distribution requirements and in all events such distributions must commence no
later than April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2.
Tax Free Rollovers. Federal law permits funds to be transferred in a tax
free rollover from a qualified employer pension, profit-sharing, or annuity
plan, or a Section 403(b) annuity Contract to an IRA Contract under certain
conditions. Amounts accumulated under such a rollover IRA may subsequently be
rolled over on a tax-free basis to another such plan or Section 403(b) annuity
Contract. In addition, a tax-free rollover may be made from one IRA to another,
provided that not more than one such rollover may be made during any twelve
month period. In order to qualify for tax-free treatment, all rollovers must be
completed within 60 days after the distribution is received.
SIMPLIFIED EMPLOYEE PENSION PLANS
Purchase Payments. Under section 408(k) of the Code, employers may
establish a type of IRA plan referred to as a simplified employee pension plan
(SEP). Employer contributions under a SEP, which generally must be made at a
rate representing a uniform percent of the compensation of participating
employees, are excluded from the gross income of employees for Federal income
tax purposes. Employer contributions to a SEP cannot exceed the lesser of
$30,000 or 15% of an employee's compensation for plan years beginning after
December 31, 1993.
Salary Reduction SEPs. Federal tax law allows employees of certain small
employers to have contributions made to the SEP on their behalf on a salary
reduction basis. These salary reduction contributions may not exceed $7,000,
indexed for inflation in later years. Employees of tax-exempt organizations are
not eligible for this type of SEP.
Taxation of Distributions. SEP distributions are subject to taxation in the
same manner as other IRA distributions.
Required Distributions. SEP distributions are subject to the same minimum
required distribution rules applicable to other IRAs.
38
<PAGE> 39
Tax Free Rollovers. Funds may be rolled over tax free from one SEP to
another as long as the rollover is completed within 60 days after the
distribution is received and is done no more frequently than once every twelve
months.
SECTION 457 UNFUNDED DEFERRED
COMPENSATION PLANS OF PUBLIC
EMPLOYERS AND TAX-EXEMPT
ORGANIZATIONS
Purchase Payments. Under section 457 of the Code, individuals who perform
services for a unit of a state or local government may participate in a deferred
compensation program. Tax-exempt employers may establish deferred compensation
plans under section 457 only for a select group of management or highly
compensated employees and/or independent contractors.
This type of program allows individuals to defer the receipt of
compensation which would otherwise be presently payable and to therefore defer
the payment of Federal income taxes on the amounts. Assuming that the program
meets the requirements to be considered an eligible deferred compensation plan
(an "EDCP"), an individual may contribute (and thereby defer from current income
for tax purposes) the lesser of $7,500 or 33 1/3% of the individual's includible
compensation. (Includible compensation means compensation from the employer
which is currently includible in gross income for Federal tax purposes.) During
the last three years before an individual attains normal retirement age,
additional catch-up deferrals are permitted.
The amounts which are deferred may be used by the employer to purchase the
Contracts offered by this prospectus. The Contract is owned by the employer and,
in fact, is subject to the claims of the employer's creditors. The employee has
no present rights or vested interest in the Contract and is only entitled to
payment in accordance with the EDCP provisions.
Taxation of Distributions. Amounts received by an individual from an EDCP
are includible in gross income for the taxable year in which such amounts are
paid or otherwise made available.
Distributions Before Separation from Service. Distributions generally are
not permitted under an EDCP prior to separation from service except for
unforeseeable emergencies. Emergency distributions are includible in the gross
income of the individual in the year in which paid.
Required Distributions. Beginning January 1, 1989, the minimum distribution
requirements for EDCP's are generally the same as those for qualified plans and
section 403(b) annuity Contracts, except that no amounts are exempted from
minimum distribution requirements.
Tax Free Transfers and Rollovers. Federal income tax law permits the tax
free transfer of EDCP amounts to another EDCP, but not to an IRA or other type
of plan.
PRIVATE EMPLOYER UNFUNDED DEFERRED
COMPENSATION PLANS
Purchase Payments. Private taxable employers may establish unfunded and
non-qualified deferred compensation plans for a select group of management or
highly compensated employees and/or for independent contractors.
Certain arrangements of nonprofit employers entered into prior to August
16, 1986, and not subsequently modified, are subject to the rules for private
taxable employer deferred compensation plans discussed below.
Deferred compensation plans represent a bare contractual promise on the
part of the employer to pay current wages at some future time. The Contract is
owned by the employer and is subject to the claims of the employer's creditors.
The individual has no present right or vested interest in the Contract and is
only entitled to payment in accordance with plan provisions. Private taxable
employers that are not natural persons, however, are currently taxable on any
increase in the Accumulation Value attributable to Purchase Payments made to
such Contracts after February 28, 1986.
Taxation of Distributions. Amounts received by an individual from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
Tax Free Transfers and Rollovers. Federal income tax law does not allow tax
free transfers or rollovers for amounts accumulated in a private employer
deferred compensation plan.
NON-QUALIFIED CONTRACTS
Purchase Payments. Purchase Payments made under certain Contracts are not
excludible from the gross income of the Contract Owner or deductible for tax
purposes ("Non-Qualified Contracts"). However, any increase in the Accumula-
39
<PAGE> 40
tion Value of a Non-Qualified Contract resulting from the investment performance
of the Separate Account is not taxable to the Contract Owner until received by
him. Contract Owners that are not natural persons, however, are currently
taxable on any increase in the Accumulation Value attributable to Purchase
Payments made to such Contracts after February 28, 1986.
Taxation of Distributions. In general, partial redemptions that are not
received as an annuity under a Non-Qualified Contract purchased after August 13,
1982 (or allocated to post-August 13 Purchase Payments under a pre-existing
Contract) are taxed as ordinary income to the extent of the accumulated income
or gain under the Contract. Partial redemptions from a Non-Qualified Contract
purchased before August 14, 1982, are taxed only after the Contract Owner has
received all of his "investment in the Contract" (Purchase Payments less any
amounts previously received and excluded from gross income.)
In the case of a complete redemption of a Non-Qualified Contract
(regardless of the date of purchase), the amount received will be taxed as
ordinary income to the extent that it exceeds the Contract Owner's investment in
the Contract.
If a Contract Owner purchases two or more Contracts from the Company (or an
affiliated company) within any twelve month period after October 21, 1988, those
Contracts are treated as a single Contract for purposes of measuring the income
on a partial redemption or complete surrender.
When payments are received as an annuity, the Contract Owner's investment
in the Contract is treated as received ratably over the expected payment period
of the annuity and excluded from gross income as a tax-free return of capital.
Individuals who start receiving annuity payments on or after January 1, 1987,
can exclude from income only their unrecovered investment in the Contract. Where
such individuals die before they have recovered their entire investment in the
Contract on a tax-free basis, they generally are entitled to a deduction of the
unrecovered amount on their final tax return.
In addition to regular income taxes, there is a 10% penalty tax on the
taxable portion of a distribution received before age 59 1/2 under a
Non-Qualified Contract, unless the distribution is: (1) made to a Beneficiary on
or after death of the Contract Owner; (2) made upon the disability of the
Contract Owner; (3) part of a series of substantially equal annuity payments for
the life or life expectancy of the Contract Owner or the Contract Owner and
Beneficiary; (4) made under an immediate annuity contract; or (5) allocable to
Purchase Payments made prior to August 14, 1982.
Required Distributions. In contrast with the required distribution rules
described above for Contracts purchased under employer-sponsored retirement
programs, the Code does not require a Contract Owner under a Non-Qualified
Contract to commence receiving distributions at any particular time and does not
limit the duration of annuity payments. However, upon the death of the Contract
Owner prior to the commencement of annuity payments, the amount accumulated
under the Contract must be distributed within five years or, if distributions to
a beneficiary designated under the Contract start within one year of the
Contract Owner's death, distributions are permitted over the life of the
beneficiary or over a period not extending beyond the beneficiary's life
expectancy. If the Contract Owner has started receiving annuity distributions
prior to his death, distributions must continue at least as rapidly as under the
method in effect at the date of his death.
Tax-Free Exchanges. Certain of the Non-Qualified single payment deferred
annuity contracts permit the Contract Owner to exchange his contract for a new
deferred annuity contract prior to the commencement of annuity payments. Under
section 1035 of the Code, the exchange of one annuity contract for another is
not a taxable transaction, but is reportable to the IRS.
40
<PAGE> 41
EFFECT OF TAX-DEFERRED ACCUMULATIONS
The charts below compare accumulations attributable to contributions to (1)
Contracts purchased with pre-tax contributions under tax-favored retirement
programs, (2) Non-Qualified Contracts purchased with after tax contributions and
(3) conventional savings vehicles such as savings accounts.
TAX-DEFERRED ACCUMULATION
[Bar Graph]
This hypothetical chart compares the results of contributing $100 per month
($138.89 for the tax-favored program because contributions are before-tax). It
assumes a 28% tax rate and an 8% fixed rate of return (before fees and charges).
The deduction of fees and charges is reflected in the chart. The dotted lines
represent amounts remaining after withdrawal and payment of taxes and any
surrender charges. An additional 10% tax penalty may apply to withdrawals before
age 59 1/2.
Unlike savings accounts, contributions to tax-favored retirement programs
and Non-Qualified Contracts provide tax-deferred treatment on earnings. In
addition, contributions to tax-favored retirement programs ordinarily are not
subject to income tax until withdrawn. As shown above, investing in a
tax-favored program increases the accumulation power of savings over time. The
more taxes saved and reinvested in the program, the more the accumulation power
effectively grows over the years.
To further illustrate the advantages of tax-deferred savings using a 28%
Federal tax bracket, an annual fixed yield (BEFORE THE DEDUCTION OF ANY FEES OR
CHARGES) of 8% under a tax-favored retirement program in which tax savings were
reinvested has an equivalent annual fixed yield of 5.76% under a conventional
savings program. THE 8% YIELD ON THE TAX-FAVORED PROGRAM WILL BE REDUCED BY THE
IMPACT OF INCOME TAXES UPON WITHDRAWAL. The yield will vary depending upon the
timing of withdrawals. The previous chart shows the actual after-tax amounts
that would be received.
As indicated above, contributions to tax-favored retirement programs are
not subject to Federal income tax unless and until withdrawn. Accumulations
under tax-favored retirement programs are not required to be withdrawn until age
70 1/2. There may be restrictions on withdrawals of certain types of
contributions until age 59 1/2, separation from service, death, disability or
hardship. Withdrawals before age 59 1/2 generally are subject to a 10% penalty
tax in addition to regular income tax, but withdrawals may be eligible for total
or partial rollover to an IRA or another retirement program.
By taking into account the current deferral of taxes, these contributions
to tax-favored retirement programs, increase the amount available for savings by
decreasing the relative current out-of-pocket cost of the investment. The chart
below illustrates this principle:
PAYCHECK COMPARISON
<TABLE>
<CAPTION>
TAX-FAVORED
RETIREMENT SAVINGS
PROGRAM ACCOUNT
------- -------
<S> <C> <C>
Set Aside..................... $ 2,500 $ 2,500
Tax Deferred until
withdrawal.................. (700) --
Current Out-of-Pocket......... $ 1,800 $ 2,500
</TABLE>
This chart compares a $2,500 contribution and assumes a 28% Federal tax
bracket.
FUND DIVERSIFICATION
Separate Account investments must be adequately diversified in order for
the increase in the value of Non-Qualified Contracts to receive tax-deferred
treatment. In order to be adequately diversified, each portfolio of the Fund
must, as of the end of each calendar quarter or within 30 days thereafter, have
no more than 55% of its assets invested in any one investment, 70% in any two
investments, 80% in any three investments and 90% in any four investments.
Failure of a Fund portfolio to meet the diversification requirements could
result in tax liability to Non-Qualified Contract Owners.
Each of the portfolios of the Fund expects to meet the diversification
requirements above and assure tax deferred treatment for holders of any
Non-Qualified Contracts.
The investment opportunities of the Fund could conceivably be limited by
adhering to the above diversification requirements. This would affect all
Contract Owners, including those own-
41
<PAGE> 42
ers of Qualified Contracts for whom diversification is not a requirement for
tax-deferred treatment.
VOTING RIGHTS
The Contract Owner during the Accumulation Period, the Annuitant during the
Annuity Period, or the Beneficiary after the Annuitant's death, will be entitled
to give instructions to the Company as to how Fund shares held in the Divisions
attributable to the Participant Account or variable annuity should be voted at
meetings of shareholders of the Series Company. Those persons entitled to give
voting instructions will be determined as of the record date for the meeting.
During the Accumulation Period, each Annuitant (other than Annuitants under
Contracts issued in connection with non-qualified and unfunded deferred
compensation plans) will have the right to give instructions for those votes,
notwithstanding that the Contract Owner may be the Annuitant's employer.
Contract Owners will instruct the Company in accordance with such instructions.
The number of Fund shares held in a Division deemed attributable to a
Participant Account prior to the Annuity Date and during the lifetime of the
Annuitant will be determined on the basis of the value of Accumulation Units
credited to the Participant Account as of the record date. On or after the
Annuity Date or after the death of the Annuitant, the number of Fund shares
deemed attributable to the Participant Account will be based on the liability
for future variable annuity payments to the payee under the Contract as of the
record date. Such liability for future payments will be calculated on the basis
of the mortality assumptions and the Assumed Investment Rate used in determining
the number of Annuity Units credited to the Participant Account and the
applicable Annuity Unit value on the record date. During the Annuity Period, the
number of votes attributable to a variable annuity will generally decrease since
funds set aside for an Annuitant will decrease.
Persons who are entitled to vote will receive proxy material and a form on
which voting instructions may be given. Fund shares held in the Separate Account
or any other registered separate account of the Company or its affiliates that
are or are not attributable to annuity contracts as to which no instructions
have been received will be voted for or against any proposition in the same
proportion as the shares for which voting instructions have been received by
that separate account. Fund shares held in unregistered separate accounts of the
Company or its affiliates will be voted in the same proportion as the aggregate
of (a) the shares for which voting instructions are received and (b) the shares
that are voted in proportion to such voting instructions. However, if the
Company or an affiliate determines that it is permitted to vote any such shares
of the Fund in its own right, it may elect to do so, subject to the then current
interpretation of the 1940 Act and the rules thereunder.
OTHER VARIABLE ANNUITY
CONTRACTS
In addition to the Contracts described in this prospectus, the Company has
made the Separate Account available to fund other group and individual variable
annuity contracts, formerly funded through the Company's Separate Account One
and the Company's Separate Account Two. These Contracts, which are funded
exclusively through Division Ten of the Separate Account, impose different
charges at the Separate Account level than the ones imposed on the Contracts
described in this prospectus.
The other contracts listed above are described in and offered pursuant to
separate prospectuses.
EXCHANGE OFFERS
GENERAL
The Company is making an exchange offer to annuitants and contract owners
under certain of its outstanding fixed annuity contracts (including both "Fixed
Contracts" and "Compounder Contracts") or under certain outstanding variable
annuity contracts formerly issued through the Company's Separate Account One
("SA-1 Contracts"), Separate Account Two ("SA-2 Contracts"), and certain
variable annuity contracts currently issued through Separate Account A ("UIT-981
Contracts"). The exchange will be available only as to contracts under which the
Company has not yet started making annuity payments. Eligible annuitants and
contract owners may exchange their current Fixed, Compounder SA-1, SA-2, and/or
UIT-981 Contracts ("Existing Contracts") for one of the new variable annuity
Contracts ("New Contracts") of the type described in this prospectus.
42
<PAGE> 43
The New Contract will have the same accumulation value as the exchanged
Existing Contract and, in addition, will have certain new features which may
prove advantageous. Annuitants under New Contracts may choose up to seven of the
ten available investment options, including two fixed accumulation options,
whereas fewer options are available under the Existing Contracts. Also, the New
Contracts have a surrender charge rather than the front end sales load imposed
under the SA-1, SA-2 and Compounder Contracts. Fees and charges under the New
Contracts are different from those under Existing Contracts, and in some cases
may be higher, and the guaranteed annuity rates may be less favorable.
Differences between New and Existing Contracts are described more fully below.
DIFFERENCES BETWEEN NEW AND EXISTING CONTRACTS
If you currently have a Fixed or a Compounder Contract, you should refer to
the form of contract (or certificate thereunder) for its terms and conditions.
You should refer to the most recently dated prospectus for a complete
description of your variable annuity contract's terms and conditions. That
prospectus is incorporated herein by reference, and you may obtain an additional
copy free of charge by contacting the nearest Regional Office of the Company.
(The addresses for these offices appear on the inside back cover of this
prospectus.) The most important differences between Existing Contracts and New
Contracts are discussed below.
Sales Charges. Under the SA-1, SA-2 and Compounder Contracts, a sales and
administrative charge is deducted from each purchase payment. This charge ranges
from 5% on the first $5,000 of purchase payments to 3% of purchase payments in
excess of $15,000.
Under the Fixed and UIT-981 Contracts, no sales charge is deducted at the
time a purchase payment is made, but a surrender charge may be imposed on total
or partial surrenders. The surrender charge under UIT-981 Contracts is equal to
5% of any purchase payments withdrawn within three years of the date such
purchase payments were made. The surrender charge under the Fixed Contracts is
equal to 7% of purchase payments withdrawn within five years of the date such
purchase payments were made. For these purposes, the most recent purchase
payments are deemed to be withdrawn first. A partial surrender of up to 10% of
the account value may be made once in a Participant Year without any surrender
charge being imposed. No surrender charge is imposed if an account under a Fixed
Contract has been in effect for fifteen years, if an individual type Existing
Contract is exchanged for a group type New Contract, different state
nonforfeiture law provisions may be applicable, which could result in a lesser
amount being payable on surrender than otherwise would be the case.
The New Contracts also impose a charge upon total or partial surrenders and
do not deduct a sales charge at the time a purchase payment is made. The
surrender charge under the New Contracts may not exceed 5% of any purchase
payments which are withdrawn within five years of the date such purchase
payments were made. The most recent purchase payments are deemed to be withdrawn
first. Furthermore, a partial surrender of up to 10% of the account value may be
made once in a Participant Year free of any surrender charge which would
otherwise apply. The Company may decrease the surrender charge applicable to a
particular New Contract if it estimates that its expenses will be lower for that
Contract. No surrender charge is imposed: (a) if an account has been in effect
for fifteen years, (b) if the employee has maintained the account for a period
of seven years and has attained the age of 59 1/2, or (c) the Participant is
disabled. For purposes of satisfying these fifteen-year and seven-year holding
period requirements, the New Contract or certificate thereunder will be deemed
to have been issued on the same date as the Existing Contract or certificate
thereunder, but no earlier than January 1, 1982.
A sales charge has already been paid on purchase payments made in the past
under SA-1, SA-2 and Compounder Contracts. Therefore, if an SA-1, SA-2 or
Compounder Contract is exchanged for a New Contract, the surrender charge under
the New Contract will not apply to the amount of accumulation value applied to
the New Contracts (the "Exchanged Amount.") Purchase payments made subsequent to
the exchange, however, will be subject to the surrender charge under the New
Contracts. In the case of a partial surrender, all such subsequent purchase
payments will be deemed to be withdrawn before any of the Exchanged Amount is
deemed to be withdrawn. No exchange pursuant to this offer will be allowed
within 120 days of a transfer of fixed
43
<PAGE> 44
accumulations under an SA-1 or SA-2 contract to the variable portion of such
contract.
If a UIT-981 or Fixed Contract is exchanged for a New Contract, the
surrender charge under the UIT-981 or Fixed Contract will not apply to the
exchanged amount. However, in the case of a total or partial surrender, Purchase
Payments under the UIT-981 Contract or under the Fixed Contract, which were
exchanged into a New Contract and which were made within three years before the
date of the exchange in the case of the UIT-981 Contract or within five years
before the date of the exchange in the case of the Fixed Contract (Exchanged
Purchase Payments) will be subject to a surrender charge under the New Contract
if withdrawn within five years of the date the Exchanged Purchase Payments were
made. Exchanged Purchase Payments will be deemed to have been made under the New
Contract on the date they were made to the Fixed or the UIT-981 Contract for
purposes of calculating the surrender charge under the New Contracts. A 2%
additional surrender charge will be imposed on Exchanged Purchase Payments which
were made under a Fixed Contract within the preceding five years, which were not
previously subject to any surrender charge, and which are withdrawn within one
year after a Fixed Contract is exchanged for a New Contract. For purposes of
this 2% charge, such Exchanged Purchase Payments will be deemed to be withdrawn
first.
Administrative and Risk Charges. Under the SA-1, SA-2 and Compounder
Contracts, a charge of a percentage of each purchase payment is made for
administrative expenses. For Compounder Contracts and most SA-1 and SA-2
Contracts, the charge is 1.25%. For SA-1 and SA-2 Contracts, the charges are
included in the sales charges (see discussion above). An additional daily charge
(at an annual rate of 1% of total net assets attributable to a SA-1 Contract and
ranging from .21% to .85% of total net assets attributable to a SA-2 Contract)
is made for mortality and expense risks assumed by the Company. The total of
these expense charges and certain other charges imposed against SA-1 and SA-2
Contracts is limited to a maximum of the rate imposed on SA-1 and SA-2 Contracts
which was charged on April 1, 1987. (See prospectus for SA-1 and SA-2 Contracts,
dated April 20, 1987.)
Under UIT-981 Contracts, a $30 annual charge is assessed once a year to
cover administrative expenses. The charge may, with prior regulatory approval if
required, be increased or decreased. In addition, a daily charge is made at an
annual rate of 1% of the net asset value allocable to the UIT-981 Contracts to
cover administrative expenses (other than those covered by the annual charge)
and the mortality risk assumed by the Company.
There are no administrative and risk charges under the Fixed Contracts.
Under the New Contracts, a maintenance charge of $20 is assessed for the
first year and an annual charge of $15 is assessed for the second and later
years during the accumulation period. The charge is due in quarterly
installments. The charge may, with prior regulatory approval, if necessary, be
increased or decreased and may be reduced or waived on particular New Contracts
if the Company's administrative expenses are expected to be lower for that
contract.
If a UIT-981 Contract is exchanged for a New Contract on or after the
annual charge is assessed, the maintenance charge will not be refunded. In
addition, the New Contract will be subject to the maintenance charge under the
New Contract.
