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SEPARATE ACCOUNT A
Units of Interest Under Individual Variable Annuity Contracts
Contract Form UIT-981
Prospectus May 1, 1997
[ART]
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THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
UNITS OF INTEREST UNDER INDIVIDUAL VARIABLE
ANNUITY CONTRACTS
(CONTRACT FORM UIT-981)
SEPARATE ACCOUNT A
PROSPECTUS MAY 1, 1997
The 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 only through participation in retirement
programs which receive favorable tax deferred treatment under federal income tax
law. The Contracts are available on a flexible payment deferred, single payment
deferred, or single payment immediate annuity basis.
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
Stock Index Fund, MidCap Index Fund, Timed Opportunity Fund, Capital
Conservation Fund and Money Market Fund which are separate portfolios of
American General Series Portfolio Company (the "Series Company").
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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, 1997, 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>
<CAPTION>
PAGE
----
<S> <C>
Definitions........................... 3
Fee Table............................. 5
Introduction.......................... 7
Selected Accumulation Unit Data....... 9
Average Annual Total Return........... 10
Performance Information............... 10
Endorsements and Published
Ratings........................ 11
Annual and Cumulative Change in
Accumulation Unit Value............. 12
The Company and the Separate
Account............................. 13
Transfers Among Investment Options.... 13
Transfers During the Accumulation
Period......................... 13
Transfers During the Annuity
Period......................... 13
Other Requirements............... 14
The Funds............................. 14
Performance Data................. 15
Stock Index Fund (Division
Ten)........................... 16
MidCap Index Fund (Division
Four).......................... 17
Timed Opportunity Fund
(Division Five)................ 18
Capital Conservation Fund
(Division One)................. 19
Money Market Fund (Division
Two)........................... 20
Charges Under Variable Annuity
Contracts........................... 21
Charge for Premium Taxes......... 21
Charge for Partial and Total
Surrenders..................... 21
Charge for Annual Contract
Maintenance.................... 22
Charge to the Separate Account... 22
Miscellaneous.................... 22
Charge for Income Taxes.......... 22
Accumulation Period................... 23
Death Benefits During
Accumulation Period............ 24
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Suspension of Purchase
Payments....................... 25
Annuity Period........................ 25
Fixed or Variable Annuity
Payments....................... 25
Annuity Date..................... 25
Annuity Payment Options.......... 25
Enhancements Under Annuity
Options........................ 27
Death of Annuitant During Annuity
Period......................... 27
Surrender............................. 27
Other Contract Features............... 28
Change of Beneficiary............ 28
Revocation....................... 28
Reservation of Rights............ 28
Relationship to Employer's
Plan........................... 29
Federal Tax Matters................... 29
General.......................... 29
Taxes Payable by Participants and
Annuitants..................... 29
Section 403(b) Annuities for
Employees of Certain Tax-Exempt
Organizations or Public
Educational Institutions....... 29
Section 401 Qualified Pension,
Profit-Sharing or Annuity
Plans.......................... 30
Individual Retirement
Annuities...................... 31
Simplified Employee Pension
Plans.......................... 32
Section 457 Unfunded Deferred
Compensation Plans of Public
Employers and Tax-Exempt
Organizations.................. 32
Private Employer Unfunded
Deferred Compensation Plans.... 33
Effect of Tax Deferred
Accumulations.................. 33
Fund Diversification............. 34
Voting Rights......................... 34
</TABLE>
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DEFINITIONS
Accumulation Period -- the period between the date of the first Purchase
Payment for a Variable Annuity Contract and the Annuity Date.
Accumulation Unit ("Unit") -- an interest of a Contract Owner in a Division
of the Separate Account before Annuity Payments begin. The value of an
Accumulation Unit will vary in proportion to the net investment experience of
the respective Division of the Separate Account. (See the Statement of
Additional Information for an example of calculation of Accumulation Unit
value.)
Accumulation Value -- the Accumulation Value of a Contract on any given
date is equal to the sum of the General Account value and the Separate Account
value under the Contract.
Annuitant -- the person to whom Annuity Payments are or will be made.
Annuity Date -- the date on which Annuity Payments begin.
Annuity Option -- one of several forms in which Annuity Payments can be
made.
Annuity Payments -- payments made by the Company to an Annuitant at regular
intervals during the Annuity Period.