Variable Investment Alternatives. Under SA-1 and SA-2 Contracts, only one
division of Separate Account A is available, which invests in a portfolio of the
Series Company. This portfolio is managed by the Company for advisory fees at
annual rates ranging from .35% to .75% of the portfolio's average monthly net
assets. (Under a "grandfathering" arrangement, the total advisory fees and
certain other charges imposed against SA-1 and SA-2 Contracts are limited to a
maximum of the rate charged on April 1, 1987. (See the prospectus for those
Contracts dated April 20, 1987.))
Under UIT-981 Contracts, five divisions of Separate Account A are
available, each investing in shares of a different underlying mutual fund of the
Series Company portfolio. The five mutual funds are managed by the Company for
advisory fees at annual rates ranging from .32% to .75% of each respective
portfolio's average daily net assets.
Under the New Contracts, ten divisions of Separate Account A are available,
each investing in a different investment portfolio of the Series Company. The
investment portfolios are managed
44
<PAGE> 45
by the Company for advisory fees at annual rates ranging from .35% to .75% of
each portfolio's average monthly net assets. In addition, two fixed investment
options are available.
Annuity payments under SA-1, SA-2 and UIT-981 Contracts and the New
Contracts may be made on a fixed or variable basis, or a combination of both.
During the period following commencement of annuity payments (the annuity
period), SA-1 and SA-2 Contracts make no provision for transfers from a separate
account to provide a fixed annuity. The option, subject to certain conditions,
is available under the New Contracts as well as under UIT-981 Contracts.
Annuity Options. One option under the New Contracts provides for annuity
payments to be made for a selected number of years between 3 and 30 on a fixed
basis only. Under SA-1, UIT-981, Fixed and Compounder Contracts, this option is
limited to 15 years. Under the SA-1 and SA-2 Contracts, such payments may be on
either a fixed or variable basis. SA-2 Contracts do not provide a designated
period option. Under the UIT-981, SA-1, Fixed and Compounder Contracts, the
designated period option may, subject to adverse tax consequences, be commuted
at any time for its remaining value. No such commutation is available under the
New Contracts.
The SA-1 Contracts provide an option for monthly variable annuity payments
to be made at a level payment basis during each year of the annuity period. The
New Contracts do not provide this option.
To satisfy a Federal tax law requirement, non-spouse beneficiaries under a
New Contract generally must receive the entire benefit payable upon the death of
the Annuitant over their life expectancy or within five years of the Annuitant's
death. This requirement is inapplicable to Existing Contracts or certificates
issued before January 19, 1985 if not exchanged.
Betterment of Rates. The New Contracts, the UIT-981 Contracts and the Fixed
Contracts provide that annuity payments for fixed annuities will be based on
mortality tables then being used by the Company, if more favorable to the
Annuitant than those included in the Contract. The SA-1 Contracts contain a
similar "betterment of rates" provision which is applicable to both fixed and
variable annuities. The Compounder and SA-2 Contracts contain no betterment of
rates provision.
Guaranteed Annuity Rates. Mortality rates have improved since annuity rates
were developed for the Existing Contracts. Therefore, the annuity rates
guaranteed in the New Contracts are less favorable to Contract Owners and
annuitants than those guaranteed in the Existing Contracts. However, the current
annuity rates being charged for fixed annuities under the "betterment of rates"
provisions discussed above are more favorable than those guaranteed under the
New or the Existing Contracts. Of course, no assurance can be given that this
will continue to be true at the time of annuitization for a given contract.
Guaranteed annuity rate tables are set forth in your Existing Contract or in
current endorsements thereto. Those guaranteed for New Contracts are set forth
therein, and copies may be obtained from one of the Company's Regional Offices
listed on the inside back cover of this prospectus.
AGENTS' AND MANAGERS' RETIREMENT PLAN
EXCHANGE OFFER
General. All eligible agents and managers of the Company are allowed to
participate in the Company's Agents' and Managers' Retirement Plan ("Plan"). The
Company is granting to participants in the Plan the right to effect a voluntary
exchange of their units of interest under the SA-1 contracts for the equivalent
units of interest in the New Contracts.
Participants who enter into the voluntary exchange will not incur under the
New Contracts any surrender charges or annual maintenance fees. Other
individuals who are not eligible agents and managers of the Company who may
exchange their units of interest under the SA-1 contracts for the equivalent
units of interest in the New Contracts may have imposed under the New Contract
such charges and fees. All other provisions with regard to exchange offers
referenced in the section entitled "Exchange Offers" will apply to the Agents'
and Managers' Retirement Plan Exchange Offer.
Pursuant to this voluntary exchange offer, participants in the Plan will
have three options to choose from. As to the funding vehicle for their
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<PAGE> 46
purchase payment plan, the participant may choose to:
1. remain in the SA-1 contract.
2. leave current assets in the SA-1 contract and direct future purchase
payments to the New Contract; or
3. transfer all current assets and future purchase payments to the New
Contract.
If the participant chooses to remain in the SA-1 contract, future purchase
payments and current assets will be controlled by the provisions of the SA-1
contract. If the participant chooses to leave current assets in the SA-1
contract and direct future purchase payments to the New Contract, the current
assets will be controlled by the provisions of the SA-1 contract. The future
purchase payments will be controlled by the terms of the New Contract subject to
the exception that surrender charges and annual maintenance fees will not be
imposed under the New Contract. If the participant chooses to transfer all
current assets and future purchase payments to the New Contract, such current
assets and future purchase payments will be controlled by the provisions of the
New Contract subject to the exception that surrender charges and annual
maintenance fees will not be imposed under the New Contract.
Once a participant transfers assets and future purchase payments to the New
Contract the participant will not be permitted to exchange back to the SA-1
contract. If a participant chooses to transfer future purchase payments but not
current assets to the New Contract, the participant will be allowed at a later
date to transfer the current assets to the New Contract. For a complete analysis
of the differences between the SA-1 contract and the New Contract, you should
refer to the section entitled "Differences Between New and Existing Contracts"
and the form of the contract or certificate for its terms and conditions.
TAXES AND CONVERSION COSTS
The Company will impose no fee or charge in connection with conversion.
Please see discussion of "Federal Tax Matters" in the prospectus regarding the
Federal income tax treatment of the New Contracts.
AVAILABILITY OF OFFER
Current owners or annuitants wishing to exchange should contact any
Regional Office at 1-800-44-VALIC for assistance. Partial exchanges are not
permitted and, once this privilege has been exercised, any exchange back to the
Existing Contract will not be made on these terms. This exchange offer is not
applicable to any outstanding fixed annuity contracts except the Compounder
series contracts (Contract Forms C-I-75 and IFA-78) and those fixed contracts on
forms GFA-582 and IFA-582. THE COMPANY RESERVES THE RIGHT TO TERMINATE OR
SUSPEND THE EXCHANGE OFFER AT ANY TIME.
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<PAGE> 47
APPENDIX
Additional Fee Table Example for Independence Plus Contract without a
surrender charge or maintenance fees imposed.
Example #3 -- Assuming no surrender charge or maintenance fees.
Total Expenses. You would pay the following expenses on a $1,000 investment
under a typical Independence Plus Contract without a surrender charge or
maintenance fees imposed, invested in a Separate Account Division as listed
below, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ---- ---- -----
<S> <C> <C> <C> <C>
Stock Index Division................................... $ 14 $ 44 $ 76 $ 166
MidCap Index Division(1)............................... 15 46 79 173
Small Cap Index Division............................... 15 46 79 173
International Equities Division........................ 15 46 79 174
Social Awareness Division.............................. 16 50 86 188
Timed Opportunity Division............................. 16 50 86 188
Capital Conservation Division.......................... 16 50 86 188
Government Securities Division......................... 16 50 86 188
International Government Bond Division................. 16 50 87 189
Money Market Division.................................. 16 50 86 187
</TABLE>
- ---------------
(1) Effective October 1, 1991 the Capital Accumulation Fund changed its name to
the MidCap Index Fund and amended its investment objective, investment
program and investment restrictions accordingly. Total Fund expenses
expressed as a percentage of Fund assets represent expenses of the Capital
Accumulation Fund prior to October 1, 1991.
47
<PAGE> 48
REVOCATION OF TELEPHONE ASSET TRANSFER AUTHORITY
Participant/Contract Owner Name:
------------------------------------------------------------------------
Social Security Number:
------------------------------------------------------------------------
Birth Date:
I am the Participant under or Contract Owner of one or more variable
annuity contracts issued by The Variable Annuity Life Insurance Company
("VALIC"). I hereby instruct VALIC not to accept any telephone instructions to
transfer Accumulation Values among investment options or change the allocation
of future Purchase Payments from me, anyone representing me or anyone
representing himself or herself to be me. I understand as a result of executing
this form that the transfer of Accumulation Values or Annuity Values among
investment options or changes in the allocation of future Purchase Payments may
only be effected upon the receipt by VALIC of my written instructions.
<TABLE>
<S> <C>
- ---------------------------------------------------------------- ------------------------
Participant/Contract Owner Signature Date
Mail this form to any Regional Office (see the last page of your prospectus for addresses) or
to the Home Office at the following address: VALIC, Customer Service A3-01, 2929 Allen
Parkway, Houston, TX 77019.
</TABLE>
48
<PAGE> 49
Please tear off, complete and return the form below to one of our Regional
Offices at the address shown on the inside back cover of this Prospectus. A
Statement of Additional Information may also be ordered by calling
1-800-44-VALIC.
................................................................................
INDEPENDENCE PLUS CONTRACTS
Please send me a free copy of the Statement of Additional Information for The
Variable Annuity Life Insurance Company Separate Account A (Independence Plus
Contract Series).
(Please Print or Type)
- --------------------------------------------------------------------------------
Name: G.A. #
--------------------------------------- ---------------------------
Address: Policy #
--------------------------------------- ---------------------------
---------------------------------------
Social Security Number:
---------------------------------------
- --------------------------------------------------------------------------------
49
<PAGE> 50
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information.................................................................... 2
Marketing Information.................................................................. 2
Types of Variable Annuity Contracts.................................................... 3
Calculation of Surrender Charge........................................................ 5
Illustration of Surrender Charge on Total Surrender............................... 5
Illustration of Surrender Charge on a 10% Partial Surrender Followed by a Full
Surrender........................................................................ 6
Accumulation Unit Value................................................................ 7
Illustration of Calculation of Accumulation Unit Value............................ 7
Illustration of Purchase of Accumulation Units.................................... 7
Performance Calculations............................................................... 7
Money Market Division Yields...................................................... 7
Calculation of Yield for Money Market Division Six........................... 7
Illustration of Calculation of Yield for Money Market Division Six........... 7
Calculation of Effective Yield for Money Market Division Six................. 7
Illustration of Calculation of Effective Yield for Money Market Division
Six........................................................................... 7
Standardized Yield for Divisions Seven, Eight and Thirteen........................ 8
Calculation of Standardized Yield for Divisions Seven, Eight and Thirteen.... 8
Illustration of Calculation of Standardized Yield for Divisions Seven, Eight
and Thirteen.................................................................. 8
Calculation of Average Annual Total Return................................... 8
Performance Information................................................................ 9
Performance Compared to Market Indices............................................ 9
Stock Index Division Ten Performance Compared to S&P 500 Index.................... 11
MidCap Index Division Four Performance Compared to Relevant Index................. 12
Small Cap Index Division Fourteen Performance Compared to Russell 2000 Index...... 13
International Equities Division Eleven Performance Compared to EAFE Index......... 13
Social Awareness Division Twelve Performance Compared to S&P 500 Index............ 14
Timed Opportunity Division Five Performance Compared to S&P 500 Index, Merrill
Lynch Corporate and Government Master Index and Certificate of Deposit Primary
Offering by
New York City Banks, 30 Day Index............................................... 14
Capital Conservation Division Seven Performance Compared to Merrill Lynch
Corporate Master Index.......................................................... 15
Government Securities Division Eight Performance Compared to Lehman Brothers
U.S. Treasury Composite Index................................................... 16
International Government Bond Division Thirteen Performance Compared to Salomon
Brothers Non U.S. Dollar World Government Bond Index............................ 16
Money Market Division Six Performance Compared to Certificate of Deposit Primary
Offering by New York City Banks, 30 Day Index................................... 17
Annuity Payments....................................................................... 17
Assumed Investment Rate........................................................... 17
Amount of Annuity Payments........................................................ 17
Annuity Unit Value................................................................ 19
Illustration of Calculation of Annuity Unit Value................................. 19
Illustration of Annuity Payments.................................................. 19
Distribution of Variable Annuity Contracts............................................. 19
Experts................................................................................ 19
Comments on Financial Statements....................................................... 21
</TABLE>
50
<PAGE> 51
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FOR ADDITIONAL INFORMATION ABOUT THE CONTRACTS
CONTACT YOUR NEAREST REGIONAL OFFICE:
10851 N. Black Canyon Hwy.
Suite 700
Phoenix, AZ 85029
(602) 678-1700
222 South Harbor Blvd.
10th Floor
Anaheim, CA 92805
(714) 774-7844
1900 O'Farrell St.
Suite 390
San Mateo, CA 94403
(415) 574-5433
165 South Union Blvd. West
Suite 1050
Lakewood, CO 80228
(303) 988-3344
10006 N. Dale Mabry Hwy.
Suite 113
Tampa, FL 33618
(813) 961-1611
100 Ashford Center North
Suite 100
Atlanta, GA 30338
(770) 395-4700
230 West Monroe
Suite 1550
Chicago, IL 60606
(312) 368-1001
8555 North River Road
Suite 420
Indianapolis, IN 46240
(317) 574-7145
7310 Ritchie Highway
Suite 800
Glen Burnie, MD 21061
(410) 768-2330
1301 West Long Lake Road
Suite 340
Troy, MI 48098
(810) 641-0022
8500 Normandale Lake Blvd.
Suite 750
Bloomington, MN 55437
(612) 893-1099
410 Amherst Street
Suite 250
Nashua, NH 03063
(603) 883-3840
90 Woodbridge Ctr. Dr.
Suite 410
Woodbridge, NJ 07095
(908) 750-5611
University Tower
3100 Tower Blvd.
Suite 1601, Box 50
Durham, NC 27707
(919) 489-6529
Two Summit Park Drive
Suite 410
Independence, OH 44131
(216) 520-2028
1800 S.W. First Avenue
Suite 505
Portland, OR 97201
(503) 223-6288
1767 Sentry Pkwy. West 19
Suite 300
Blue Bell, PA 19422
(215) 646-8030
5400 LBJ Freeway
Suite 1340
Dallas, TX 75240
(214) 490-1515
800 Gessner
Suite 1280
Houston, TX 77024
(713) 465-2253
THERE ARE ALSO MORE THAN THIRTY BRANCH OFFICES LOCATED THROUGHOUT THE COUNTRY.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019 1-800-44-VALIC
TDD NUMBER 1-800-35-VALIC
FOR UNIT VALUE INFORMATION CALL: 1-800-42-VALIC
FOR ASSET TRANSFERS BY TELEPHONE CALL: 1-800-42-VALIC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 52
LOGO
Printed Matter
Printed in U.S.A. VA 9079 REV 5/96
(C)The Variable Annuity Life Insurance Company, Houston, Texas
Recycled Paper LOGO
<PAGE> 53
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
SEPARATE ACCOUNT A
UNITS OF INTEREST UNDER GROUP AND
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
INDEPENDENCE PLUS CONTRACT SERIES
----------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
----------------------------------------------------------------
FORM N-4 PART B
MAY 1, 1996
This Statement of Additional Information is not a prospectus but contains
information in addition to that set forth in the Prospectus for the Independence
Plus Contract Series* dated May 1, 1996 ("Contracts") and should be read in
conjunction with the Prospectus. The terms used in this Statement of Additional
Information have the same meaning as those set forth in the Prospectus. A
Prospectus may be obtained by calling or writing the Company, or The Variable
Annuity Marketing Company (the "Underwriter") at 2929 Allen Parkway, Houston,
Texas 77019; 1-800-44-VALIC. Prospectuses are also available from regional sales
offices of the Underwriter or from its registered sales representatives.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
General Information.............................. 2
Marketing Information............................ 2
Types of Variable Annuity Contracts.............. 3
Calculation of Surrender Charge.................. 5
Illustration of Surrender Charge on Total
Surrender.................................... 5
Illustration of Surrender Charge on a 10%
Partial Surrender Followed by a Full
Surrender.................................... 6
Accumulation Unit Value.......................... 7
Illustration of Calculation of Accumulation
Unit Value................................... 7
Illustration of Purchase of Accumulation
Units........................................ 7
Performance Calculations......................... 7
Money Market Division Yields................... 7
Calculation of Yield for Money Market Division
Six.......................................... 7
Illustration of Calculation of Yield for Money
Market Division Six.......................... 7
Calculation of Effective Yield for Money Market
Division Six................................. 7
Illustration of Calculation of Effective Yield
for
Money Market Division Six.................... 7
Standardized Yield for Divisions Seven, Eight and
Thirteen....................................... 8
Calculation of Standardized Yield for Divisions
Seven, Eight and Thirteen.................... 8
Illustration of Calculation of Standardized
Yield for Divisions Seven, Eight and
Thirteen..................................... 8
Calculation of Average Annual Total Return..... 8
Performance Information.......................... 9
Performance Compared to Market Indices......... 9
Stock Index Division Ten Performance Compared
to S&P 500 Index............................. 11
MidCap Index Division Four Performance
Compared to Relevant Index................... 12
<CAPTION>
PAGE
---
<S> <C>
Small Cap Index Division Fourteen Performance
Compared to Russell 2000([) Index............ 13
International Equities Division Eleven
Performance Compared to EAFE Index........... 13
Social Awareness Division Twelve Performance
Compared to S&P 500 Index.................... 14
Timed Opportunity Division Five Performance
Compared to S&P 500([) Index, Merrill Lynch
Corporate and Government Master Index and
Certificate of Deposit Primary Offering by
New York City Banks, 30 Day Index............ 14
Capital Conservation Division Seven Performance
Compared to Merrill Lynch Corporate Master
Index........................................ 15
Government Securities Division Eight
Performance Compared to Lehman Brothers U.S.
Treasury Composite Index..................... 16
International Government Bond Division Thirteen
Performance Compared to Salomon Brothers Non
U.S. Dollar World Government Bond Index...... 16
Money Market Division Six Performance Compared
to Certificate of Deposit Primary Offering by
New York City Banks, 30 Day Index............ 17
Annuity Payments................................. 17
Assumed Investment Rate........................ 17
Amount of Annuity Payments..................... 17
Annuity Unit Value............................. 19
Illustration of Calculation of Annuity Unit
Value........................................ 19
Illustration of Annuity Payments............... 19
Distribution of Variable Annuity Contracts..... 19
Experts........................................ 19
Comments on Financial Statements............... 21
</TABLE>
(*The Independence Plus Contract Series is composed of Contract Forms UIT-585
and UITG-585.)
VA 9079-1, REV. 5/96
1
<PAGE> 54
GENERAL INFORMATION
The Variable Annuity Life Insurance Company ("the Company") is a stock life
insurance company organized under the laws of the State of Texas and is engaged
primarily in the offering and issuance of fixed and variable retirement annuity
contracts and combinations thereof. The Company also is licensed to write life
insurance in all states (other than Connecticut) and the District of Columbia,
and annuities in all fifty states and the District of Columbia. The Company is
an indirectly wholly owned subsidiary of American General Corporation (formerly
American General Insurance Company).
On April 18, 1979, the Board of Directors of the Company established
Separate Account A (the Separate Account) in accordance with the Texas Insurance
Code. The Separate Account is registered with the U.S. Securities and Exchange
Commission as a unit investment trust under the Investment Company Act of 1940
(the "1940 Act").
Each Division of the Separate Account invests in the shares of a
diversified, open-end, management-type investment company registered under the
1940 Act, or one of thirteen investment portfolios of a diversified, open-end,
management investment company registered under the 1940 Act. The Separate
Account currently is made up of twenty one Divisions, ten of which are available
as variable investment options under the Contracts (Divisions Four, Five, Six,
Seven, Eight, Ten, Eleven, Twelve, Thirteen and Fourteen), except that Division
Eight is currently not available to Non-Qualified Contracts.
MARKETING INFORMATION
The Company has targeted not-for-profit organizations as the central focus
of its marketing efforts for its Contracts. The Company has utilized as its
general marketing theme the concept that the Company is "America's Retirement
Plan Specialists." Specifically, the Company's marketing thrust is aimed at
individuals and groups associated with public and private schools, colleges and
universities, not-for-profit health care organizations, state and local
governments and other not-for-profit organizations.
This marketing concept has proven to be successful. In the aggregate,
premium deposits to the Company have grown from $37,000 in 1956 to more than
$2.5 billion as of December 31, 1995. The number of aggregate participant
accounts has increased from 155,000 accounts in 1980 to more than 1,390,700
accounts as of December 31, 1995. The number of employer groups which have
purchased Contracts has increased by 83 percent in the past five years to more
than 20,386 as of December 31, 1995. As of December 31, 1995, the Company was
ranked in the top 1 percent of all U.S. life insurance companies with regard to
asset size. As of December 31, 1995 the Company's assets totaled $27 billion.
The Company's growth can also be reviewed by examining the growth in each
market segment that the Company targets.
As of December 31, 1995, the Company was marketing Contracts in more than
7,911 public and private, primary and secondary schools with nearly 401,064
participant accounts for employees in public and private schools nationwide.
From December 31, 1990 to December 31, 1995, the cash value of investments in
these Contracts has increased by 96 percent while the number of public and
private school groups in these Contracts increased 34 percent and the number of
participant accounts in these Contracts increased by 44 percent.
The Company has also increased its marketing efforts to colleges and
universities. From December 31, 1990 to December 31, 1995, the number of
colleges and universities which allow the Company to market Contracts to its
faculty and staff members has increased 72 percent and for the same period the
number of participant accounts has increased 48 percent. For the same time
period cash values for participants have increased 102 percent. As of December
31, 1995 more than 41 percent of United States colleges and universities allow
the Company to market Contracts to their faculty and staff members.
The Company has utilized as the central focus in its marketing to college
and university faculty and staff members the theme that the Company is the
"Alternative of Choice."
The Company has also had growth in the health care segment of the
not-for-profit organiza-
2
<PAGE> 55
tion market. From December 31, 1990 to December 31, 1995 Contract cash values
have increased 199 percent. During the same period the number of health care
groups that have purchased these Contracts increased 78 percent and the number
of participants who were in the Contracts increased 148 percent.