Annuity Period -- the period 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 will change in accordance with the net
investment experience of the Divisions selected, adjusted for the Contract's
3 1/2% initial Assumed Investment Rate. (See the Statement of Additional
Information for an example of calculation of Annuity Unit value.)
Assumed Investment Rate -- the rate used to determine the first monthly
Annuity Payment per thousand dollars of Accumulation Value. The Company will
permit each Annuitant 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%. Unless otherwise selected, the Assumed Investment
Rate shall equal 3 1/2%, and the information herein is based on that rate.
Beneficiary -- the person to whom benefits, if any, will be paid upon the
death of an Annuitant, including any contingent Beneficiary, i.e., one who
stands in the place of a Beneficiary in the event of the primary Beneficiary's
death.
Contract -- an individual Variable Annuity Contract offered by this
prospectus.
Contract Owner -- the person or entity to whom a Contract is issued. Unless
otherwise provided in an application, the Contract Owner is the Annuitant. Two
Contract Owners may be designated as co-owners when the Contract is issued
pursuant to an employer's retirement program. When co-ownership is designated
the rights vested in the Contract Owner must be jointly exercised.
Contract Year -- a 12-month period beginning with the date of issue of a
Contract, and any anniversary of that date.
Divisions of the Separate Account -- the individual subaccounts into which
the Separate Account is divided and to which Net Purchase Payments and
Accumulation Values may be allocated under a Variable Annuity Contract.
Fixed Annuity -- a series of Annuity Payments to the Annuitant made at
regular intervals which remain fixed throughout the Annuity Period and which do
not vary with investment experience.
Fund -- a mutual fund or investment portfolio of a mutual fund which is the
underlying investment medium for Net Purchase Payments and Accumulation Values
allocated to a Division of the Separate Account.
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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 Home Office of the Company shall mean its main office
located at 2929 Allen Parkway, Houston, Texas 77019.
Net Purchase Payment -- a gross Purchase Payment less any applicable taxes.
Purchase Payment -- an amount paid to the Company prior to any premium tax
or other deductions.
Separate Account -- the segregated asset account referred to as Separate
Account A which was established by the Company under the Texas Insurance Code to
receive and invest the Net Purchase Payments made under Variable Annuity
Contracts.
Surrender Value -- the Accumulation Value of a Contract less the surrender
charge, if any.
Variable Annuity -- a series of Annuity Payments, the amounts of which will
increase or decrease to reflect the net investment experience of the Divisions
of the Separate Account selected.
Variable Annuity Contract -- a Contract providing for the payment of a
Variable Annuity.
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FEE TABLE
CONTRACT OWNER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Surrender Charge (as a % of the lesser of all purchase
payments received during the last 36 months or the amount
withdrawn(2))............................................. 5%
ACCOUNT MAINTENANCE FEE(2).................................. $30
SEPARATE ACCOUNT ANNUAL EXPENSES (as a % of average account
value)
Mortality and Expense Risk Charge........................... 1.00%
</TABLE>
SERIES COMPANY ANNUAL EXPENSES (as a % of Fund average net assets)
<TABLE>
<CAPTION>
STOCK MIDCAP TIMED CAPITAL MONEY
INDEX INDEX OPPORTUNITY CONSERVATION MARKET
EXPENSES FUND FUND FUND FUND FUND
-------- ----- ------ ----------- ------------ ------
<S> <C> <C> <C> <C> <C>
Management fees(3)................................. .28% .35% .50% .50% .50%
Other expenses(4).................................. .07 .06 .07 .07 .07
Company Reduction of Fund Expenses(5).............. .00 .00 .00 .00 .00
-- -- -- -- --
Total Fund Expenses (after Reduction).............. .35% .41% .57% .57% .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 UIT-981 Contract 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........................................ $61 $ 95 $78 $171
MidCap Index Division....................................... 62 97 81 177
Timed Opportunity Division.................................. 63 102 89 195
Capital Conservation Division............................... 63 102 89 195
Money Market Division....................................... 63 102 89 195
</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 UIT-981 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........................................ $14 $45 $78 $171
MidCap Index Division....................................... 15 47 81 177
Timed Opportunity Division.................................. 17 52 89 195
Capital Conservation Division............................... 17 52 89 195
Money Market Division....................................... 17 52 89 195
</TABLE>
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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 the account maintenance fees are
available if certain conditions are met. The surrender charge is not
incurred on annuitization or upon payment of death benefits. No annual
account maintenance fee will be assessed during the Annuity Period. The
first partial surrender per Contract year of 10% or less of Accumulation
Value with respect to a Contract Owner Account will not be subject to a
surrender charge. See "Charge for Total and Partial Surrender" and "Charge
for Annual Account Maintenance."