The Company has also experienced growth in contracts sold to state and
local governmental groups. From December 31, 1990 to December 31, 1995, Contract
cash values for participants in these groups have increased 98 percent. For the
same period the number of participant accounts for individuals in these groups
in these Contracts increased 75 percent and the number of employer groups has
increased 101 percent.
Additionally, several states have enacted, as an alternative to state
administered defined benefit retirement programs, Optional Retirement Plans
(ORPs). A state that sponsors an ORP will select the carriers which will be
allowed to participate in the ORP. The Company has been selected as one of the
carriers permitted to market Contracts to state employees who elect to
participate in the ORP in 24 of the last 27 states to sponsor ORPs with multiple
carriers, as of December 31, 1995. From December 31, 1990 to December 31, 1995
in these ORPs the number of participant accounts increased 164 percent and cash
values increased 153 percent to more than $1.5 billion. In addition, during this
time period annual ORP premiums more than doubled.
The Company, in its marketing efforts to each of the market segments, may
from time to time design sales literature and material specifically for that
market segment, e.g., the health care segment of the not-for-profit organization
market. This sales literature and material may also be specific to a certain
group. For example, sales literature and material may be designed for a specific
hospital. The sales literature and material would address specifically the
group's contract and retirement plan.
From time to time the Company may refer to the diversifying process of
asset allocation based on the Modern Portfolio Theory developed by Nobel Prize
winning economist Harry Markowitz. The basic assumptions of Modern Portfolio
Theory are the selection of individual investments has little impact on
portfolio performance, market timing strategies seldom work, markets are
efficient, and portfolio selection should be made among asset classes. Modern
Portfolio Theory allows an investor to determine an efficient portfolio
selection that will provide a higher return with the same risk or the same
return with lower risk.
When presenting the asset allocation process the Company may outline the
process of personal and investment risk analysis including determining
individual risk tolerances and a discussion of the different types of investment
risk. The Company may classify investors into five categories based on their
risk tolerance and will quote various industry experts on which types of
investments are best suited to each of the five risk categories. The industry
experts quoted may include Ibbotson Associates, CDA Investment Technologies,
Lipper Analytical Services, Wilson & Associates and any other expert which has
been deemed by the Company to be appropriate. The Company may also provide a
historical overview of the performance of a variety of investment market
indexes, the performance of these indexes over time, and the performance of
different assets classes, such as stocks, bonds, cash equivalents, etc. The
Company may also discuss investment volatility including the range of returns
for different asset classes and over different time horizons, and the
correlation between the returns of different asset classes. The Company may also
discuss the basis of portfolio optimization including the required inputs and
the construction of efficient portfolios using sophisticated computer-based
techniques. Finally, the Company may describe various investment strategies and
methods of implementation such as the use of index funds vs. actively managed
funds, the use of dollar cost averaging techniques, the tax status of
contributions, and the periodic rebalancing of diversified portfolios.
TYPES OF VARIABLE ANNUITY
CONTRACTS
Three types of Contracts are offered in connection with the Prospectus to
which this Statement of Additional Information relates:
(1) single payment immediate annuity Contracts;
(2) single payment deferred annuity Contracts; and
(3) flexible payment deferred annuity Contracts.
3
<PAGE> 56
Under single payment Contracts, only one Purchase Payment is made by the
Contract Owner. Under flexible payment Contracts, Purchase Payments generally
are made until retirement age is reached. However, no Purchase Payments are
required to be made after the first payment. Purchase Payments are subject to
any minimum payment requirements under the Contract.
Under deferred annuity contracts, Purchase Payments are invested and
accumulate on a fixed or variable basis until the date the Contract Owner
selects to commence annuity payments.
Under immediate annuity Contracts, the first annuity payment is made on the
first day of the second month after the Purchase Payment is received. During the
period before the Annuity Date, the Purchase Payments are invested in the same
manner, and the other terms and conditions (including the options and rights of
Contract Owners, Annuitants and Beneficiaries) are the same under immediate
annuity Contracts as under deferred annuity Contracts.
The Contracts are non-participating and will not share in any of the
profits of the Company.
4
<PAGE> 57
CALCULATION OF SURRENDER CHARGE
The surrender charge is discussed in the Prospectus under "Charges Under
Variable Annuity Contracts -- Charge for Partial and Total Surrenders." Examples
of calculation of the surrender charge upon total and partial surrender are set
forth below:
ILLUSTRATION OF SURRENDER CHARGE ON TOTAL SURRENDER
Example 1.
TRANSACTION HISTORY
<TABLE>
<CAPTION>
DATE TRANSACTION AMOUNT
------------------------------- ------------------------------------------ --------
<S> <C> <C>
2/1/90......................... Purchase Payment $ 10,000
2/1/91......................... Purchase Payment 5,000
2/1/92......................... Purchase Payment 15,000
2/1/93......................... Purchase Payment 2,000
2/1/94......................... Purchase Payment 3,000
2/1/95......................... Purchase Payment 4,000
7/1/95......................... Total Purchase Payments (Assumes
Accumulation Value is $50,000)
Surrender Charge is lesser of (a) or (b):
a. Surrender Charge calculated on 60 months of Purchase Payments
1. Surrender Charge against Purchase Payment of 2/1/90.......................... $ 0
2. Surrender Charge against Purchase Payment of 2/1/91 (0.05 X $5,000).......... $ 250
3. Surrender Charge against Purchase Payment of 2/1/92 (0.05 X $15,000)......... $ 750
4. Surrender Charge against Purchase Payment of 2/1/93 (0.05 X $2,000).......... $ 100
5. Surrender Charge against Purchase Payment of 2/1/94 (0.05 X $3,000).......... $ 150
6. Surrender Charge against Purchase Payment of 2/1/95 (0.05 X $4,000).......... $ 200
Surrender Charge based on Purchase Payments (1 + 2 + 3 + 4 + 5 + 6).......... $ 1,450
b. Surrender Charge calculated on the excess over 10% of the Accumulation Value at the
time of surrender:
Accumulation Value at time of surrender $50,000
Less 10% not subject to surrender charge -5,000
---------
Subject to surrender charge 45,000
X .05
---------
Surrender Charge based on Accumulation Value $2,250 .......................... $ 2,250
c. Surrender Charge is the lesser of a or b........................................... $ 1,450
</TABLE>
5
<PAGE> 58
ILLUSTRATION OF SURRENDER CHARGE ON A 10% PARTIAL SURRENDER FOLLOWED BY A FULL
SURRENDER
Example 2.
TRANSACTION HISTORY (ASSUMES NO INTEREST EARNED)
<TABLE>
<CAPTION>
DATE TRANSACTION AMOUNT
------------------------------- ------------------------------------------ --------
<S> <C> <C>
2/1/90......................... Purchase Payment 5,000
2/1/91......................... Purchase Payment 15,000
2/1/92......................... Purchase Payment 2,000
2/1/93......................... Purchase Payment 3,000
2/1/94......................... Purchase Payment 4,000
2/1/95......................... Purchase Payment $ 10,000
7/1/95......................... 10% Partial Surrender (Assumes 3,900
Accumulation Value is $39,000)
8/1/95......................... Full Surrender 35,100
</TABLE>
a. Since this is the first partial surrender in this participant year,
calculate the excess over 10% of the value of the Accumulation Units.
10% of $39,000 = $3,900 [no charge on this 10% withdrawal]
b. The Accumulation Value upon which Surrender Charge on the Full Surrender
may be calculated (levied) is $39,000 - $3,900 = $35,100
c. The Surrender Charge calculated on the Accumulation Value withdrawn
$35,100 X .05 = $1,755
d. Since only $29,000 has been paid in Purchase Payments in the 60 months
prior to the Full Surrender, the charge can only be calculated on
$29,000. The $3,900 partial withdrawal does not reduce this amount.
Thus, the charge is $29,000 X (0.05) = $1,450.
6
<PAGE> 59
ACCUMULATION UNIT VALUE
The calculation of Accumulation Unit value is discussed in the Prospectus
under "Accumulation Period." The following illustrations show a calculation of a
new Unit value and the purchase of Accumulation Units (using hypothetical
examples):
ILLUSTRATION OF CALCULATION OF ACCUMULATION UNIT VALUE
Example 3.
<TABLE>
<S> <C>
1. Accumulation Unit value, beginning of period....................... $ 1.800000
2. Value of Fund share, beginning of period........................... $ 21.200000
3. Change in value of Fund share...................................... $ .500000
4. Gross investment return (3)/(2).................................... .023585
5. Daily mortality and expense charge................................. .000027
6. Net investment return (4)-(5)...................................... .023558
7. Net investment factor 1.000000+(6)................................. 1.023558
8. Accumulation Unit value, end of period (1)X(7)..................... $ 1.842404
</TABLE>
ILLUSTRATION OF PURCHASE OF ACCUMULATION UNITS (ASSUMING NO STATE PREMIUM TAX)
Example 4.
<TABLE>
<S> <C>
1. First Periodic Purchase Payment.................................... $100.00
2. Accumulation Unit value on effective date of purchase (see Example
3)................................................................. $ 1.800000
3. Number of Accumulation Units purchased (1)/(2)..................... 55.556
4. Accumulation Unit value for valuation date following purchase
(see Example 3).................................................... $ 1.842404
5. Value of Accumulation Units in account for valuation date following
purchase (3)X(4)................................................... $102.36
</TABLE>
PERFORMANCE CALCULATIONS
MONEY MARKET DIVISION YIELDS
CALCULATION OF YIELD FOR MONEY MARKET DIVISION SIX
7-Day Current Yield: 4.15%
ILLUSTRATION OF CALCULATION OF YIELD FOR MONEY MARKET DIVISION SIX
Example 5.
The yield quotation above is based on the seven days ended December 31,
1995, the date of the most recent balance sheet included in the registration
statement ("base period"). It is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one Accumulation Unit at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from Contract
Owner accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return and then
multiplying the base period return by 365/7.
CALCULATION OF EFFECTIVE YIELD FOR MONEY MARKET DIVISION SIX
7-Day Effective Yield: 4.24%
ILLUSTRATION OF CALCULATION OF EFFECTIVE YIELD FOR MONEY MARKET DIVISION SIX
Example 6.
The effective yield quotation above is based on the seven days ended
December 31, 1995, the date of the most recent balance sheet included in the
registration statement ("base period"). It is computed by determining the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one Accumulation Unit at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
Contract Owner accounts, and dividing the difference by the value of the account
at the beginning of the
7
<PAGE> 60
base period to obtain the base period return and then compounding the base
period return by adding 1, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1) 365/7] - 1
STANDARDIZED YIELD FOR DIVISIONS SEVEN, EIGHT AND THIRTEEN
CALCULATION OF STANDARDIZED YIELD FOR DIVISIONS SEVEN, EIGHT AND THIRTEEN
<TABLE>
<CAPTION>
DIV 7 DIV 8 DIV 13
------ ------ ------
<S> <C> <C> <C>
Standardized Yield........................................ 5.23% 5.00% 4.25%
</TABLE>
ILLUSTRATION OF CALCULATION OF STANDARDIZED YIELD FOR DIVISIONS SEVEN, EIGHT AND
THIRTEEN
Example 7.
The yield quotation based on a 30-day period ended December 31, 1995, the
date of the most recent balance sheet of the Registrant included in the
registration statement is computed by dividing the net investment income per
Accumulation Unit earned during the period by the maximum offering price per
Unit on the last day of the period, according to the following formula:
YIELD = 2 [ ( a - b + 1 )6 - 1 ]
----------------------------------------------
cd
Where:
<TABLE>
<C> <S>
a = net investment income earned during the period by the Fund attributable to
shares owned by the Division
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the
period
d = the maximum offering price per Accumulation Unit on the last day of the
period
</TABLE>
Yield on each Division is earned from dividends declared and paid by the
Fund, which are automatically reinvested in Fund shares.
CALCULATION OF AVERAGE ANNUAL TOTAL RETURN
Average Annual Total Return quotations for the 1, 3, 5, and 10 year periods
ended December 31, 1995, the date of the most recent balance sheet included in
this registration statement, are computed by finding the average annual
compounded rates of return over the 1, 3, 5, and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P (1+T)n = ERV
Where:
<TABLE>
<C> <S>
P = a hypothetical initial Purchase Payment of $1,000
T = average annual total return
n = number of years
ERV = redeemable value at the end of the 1, 3, 5 or 10 year periods of a
hypothetical $1,000 Purchase Payment made at the beginning of the 1, 3,
5, or 10 year periods (or fractional portion thereof)
</TABLE>
The Company may advertise standardized average annual total return which
includes the surrender charge of up to 5% of Gross Purchase Payments received
during the most recent
60 months as well as non-standardized average annual total returns which does
not include a surrender charge or maintenance fee.
8
<PAGE> 61
There is no sales charge for reinvested dividends. All recurring fees have
been deducted. For fees which vary with the account size, an account size equal
to that of the median account size has been assumed. Ending redeemable
value has been determined assuming a complete redemption at the end of the 1, 5
or 10 year period and deduction of all nonrecurring charges at the end of each
such period.
PERFORMANCE INFORMATION
PERFORMANCE COMPARED TO MARKET INDICES
The following tables show the Hypothetical $10,000 Account Value and
Cumulative Return of each Division as compared to the benchmarks shown.
These performance calculations for the Divisions, and the methods used for
calculating them, are explained in the Prospectus. (See "Performance
Information" and "The Fund.")
These tables compare hypothetical investment performance and percentage
changes in Accumulation Unit values with the results of several benchmarks,
representing unmanaged market indices. The comparisons should be considered in
light of the investment policies and objectives of the Funds. Rates of return
for the Divisions include reinvestment of investment income, including capital
gains, interest and dividends. The rates of return on the market indices also
have been adjusted to reflect reinvestment of interest and dividends.
Price returns for the market indices are calculated by subtracting the
price level at the beginning of the year from the price level at the end of the
year and dividing the difference by the price level at the beginning of the
year. To calculate dollar values for the indices' Hypothetical $10,000 Account
Value presentation, price index values were substituted for Unit values in the
calculation described in the Prospectus, and where applicable, dividend yields
were then added to determine the total returns applied in the dollar value
calculations. Similarly, to calculate Cumulative Return for the indices, the
Cumulative Return calculation described in the Prospectus for Unit values of the
Divisions is used, substituting the Hypothetical $10,000 Account Value at the
end of each year for the Accumulation Unit Value. No sales load, administrative
charges, or any other expenses have been deducted from the index calculations.
The performance results shown in this section are not an estimate or guarantee
of future investment performance, and do not represent the actual experience of
amounts invested by a particular Participant.
The performance of Stock Index Division Ten and Social Awareness Division
Twelve may be compared to the record of the Standard & Poor's([) Corporation
("S&P([)")* Composite Stock Price Index ("S&P 500 Index"). The S&P 500([) Index
is a well known measure of the price performance of 500 leading larger domestic
stocks which represents approximately 80% of the market capitalization of the
United States equity market. The index is an unmanaged weighted index of 500
industrial, transportation, utility and financial companies.
The performance of MidCap Index Division Four may be compared to the record
of the S&P MidCap 400 Index. The S&P MidCap 400 Index was developed in 1991 by
S&P to track the stock market performance of medium-capitalization domestic
stocks. The S&P MidCap 400 Index is market weighted and consists of 400 stocks
of domestic companies having a median market capitalization of approximately
$600 million. Stocks included in the S&P MidCap 400 Index are chosen on the
basis of their market size, liquidity and industry group representation. No
stocks included in the S&P 500 Index are included in the S&P MidCap 400 Index.
The performance of Money Market Division Six may be compared to the
Certificate of Deposit Primary Offering by New York City Banks, 30 Day Index.
The index is a money market index which reflects the average rate paid by New
York Banks on certificates of deposit of more than $100,000. The Index for 30
days is published daily.
The performance of Capital Conservation Division Seven may be compared to
the Merrill Lynch Corporate Master Index. The Merrill Lynch Corporate Master
Index consists of an index of approximately 4000 corporate bond holdings of
which assets are rated A or AA. The average years to maturity of these corporate
bond holdings are approximately 7 years.
Performance of Government Securities Division Eight may be compared to the
Lehman Brothers U.S. Treasury Composite Index. The Lehman Brothers U.S. Treasury
Composite Index consists of an index of approximately 500 govern-
9
<PAGE> 62
ment securities issues with all such issues having a maturity of greater than
one year.
The performance of International Equities Division Eleven may be compared
to the Morgan Stanley Capital International Europe, Australia and Far East Index
("EAFE Index"). The EAFE Index, which commenced in 1969, is an unmanaged stock
index consisting of more than 900 companies from Europe, Australia and the Far
East. The index is capitalization weighted. It is a well known measure for
international stock performance. This index is published using two methods, each
of which includes reinvestment of dividends received. The first method includes
gross dividends declared without subtracting foreign income taxes which may be
withheld from foreign investors. The second method includes net dividends after
subtracting estimated foreign taxes from gross dividends declared. The Division
currently compares its performance with the index using the second method.
The performance of the International Government Bond Fund Division Thirteen
may be compared to the Salomon Brothers Non-US Dollar World Government Bond Fund
("Salomon Index"). This index is published using two methods. The first method
includes income earned without subtracting foreign income taxes which may be
withheld from foreign investors. The second method includes income earned after
subtracting estimated foreign taxes. The Division currently compares its
performance with the index using the second method. The Salomon Index is an
unmanaged aggregate index composed of 690 issues from thirteen foreign
countries. These countries include Austria, Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United
Kingdom.
The performance of the Small Cap Index Division Fourteen may be compared
with the Russell 2000([) Index ("Russell 2000").** The Russell 2000 was
developed in 1984 by the Frank Russell Company to track the stock market
performance of small capitalization domestic stocks. The Russell 2000 is market
weighted and consists of approximately 2000 stocks. Stocks included in the
Russell 2000 are chosen by the Frank Russell Company on the basis of their
market size.
The performance of Timed Opportunity Division Five may be compared to a
benchmark comprised of a weighted average of three market sectors corresponding
to the three market sectors in which the Division, through the Timed Opportunity
Fund, will invest as follows: 55% in equity securities, 35% in intermediate or
long-term debt securities and 10% in money market or short-term debt securities,
regardless of the Division's actual asset allocation. The performance of the
equity securities sector of the Division may be compared to the S&P 500 Index.
The performance of the intermediate or long-term debt securities sector may be
compared to the Merrill Lynch Corporate and Government Master Index. The Merrill
Lynch Corporate and Government Master Index consists of an index of
approximately 5000 corporate and government bond holdings. The average maturity
of these corporate bond holdings is approximately 10 years. The performance of
the money market or short-term debt securities sector may be compared to the
Certificate of Deposit Primary Offering by New York City Banks, 30 Day Index.
Additionally, the performance of a Division may from time to time be
compared with other Indexes which have been deemed by the Company relevant to
the Division.
These benchmarks do not reflect any charges for investment advisory fees,
brokerage commissions or other fees and expenses of the type charged at either
the Separate Account or Fund level. Therefore, the comparisons with these
benchmarks are of limited use.
- ---------------
* "Standard & Poor's([)", "S&P([)", "S&P 500([)" and "S&P MidCap 400" are
trademarks of Standard and Poor's Corporation. Neither the MidCap Index Fund
nor the Stock Index Fund is sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in these
Funds.
** The Russell 2000([) Index is a trademark/service mark of the Frank Russell
Trust Company. RussellTM is a trademark of the Frank Russell Company.
10
<PAGE> 63
Stock Index Division Ten Performance Compared to S&P 500 Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE APRIL 20, 1987
<TABLE>
<CAPTION>
STOCK INDEX S&P 500
DIVISION TEN INDEX
-------------------------------------------------------------------- --------
<S> <C> <C>
04/20/87................................................. $ 10,000 $ 10,000
12/31/87................................................. 8,562 8,722
12/31/88................................................. 9,687 10,171
12/31/89................................................. 12,388 13,394
12/31/90................................................. 11,790 12,978
12/31/91................................................. 15,056 16,932
12/31/92................................................. 15,897 18,222
12/31/93................................................. 17,293 20,059
12/31/94................................................. 17,241 20,323
12/31/95................................................. 23,439 27,960
</TABLE>
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION* 5 YEARS 3 YEARS 1 YEAR
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Investment Division
Stock Index Division Ten...... 134.39% 98.80% 47.44% 35.95%
Benchmark Comparison
S&P 500 Index................. 179.60% 115.45% 53.44% 37.58%
</TABLE>
- ---------------
* This Division was initiated on April 20, 1987.
11
<PAGE> 64
MidCap Index Division Four* Performance Compared to S&P 500 Index and S&P MidCap
400 Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE OCTOBER 13, 1982
<TABLE>
<CAPTION>
S&P
S&P MIDCAP
500 400
DIVISION FOUR INDEX INDEX
--------------------------------------------------- -------- --------
<S> <C> <C> <C>
10/13/82................................ $ 10,000 $ 10,000 $ 10,000
12/31/82................................ 10,096 11,352 11,564
12/31/83................................ 11,608 13,913 14,583
12/31/84................................ 11,721 14,786 14,755
12/31/85................................ 13,195 19,477 20,004
12/31/86................................ 13,516 23,113 23,247
12/31/87................................ 12,827 24,326 22,774
12/31/88................................ 14,502 28,367 27,527
12/31/89................................ 17,127 37,355 37,310
12/31/90................................ 15,380 36,195 35,401
12/31/91................................ 18,580 47,223 53,136
12/31/92................................ 20,213 50,820 59,466
12/31/93................................ 22,594 55,943 67,762
12/31/94................................ 21,532 56,681 65,332
12/31/95................................ 27,827 77,981 85,547
</TABLE>
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION** 10 YEARS 5 YEARS 3 YEARS 1 YEAR
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Investment Division
Division Four............. 178.27% 110.89% 80.93% 37.67% 29.24%
Benchmark Comparison
S&P 500 Index............. 679.81% 300.37% 115.45% 53.44% 37.58%
S&P MidCap 400 Index...... 755.47% 327.64% 141.65% 43.86% 30.94%
</TABLE>
- ---------------
* Effective October 1, 1991, the Capital Accumulation Fund changed its name to
the MidCap Index Fund and revised its investment objective, investment
program and investment restrictions accordingly, pursuant to contract owner
vote. Selected accumulation unit data for the last ten years for this
Division appears in the Prospectus. Figures appearing above for the S&P
MidCap 400 Index for years prior to 1991 are based on estimates provided by
Standard & Poor's for illustrative purposes.
** This Division was initiated on October 13, 1982.
12
<PAGE> 65
Small Cap Index Division Fourteen Performance Compared to Russell 2000 Index(R)
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE MAY 1, 1992
<TABLE>
<CAPTION>
RUSSELL
SMALL CAP INDEX 2000
DIVISION 14 INDEX
-------------------------------------------------------------------- --------
<S> <C> <C>
05/01/92................................................. $ 10,000 $ 10,000
12/31/92................................................. 11,128 11,416
12/31/93................................................. 12,772 13,571
12/31/94................................................. 12,223 13,324
12/31/95................................................. 15,449 17,114
</TABLE>
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION* 3 YEARS 1 YEAR
------- ------- -------
<S> <C> <C> <C>
Investment Division
Small Cap Index Division 14........................ 54.49% 38.83% 26.39%
Benchmark Comparison
Russell 2000....................................... 71.14% 49.92% 28.45%
</TABLE>
- ---------------
* This Division was initiated May 1, 1992.
International Equities Division Eleven Performance Compared to EAFE Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE OCTOBER 2, 1989
<TABLE>
<CAPTION>
INTERNATIONAL EQUITIES EAFE
DIVISION ELEVEN INDEX
-------------------------------------------------------------------- --------
<S> <C> <C>
10/02/89................................................. $ 10,000 $ 10,000
12/31/89................................................. 10,284 10,467
12/31/90................................................. 8,134 8,013
12/31/91................................................. 8,952 8,984
12/31/92................................................. 7,671 7,891
12/31/93................................................. 9,864 10,460
12/31/94................................................. 10,545 11,274
12/31/95................................................. 11,565 12,537
</TABLE>
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION* 5 YEARS 3 YEARS 1 YEAR
------- ------- ------- -------
<S> <C> <C> <C> <C>
Investment Division
International Equities
Division Eleven............... 15.65% 42.17% 50.75% 9.67%
Benchmark Comparison
EAFE Index...................... 25.37% 56.46% 58.88% 11.21%
</TABLE>
- ---------------
* This Division was initiated on October 2, 1989.
13
<PAGE> 66
Social Awareness Division Twelve Performance Compared to S&P 500 Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE OCTOBER 2, 1989
<TABLE>
<CAPTION>
SOCIAL AWARENESS S&P 500
DIVISION TWELVE INDEX
-------------------------------------------------------------------- --------
<S> <C> <C>
10/02/89................................................. $ 10,000 $ 10,000
12/31/89................................................. 10,100 10,214
12/31/90................................................. 9,877 9,897
12/31/91................................................. 12,506 12,912
12/31/92................................................. 12,795 13,896
12/31/93................................................. 13,670 15,297
12/31/94................................................. 13,339 15,499
12/31/95................................................. 18,351 21,323
</TABLE>
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION* 5 YEARS 3 YEARS 1 YEAR
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Investment Division
Social Awareness Division Twelve.... 83.51% 85.80% 43.42% 37.57%
Benchmark Comparison
S&P 500 Index....................... 113.23% 115.45% 53.44% 37.58%
</TABLE>
- ---------------
* This Division was initiated on October 2, 1989.
Timed Opportunity Division Five Performance Compared to S&P 500 Index,
Merrill Lynch Corporate and Government Master Index and Certificate of
Deposit Primary Offering by New York City Banks, 30 Day Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE SEPTEMBER 6, 1983
<TABLE>
<CAPTION>
TIMED OPPORTUNITY S&P 500 BLENDED
DIVISION FIVE INDEX INDEX**
--------------------------------------------------- -------- --------
<S> <C> <C> <C>
09/06/83................................ $ 10,000 $ 10,000 $ 10,000
12/31/83................................ 9,857 10,156 10,252
12/31/84................................ 9,853 10,793 11,269
12/31/85................................ 11,004 14,217 14,177
12/31/86................................ 11,987 16,871 16,536
12/31/87................................ 12,862 17,757 17,472
12/31/88................................ 13,973 20,706 19,669
12/31/89................................ 16,182 27,267 24,213
12/31/90................................ 15,634 26,420 24,748
12/31/91................................ 18,782 34,470 30,404
12/31/92................................ 18,460 37,095 32,608
12/31/93................................ 19,973 40,834 35,770
12/31/94................................ 19,515 41,373 35,769
12/31/95................................ 24,110 56,921 45,566
</TABLE>
14
<PAGE> 67
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION* 10 YEARS 5 YEARS 3 YEARS 1 YEAR
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Investment Division
Timed Opportunity Division Five... 141.10% 119.10% 54.21% 30.61% 23.55%
Benchmark Comparison**
S&P 500 Index................. 469.21% 300.37% 115.45% 53.44% 37.58%
Blended Index................. 355.66% 221.41% 84.12% 39.74% 27.39%
</TABLE>
- ---------------
* This Division was initiated on September 6, 1983.
** The Blended Index reflects an allocation of investments in the following
Indexes: 55% of investments included in the S&P 500 Index, 35% of investments
included in the Merrill Lynch Corporate and Government Master Index, and 10%
of investments included in the Certificate of Deposit Primary Offering by New
York City Banks, 30 Day Index.
Capital Conservation Division Seven Performance Compared to Merrill Lynch
Corporate Master Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE JANUARY 16, 1986
<TABLE>
<CAPTION>
MERRILL LYNCH
CAPITAL CONSERVATION CORPORATE MASTER
DIVISION SEVEN INDEX
---------------------------------------------------------------- --------
<S> <C> <C>
01/16/86............................................. $ 10,000 $ 10,000
12/31/86............................................. 10,477 11,609
12/31/87............................................. 10,186 11,823
12/31/88............................................. 10,789 12,976
12/31/89............................................. 11,936 14,808
12/31/90............................................. 11,784 15,899
12/31/91............................................. 13,669 18,799
12/31/92............................................. 14,702 20,514
12/31/93............................................. 16,301 23,064
12/31/94............................................. 15,153 22,288
12/31/95............................................. 18,120 27,097
</TABLE>
<TABLE>
<CAPTION>
SINCE
INCEPTION* 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Investment Division
Capital Conservation Division Seven..... 81.20% 53.77% 23.25% 19.58%
Benchmark Comparison
Merrill Lynch Corporate Master Index.... 170.97% 70.43% 32.09% 21.58%
</TABLE>
- ---------------
* This Division was initiated on January 16, 1986.
15
<PAGE> 68
Government Securities Division Eight Performance Compared to Lehman Brothers
U.S. Treasury Composite Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE JANUARY 16, 1986
<TABLE>
<CAPTION>
U.S.
TREASURY
GOVERNMENT SECURITIES COMPOSITE
DIVISION EIGHT INDEX
-------------------------------------------------------------------- --------
<S> <C> <C>
01/16/86................................................. $ 10,000 $ 10,000
12/31/86................................................. 10,461 11,630
12/31/87................................................. 10,120 11,862
12/31/88................................................. 10,621 12,694
12/31/89................................................. 11,792 14,516
12/31/90................................................. 12,371 15,765
12/31/91................................................. 14,052 18,187
12/31/92................................................. 14,915 19,502
12/31/93................................................. 16,362 21,597
12/31/94................................................. 15,472 20,857
12/31/95................................................. 17,995 24,684
</TABLE>
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION* 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Investment Division
Government Securities Division Eight.... 79.95% 45.46% 20.65% 16.31%
Benchmark Comparison
U.S. Treasury Composite Index........... 146.84% 56.57% 26.57% 18.35%
</TABLE>
- ---------------
* This Division was initiated on January 16, 1986.
International Government Bond Division Thirteen Performance Compared to Salomon
Brothers Non-U.S. Dollar World Government Bond Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
QUARTERLY VALUE OF A $10,000 STIPULATED PAYMENT MADE OCTOBER 1, 1991
<TABLE>
<CAPTION>
SALOMON
BROS.
NON-U.S.
DOLLAR
WORLD
GOVERNMENT
INTERNATIONAL GOVERNMENT BOND BOND
DIVISION THIRTEEN INDEX
-------------------------------------------------------------------- --------
<S> <C> <C>
10/01/91................................................. $ 10,000 $ 10,000
12/31/91................................................. 10,905 11,042
12/31/92................................................. 11,128 11,540
12/31/93................................................. 12,583 13,246
12/31/94................................................. 13,014 13,999
12/31/95................................................. 15,308 16,692
</TABLE>
16
<PAGE> 69
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION* 3 YEARS 1 YEAR
-------- ------- ------
<S> <C> <C> <C>
Investment Division
International Government Bond Division Thirteen.... 53.08% 37.56% 17.63%
Benchmark Comparison
Salomon Bros. Non-U.S. Dollar World Government Bond
Index.............................................. 66.92% 44.64% 19.23%
</TABLE>
- ---------------
* This Division was initiated on October 1, 1991.
Money Market Division Six Performance Compared to Certificate of Deposit Primary
Offering by New York City Banks, 30 Day Index (Primary CD Index)
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE JANUARY 16, 1986
<TABLE>
<CAPTION>
MONEY MARKET PRIMARY
DIVISION SIX CD INDEX
-------------------------------------------------------------------- --------
<S> <C> <C>
01/16/86................................................. $ 10,000 $ 10,000
12/31/86................................................. 10,405 10,591
12/31/87................................................. 10,873 11,253
12/31/88................................................. 11,495 12,083
12/31/89................................................. 12,406 13,130
12/31/90................................................. 13,254 14,181
12/31/91................................................. 13,849 14,955
12/31/92................................................. 14,157 15,427
12/31/93................................................. 14,393 15,826
12/31/94................................................. 14,791 16,390
12/31/95................................................. 15,458 17,200
</TABLE>
CUMULATIVE RETURN COMPARED TO MARKET INDEX
<TABLE>
<CAPTION>
SINCE
INCEPTION* 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Investment Division
Money Market Division Six...... 54.58% 16.63% 9.19% 4.51%
Benchmark Comparison
Primary CD Index............... 72.00% 21.29% 11.50% 4.94%
</TABLE>
- ---------------
* This Division was initiated on January 16, 1986.
ANNUITY PAYMENTS
ASSUMED INVESTMENT RATE
The discussion concerning the amount of annuity payments which follows this
section is based on an Assumed Investment Rate of 3 1/2% per annum. However, the
Company will permit each Annuitant choosing a variable annuity payment option to
select an Assumed Investment Rate permitted by state law or regulations other
than the 3 1/2% rate described in this prospectus as follows: 4 1/2%, 5% or 6%
per annum. (Note: an Assumed Investment Rate higher than 5% may not be selected
under individual Contracts.) The foregoing Assumed Investment Rates are used
merely in order to determine the first monthly payment per thousand dollars of
value. It should not be inferred that such rates will bear any relationship to
the actual net investment experience of the Separate Account.
AMOUNT OF ANNUITY PAYMENTS
The amount of the first variable annuity payment to the Annuitant will
depend on the amount of the Accumulation Value applied to effect the variable
annuity as of the tenth day immediately preceding the date annuity payments
commence, the amount of any premium tax owed, the annuity
17
<PAGE> 70
option selected, and the age of the Annuitant. The Contracts contain tables
indicating the dollar amount of the first annuity payment under each annuity
option for each $1,000 of Accumulation Value (after the deduction for any
premium tax) at various ages. These tables are based upon the 1983 Table A
(promulgated by the Society of Actuaries) and an Assumed Investment Rate of
3 1/2%, 4% and 5% per annum (3 1/2% in the group Contract).
The portion of the first monthly variable annuity payment derived from a
Division of the Separate Account is divided by the Annuity Unit value for that
Division (calculated ten days prior to the date of the first monthly payment) to
determine the number of Annuity Units in each Division represented by the
payment. The number of such units will remain fixed during the Annuity Period,
assuming the Annuitant makes no transfers of Annuity Units to provide Annuity
Units under another Division or to provide a fixed annuity.
In any subsequent month, the dollar amount of the variable annuity payment
derived from each Division is determined by multiplying the number of Annuity
Units in that Division by the value of such Annuity Unit on the tenth day
preceding the due date of such payment. The Annuity Unit value will increase or
decrease in proportion to the net investment return of the Division or Divisions
underlying the variable annuity since the date of the previous annuity payment,
less an adjustment to neutralize the 3 1/2% or other Assumed Investment Rate
referred to above.
Therefore, the dollar amount of variable annuity payments after the first
will vary with the amount by which the net investment return is greater or less
than 3 1/2% per annum. For example, if a Division has a cumulative net
investment return of 5% over a one year period, the first annuity payment in the
next year will be approximately 1 1/2 percentage points greater than the payment
on the same date in the preceding year, and subsequent payments will continue to
vary with the investment experience of the Division. If such net investment
return is 1% over a one year period, the first annuity payment in the next year
will be approximately 2 1/2 percentage points less than the payment on the same
date in the preceding year, and subsequent payments will continue to vary with
the investment experience of the applicable Division.
Each deferred Contract provides that, when fixed annuity payments are to be
made under one of the first four annuity options, the monthly payment to the
Annuitant will not be less than the monthly payment produced by the then current
settlement option rates, which will not be less than the rates used for a
currently issued single payment immediate annuity contract. The purpose of this
provision is to assure the Annuitant that, at retirement, if the fixed annuity
purchase rates then required by the Company for new single payment immediate
annuity contracts are significantly more favorable than the annuity rates
guaranteed by a Contract, the Annuitant will be given the benefit of the new
annuity rates.
18
<PAGE> 71
ANNUITY UNIT VALUE
The value of an Annuity Unit is calculated at the same time that the value
of an Accumulation Unit is calculated and is based on the same values for Fund
shares and other assets and liabilities. (See "Accumulation Period" in the
Prospectus.) The calculation of Annuity Unit value is discussed in the
Prospectus under "Annuity Period."
The following illustrations show, by use of hypothetical examples, the
method of determining the Annuity Unit value and the amount of variable annuity
payments.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
Example 8.
<TABLE>
<S> <C>
1. Annuity Unit value, beginning of period........................ $ .980000
2. Net investment factor for Period (see Example 3)............... 1.023558
3. Daily adjustment for 3 1/2% Assumed Investment Rate............ .999906
4. (2)X(3)........................................................ 1.023462
5. Annuity Unit value, end of period (1)X(4)...................... $ 1.002993
</TABLE>
ILLUSTRATION OF ANNUITY PAYMENTS
Example 9. Annuitant age 65, Life Annuity with 120 Payments Certain
<TABLE>
<S> <C>
1. Number of Accumulation Units at Annuity Date................... 10,000.00
2. Accumulation Unit value (see Example 3)........................ $ 1.800000
3. Accumulation Value of Contract (1)X(2)......................... $18,000.00
4. First monthly annuity payment per $1,000 of Accumulation
Value............................................................ $ 5.63
5. First monthly annuity payment (3)X(4)/1,000.................... $ 101.34
6. Annuity Unit value (see Example 10)............................ $ .980000
7. Number of Annuity Units (5)/(6)................................ 103.408
8. Assume Annuity Unit value for second month equal to............ $ .997000
9. Second monthly Annuity Payment (7)X(8)......................... $ 103.10
10. Assume Annuity Unit value for third month equal to............. $ .953000
11. Third monthly Annuity Payment (7)X(10)......................... $98.55
</TABLE>
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
The Company has qualified or intends to qualify the Contracts for sale in
all fifty states and the District of Columbia and will commence offering the
Contracts promptly upon qualification in each such jurisdiction.
The Contracts are sold in a continuous offering by licensed insurance
agents who are registered representatives of broker-dealers which are members of
the National Association of Securities Dealers, Inc. (the "NASD"). The principal
underwriter for the Separate Account is the Underwriter as defined above, a
wholly-owned subsidiary of the Company. The Underwriter's address is 2929 Allen
Parkway, Houston, Texas 77019. The Underwriter is a Texas corporation organized
in 1970 and is a member of the NASD.
The licensed agents who sell the Contracts will be compensated for such
sales by commissions ranging from 1% to 4.5% of each Purchase Payment. Managers
who supervise the agents will receive overriding commissions ranging to 1% of
Purchase Payments. (These various commissions are paid by the Company and do not
result in any charge to Contract Owners or to the Separate Account in addition
to the charges described under "Charges Under Variable Annuity Contracts.")
Pursuant to its underwriting agreement with the Underwriter and the
Separate Account, the Company reimburses the Underwriter for reasonable sales
expenses, including overhead expenses. Sales commissions paid for the years
1993, 1994 and 1995 were $27,049,371, $26,632,000 and $10,260,000, respectively.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995,
and the financial statements
19
<PAGE> 72
of the Company's Separate Account A at December 31, 1995 and for each of the two
years in the period then ended, appearing in this Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein. The financial
statements audited by Ernst & Young LLP have been included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
20
<PAGE> 73
COMMENTS ON FINANCIAL STATEMENTS
The financial statements of The Variable Annuity Life Insurance Company
should be considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts, which include death benefits, and its
assumption of the mortality and expense risks.
Divisions Four, Five, Six, Seven, Eight, Ten, Eleven, Twelve, Thirteen and
Fourteen are the only Divisions available under the Contracts described in the
Prospectus. The Separate Account financial statements contained herein reflect
the composition of the Separate Account as of December 31, 1995.
21
<PAGE> 74
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1995
TABLE OF CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . 1
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Income . . . . . . . . . . . . . . 3
Consolidated Statement of Changes in
Stockholder's Equity . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . 6
<PAGE> 75
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
The Variable Annuity Life Insurance Company
We have audited the accompanying consolidated balance sheets of The
Variable Annuity Life Insurance Company and Subsidiary as of December 31, 1995
and 1994, and the related consolidated statements of income, changes in
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Variable Annuity Life Insurance Company and Subsidiary at December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1.3 to the financial statements, in 1993 the
company changed its method of accounting for postretirement benefits other than
pensions, income taxes, postemployment benefits, reinsurance, loan impairments,
and certain investments in debt and equity securities, as a result of adopting
recently promulgated accounting standards governing the accounting treatment
for these items.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Houston, Texas
February 12, 1996
<PAGE> 76
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Consolidated Balance Sheet
At December 31,
In Thousands
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Investments - Notes 2, 6, 7, 8:
Fixed maturity securities
(amortized cost: $18,590,102 in 1995 and $16,930,860 in 1994) $19,745,726 $ 16,084,308
Equity securities (cost: $56,825 in 1995 and $69,774 in 1994) 71,770 72,752
Mortgage loans on real estate 1,443,817 1,535,201
Real estate, net of accumulated depreciation
of $99 in 1995 and $134 in 1994 23,365 22,235
Policy loans 557,637 474,830
Other long-term invested assets 16,929 7,232
Short-term investments 39,277 160,022
-------------------------------------------------------------------------------------------------------
Total investments 21,898,521 18,356,580
-------------------------------------------------------------------------------------------------------
Investment income receivable 292,967 280,161
Cash on deposit and on hand 27,794 18,909
Receivable for securities sold 51,947 3,896
Deferred policy acquisition costs - Note 3 182,546 910,479
Due from reinsurer, net 16,873 18,009
Other assets 37,912 26,655
Assets held in Separate Accounts 4,540,889 2,506,810
-------------------------------------------------------------------------------------------------------
Total assets $27,049,449 $ 22,121,499
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES Policy reserves for fixed annuity investment contracts $20,146,697 $ 18,656,189
Payable for securities purchased 26,885 2,310
Remittances not allocated 52,913 34,275
Commissions, general expenses, and taxes (other than income taxes) 44,380 32,552
Other liabilities 51,768 46,941
Income tax liabilities - Note 4 387,076 109,362
Liabilities related to Separate Accounts 4,540,889 2,506,810
-------------------------------------------------------------------------------------------------------
Total liabilities 25,250,608 21,388,439
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S Common stock (voting) par value $1 per share, 5,000 shares authorized
EQUITY and 3,575 issued and outstanding in 1995 and 1994 - Note 5 3,575 3,575
Additional paid-in capital 384,126 382,733
Retained earnings 1,014,520 910,233
Net unrealized investment gains (losses) - Note 2 396,620 (563,481)
-------------------------------------------------------------------------------------------------------
Total stockholder's equity 1,798,841 733,060
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $27,049,449 $ 22,121,499
-------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 77
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Consolidated Statement of Income
For the Years Ended December 31,
In Thousands
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES Surrender charges $ 9,967 $ 9,964 $ 8,605
Mortality charges 34,965 21,136 15,614
Expense charges 5,122 5,528 5,349
Net investment income - Note 2 1,597,681 1,493,942 1,434,019
Net reinsurance income 1,573 1,908 1,826
Realized investment gains (losses) - Note 2 (7,149) (71,950) 17,969
Other income 6,878 6,517 4,361
-------------------------------------------------------------------------------------------------
Total revenues 1,649,037 1,467,045 1,487,743
- ---------------------------------------------------------------------------------------------------------------------
COSTS AND Policy costs:
EXPENSES Increase in policy reserves for fixed
annuity contracts 1,203,986 1,133,547 1,125,055
-------------------------------------------------------------------------------------------------
Total costs 1,203,986 1,133,547 1,125,055
-------------------------------------------------------------------------------------------------
Expenses:
Commissions 84,670 73,198 66,739
Salaries 48,227 42,742 39,923
Guaranty association assessments - Note 9 18,961 6,300 7,000
Data processing 13,200 10,908 10,262
Postage and telephone 10,710 8,137 7,348
Sales promotion 9,361 8,024 7,305
Printing and supplies 4,721 4,372 3,505
Other expenses 44,055 43,029 36,327
Amortization of deferred policy acquisition
costs - Note 3 16,841 13,263 10,000
Policy acquisition costs deferred - Note 3 (104,702) (88,046) (82,960)
-------------------------------------------------------------------------------------------------
Total expenses 146,044 121,927 105,449
-------------------------------------------------------------------------------------------------
Total costs and expenses 1,350,030 1,255,474 1,230,504
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS Earnings before income taxes and cumulative effect of
accounting changes 299,007 211,571 257,239
Income tax expense:
Excluding tax rate related adjustment - Note 4 99,720 70,183 84,863
Tax rate related adjustment - Note 4 -- -- 4,490
-------------------------------------------------------------------------------------------------
Total 99,720 70,183 89,353
-------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes 199,287 141,388 167,886
Cumulative effect of accounting changes - Note 1 -- -- (2,588)
-------------------------------------------------------------------------------------------------
Net income $ 199,287 $ 141,388 $ 165,298
-------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 78
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Consolidated Statement of Changes in Stockholder's Equity
For the Years Ended December 31,
In Thousands
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK Balance at beginning and end of year $ 3,575 $ 3,575 $ 3,575
- ------------------------------------------------------------------------------------------------------------------
ADDITIONAL Balance at beginning of year 382,733 382,727 330,800
PAID-IN-CAPITAL Capital contribution from stockholder 1,393 6 51,927
-------------------------------------------------------------------------------------------
Balance at end of year 384,126 382,733 382,727
- ------------------------------------------------------------------------------------------------------------------
RETAINED Balance at beginning of year 910,233 821,845 656,547
EARNINGS Net income 199,287 141,388 165,298
Dividends paid to stockholder (95,000) (53,000) -
-------------------------------------------------------------------------------------------
Balance at end of year 1,014,520 910,233 821,845
- ------------------------------------------------------------------------------------------------------------------
NET UNREALIZED Balance at beginning of year (563,481) 348,470 4,892
INVESTMENT Change during year 960,101 (911,951) 343,578
-------------------------------------------------------------------------------------------
GAINS (LOSSES) Balance at end of year 396,620 (563,481) 348,470
- ------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S
EQUITY Total stockholder's equity at end of year $ 1,798,841 $ 733,060 $ 1,556,617
-------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 79
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Consolidated Statement of Cash Flows
For the Years Ended December 31,
In Thousands
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING Income before cumulative effect of accounting
changes $ 199,287 $ 141,388 $ 167,886
ACTIVITIES Reconciling adjustments to net cash provided by
operating activities:
Insurance and annuity liabilities 1,203,986 1,133,547 1,125,055
Deferred policy acquisition costs (87,861) (74,783) (72,960)
Other, net 28,179 (41,944) (95,445)
-------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,343,591 1,158,208 1,124,536
- ------------------------------------------------------------------------------------------------------------------
INVESTING Investment purchases (9,671,304) (7,827,877) (5,531,834)
ACTIVITIES Investment calls, maturities, and sales 8,025,420 6,456,637 3,497,419
Net (increase) decrease in short-term investments 120,745 (160,022) -
-------------------------------------------------------------------------------------------
Net cash used for investing activities (1,525,139) (1,531,262) (2,034,415)
- ------------------------------------------------------------------------------------------------------------------
FINANCING Policyholder account deposits 2,553,928 2,227,803 2,129,542
ACTIVITIES Policyholder account withdrawals (996,324) (1,004,953) (751,537)
Transfers to Separate Accounts (1,273,778) (723,994) (504,969)
Capital contribution from stockholder 1,607 6 52,941
Net decrease in short-term debt - (59,000) (20,400)
Dividends paid (95,000) (53,000) -
-------------------------------------------------------------------------------------------
Net cash provided by financing activities 190,433 386,862 905,577
- ------------------------------------------------------------------------------------------------------------------
NET CHANGE Net increase (decrease) in cash 8,885 13,808 (4,302)
IN CASH Cash at beginning of year 18,909 5,101 9,403
-------------------------------------------------------------------------------------------
Cash at end of year $ 27,794 $ 18,909 $ 5,101
-------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 80
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1995
All dollar amounts in thousands, except per share data
1. SIGNIFICANT ACCOUNTING POLICIES
1.1 INTRODUCTION
The Variable Annuity Life Insurance Company (VALIC), an indirect, wholly
owned subsidiary of American General Corporation (AGC), provides tax-deferred
retirement annuities and employer-sponsored retirement plans to employees of
educational, health care, public sector, and not-for-profit organizations.