(3) Annual management fees for the MidCap Index Fund and the Stock Index Fund
are based on each Fund's average annual 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 the Capital Conservation Fund, Money
Market Fund and Timed Opportunity 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) The Company has undertaken to reimburse Contract Owners for ordinary
business expenses of the following Funds for any fiscal year which exceed
certain levels as set forth below:
<TABLE>
<S> <C>
Capital Conservation Fund................ .95% of first $75 million plus .85% of excess
over $75 million of average net assets
Money Market Fund........................ 1.00% of average net assets
Stock Index Fund......................... 1.50% of the first $30 million plus 1.00% of
excess over $30 million of average net assets
</TABLE>
Additionally, 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, 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
understand the various expenses of the Separate Account and the Funds which are,
in effect, passed on to Contract Owners.
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 the Fee Table.
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INTRODUCTION
THE CONTRACTS ARE COMBINATION FIXED/VARIABLE CONTRACTS OFFERING
VARIABLE OR FIXED ACCUMULATIONS AND VARIABLE OR FIXED BENEFITS OR COMBINATIONS
OF BOTH. THIS PROSPECTUS DESCRIBES ONLY THE VARIABLE ASPECTS OF THE CONTRACTS,
EXCEPT WHERE FIXED ASPECTS ARE SPECIFICALLY NOTED.
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.
The Funds. Five Separate Account Divisions investing in portfolios of the
Series Company (the "Funds") are available under the Contracts in addition to
the Company's General Account. The five Funds currently underlying the available
Separate Account Divisions are: Capital Conservation Fund, Money Market Fund,
MidCap Index Fund, Timed Opportunity Fund and Stock Index Fund.
Accumulation of Purchase Payments. Prior to retirement, the Contract Owner
pursues various investment options on a variable or fixed basis by electing to
deposit Purchase Payments in up to three Divisions of the Separate Account, or
in the General Account and up to two Divisions of the Separate Account. Those
payments allocated to the Separate Account will be applied to purchase shares of
the Funds as chosen by the Contract Owner in which such Divisions of the
Separate Account invest. As the value of the investment in the Funds increases
or decreases, the value of accumulated Net Purchase Payments will increase or
decrease. The value of such accumulations is subject to deduction for charges
summarized below. (For information as to how the Contracts may be purchased, and
certain minimums that apply to Purchase Payments and Accumulation Values, see
"Accumulation Period.") Contract Owners may exercise a 10-day revocation right
(in some states this may be a 20-day revocation right). (See "Revocation.")
Surrenders. The Contract Owner 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.") The Contract must be returned to the Company before
a total surrender can be effected. A surrender charge may be assessed for a
partial or total surrender, or upon the election of a lump sum payment during
the Annuity Period under the fifth annuity option, depending on the length of
time the Contract has been in force.
Surrender Charge. A surrender charge of up to 5% of Purchase Payments
received during the most recent 36 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. (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 three Divisions of the
Separate Account, or the General Account and up to two Divisions of the Separate
Account may be utilized to provide annuity payments.
Transfers. The Company has the right to limit transfers. The Company's
current policy is that at any time during the Accumulation Period, a Contract
Owner may transfer all or part of the Accumulation Value among Divisions of the
Separate Account or to the General Account. After a transfer to the General
Account, at least 90 days must elapse before any subsequent transfer from the
General Account will be permitted.
During the Annuity Period, an Annuitant may also transfer all or part of
the Contract's Accumulation Value among Divisions of the Separate Account or to
the General Account once every 365 days. Transfers from the General Account
during the Annuity Period are not permitted.
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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 contract maintenance charge, which is currently
$30, but may be increased or decreased, is assessed on the last day of the
calendar quarter in which the first Purchase Payment is made and annually on
that date throughout the Accumulation Period for the cost of administrative
expenses with respect to each Contract. This charge will reduce the Surrender
Value of the Contract. No annual contract maintenance charge will be assessed
during the annuity period.