VALIC markets products nationwide to 900,000 customers through a national
network of 850 sales representatives. VALIC is 100% owned by American General
Life Insurance Company (AGL), a wholly owned subsidiary of AGC Life Insurance
Company (AGC Life). AGC Life is a wholly owned subsidiary of AGC. A summary of
the accounting policies followed in the preparation of the consolidated
financial statements is set forth below.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP). The consolidated financial
statements include the accounts of VALIC and its wholly owned marketing
company. All material intercompany accounts have been eliminated upon
consolidation. To conform with the 1995 presentation, certain items in the
prior years' financial statements have been reclassified.
The preparation of financial statements requires management to make
estimates and assumptions that affect (1) the reported amounts of assets and
liabilities, (2) disclosures of contingent assets and liabilities, and (3) the
reported amounts of revenues and expenses during the reporting period. Ultimate
results could differ from those estimates.
1.3 ACCOUNTING CHANGES
Current Year. During 1995, VALIC adopted Statement of Financial Accounting
Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting
standards for (1) the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used in the
business, and (2) long-lived assets and certain identifiable intangibles to be
disposed of. With the adoption of SFAS 121, VALIC measures impairment of
certain investment real estate based on fair value, rather than net realizable
value as previously required. Adoption of this standard did not have a material
impact on the consolidated financial statements.
Prior Years. Effective January 1, 1993, VALIC adopted the following
accounting standards: (1) SFAS 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions," which resulted in a one-time reduction of net
income of $573 ($868 pretax); (2) SFAS 109, "Accounting for Income Taxes,"
which resulted in a one-time reduction of net income of $1,880; and (3) SFAS
112, "Employers' Accounting for Postemployment Benefits," which resulted in a
one-time reduction of net income of $135 ($205 pretax).
Effective January 1, 1993, VALIC also adopted SFAS 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," and
SFAS 114, "Accounting by Creditors for Impairment of a Loan." Adoption of these
standards did not have a material impact on the consolidated financial
statements.
At December 31, 1993, VALIC adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities." This standard requires that debt
and equity securities be carried at fair value unless VALIC has the positive
intent and ability to hold these investments to maturity. Upon adoption, VALIC
reported all debt and equity securities at fair value and recorded net
unrealized gains on securities of $345,645 to shareholder's equity.
1.4 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity and equity
securities are currently classified as available-for-sale and recorded at fair
value. After adjusting related balance sheet accounts as if the unrealized
gains (losses) had been realized, the net adjustment is recorded in net
unrealized gains (losses) on securities within stockholder's equity. If the
fair value of a security classified as available-for-sale declines below its
cost and this decline is considered to be other than temporary, the security is
reduced to its net realizable value, and the reduction is recorded as a
realized loss.
MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of an
allowance for losses. The allowance for losses covers all non-performing loans,
consisting of loans restructured or delinquent 60 days or more. The allowance
also covers loans for which there is a concern based on management's assessment
of risk factors, such as potential non-payment or non-monetary default. The
allowance is based on a loan-specific review and a formula that reflects past
results and current trends.
Impaired loans, those for which VALIC determines that it is probable that
all amounts due under the contractual terms will not be collected, are reported
at the lower of amortized cost or fair value of the underlying collateral, less
estimated costs to sell.
POLICY LOANS. Policy loans are reported at cost and are adjusted
periodically for possible uncollectible amounts.
6
<PAGE> 81
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995
INVESTMENT INCOME. Interest on fixed maturity securities and performing
mortgage loans is recorded as income when earned and is adjusted for any
amortization of premium or discount. Interest on restructured mortgage loans is
recorded as income when earned based on the new contractual rate. Interest on
delinquent mortgage loans is recorded as income on a cash basis. Dividends are
recorded as income on ex-dividend dates.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method and include declines in
fair value of investments below cost that are considered other than temporary.
1.5 DEFERRED POLICY ACQUISITION COSTS (DPAC)
The costs of writing an insurance policy, including agents' commissions and
underwriting and marketing expenses, are deferred and included in the DPAC
asset. DPAC is charged to expense in relation to the estimated gross profits of
the insurance contracts, including realized investment gains (losses).
Gross profits include realized investment gains (losses). In addition, DPAC
is adjusted for the impact on estimated future gross profits as if net
unrealized gains (losses) on securities had been realized at the balance sheet
date. The impact of this adjustment is included in net unrealized gains
(losses) on securities within stockholder's equity.
VALIC reviews the carrying amount of DPAC on at least an annual basis. In
determining whether the carrying amount is appropriate, the company considers
estimated future gross profit margins, as well as, expected mortality, interest
earned and credited rates, persistency, and expenses.
1.6 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts, principally annuities for which the investment risk lies solely with
the holder of the contract rather than the company. Consequently, the insurer's
liability for these accounts equals the value of the account assets. Investment
income, realized investment gains (losses), and policyholder account deposits
and withdrawals related to Separate Accounts are excluded from the consolidated
statements of income and cash flows. Assets held in the Separate Accounts are
primarily shares in mutual funds, which are carried at fair value, based on the
quoted net asset value per share.
1.7 POLICY RESERVES
Net deposits made by fixed annuity policyholders are accumulated at interest
rates guaranteed by VALIC plus excess interest paid at the sole discretion of
the Board of Directors until benefits are payable. Reserves for deferred
annuities (accumulation phase) are equivalent to the policyholders' account
values. Reserves for annuities on which benefits are currently payable (annuity
payout phase) are provided based upon estimated mortality and other
assumptions, including provisions for the risk of adverse deviation from
assumptions, which were appropriate at the time the contracts were issued. The
Progressive Annuity Mortality Table, the 1971 Individual or Group Annuity
Mortality Tables, and the 1983a Table have been used to provide for future
annuity benefits in the annuity payout phase. Interest rates used in
determining reserves for policy benefits during both the accumulation and
annuity payout phases range from 3.5% to 13.5%.
1.8 RECOGNITION OF REVENUES AND COSTS
Premium receipts for annuity contracts are classified as deposits instead of
revenues. Revenues for these contracts consist of the mortality, expense, and
surrender charges assessed against the account balance. Gains (losses) from
mortality guarantees under variable annuity contracts are recognized as they
occur.
1.9 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of assets
and liabilities, at the enacted tax rates expected to be in effect when the
temporary differences reverse. The effect of a tax rate change is recognized in
income in the period of enactment. State income taxes are included in income
tax expense.
A valuation allowance for deferred tax assets is provided if all or some
portion of the deferred tax asset may not be realized. An increase or decrease
in a valuation allowance that results from a change in circumstances that
causes a change in judgment about the realizability of the related deferred tax
asset is included in income. A change related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains (losses) on
securities in stockholder's equity.
1.10 STATUTORY ACCOUNTING
State insurance laws prescribe accounting practices for calculating
statutory net income and equity (capital and surplus) that differ from GAAP.
Net income and stockholder's equity as determined by statutory accounting
practices at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $157,622 $ 171,486 $ 154,231
Stockholder's equity $926,654 $ 869,026 $ 770,385
- -----------------------------------------------------------------------------
</TABLE>
7
<PAGE> 82
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995
2. INVESTMENTS
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Affiliated fixed
maturity securities $ 1,414,644 $ 1,300,028 $ 1,222,544
Affiliated fixed
maturity securities 3,181 3,342 3,466
Equity securities 4,281 2,529 2,454
Mortgage loans on real estate 149,974 163,263 183,532
Other investments 36,473 36,226 33,993
- ------------------------------------------------------------------------------------------------------------
Gross investment income 1,608,553 1,505,388 1,445,989
Investment expenses 10,872 11,446 11,970
- ------------------------------------------------------------------------------------------------------------
Net investment income $ 1,597,681 $ 1,493,942 $ 1,434,019
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income during
1995 totaled $8,675 or .04% of total invested assets. The ultimate disposition
of these assets is not expected to have a material effect on VALIC's
consolidated results of operations and financial position.
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities $ 832 $ (83,950) $ 45,166
Equity securities 7,706 2,143 12,060
Mortgage loans on real estate (24,465) (11,640) (30,565)
Real estate 3,767 1,608 (8,519)
Other 5,011 19,889 (173)
- ------------------------------------------------------------------------------------------------------------
Realized gains (losses)
before taxes (7,149) (71,950) 17,969
Income tax expense (benefit) (1,414) (25,183) 6,289
- ------------------------------------------------------------------------------------------------------------
Net realized investment
gains (losses) $ (5,735) $ (46,767) $ 11,680
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of fixed maturity securities were $1,432,183,
$1,128,925, and $413,679 during 1995, 1994, and 1993, respectively. Gross gains
of $15,722, $7,610, and $25,737 and gross losses of $30,518, $89,917, and
$32,878, were realized on those sales during 1995, 1994, and 1993,
respectively.
During fourth quarter 1994, AGC initiated a program to realize capital
losses for tax purposes to offset prior period capital gains. During 1995, AGC
received a tax refund of $45,944 generated by $126,285 in net capital losses
realized in fourth quarter 1994 primarily through the sale of fixed maturity
securities. In conjunction with this program, VALIC realized net capital losses
for tax purposes of $110,019 in fourth quarter 1994, primarily through the sale
of $1,186,197 of fixed maturity securities. Due to declining interest rates
during 1995, which resulted in increasing values of VALIC's fixed maturity
securities, no additional capital losses were realized under this program.
2.3 FIXED MATURITY AND EQUITY SECURITIES
VALUATION. All fixed maturity and equity securities are classified as
available-for-sale and reported at fair value (see Note 1.4). Amortized cost
and fair value at December 31 were as follows:
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gains
------------------------------- ------------------------------
1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 173,879 $ 178,724 $ 33,063 $ 3,623
Obligations of states and
political subdivisions 32,349 13,902 1,467 15
Debt securities issued by
foreign governments 238,592 272,999 19,639 1,310
Corporate securities 11,338,933 9,413,532 792,302 91,402
Mortgage-backed securities 6,771,473 7,016,389 333,436 34,801
Affiliated fixed maturity securities 32,275 35,314 - -
Redeemable preferred stock 2,601 - - -
- ------------------------------------------------------------------------------------------------------------
Total fixed maturity securities $ 18,590,102 $ 16,930,860 $ 1,179,907 $ 131,151
- ------------------------------------------------------------------------------------------------------------
Equity securities $ 56,825 $ 69,774 $ 14,966 $ 4,153
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Unrealized Losses Fair Value
------------------------------- --------------------------------
1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ (25) $ (2,165) $ 206,917 $ 180,182
Obligations of states and
political subdivisions (15) (1,290) 33,801 12,627
Debt securities issued by
foreign governments - (14,570) 258,231 259,739
Corporate securities (20,225) (458,242) 12,111,010 9,046,692
Mortgage-backed securities (3,924) (501,436) 7,100,985 6,549,754
Affiliated fixed maturity securities - - 32,275 35,314
Redeemable preferred stock (94) - 2,507 -
- ------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities $ (24,283) $ (977,703) $ 19,745,726 $ 16,084,308
- ------------------------------------------------------------------------------------------------------------------
Equity securities $ (21) $ (1,175) $ 71,770 $ 72,752
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 83
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1995
2. INVESTMENTS - (CONTINUED)
MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturity securities, excluding
mortgage-backed securities
Due in one year or less $ 66,864 $ 67,872
Due after one year through five years 1,937,164 2,052,167
Due after five years through ten years 7,744,456 8,260,724
Due after ten years 2,070,145 2,263,978
Mortgage-backed securities 6,771,473 7,100,985
- -----------------------------------------------------------------------------------------------------------
Total fixed maturity securities $ 18,590,102 $ 19,745,726
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers may
have the right to call or prepay obligations. Corporate requirements and
investment strategies may result in the sale of investments before maturity.
2.4 NET UNREALIZED GAINS (LOSSES) ON SECURITIES
Net unrealized gains (losses) on fixed maturity and equity securities
included in stockholder's equity at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 1,194,873 $ 135,304
Gross unrealized losses (24,304) (978,877)
DPAC adjustments (551,624) 269,161
Deferred federal income taxes (222,325) 10,931
- -----------------------------------------------------------------------------------------------------------
Net unrealized gains (losses)
on securities $ 396,620 $ (563,481)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
2.5 MORTGAGE LOANS ON REAL ESTATE
DIVERSIFICATION. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, VALIC requires loan-to-value ratios of 75% or less, based
on management's credit assessment of the borrower. At December 31 the mortgage
loan portfolio was distributed as follows:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Geographic distribution:
Atlantic $ 677,739 $ 705,643
Pacific and Mountain 455,009 500,417
Central 365,282 384,806
Allowance for losses (54,213) (55,665)
- -----------------------------------------------------------------------------------------------------------
Total $ 1,443,817 $ 1,535,201
- -----------------------------------------------------------------------------------------------------------
Property type:
Office $ 478,493 $ 512,229
Retail 461,272 486,881
Industrial 223,374 253,760
Apartments 242,469 229,324
Residential and other 92,422 108,672
Allowance for losses (54,213) (55,665)
- -----------------------------------------------------------------------------------------------------------
Total $ 1,443,817 $ 1,535,201
- -----------------------------------------------------------------------------------------------------------
</TABLE>
ALLOWANCE. The allowance for mortgage loan losses was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 55,665 $ 48,612 $ 25,170
Net additions (a) 12,619 9,926 31,757
Deductions (b) (14,071) (2,873) (8,315)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31 $ 54,213 $ 55,665 $ 48,612
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Charged to realized investment losses.
(b) Resulting from foreclosures.
IMPAIRED LOANS. Impaired mortgage loans on real estate and related interest
income were as follows:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
With allowance* $ 63,167 $ 100,353
Without allowance 2,577 1,434
- -----------------------------------------------------------------------------------------------------------
Total impaired loans $ 65,744 $ 101,787
- -----------------------------------------------------------------------------------------------------------
Average investment $ 83,049 $ 79,337
Interest income earned 7,012 4,634
Interest income - cash basis 6,539 2,318
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Represents gross amounts before allowance for mortgage loan losses of
$17,701 and $23,553, respectively.
3. DEFERRED POLICY ACQUISITION COSTS (DPAC)
DPAC at December 31 and the components of the change for the years then
ended, were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 910,479 $ 113,116 $ 473,764
Capitalization:
Commissions 52,959 44,899 43,131
Other acquisition costs 51,743 43,147 39,829
Accretion of interest 54,086 47,170 42,439
Amortization:
Operating earnings (70,927) (60,433) (52,439)
Offset to realized losses 4,991 19,812 -
Effect of net unrealized
(gains) losses on securities (820,785) 702,768 (433,608)
- -----------------------------------------------------------------------------------------------------------
Balance at December 31 $ 182,546 $ 910,479 $ 113,116
- -----------------------------------------------------------------------------------------------------------
</TABLE>
4. INCOME TAXES
4.1 TAX-SHARING AGREEMENT
VALIC, combined with its Separate Accounts, is taxed as a life insurance
company. VALIC and the Separate Accounts are included in the consolidated life
insurance company tax return of AGC. VALIC participates in a tax-sharing
agreement with the other companies included in the consolidated return. Under
this agreement, tax payments are made to AGC as if the companies filed separate
tax returns and companies incurring operating losses and/or capital losses are
reimbursed for the use of these losses by the consolidated return group.
9
<PAGE> 84
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements - Continued
December 31, 1995
4.2 TAX LIABILITIES
Components of income tax liabilities and assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current tax liabilities (assets) $ 10,740 $ (36,282)
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities, applicable to:
Basis differential of investments 428,863 7,105
Deferred policy acquisition costs 61,915 317,015
Other 2,480 2,322
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 493,258 326,442
- -----------------------------------------------------------------------------------------------------------
Deferred tax assets, applicable to:
Policy reserves (100,014) (71,232)
Other (9,381) (10,287)
Basis differential of investments (7,527) (295,251)
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets before
valuation allowance (116,922) (376,770)
Valuation allowance -- 195,972
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets net of,
valuation allowance (116,922) (180,798)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax liabilities 376,336 145,644
- -----------------------------------------------------------------------------------------------------------
Total income tax liabilities $ 387,076 $ 109,362
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The deferred tax asset valuation allowance at December 31, 1994, was
attributable to unrealized losses on securities and had no income statement
impact.
4.3 TAX EXPENSE
Components of income tax expense were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 99,273 $ 52,973 $ 93,936
State 3,224 2,368 1,461
- -------------------------------------------------------------------------------------------------------------
Total current income
tax expense 102,497 55,341 95,397
- -------------------------------------------------------------------------------------------------------------
Deferred, applicable to:
Basis differential of
investments (786) 7,189 (2,600)
Deferred policy acquisition
costs 32,174 32,800 25,119
Policy reserves (28,780) (31,085) (32,633)
Other, net (5,385) 5,938 4,070
- -------------------------------------------------------------------------------------------------------------
Total deferred income
tax expense (benefit) (2,777) 14,842 (6,044)
- -------------------------------------------------------------------------------------------------------------
Income tax expense $ 99,720 $ 70,183 $ 89,353
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Effective January 1, 1993, the federal corporate tax rate increased from 34%
to 35%. The effect of the 1% tax rate increase on the existing deferred tax
liability was $4,490. This amount was included in 1993 income tax expense.
A reconciliation between the federal income tax rate and the effective tax
rate follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
Income tax expense at
applicable rate $ 104,652 $ 74,050 $ 90,034
Dividends received
deduction (3,883) (3,392) (1,819)
Tax-exempt interest (ESOP) (4,426) (4,670) (4,996)
Effect of tax rate change
on deferred tax liabilities - - 4,490
State income taxes 2,918 7,051 1,461
Other items 459 (2,856) 183
- -------------------------------------------------------------------------------------------------------------
Income tax expense $ 99,720 $ 70,183 $ 89,353
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Federal income taxes paid in 1995, 1994, and 1993 were $52,790, $122,608,
and $$59,613, respectively. State income taxes paid in 1995, 1994 and 1993 were
$2,653, $3,390 and $1,363, respectively.
5. CAPITAL STOCK
VALIC has two classes of capital stock: preferred stock ($1.00 par value
with 2 million shares authorized) that may be issued with such dividend,
liquidation, redemption, conversion, voting, and other rights as the board of
directors may determine, and common stock ($1.00 par value, 5 million shares
authorized).
VALIC is restricted by state insurance laws as to the amount it may pay as
dividends without prior approval from the Texas Department of Insurance. The
maximum dividend payout which may be made without prior approval in 1996 is
$172,402.
6. DERIVATIVE FINANCIAL INSTRUMENTS
6.1 USE OF DERIVATIVE FINANCIAL INSTRUMENTS
VALIC's objectives for using interest rate swap agreements on its investment
securities are to effectively convert specific investment securities from a
floating to a fixed-rate basis, or vice versa, and to hedge against the risk of
rising prices on anticipated investment security purchases.
VALIC's objectives for using currency swap agreements are to effectively
convert cash flows from specific investment securities denominated in foreign
currencies into U.S. dollars at specified exchange rates, and to hedge against
currency rate fluctuations on anticipated investment security purchases.
Derivative financial instruments related to investment securities, which
were not used prior to 1994, did not have a material effect on net investment
income in 1995 or 1994. VALIC is neither a dealer nor a trader in derivative
financial instruments.
10
<PAGE> 85
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements - Continued
December 31, 1995
6.2 CREDIT AND MARKET RISK
VALIC is exposed to credit risk in the event of nonperformance by
counterparties to swap agreements. The company limits this exposure by entering
into swap agreements with counterparties having high credit ratings, basing the
amount and term of agreements on these credit ratings, and regularly monitoring
the ratings.
VALIC's credit exposure on swaps is limited to the fair value of swap
agreements that are favorable to the company. VALIC does not expect any
counterparty to fail to meet its obligation; however, nonperformance would not
have a material impact on the consolidated financial statements.
VALIC's exposure to market risk is mitigated by the offsetting effects of
changes in the value of swap agreements and of the related investment
securities.
6.3 ACCOUNTING POLICIES
The difference between amounts paid and received on swap agreements is
recorded on an accrual basis as an adjustment to investment expense or
investment income, as appropriate, over the periods covered by the agreements.
The related amount payable to or receivable from counterparties is included in
other liabilities or assets.
The fair values of the swap agreements are recognized in the consolidated
balance sheet if they hedge investment securities carried at fair value or
anticipated investment purchases. In this event, changes in the fair value of a
swap agreement are reported in net unrealized gains (losses) on securities
included in shareholder's equity, consistent with the treatment of the related
investment security.
For swap agreements hedging anticipated investment security purchases, the
net swap settlement amount or unrealized gain or loss is deferred and included
in the measurement of the anticipated transaction when it occurs.
Any gain or loss from early termination of swap agreements is recognized in
income if the related investment security is sold. Otherwise, the gain or loss
from early termination is deferred and amortized into income over the remaining
term of the related investment security.
6.4 TERMS OF DERIVATIVE FINANCIAL INSTRUMENTS
Swap agreements generally have terms of two to ten years. Average floating
rates may change significantly, thereby affecting future cash flows.
Derivative financial instruments related to investment securities at
December 31, 1995 were as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
Interest rate swap agreements to pay fixed rate
Notional amount $ 15,000
Average receive rate 7.10%
Average pay rate 5.93
- -----------------------------------------------------------------------------------
Currency swap agreements (receive U.S.$/pay Canadian$)
Notional amount (in U.S.$) $ 62,223
Average exchange rate 1.62
- -----------------------------------------------------------------------------------
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and fair values for certain of VALIC's financial
instruments at December 31 are presented below. Care should be exercised in
drawing conclusions based on fair value, since (1) the fair values presented do
not include the value associated with all VALIC's assets and liabilities, and
(2) the reporting of investments at fair value without a corresponding
revaluation of related policyholder liabilities can be misinterpreted.
<TABLE>
<CAPTION>
1995 1994
---------------------------- -------------------------------
Fair Carrying Fair Carrying
Value Amount Value Amount
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity and equity securities $ 19,817,496* $ 19,817,496* $ 16,157,060* $ 16,157,060*
Mortgage loans on real estate 1,473,598 1,443,817 1,533,403 1,535,201
Policy Loans 567,199 557,637 474,830 474,830
Liabilities
Insurance investment contracts 19,883,419 20,146,697 16,273,449 18,656,189
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes derivative financial instruments with negative fair value of $1,121
in 1995 and positive fair value of $952 in 1994.
11
<PAGE> 86
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements - Continued
December 31, 1995
7. FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The following methods and assumptions were used to estimate the fair
values of financial instruments.
FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and
equity securities were based on quoted market prices, where available. For
investments not actively traded, fair values were estimated using values
obtained from independent pricing services or, in the case of some private
placements, by discounting expected future cash flows using a current market
rate applicable to yield, credit quality, and average life of the investments.
MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated
primarily using discounted cash flows, based on contractual maturities and
discount rates that were based on U.S. Treasury rates for similar maturity
ranges, adjusted for risk, based on property type.
POLICY LOANS. Fair value of policy loans was estimated using discounted cash
flows and actuarially-determined assumptions, incorporating market rates.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts, which do not subject VALIC to significant risks arising from
policyholder mortality or morbidity, was estimated using cash flows discounted
at market interest rates. Care should be exercised in drawing conclusions from
the estimated fair value, since the estimates are based on assumptions
regarding future economic activity.
8. TRANSACTIONS WITH AFFILIATED COMPANIES
In the ordinary course of business, VALIC is occasionally involved in
transactions with affiliated companies. Transactions involving the purchase or
disposal of securities are consummated at the market value of the security on
the date of the transaction. Transactions with affiliated companies during each
of the three years in the period ended December 31, 1995 were as follows:
Operating expenses include $21,173 in 1995, $23,138 in 1994, and $23,055 in
1993 for amounts paid to AGC or its subsidiaries primarily for rent, data
processing services, use of facilities, and investment expenses. Interest paid
on borrowings from AGC totaled $1,662 in 1995, $525 in 1994, and $430 in 1993.
On November 4, 1982, VALIC invested $11,853 in 13 1/2% Restricted
Subordinated Notes due November 4, 2002 issued by AGC. The principal amount of
the note is due November 4, 2002. Principal payments of $592 were received on
November 4, 1995, and 1994. AGC called an amount totaling $410 on November 4,
1993. VALIC recognized $1,452 in interest income during 1995, $1,532 for 1994,
and $1,591 for 1993.
On December 31, 1984, VALIC entered into a $48,929 note purchase agreement
with AGC. Under the agreement AGC issued an adjustable rate promissory note in
exchange for VALIC's holdings of AGC preferred stock, common stock, and
warrants. The principal amount of the note is due in 20 equal installment
payments commencing December 29, 1985 and concluding December 29, 2004.
Principal payments of $2,446 were received on December 29, 1995, December 31,
1994, and December 29, 1993. VALIC recognized $1,729, $1,810, and $1,875 of
interest income on the note during 1995, 1994, and 1993, respectively.
On March 19, 1993, VALIC received a capital contribution of $40,000 from
American General Life Insurance Company (AGL).
On June 30, 1993, VALIC received a capital contribution from AGL of
furniture and equipment with a book value of $12,942 and a related deferred tax
liability of $1,096.
On February 14, 1994, VALIC acquired from AGL bonds of various issuers at a
cost of $11,268.
On February 15, 1994, VALIC acquired from AGL bonds of various issuers at a
cost of $9,900.
On September 30, 1995, VALIC received a capital contribution from AGL of
electronic data processing equipment with a book value of $1,575 and a related
tax liability of $214.
VALIC paid common stock dividends of $95,000, $26.57 per share, and $53,000,
$14.83 per share, to AGL in 1995 and 1994, respectively.
9. COMMITMENTS AND CONTINGENCIES
VALIC is a defendant in various lawsuits arising in the normal course of
business. VALIC believes it has valid defenses in these lawsuits and is
defending the cases vigorously. VALIC also believes that the total amounts
that would ultimately have to be paid arising from these lawsuits would have no
material effect on its consolidated financial position.
All 50 states have laws requiring solvent life insurance companies to pay
assessments to state guaranty associations to protect the interests of
policyholders of insolvent life insurance companies. State guaranty fund
expense included in operating costs and expenses was $18,961, $6,300, and
$7,000, for the years ended December 31, 1995, 1994, and 1993, respectively.
The accrued liability for anticipated assessments was $20,249, $10,214, and
$13,727, at December 31, 1995, 1994, and 1993, respectively. The 1995 liability
was estimated by VALIC using the latest information available from the National
Organization of Life and Health Insurance Guaranty Associations. Although the
amount accrued represents VALIC's best estimate of its liability, this estimate
may change in the future. Additionally, changes in state laws could decrease
the amount recoverable against future premium taxes.
10. EMPLOYEE BENEFIT PLANS
10.1 PENSION PLANS
VALIC participates in several employee benefit plans which together cover
substantially all of its employees. One of these plans is a defined benefit
plan. Pension benefits under this plan are based on the participant's average
monthly compensation and length of credited service. VALIC's funding policy for
this plan is to contribute annually no more than the maximum amount that can be
deducted for federal income tax purposes.
12
<PAGE> 87
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995
10. EMPLOYEE BENEFIT PLANS - (CONTINUED)
The components of pension expense for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost (benefits earned)
during period $ 601 $ 759 $ 567
Interest cost on projected
benefit obligation 635 551 407
Actual (return) loss on
plan assets (1,249) 414 (667)
Amortization of unrecognized
net asset existing at date of
initial application (72) (58) (58)
Amortization of unrecognized
prior service cost 44 35 35
Deferral of net asset gain (loss) 749 (920) 224
- -------------------------------------------------------------------------------------------------------------
Total pension expense $ 708 $ 781 $ 508
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used for 1995, 1994, and 1993:
<TABLE>
<S> <C> <C> <C>
Weighted-average discount rate
on benefit obligation 7.25% 8.50% 7.25%
Rate of increase in
compensation levels 4.00% 4.00% 4.00%
Expected long-term rate of
return on plan assets 10.00% 10.00% 10.00%
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheet at December 31 for VALIC's defined benefit
pension plan:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 6,983 $ 4,862
Nonvested 1,127 285
- ------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 8,110 5,147
Effect of increase in compensation levels 2,219 1,607
- ------------------------------------------------------------------------------------------------------------
Projected benefit obligation 10,329 6,754
Plan assets at fair value 6,406 5,211
- ------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation (3,923) (1,543)
Unrecognized net gain 2,037 306
Unrecognized prior service cost 105 148
Unrecognized net obligation at
January 1, net of amortization (23) (93)
- ------------------------------------------------------------------------------------------------------------
Net pension liability $ (1,804) $ (1,182)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Equity and fixed maturity securities were 63% and 35%, respectively, of the
plans' assets at the plans' most recent balance sheet dates. The remaining plan
assets consisted primarily of cash equivalents and investment-related
receivables.
10.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
VALIC, through American General Corporation, has life, medical, supplemental
major medical, and dental plans for certain retired employees and agents. Most
plans are contributory, with retiree contributions adjusted annually to limit
employer contributions to predetermined amounts. VALIC has reserved the right
to change or eliminate these benefits at any time.
The life plans are fully insured; the retiree and medical and dental plans
are unfunded and self-insured.
The plans' combined funded status and the accrued postretirement benefit
cost included in other liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations
Retirees $ 115 $ 142
Fully eligible active plan participants 26 272
Other active plan participants 1,509 865
- ------------------------------------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation (APBO) 1,650 1,279
Unrecognized net gain (loss) (393) (114)
- ------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ 1,257 $ 1,165
- ------------------------------------------------------------------------------------------------------------
Discount rate on postretirement
benefit obligations 7.25% 8.50%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Postretirement benefit expense was as follows:
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Service cost (benefits earned) $ 110 $ 131
Interest cost on accumulated
postretirement benefit obligation 118 150
- ------------------------------------------------------------------------------------------------------------
Postretirement benefit expense $ 228 $ 281
- ------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 11.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1996; the rate was assumed
to decrease gradually to 6% in 2007 and remain at that level. A 1% increase in
the assumed annual rate of increase in per capita cost of health care benefits
results in a $108 increase in the accumulated postretirement benefit obligation
and a $15 increase in postretirement benefit expense.
13
<PAGE> 88
================================================================================
CHAIRMAN'S LETTER SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
TO OUR PARTICIPANTS:
We are pleased to present the December 31, 1995 Annual Report to Contract
Owners for Separate Account A of the Variable Annuity Life Insurance Company.
A summary of the change in unit value for each fund and each product series
(Portfolio Director, Independence Plus, Group Unit Purchase and Impact) appears
on page two.
The economic climate in 1995 was positive for investors. Economic growth was
steady and inflation was well controlled. Gross Domestic Product increased
modestly in each of the three quarters that were reported and the same should
hold true for the fourth quarter. The full year GDP gain is estimated at 2.1%.
Monthly Consumer Price Index changes varied between 0.4% and zero. For the year
the CPI change is 2.5%.
In that environment the Federal Reserve Board was accommodative. From the 6%
level in February, Federal Funds were reduced by one quarter point in July and
a like amount in December. That was followed by another quarter point cut in
January. Those actions resulted in an interest rate decline of nearly 2% on the
U.S. Treasury long bond.
VALIC's domestic indexed funds provided returns ranging from 26% to 36%.
Managed domestic equity funds returned 23% to 60%. International funds earned
between 9% and 21%. Market and economic conditions were not as favorable
outside the U.S. as they were domestically.
The three bond funds gained 16% to 20%, benefitting from the decline in
interest rates.
In the Lipper Analytical rankings, all but three of VALIC's funds were in the
top half of the funds with similar objectives. Of the thirteen funds in the top
half, seven were in the top quartile.
In the Morningstar rankings, ten of VALIC's funds were in the top half and of
those six were in the top quartile. If you have any questions about your
contract or this report, we would be happy to hear from you.
Respectfully,
/s/ STEPHEN D. BICKEL
Stephen D. Bickel, Chairman and CEO
The Variable Annuity Life Insurance Company
January 26, 1996
This report is not authorized for distribution as advertising or sales
literature. This report is published exclusively for the information of the
variable annuity contract owners of the Company in accordance with section 30
(d) of the Investment Company Act of 1940.
1
<PAGE> 89
================================================================================
CHAIRMAN'S LETTER - CONTINUED SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
UNIT VALUE RETURNS
(Unaudited)
<TABLE>
<CAPTION>
ONE YEAR TOTAL RETURNS FOR THE
PORTFOLIO INDEPENDENCE GROUP UNIT YEAR ENDING DECEMBER 31,
DIRECTOR PLUS IMPACT PURCHASE -------------------------------
DIVISION DIVISION DIVISION DIVISION 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INDEXED FUNDS
Stock Index Fund . . . . . . . . . . . 10C 10C 10D 10A, 10B 35.95% (0.30)%
MidCap Index Fund . . . . . . . . . . . 4 4 4 N/A 29.24 (4.70)
Small Cap Index Fund . . . . . . . . . . 14 14 N/A N/A 26.39 (4.30)
International Equities Fund . . . . . . 11 11 N/A N/A 9.67 6.90
MANAGED FUNDS
Growth Fund . . . . . . . . . . . . . . 15 N/A N/A N/A 46.40 0.18 (1)
Growth & Income Fund . . . . . . . . . . 16 N/A N/A N/A 30.55 (0.68) (1)
Science & Technology Fund . . . . . . . 17 N/A N/A N/A 60.07 24.77 (1)
Social Awareness Fund . . . . . . . . . 12 12 N/A N/A 37.57 (2.42)
Timed Opportunity Fund . . . . . . . . . 5 5 5 N/A 23.55 (2.29)
Capital Conservation Fund . . . . . . . 7 7 1 N/A 19.58 (7.04)
Government Securities Fund . . . . . . . 8 8 N/A N/A 16.31 (5.44)
International Government Bond Fund . . . 13 13 N/A N/A 17.63 3.42
Money Market Fund . . . . . . . . . . . 6 6 2 N/A 4.51 2.77
Dreyfus Small Cap Fund . . . . . . . . . 18 N/A N/A N/A 27.78 6.33
Templeton Asset Allocation Fund . . . . 19 N/A N/A N/A 21.02 (4.24)
Templeton International Fund . . . . . . 20 N/A N/A N/A 14.34 (3.49)
</TABLE>
(1) Since April 29, 1994, inception of the Fund.
VARIABLE ACCOUNT PERFORMANCE
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
LIPPER ANALYTICAL
SERVICES, INC. MORNINGSTAR, INC.
---------------------------- -----------------------------
UNIT RANKING RANKING
VALUE -------------------- AVERAGE -------------------- AVERAGE
RETURN POSITION PERCENTILE RETURN POSITION PERCENTILE RETURN
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock Index Fund . . . . . . . . . . . . . . . 35.95% 6/48 88% 35.31 18/267 93% 31.77
MidCap Index Fund . . . . . . . . . . . . . . . 29.24 17/31 45 32.67 272/409 33 31.10
Small Cap Index Fund . . . . . . . . . . . . . 26.39 34/55 38 28.20 123/155 21 30.74
International Equities Fund . . . . . . . . . . 9.67 64/133 52 9.60 126/248 49 10.38
Growth Fund . . . . . . . . . . . . . . . . . . 46.40 3/226 99 30.51 4/409 99 31.10
Growth & Income Fund . . . . . . . . . . . . . 30.55 68/139 51 31.16 177/267 34 31.77
Science & Technology Fund . . . . . . . . . . . 60.07 1/17 100 31.04 1/63 100 20.68
Social Awareness Fund . . . . . . . . . . . . . 37.57 3/17 82 31.04 5/267 98 31.77
Timed Opportunity Fund . . . . . . . . . . . . 23.55 65/184 65 21.58 116/322 64 22.17
Capital Conservation Fund . . . . . . . . . . . 19.58 7/82 91 17.37 33/239 86 16.44
Government Securities Fund . . . . . . . . . . 16.31 27/60 55 15.47 43/113 62 15.83
International Government Bond Fund . . . . . . 17.63 7/46 85 12.87 17/62 73 14.15
Money Market Fund . . . . . . . . . . . . . . . 4.51 65/227 71 4.35 63/219 71 4.34
Dreyfus Small Cap Fund . . . . . . . . . . . . 27.78 29/55 47 28.20 111/155 28 30.74
Templeton Asset Allocation Fund . . . . . . . . 21.02 7/14 50 18.62 193/322 40 22.17
Templeton International Fund . . . . . . . . . 14.34 13/133 90 9.60 48/248 81 10.38
</TABLE>
SOURCES: Morningstar Variable Annuity/Life Performance Report, January 1996
Lipper Variable Insurance Products Performance Analysis Service,
December 1995
The Portfolio Director rankings shown in this publication indicate the total
return rankings of Separate Account A's divisions compared to Morningstar and
Lipper categories for the twelve month period ending 12/31/95. The total
returns and rankings displayed show value after all management, administration
fees and fund expenses and do not include potential sales charges or
maintenance fees, if applicable. For total return information over a longer
period, see the Portfolio Director prospectus. The performance shown represents
past performance. The principal value of an investment will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Past performance does not guarantee future returns.
2
<PAGE> 90
================================================================================
FINANCIAL STATEMENTS SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
ASSETS: ALL DIVISIONS
---------------
<S> <C>
Total investment in shares of mutual funds, at market (cost $3,569,502,230) . . . . . $ 4,265,526,052
Balance due from VALIC general account . . . . . . . . . . . . . . . . . . . . . . . 5,104,219
---------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,270,630,271
===============
CONTRACT OWNER RESERVES:
Reserves for redeemable annuity contracts
(Net of applicable contract loans - partial withdrawals with right of
reinvestment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,258,190,663
Reserves for annuity contracts on benefit . . . . . . . . . . . . . . . . . . . . . . 12,439,608
---------------
TOTAL CONTRACT OWNER RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,270,630,271
===============
STATEMENT OF OPERATIONS
For the year ended December 31, 1995
INVESTMENT INCOME: ALL DIVISIONS
---------------
Dividends from mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,067,158
---------------
EXPENSES:
Mortality risk charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,346,212
Expense risk charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,529,006
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,875,218
---------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,191,940
===============
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . 54,777,042
Capital gains distributions from mutual funds . . . . . . . . . . . . . . . . . . . . 110,007,833
Net unrealized appreciation of investments during the year . . . . . . . . . . . . . 640,017,922
---------------
Net realized and unrealized gain on investments . . . . . . . . . . . . . . . . . 804,802,797
---------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . . . . . $ 838,994,737
===============
STATEMENTS OF CHANGES IN NET ASSETS ALL DIVISIONS
For the year ended December 31: ------------------------------
1995 1994
OPERATIONS: ------------------------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,191,940 $ 32,581,603
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . 54,777,042 14,131,361
Capital gains distributions from mutual funds . . . . . . . . . . . . . . . . . . . . 110,007,833 25,307,836
Net unrealized appreciation (depreciation) of investments during the year . . . . . . 640,017,922 (95,069,796)
--------------- -------------
Increase (decrease) in net assets resulting from operations . . . . . . . . . . . 838,994,737 (23,048,996)
--------------- -------------
PRINCIPAL TRANSACTIONS:
Purchase payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820,355,349 581,037,348
Surrenders of accumulation units by terminations, withdrawals, and
maintenance fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (114,759,722) (96,084,797)
Annuity benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,588,610) (1,371,515)
Amounts transferred from VALIC general account . . . . . . . . . . . . . . . . . . . 220,818,448 155,830,645
--------------- -------------
Increase in net assets resulting from principal transactions . . . . . . . . . . 924,825,465 639,411,681
--------------- -------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,763,820,202 616,362,685
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,506,810,069 1,890,447,384
--------------- --------------
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,270,630,271 $2,506,810,069
=============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE> 91
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
STOCK INDEX FUND
--------------------------------------------------------------
DIVISION 10A DIVISION 10B DIVISION 10C DIVISION 10D
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of mutual funds, at market . . $341,205,299 $28,301,222 $1,066,560,864 $41,200,277
Balance due (to) from VALIC general account . . . . (36,122) (7,529) 822,847 4,929
------------ ----------- -------------- -----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . $341,169,177 $28,293,693 $1,067,383,711 $41,205,206
============ =========== ============== ===========
CONTRACT OWNER RESERVES:
Reserves for redeemable annuity contracts (Net of
applicable contract loans - partial withdrawals
with right of reinvestment) . . . . . . . . . . . $331,057,207 $26,875,071 $1,067,072,765 $41,076,367
Reserves for annuity contracts on benefit . . . . . 10,111,970 1,418,622 310,946 128,839
------------ ----------- -------------- -----------
TOTAL CONTRACT OWNER RESERVES . . . . . . . . . . $341,169,177 $28,293,693 $1,067,383,711 $41,205,206
============ =========== ============== ===========
</TABLE>
STATEMENTS OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
SOCIAL TIMED
AWARENESS OPPORTUNITY CAPITAL CONSERVATION FUND
FUND FUND --------------------------
ASSETS: DIVISION 12 DIVISION 5 DIVISION 1 DIVISION 7
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Investment in shares of mutual funds, at market . . $59,966,151 $182,869,410 $7,770,858 $53,368,978
Balance due (to) from VALIC general account . . . . 133,659 84,295 12,591 219,088
----------- ------------ ---------- -----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . $60,099,810 $182,953,705 $7,783,449 $53,588,066
=========== ============ ========== ===========
CONTRACT OWNER RESERVES:
Reserves for redeemable annuity contracts (Net of
applicable contract loans - partial withdrawals
with right of reinvestment) . . . . . . . . . . . $60,099,810 $182,879,468 $7,778,840 $53,588,066
Reserves for annuity contracts on benefit . . . . -- 74,237 4,609 --
----------- ------------ ---------- -----------
TOTAL CONTRACT OWNER RESERVES . . . . . . . . . . $60,099,810 $182,953,705 $7,783,449 $53,588,066
=========== ============ ========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE> 92
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MIDCAP SMALL CAP INTERNATIONAL GROWTH & SCIENCE &
INDEX INDEX EQUITIES GROWTH INCOME TECHNOLOGY
FUND FUND FUND FUND FUND FUND
DIVISION 4 DIVISION 14 DIVISION 11 DIVISION 15 DIVISION 16 DIVISION 17
------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
$480,090,535 $152,407,245 $199,139,104 $240,566,401 $66,881,957 $374,148,985
316,741 (416,173) 548,336 577,364 253,619 1,064,371
------------ ------------ ------------ ------------ ----------- ------------
$480,407,276 $151,991,072 $199,687,440 $241,143,765 $67,135,576 $375,213,356
============ ============ ============ ============ =========== ============
$480,328,146 $151,918,885 $199,562,349 $241,143,765 $67,135,576 $375,193,754
79,130 72,187 125,091 -- -- 19,602
------------ ------------ ------------ ------------ ----------- ------------
$480,407,276 $151,991,072 $199,687,440 $241,143,765 $67,135,576 $375,213,356
============ ============ ============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
GOVERNMENT INTERNATIONAL DREYFUS ASSET TEMPLETON
SECURITIES GOVERNMENT MONEY MARKET FUND SMALL CAP ALLOCATION INTERNATIONAL
FUND BOND FUND ---------------------------- FUND FUND FUND
DIVISION 8 DIVISION 13 DIVISION 2 DIVISION 6 DIVISION 18 DIVISION 19 DIVISION 20
----------- ------------ ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$71,615,518 $112,179,184 $6,379,563 $80,556,398 $356,075,243 $94,348,477 $249,894,383
88,257 132,996 11,459 (299,003) 828,651 276,875 486,968
----------- ------------ ---------- ----------- ------------ ----------- ------------
$71,703,775 $112,312,180 $6,391,022 $80,257,395 $356,903,894 $94,625,352 $250,381,351
=========== ============ ========== =========== ============ =========== ============
$71,703,775 $112,312,180 $6,391,022 $80,239,114 $356,865,344 $94,600,086 $250,369,073
-- -- -- 18,281 38,550 25,266 12,278
----------- ------------ ---------- ----------- ------------ ----------- ------------
$71,703,775 $112,312,180 $6,391,022 $80,257,395 $356,903,894 $94,625,352 $250,381,351
=========== ============ ========== =========== ============ =========== ============
</TABLE>
5
<PAGE> 93
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
STOCK INDEX FUND
---------------------------------------------------------------
INVESTMENT INCOME: DIVISION 10A DIVISION 10B DIVISION 10C DIVISION 10D
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Dividends from mutual funds . . . . . . . . . . . $ 6,876,645 $ 578,463 $ 19,463,430 $ 868,192
----------- ---------- ------------ -----------
EXPENSES:
Mortality risk charge . . . . . . . . . . . . . . 2,492,730 74,835 7,012,079 367,749
Expense risk charge . . . . . . . . . . . . . . . 623,182 10,205 1,753,020 27,680
----------- ---------- ------------ -----------
Total expenses . . . . . . . . . . . . . . . . 3,115,912 85,040 8,765,099 395,429
----------- ---------- ------------ -----------
NET INVESTMENT INCOME . . . . . . . . . . . . . . 3,760,733 493,423 10,698,331 472,763
----------- ---------- ------------ -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments . . . . . . . . 5,349,737 631,222 10,775,457 1,335,894
Capital gains distributions from mutual funds . . 6,875,040 570,166 21,483,819 831,333
Net unrealized appreciation (depreciation)
of investments during the period . . . . . . . 78,996,842 6,528,773 221,238,425 9,456,579
----------- ---------- ------------ -----------
Net realized and unrealized gain on investments . 91,221,619 7,730,161 253,497,701 11,623,806
----------- ---------- ------------ -----------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . . . . $94,982,352 $8,223,584 $264,196,032 $12,096,569
=========== ========== ============ ===========
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
SOCIAL TIMED
AWARENESS OPPORTUNITY CAPITAL CONSERVATION FUND
FUND FUND --------------------------
INVESTMENT INCOME: DIVISION 12 DIVISION 5 DIVISION 1 DIVISION 7
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Dividends from mutual funds . . . . . . . . . . . . $ 1,076,551 $ 7,221,681 $ 528,894 $3,067,082
----------- ----------- ---------- ----------
EXPENSES:
Mortality risk charge . . . . . . . . . . . . . . . 381,303 1,438,653 74,198 367,628
Expense risk charge . . . . . . . . . . . . . . . . 95,326 330,908 5,585 91,907
----------- ----------- ---------- ----------
Total expenses . . . . . . . . . . . . . . . . . 476,629 1,769,561 79,783 459,535
----------- ----------- ---------- ----------
NET INVESTMENT INCOME . . . . . . . . . . . . . . . 599,922 5,452,120 449,111 2,607,547
----------- ----------- ---------- ----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments . . . . . . 371,169 2,006,917 65,122 (138,616)
Capital gains distributions from mutual funds . . . 3,609,468 3,186,462 - -
Net unrealized appreciation of investments . . . .
during the period . . . . . . . . . . . . . . . . . 10,227,915 26,710,438 906,759 5,643,853
----------- ----------- ---------- ----------
Net realized and unrealized gain on investments . . 14,208,552 31,903,817 971,881 5,505,237
----------- ----------- ---------- ----------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . . . . . . . $14,808,474 $37,355,937 $1,420,992 $8,112,784
=========== =========== ========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE> 94
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MIDCAP SMALL CAP INTERNATIONAL GROWTH & SCIENCE &
INDEX INDEX EQUITIES GROWTH INCOME TECHNOLOGY
FUND FUND FUND FUND FUND FUND
DIVISION 4 DIVISION 14 DIVISION 11 DIVISION 15 DIVISION 16 DIVISION 17
------------ ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 6,653,173 $ 1,907,029 $ 3,271,083 $ 309,137 $ 301,811 $ 608,070
------------ ----------- ----------- ----------- ---------- -----------
3,436,876 1,074,988 1,572,989 942,972 301,789 1,632,154
824,595 268,747 393,247 235,743 75,447 408,038
------------ ----------- ----------- ----------- ---------- -----------
4,261,471 1,343,735 1,966,236 1,178,715 377,236 2,040,192
------------ ----------- ----------- ----------- ---------- -----------
2,391,702 563,294 1,304,847 (869,578) (75,425) (1,432,122)
------------ ----------- ----------- ----------- ---------- -----------
10,603,188 2,963,270 13,215,875 8,587 19,953 6,545,968
17,377,938 2,945,819 4,363,325 3,650,399 472,785 37,380,606
76,322,743 24,766,420 (725,229) 39,103,633 8,794,032 41,310,631
------------ ----------- ----------- ----------- ---------- -----------
104,303,869 30,675,509 16,853,971 42,762,619 9,286,770 85,237,205
------------ ----------- ----------- ----------- ---------- -----------
$106,695,571 $31,238,803 $18,158,818 $41,893,041 $9,211,345 $83,805,083
============ =========== =========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
GOVERNMENT INTERNATIONAL DREYFUS ASSET TEMPLETON
SECURITIES GOVERNMENT MONEY MARKET FUND SMALL CAP ALLOCATION INTERNATIONAL
FUND BOND FUND --------------------------- FUND FUND FUND
DIVISION 8 DIVISION 13 DIVISION 2 DIVISION 6 DIVISION 18 DIVISION 19 DIVISION 20
---------- ----------- ---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$3,526,257 $4,148,671 $376,138 $4,020,847 $ 1,283,472 $ 1,162,767 $ 817,765
---------- ---------- -------- ---------- ----------- ----------- -----------
435,010 551,505 64,741 594,817 1,743,882 513,382 1,271,932
108,752 137,876 4,873 148,704 980,933 288,777 715,461
---------- ---------- -------- ---------- ----------- ----------- -----------
543,762 689,381 69,614 743,521 2,724,815 802,159 1,987,393
---------- ---------- -------- ---------- ----------- ----------- -----------
2,982,495 3,459,290 306,524 3,277,326 (1,441,343) 360,608 (1,169,628)
---------- ---------- -------- ---------- ----------- ----------- -----------
(28,711) 911,852 - - 26,776 87,754 25,628
- 114,019 - - 6,796,184 - 350,470
5,103,399 3,111,995 - - 47,179,100 11,935,576 23,406,038
---------- ---------- -------- ---------- ----------- ----------- -----------
5,074,688 4,137,866 - - 54,002,060 12,023,330 23,782,136
---------- ---------- -------- ---------- ----------- ----------- -----------
$8,057,183 $7,597,156 $306,524 $3,277,326 $52,560,717 $12,383,938 $22,612,508
========== ========== ======== ========== =========== =========== ===========
</TABLE>
7
<PAGE> 95
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
STOCK INDEX FUND
--------------------------------------------------------------
DIVISION 10A DIVISION 10B
----------------------------- -----------------------------
OPERATIONS: 1995 1994 1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net investment income . . . . . . . . . . . . . . . . . . . $ 3,760,733 $ 4,490,176 $ 493,423 $ 541,395
Net realized gain (loss) on investments . . . . . . . . . . 5,349,737 (266,345) 631,222 (16,715)
Capital gains distributions from mutual funds . . . . . . . 6,875,040 638,819 570,166 54,939
Net unrealized appreciation (depreciation)
of investments during the year . . . . . . . . . . . . . 78,996,842 (5,896,939) 6,528,773 (495,564)
----------------------------- -----------------------------
Increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . . 94,982,352 (1,034,289) 8,223,584 84,055
----------------------------- -----------------------------
PRINCIPAL TRANSACTIONS:
Purchase payments . . . . . . . . . . . . . . . . . . . . . 5,033,111 5,464,415 574,384 720,902
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees . . . . . . . . . . . (16,541,542) (20,019,026) (1,698,590) (1,706,119)
Annuity benefit payments . . . . . . . . . . . . . . . . . (1,296,973) (1,114,443) (218,489) (205,698)
Amounts transferred (to) from VALIC general account . . . . (23,599,151) (6,986,742) (2,885,564) (256,628)
----------------------------- -----------------------------
Increase (decrease) in net assets
resulting from principal transactions . . . . . . . (36,404,555) (22,655,796) (4,228,259) (1,447,543)
----------------------------- -----------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . 58,577,797 (23,690,085) 3,995,325 (1,363,488)
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . . 282,591,380 306,281,465 24,298,368 25,661,856
----------------------------- -----------------------------
End of year . . . . . . . . . . . . . . . . . . . . . . . . $341,169,177 $ 282,591,380 $ 28,293,693 $ 24,298,368
============================= =============================
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year . . . . . . . . . . . 33,814,520 36,512,399 1,836,094 1,937,835
Purchase payments . . . . . . . . . . . . . . . . . . . . . 497,922 678,364 39,513 57,856
Surrenders . . . . . . . . . . . . . . . . . . . . . . . . (1,718,657) (2,487,947) (110,735) (138,745)
Transfers -- interdivision and (to) from VALIC general
account . . . . . . . . . . . . . . . . . . . . . . . (2,598,422) (888,296) (204,347) (20,852)
----------------------------- -----------------------------
Accumulation units end of year . . . . . . . . . . . . . . 29,995,363 33,814,520 1,560,525 1,836,094
============================= =============================
<CAPTION>
DECEMBER 31: DECEMBER 31:
----------------------------- -----------------------------
1995 1994 1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Accumulation unit value . . . . . . . . . . . . . . . . . . $ 11.036946 $ 8.116786 $ 17.221812 $ 12.582568
----------------------------- -----------------------------
Annuity unit value assuming a 3.5% discount factor . . . . $ 3.298369 $ 2.510493 $ 4.376632 $ 3.309445
============================= =============================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 96
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION> SMALL CAP
STOCK INDEX FUND MIDCAP INDEX FUND INDEX FUND
- ------------------------------------------------------------- ----------------------------- ----------------------------
DIVISION 10C DIVISION 10D DIVISION 4 DIVISION 14
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
1995 1994 1995 1994 1995 1994 1995 1994
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 10,698,331 $ 10,610,432 $ 472,763 $ 605,767 $ 2,391,702 $ 2,515,091 $ 563,294 $ 341,917
10,775,457 4,405,234 1,335,894 49,938 10,603,188 2,119,902 2,963,270 1,086,972
21,483,819 1,624,189 831,333 84,388 17,377,938 11,552,151 2,945,819 --
221,238,425 (17,763,623) 9,456,579 (896,531) 76,322,743 (32,449,763) 24,766,420 (5,860,073)
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
264,196,032 (1,123,768) 12,096,569 (156,438) 106,695,571 (16,262,619) 31,238,803 (4,431,184)
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
155,833,642 173,237,158 1,280,197 1,678,616 87,946,264 124,009,106 40,608,391 60,678,232
(30,060,583) (26,626,162) (2,417,823) (2,632,793) (15,264,152) (14,276,915) (4,632,557) (3,630,894)
(29,665) (23,752) (5,520) (3,736) (16,844) (14,576) (3,022) --
(42,300,802) (65,001,259) (7,115,532) (4,630,624) (69,269,652) (27,422,005) (38,506,364) (1,057,342)
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
83,442,592 81,585,985 (8,258,678) (5,588,537) 3,395,616 82,295,610 (2,533,552) 55,989,996
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
347,638,624 80,462,217 3,837,891 (5,744,975) 110,091,187 66,032,991 28,705,251 51,558,812
719,745,087 639,282,870 37,367,315 43,112,290 370,316,089 304,283,098 123,285,821 71,727,009
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
$1,067,383,711 $ 719,745,087 $ 41,205,206 $ 37,367,315 $ 480,407,276 $ 370,316,089 $ 151,991,072 $ 123,285,821
============================= ============================ ============================ ============================
416,234,288 369,550,060 12,207,684 14,043,516 171,442,018 134,621,879 100,383,839 56,159,647
76,950,994 99,449,095 341,405 551,269 35,874,094 55,929,821 30,141,511 48,518,804
(14,254,441) (14,897,712) (663,263) (863,807) (5,995,776) (6,365,496) (3,356,851) (2,868,199)
(23,675,598) (37,867,155) (1,999,953) (1,523,294) (28,706,646) (12,744,186) (28,832,504) (1,426,413)
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
455,255,243 416,234,288 9,885,873 12,207,684 172,613,690 171,442,018 98,335,995 100,383,839
============================= ============================ ============================ ============================
<CAPTION>
DECEMBER 31: DECEMBER 31: DECEMBER 31: DECEMBER 31:
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
1995 1994 1995 1994 1995 1994 1995 1994
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2.343900 $ 1.724134 $ 4.155057 $ 3.056808 $ 2.782677 $ 2.153183 $ 1.544896 $ 1.222329
- ----------------------------- ---------------------------- ---------------------------- ----------------------------
$ 1.776053 $ 1.352112 $ 2.582770 $ 1.966534 $ 1.799452 $ 1.441063 $ 1.361960 $ 1.115264
============================= ============================ ============================ ============================
</TABLE>
9
<PAGE> 97
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITIES
FUND GROWTH FUND
----------------------------- -----------------------------
DIVISION 11 DIVISION 15
----------------------------- -----------------------------
OPERATIONS: 1995 1994 1995 1994*
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net investment income . . . . . . . . . . . . . . . . . . . $ 1,304,847 $ 586,461 $ (869,578) $ (3,344)
Net realized gain on investments . . . . . . . . . . . . . 13,215,875 4,189,593 8,587 2
Capital gains distributions from mutual funds . . . . . . . 4,363,325 1,224,134 3,650,399 --
Net unrealized appreciation (depreciation)
of investments during the year . . . . . . . . . . . . . (725,229) 1,953,569 39,103,633 330,403
----------------------------- -----------------------------
Increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . . 18,158,818 7,953,757 41,893,041 327,061
----------------------------- -----------------------------
PRINCIPAL TRANSACTIONS:
Purchase payments . . . . . . . . . . . . . . . . . . . . . 52,726,233 70,132,976 58,223,803 4,547,841
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees . . . . . . . . . . . (6,722,321) (6,159,144) (1,776,523) (39,858)
Annuity benefit payments . . . . . . . . . . . . . . . . . (5,870) (2,449) -- --
Amounts transferred (to) from VALIC general account . . . . (63,364,477) 11,350,355 109,893,422 28,074,978
----------------------------- -----------------------------
Increase (decrease) in net assets
resulting from principal transactions . . . . . . . (17,366,435) 75,321,738 166,340,702 32,582,961
----------------------------- -----------------------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . . . . . . . . 792,383 83,275,495 208,233,743 32,910,022
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . . 198,895,057 115,619,562 32,910,022 --
----------------------------- -----------------------------
End of year . . . . . . . . . . . . . . . . . . . . . . . . $199,687,440 $ 198,895,057 $241,143,765 $ 32,910,022
============================= =============================
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year . . . . . . . . . . . 187,749,916 117,215,227 32,633,370 --
Purchase payments . . . . . . . . . . . . . . . . . . . . . 49,402,081 65,406,765 45,984,606 4,373,529
Surrenders . . . . . . . . . . . . . . . . . . . . . . . . (6,214,230) (5,718,100) (1,266,891) (40,064)
Transfers -- interdivision and (to) from VALIC general
account . . . . . . . . . . . . . . . . . . . . . . . . (58,373,749) 10,846,024 87,066,763 28,299,905
----------------------------- -----------------------------
Accumulation units end of year . . . . . . . . . . . . . . 172,564,018 187,749,916 164,417,848 32,633,370
============================= =============================
<CAPTION>
DECEMBER 31: DECEMBER 31:
----------------------------- -----------------------------
1995 1994 1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Accumulation unit value . . . . . . . . . . . . . . . . . . $ 1.156454 $ 1.054460 $ 1.466652 $ 1.001834
----------------------------- -----------------------------
Annuity unit value assuming a 3.5% discount factor . . . . $ 0.933003 $ 0.880460 $ 1.384532 $ 0.978806
============================= =============================
</TABLE>
* For the period from July 11, 1994 to December 31, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 98
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH & INCOME FUND SCIENCE & TECHNOLOGY FUND SOCIAL AWARENESS FUND
- ------------------------------------ ------------------------------------ -----------------------------------
DIVISION 16 DIVISION 17 DIVISION 12
- ------------------------------------ ------------------------------------ -----------------------------------
1995 1994* 1995 1994* 1995 1994
- ------------------------------------ ------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
$ (75,425) $ 4,055 $ (1,432,122) $ (54,071) $ 599,922 $ 484,291
19,953 160 6,545,968 250,313 371,169 632,326
472,785 -- 37,380,606 549,747 3,609,468 2,328,955
8,794,032 85,633 41,310,631 2,692,873 10,227,915 (4,358,741)
- ------------------------------------ ------------------------------------ -----------------------------------
9,211,345 89,848 83,805,083 3,438,862 14,808,474 (913,169)
- ------------------------------------ ------------------------------------ -----------------------------------
17,507,504 1,630,675 93,027,877 6,652,744 10,849,944 13,160,211
(641,935) (5,453) (3,055,711) (37,889) (1,516,923) (1,413,415)
-- -- (824) -- -- --
28,680,150 10,663,442 147,758,969 43,624,245 (2,864,774) (7,867,172)
- ------------------------------------ ------------------------------------ -----------------------------------
45,545,719 12,288,664 237,730,311 50,239,100 6,468,247 3,879,624
- ------------------------------------ ------------------------------------ -----------------------------------
54,757,064 12,378,512 321,535,394 53,677,962 21,276,721 2,966,455
12,378,512 -- 53,677,962 -- 38,823,089 35,856,634
- ------------------------------------ ------------------------------------ -----------------------------------
$ 67,135,576 $ 12,378,512 $ 375,213,356 $ 53,677,962 $ 60,099,810 $ 38,823,089
==================================== ==================================== ===================================
12,386,602 -- 42,726,137 -- 29,015,764 26,230,566
14,980,745 1,583,044 54,428,033 5,315,122 6,860,477 9,604,919
(455,265) (5,487) (1,584,330) (32,041) (929,671) (983,733)
24,867,007 10,809,045 92,292,392 37,443,056 (2,196,450) (5,835,988)
- ------------------------------------ ------------------------------------ -----------------------------------
51,779,089 12,386,602 187,862,232 42,726,137 32,750,120 29,015,764
==================================== ==================================== ===================================
<CAPTION>
DECEMBER 31: DECEMBER 31: DECEMBER 31:
- ------------------------------------ ------------------------------------ -----------------------------------
1995 1994 1995 1994 1995 1994
- ------------------------------------ ------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.296577 $ 0.993168 $ 1.997175 $ 1.247713 $ 1.835102 $ 1.333899
- ------------------------------------ ------------------------------------ -----------------------------------
$ 1.223980 $ 0.970339 $ 1.885352 $ 1.219034 $ 1.480522 $ 1.113787
==================================== ==================================== ===================================
</TABLE>
11
<PAGE> 99
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
TIMED OPPORTUNITY CAPITAL CONSERVATION
FUND FUND
----------------------------- -----------------------------
DIVISION 5 DIVISION 1
----------------------------- -----------------------------
OPERATIONS: 1995 1994 1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net investment income . . . . . . . . . . . . . . . . . . $ 5,452,120 $ 4,810,838 $ 449,111 $ 517,106
Net realized gain (loss) on investments . . . . . . . . . 2,006,917 735,641 65,122 32,250
Capital gains distributions from mutual funds . . . . . . 3,186,462 6,863,526 -- --
Net unrealized appreciation (depreciation)
of investments during the year . . . . . . . . . . . . 26,710,438 (16,833,221) 906,759 (1,254,436)
----------------------------- -----------------------------
Increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . 37,355,937 (4,423,216) 1,420,992 (705,080)
----------------------------- -----------------------------
PRINCIPAL TRANSACTIONS:
Purchase payments . . . . . . . . . . . . . . . . . . . . 20,940,181 36,297,892 286,600 494,060
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees . . . . . . . . . . (7,824,702) (8,285,289) (623,792) (1,098,891)
Annuity benefit payments . . . . . . . . . . . . . . . . (6,591) (4,816) (499) (478)
Amounts transferred (to) from VALIC general account . . . (42,300,580) (36,353,014) (1,306,120) (1,152,049)
----------------------------- -----------------------------
Increase (decrease) in net assets
resulting from principal transactions . . . . . . (29,191,692) (8,345,227) (1,643,811) (1,757,358)
----------------------------- -----------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . 8,164,245 (12,768,443) (222,819) (2,462,438)
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 174,789,460 187,557,903 8,006,268 10,468,706
----------------------------- -----------------------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $182,953,705 $ 174,789,460 $ 7,783,449 $ 8,006,268
============================= =============================
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year . . . . . . . . . . 89,377,860 93,899,802 2,953,861 3,590,916
Purchase payments . . . . . . . . . . . . . . . . . . . . 9,806,864 18,196,642 96,297 145,757
Surrenders . . . . . . . . . . . . . . . . . . . . . . . (3,569,040) (4,118,862) (207,008) (362,666)
Transfers -- interdivision and (to) from VALIC general
account . . . . . . . . . . . . . . . . . . . . . . . (19,764,253) (18,599,722) (441,065) (420,146)
----------------------------- -----------------------------
Accumulation units end of year . . . . . . . . . . . . . 75,851,431 89,377,860 2,402,085 2,953,861
============================= =============================
<CAPTION>
DECEMBER 31: DECEMBER 31:
----------------------------- -----------------------------
1995 1994 1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Accumulation unit value . . . . . . . . . . . . . . . . . $ 2.411022 $ 1.951533 $ 3.238370 $ 2.709029
----------------------------- -----------------------------
Annuity unit value assuming a 3.5% discount factor . . . $ 1.581407 $ 1.324778 $ 1.843690 $ 1.596246
============================= =============================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 100
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL CONSERVATION GOVERNMENT SECURITIES INTERNATIONAL GOVERNMENT
FUND FUND BOND FUND
- ------------------------------------ ------------------------------------ -----------------------------------
DIVISION 7 DIVISION 8 DIVISION 13
- ------------------------------------ ------------------------------------ -----------------------------------
1995 1994 1995 1994 1995 1994
- ------------------------------------ ------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
$ 2,607,547 $ 2,360,212 $ 2,982,495 $ 2,030,237 $ 3,459,290 $ 1,361,407
(138,616) 350,094 (28,711) 316,682 911,852 245,193
-- -- -- -- 114,019 --
5,643,853 (5,791,380) 5,103,399 (4,822,548) 3,111,995 (642,360)
- ------------------------------------ ------------------------------------ -----------------------------------
8,112,784 (3,081,074) 8,057,183 (2,475,629) 7,597,156 964,240
- ------------------------------------ ------------------------------------ -----------------------------------
10,464,260 14,414,782 15,047,915 13,894,906 31,073,737 12,960,014
(1,972,220) (2,021,727) (1,987,445) (1,878,777) (1,946,252) (981,285)
-- -- -- -- -- --
(3,821,311) (8,653,752) 9,219,172 (11,636,951) 42,026,449 (2,227,507)
- ------------------------------------ ------------------------------------ -----------------------------------
4,670,729 3,739,303 22,279,642 379,178 71,153,934 9,751,222
- ------------------------------------ ------------------------------------ -----------------------------------
12,783,513 658,229 30,336,825 (2,096,451) 78,751,090 10,715,462
40,804,553 40,146,324 41,366,950 43,463,401 33,561,090 22,845,628
- ------------------------------------ ------------------------------------ -----------------------------------
$ 53,588,066 $ 40,804,553 $ 71,703,775 $ 41,366,950 $ 112,312,180 $ 33,561,090
==================================== ==================================== ===================================
26,859,219 24,628,606 26,667,073 26,563,166 25,691,713 18,155,381
6,253,935 9,129,477 9,058,310 8,675,976 21,413,110 10,044,637
(1,058,493) (1,241,827) (1,149,951) (1,181,704) (1,286,336) (763,521)
(2,480,853) (5,657,037) 5,271,621 (7,390,365) 27,550,763 (1,744,784)
- ------------------------------------ ------------------------------------ -----------------------------------
29,573,808 26,859,219 39,847,053 26,667,073 73,369,250 25,691,713
==================================== ==================================== ===================================
<CAPTION>
DECEMBER 31: DECEMBER 31: DECEMBER 31:
- ------------------------------------ ------------------------------------ -----------------------------------
1995 1994 1995 1994 1995 1994
- ------------------------------------ ------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.812011 $ 1.515278 $ 1.799475 $ 1.547150 $ 1.530780 $ 1.301357
- ------------------------------------ ------------------------------------ -----------------------------------
$ 1.289558 $ 1.116084 $ 1.280634 $ 1.139558 $ 1.323493 $ 1.164474
==================================== ==================================== ===================================
</TABLE>
13
<PAGE> 101
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
MONEY MARKET FUND
--------------------------------------------------------------
DIVISION 2 DIVISION 6
----------------------------- -----------------------------
OPERATIONS: 1995 1994 1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net investment income . . . . . . . . . . . . . . . . . . $ 306,524 $ 211,175 $ 3,277,326 $ 1,241,669
Net realized gain on investments . . . . . . . . . . . . -- -- -- --
Capital gains distributions from mutual funds . . . . . . -- -- -- --
Net unrealized appreciation (depreciation)
of investments during the year . . . . . . . . . . . . -- -- -- --
----------------------------- -----------------------------
Increase (decrease) in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . 306,524 211,175 3,277,326 1,241,669
----------------------------- -----------------------------
PRINCIPAL TRANSACTIONS:
Purchase payments . . . . . . . . . . . . . . . . . . . . 355,756 221,092 26,840,702 13,855,791
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees . . . . . . . . . . (681,366) (663,266) (7,793,169) (4,406,881)
Annuity benefit payments . . . . . . . . . . . . . . . . -- -- (1,574) (1,567)
Amounts transferred (to) from VALIC general account . . . (806,250) (978,344) (54,484,648) 66,014,809
----------------------------- -----------------------------
Increase (decrease) in net assets
resulting from principal transactions . . . . . . (1,131,860) (1,420,518) (35,438,689) 75,462,152
----------------------------- -----------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . (825,336) (1,209,343) (32,161,363) 76,703,821
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 7,216,358 8,425,701 112,418,758 35,714,937
----------------------------- -----------------------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 6,391,022 $ 7,216,358 $ 80,257,395 $ 112,418,758
============================= =============================
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year . . . . . . . . . . 3,442,237 4,129,981 75,765,781 24,799,810
Purchase payments . . . . . . . . . . . . . . . . . . . . 165,743 107,142 18,072,687 9,439,315
Surrenders . . . . . . . . . . . . . . . . . . . . . . . (316,475) (314,181) (5,090,822) (3,026,130)
Transfers -- interdivision and (to) from VALIC general
account . . . . . . . . . . . . . . . . . . . . . . (374,144) (480,705) (36,839,889) 44,552,786
----------------------------- -----------------------------
Accumulation units end of year . . . . . . . . . . . . . 2,917,361 3,442,237 51,907,757 75,765,781
============================= =============================
<CAPTION>
DECEMBER 31: DECEMBER 31:
----------------------------- -----------------------------
1995 1994 1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Accumulation unit value . . . . . . . . . . . . . . . . . $ 2.190686 $ 2.096416 $ 1.545802 $ 1.479129
----------------------------- -----------------------------
Annuity unit value assuming a 3.5% discount factor . . . $ 1.392992 $ 1.379656 $ 1.088077 $ 1.077548
============================= =============================
</TABLE>
* For the period from July 11, 1994 to December 31, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 102
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TEMPLETON ASSET
DREYFUS SMALL CAP FUND ALLOCATION FUND TEMPLETON INTERNATIONAL FUND
- ------------------------------------ ------------------------------------ -----------------------------------
DIVISION 18 DIVISION 19 DIVISION 20
- ------------------------------------ ------------------------------------ -----------------------------------
1995 1994* 1995 1994* 1995 1994*
- ------------------------------------ ------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
$ (1,441,343) $ 166,996 $ 360,608 $ (75,725) $ (1,169,628) $ (164,482)
26,776 -- 87,754 -- 25,628 121
6,796,184 386,988 -- -- 350,470 --
47,179,100 (102,019) 11,935,576 (729,094) 23,406,038 (2,235,982)
- ------------------------------------ ------------------------------------ -----------------------------------
52,560,717 451,965 12,383,938 (804,819) 22,612,508 (2,400,343)
- ------------------------------------ ------------------------------------ -----------------------------------
96,201,687 12,217,697 26,412,918 4,656,678 69,120,243 10,111,560
(3,867,838) (111,066) (1,156,891) (47,985) (2,577,387) (41,962)
(915) -- (1,361) -- (463) --
122,606,635 76,845,012 24,133,475 29,049,399 89,125,401 64,431,794
- ------------------------------------ ------------------------------------ -----------------------------------
214,939,569 88,951,643 49,388,141 33,658,092 155,667,794 74,501,392
- ------------------------------------ ------------------------------------ -----------------------------------
267,500,286 89,403,608 61,772,079 32,853,273 178,280,302 72,101,049
89,403,608 -- 32,853,273 -- 72,101,049 --
- ------------------------------------ ------------------------------------ -----------------------------------
$ 356,903,894 $ 89,403,608 $ 94,625,352 $ 32,853,273 $ 250,381,351 $ 72,101,049
==================================== ==================================== ===================================
85,169,871 -- 32,807,602 -- 71,716,511 --
80,950,706 11,303,726 24,212,805 4,421,687 65,697,216 9,484,235
(2,954,777) (107,113) (964,768) (48,133) (2,198,909) (41,499)
104,569,419 73,973,258 22,438,866 28,434,048 83,910,108 62,273,775
- ------------------------------------ ------------------------------------ -----------------------------------
267,735,219 85,169,871 78,494,505 32,807,602 219,124,926 71,716,511
==================================== ==================================== ===================================
<CAPTION>
DECEMBER 31: DECEMBER 31: DECEMBER 31:
- ------------------------------------ ------------------------------------ -----------------------------------
1995 1994 1995 1994 1995 1994
- ------------------------------------ ------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.332904 $ 1.043156 $ 1.205181 $ 0.995860 $ 1.142586 $ 0.999282
- ------------------------------------ ------------------------------------ -----------------------------------
$ 1.267071 $ 1.026303 $ 1.145656 $ 0.979771 $ 1.086152 $ 0.983138
==================================== ==================================== ===================================
</TABLE>
15
<PAGE> 103
================================================================================
NOTES TO FINANCIAL STATEMENTS SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
NOTE A -- ORGANIZATION
Separate Account A (the "Separate Account"), established by The Variable
Annuity Life Insurance Company ("VALIC") on April 18, 1979, is registered under
the Investment Company Act of 1940 as a unit investment trust. The Separate
Account is comprised of twenty-one subaccounts or "divisions." Each division,
which represents a variable investment vehicle available only through a VALIC
annuity contract, invests in one of the following mutual funds:
AMERICAN GENERAL SERIES PORTFOLIO COMPANY ("AGSPC"):
Stock Index Fund (Divisions 10A, B, C, and D),
MidCap Index Fund (Division 4),
Small Cap Index Fund (Division 14),
International Equities Fund (Division 11),
Growth Fund (Division 15),
Growth & Income Fund (Division 16),
Science & Technology Fund (Division 17),
Social Awareness Fund (Division 12),
Timed Opportunity Fund (Division 5),
Capital Conservation Fund (Divisions 1 and 7),
Government Securities Fund (Division 8),
International Government Bond Fund (Division 13), and
Money Market Fund (Divisions 2 and 6).
DREYFUS VARIABLE INVESTMENT FUND:
Dreyfus Small Cap Portfolio (Division 18)
TEMPLETON VARIABLE PRODUCTS SERIES FUND:
Templeton Asset Allocation Fund (Division 19)
Templeton International Fund (Division 20)
Divisions 15, 16, 17, 18, 19, and 20 commenced operations on July 11, 1994.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The assets of the Separate Account are segregated from VALIC's other
assets. The operations of the Separate Account are part of VALIC. The following
is a summary of significant accounting policies consistently followed by the
Separate Account in the preparation of its financial statements.
INVESTMENT VALUATION. Investments in mutual funds (the "Funds") are valued
at the net asset (market) value per share at the close of each business day.
INVESTMENT TRANSACTIONS. Investment transactions are accounted for on the
trade date. Realized gains and losses on investments are determined on the
basis of identified cost. Capital gain distributions from mutual funds are
recorded on the ex-dividend date and reinvested upon receipt.
INVESTMENT INCOME. Dividend income from mutual funds is recorded on the
ex-dividend date and reinvested upon receipt.
ANNUITY RESERVES. Net payments made by variable annuity contract owners are
accumulated based on the performance of the investments of the Separate Account
until the date the contract owners select to commence annuity payments.
Reserves for annuities on which benefits are currently payable are provided for
based upon estimated mortality and other assumptions, including provisions for
the risk of adverse deviation from assumptions, which were appropriate at the
time the contracts were issued. The 1949 Progressive Annuity Table has been
used in the computation of annuity reserves for currently payable contracts.
Participants are able to elect investment rates between 3.0% and 6.0%, as
regulated by the applicable state laws.
NOTE C -- TRANSACTIONS WITH AFFILIATES
VALIC acts as investment adviser and transfer agent to AGSPC.
The Separate Account is charged for mortality and expense risks assumed by
VALIC. The charge, based on the daily net assets of each division, is assessed
daily based on the following annual rates: for Division 10B, .85% on the first
$10,000,000, .425% on the next $90,000,000, and .21% on the excess over
$100,000,000; for Divisions 1, 2, 4, 5, 6, 7, 8, 10A, 10C, 10D, 11, 12, 13, 14,
15, 16, and 17, 1.00%; and for Divisions 18, 19, and 20, 1.25%.
Pursuant to the reorganization agreement entered into on April 17, 1987,
which transferred VALIC Separate Accounts One and Two into the Separate
Account, expenses of Division 10A (formerly Separate Account One) are limited
to 1.4157% of average daily net assets, and expenses of Division 10B (formerly
Separate Account Two) are limited to the following rates based on average daily
net assets: 0.6966% on the first $25,434,267 and 0.5% on the next $74,565,733.
Accordingly, during the years ended December 31, 1995 and 1994, VALIC reduced
expenses of Division 10B by $69,586 and $67,955, respectively.
A portion of the annual contract maintenance charge is assessed each
contract (except those relating to Divisions 10A and 10B) by VALIC on the last
day of the calendar quarter in which VALIC receives the first purchase payment,
and in quarterly installments thereafter during the accumulation period.
Maintenance charges assessed totaled $2,494,903 and $1,857,628 for the years
ended December 31, 1995, and December 31, 1994, respectively.
VALIC received surrender charges of $1,299,069 and $1,233,026 for the years
ended December 31, 1995, and December 31, 1994, respectively. In addition,
VALIC received $100,290 and $18,404 for the year ended December 31, 1995, in
sales load on variable annuity purchase payments for Divisions 10A and 10B,
respectively. VALIC received $124,462 and $22,329 for the year ended December
31, 1994, in sales load on variable annuity purchase payments for Divisions 10A
and 10B, respectively.
16
<PAGE> 104
================================================================================
NOTES TO FINANCIAL STATEMENTS - CONTINUED SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
NOTE D -- INVESTMENTS
The cost of fund shares is the same for financial reporting and federal
income tax purposes. The following is a summary of fund shares owned as of
December 31, 1995:
<TABLE>
<CAPTION>
MARKET UNREALIZED
UNDERLYING FUND DIVISION SHARES PRICE MARKET COST APPRECIATION
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stock Index Fund . . . . . . . . 10A,B,C,D 77,628,358 $ 19.03 $ 1,477,267,662 $ 1,105,508,457 $371,759,205
MidCap Index Fund . . . . . . . . 4 27,734,866 17.31 480,090,535 397,011,660 83,078,875
Small Cap Index Fund . . . . . . 14 10,710,277 14.23 152,407,245 129,522,422 22,884,823
International Equities Fund . . . 11 18,628,541 10.69 199,139,104 187,888,444 11,250,660
Growth Fund . . . . . . . . . . . 15 16,488,444 14.59 240,566,401 201,132,365 39,434,036
Growth & Income Fund . . . . . . 16 5,184,648 12.90 66,881,957 58,002,292 8,879,665
Science & Technology Fund . . . . 17 20,809,176 17.98 374,148,985 330,145,481 44,003,504
Social Awareness Fund . . . . . . 12 4,237,891 14.15 59,966,151 52,197,124 7,769,027
Timed Opportunity Fund . . . . . 5 15,100,694 12.11 182,869,410 160,827,715 22,041,695
Capital Conservation Fund . . . . 1 & 7 6,169,509 9.91 61,139,836 59,432,080 1,707,756
Government Securities Fund . . . 8 7,014,252 10.21 71,615,518 70,467,996 1,147,522
International Government Bond Fund 13 9,127,680 12.29 112,179,184 109,565,749 2,613,435
Money Market Fund. . . . . . . . 2 & 6 86,935,961 1.00 86,935,961 86,935,961 --
Dreyfus Small Cap Fund . . . . . 18 7,718,952 46.13 356,075,243 308,998,162 47,077,081
Templeton Asset Allocation Fund . 19 5,037,292 18.73 94,348,477 83,141,995 11,206,482
Templeton International Fund . . 20 16,516,483 15.13 249,894,383 228,724,327 21,170,056
-----------------------------------------------
$ 4,265,526,052 $ 3,569,502,230 $696,023,822
===============================================
</TABLE>
NOTE E -- FEDERAL INCOME TAXES
VALIC is taxed as a life insurance company under the Internal Revenue Code
and includes the operations of the Separate Account in determining its federal
income tax liability. Under current federal income tax law the investment
income and capital gains from sale of investments realized by the Separate
Account are not taxable. Therefore, no federal income tax provision has been
made.
NOTE F -- SECURITY PURCHASES AND SALES
For the year ended December 31, 1995, the aggregate cost of purchases and
proceeds from sales of investments were:
<TABLE>
<CAPTION>
PURCHASES SALES
-------------------------------------
<S> <C> <C>
Stock Index Fund:
Division 10A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,829,646 $ 43,581,553
Division 10B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750,366 4,905,910
Division 10C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,148,042 50,236,291
Division 10D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,318,140 9,247,780
MidCap Index Fund Division 4 . . . . . . . . . . . . . . . . . . . . . . . 62,422,985 39,646,090
Small Cap Index Fund Division 14 . . . . . . . . . . . . . . . . . . . . . 24,793,667 23,245,115
International Equities Fund Division 11 . . . . . . . . . . . . . . . . . . 57,671,192 69,714,222
Growth Fund Division 15 . . . . . . . . . . . . . . . . . . . . . . . . . . 168,790,861 57,736
Growth & Income Fund Division 16 . . . . . . . . . . . . . . . . . . . . . 45,865,792 122,058
Science & Technology Fund Division 17 . . . . . . . . . . . . . . . . . . . 290,019,742 18,313,402
Social Awareness Fund Division 12 . . . . . . . . . . . . . . . . . . . . . 14,778,261 4,227,474
Timed Opportunity Fund Division 5 . . . . . . . . . . . . . . . . . . . . . 13,643,488 34,236,462
Capital Conservation Fund:
Division 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766,423 1,960,586
Division 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,499,959 10,443,867
Government Securities Fund Division 8 . . . . . . . . . . . . . . . . . . . 30,092,359 4,775,625
International Government Bond Fund Division 13 . . . . . . . . . . . . . . 85,454,562 10,810,456
Money Market Fund:
Division 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,717,163 3,576,785
Division 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,237,936 152,993,878
Dreyfus Small Cap Fund Division 18 . . . . . . . . . . . . . . . . . . . . 219,949,004 128,645
Templeton Asset Allocation Fund Division 19 . . . . . . . . . . . . . . . . 50,326,793 783,734
Templeton International Fund Division 20 . . . . . . . . . . . . . . . . . 155,004,679 292,803
-------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 1,555,081,060 $ 483,300,472
=====================================
</TABLE>
17
<PAGE> 105
================================================================================
REPORT OF INDEPENDENT AUDITORS SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
TO THE BOARD OF THE VARIABLE ANNUITY LIFE INSURANCE COMPANY AND CONTRACT OWNERS
OF THE VARIABLE ANNUITY LIFE INSURANCE COMPANY SEPARATE ACCOUNT A
We have audited the accompanying statements of net assets of The Variable
Annuity Life Insurance Company Separate Account A ("Separate Account A") and
each of the divisions (1, 2, 4, 5, 6, 7, 8, 10A, 10B, 10C, 10D, 11, 12, 13, 14,
15, 16, 17, 18, 19, and 20) comprising Separate Account A as of December 31,
1995. We have also audited the related statements of operations for the year
then ended and the statements of changes in net assets for each of the two
years in the period then ended of Separate Account A and each of its divisions
except for divisions 15, 16, 17, 18, 19, and 20 for which we audited the
statements of changes in net assets for the year ended December 31, 1995 and
for the period from July 11, 1994 (inception) to December 31, 1994. These
financial statements are the responsibility of Separate Account A'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 securities owned as of December 31, 1995,
by correspondence with the 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 Separate Account A and each of
the divisions comprising Separate Account A at December 31, 1995, and the
results of their operations and changes in their net assets for each of the
periods identified above, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
January 26, 1996
<PAGE> 106
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY ---------------------
SEPARATE ACCOUNT A Bulk Rate
U.S. Postage
P.O. Box 3206 PAID
Houston, Texas 77253-3206 Permit No. 6748
Houston, Texas
---------------------
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