A daily charge at an annual rate of 1% of the average daily net asset value
of the Separate Account allocable to a Contract is imposed for certain
additional expenses and for assumption by the Company of mortality risks. In
addition, in certain states a deduction for premium taxes 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 Fee Table above, are borne indirectly by the
Contract Owners.
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SELECTED ACCUMULATION UNIT DATA
The information presented below reflects the Accumulation Unit information
for Divisions of the Separate Account through December 31, 1996.
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 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.
<TABLE>
<CAPTION>
MIDCAP TIMED CAPITAL MONEY
STOCK INDEX INDEX OPPORTUNITY CONSERVATION MARKET
DIVISION 10(1) DIVISION 4(2) DIVISION 5 DIVISION 1 DIVISION 2
-------------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
December 31, 1996
Accumulation Units in Force.............. 8,381,704 172,816,978 65,292,617 1,991,536 2,142,534
Accumulation Unit Value.................. $5.049088 $3.272588 $2.651899 $3.262402 $2.277444
December 31, 1995
Accumulation Units in Force.............. 9,885,873 172,613,690 75,851,431 2,402,085 2,917,361
Accumulation Unit Value.................. $4.155057 $2.782677 $2.411022 $3.238370 $2.190686
December 31, 1994
Accumulation Units in Force.............. 12,207,684 171,442,018 89,377,860 2,953,861 3,442,237
Accumulation Unit Value.................. $3.056808 $2.153183 $1.951533 $2.709029 $2.096416
December 31, 1993
Accumulation Units in Force.............. 14,043,516 134,621,879 93,899,802 3,590,916 4,129,981
Accumulation Unit Value.................. $3.066025 $2.259378 $1.997266 $2.913980 $2.040131
December 31, 1992
Accumulation Units in Force.............. 16,275,183 81,007,871 80,637,090 4,086,583 5,536,887
Accumulation Unit Value.................. $2.818583 $2.021271 $1.846025 $2.628509 $2.006700
December 31, 1991
Accumulation Units in Force.............. 17,981,945 49,106,844 76,624,765 4,464,580 7,282,083
Accumulation Unit Value.................. $2.746708 $1.858030 $1.878219 $2.444253 $1.963118
December 31, 1990
Accumulation Units in Force.............. 20,409,931 42,958,640 72,284,139 5,092,258 9,234,995
Accumulation Unit Value.................. $2.097328 $1.538017 $1.563444 $1.995673 $1.879911
December 31, 1989
Accumulation Units in Force.............. 23,982,977 40,618,028 68,361,149 6,710,808 11,155,035
Accumulation Unit Value.................. $2.189419 $1.712671 $1.618165 $2.228459 $1.762208
December 31, 1988
Accumulation Units in Force.............. 30,359,436 38,747,706 65,817,325 9,409,294 10,834,647
Accumulation Unit Value.................. $1.715045 $1.450217 $1.397280 $2.561043 $1.633242
December 31, 1987
Accumulation Units in Force.............. 39,215,558 35,297,367 59,631,901 10,677,356 12,161,740
Accumulation Unit Value.................. $1.666660 $1.282662 $1.286227 $2.311203 $1.537157
December 31, 1986
Accumulation Units in Force.............. 42,987,657 28,360,188 41,290,244 15,815,301 10,541,809
Accumulation Unit Value.................. $1.603012 $1.351553 $1.198662 $2.341741 $1.459028
</TABLE>
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(1) Effective with the merger of the Quality Growth Fund into the Stock Index
Fund on May 1, 1992 Quality Growth Division 3 was renamed Stock Index
Division 10.
(2) 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.
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AVERAGE ANNUAL TOTAL RETURN
WITH SURRENDER CHARGE AND ACCOUNT MAINTENANCE FEE IMPOSED
CALCULATION OF AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
NO. OF YEARS DIV 1 DIV 2 DIV 4 DIV 5 DIV 10
------------ ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
1 Year................................ -3.87% -0.80% 12.51% 4.95% 16.41%
3 Years............................... 2.14 2.04 11.69 8.38 16.74
5 Years............................... 5.81 2.88 11.84 7.00 12.80
10 Years.............................. 3.20 4.39 9.07 8.09 11.98
Since Inception....................... 8.11 5.52 8.54 7.45 11.69
</TABLE>
- ------------
- - Division One was initiated on February 11, 1982. From that date until December
18, 1990, historical performance for the Division was that of the A.G. High
Yield Accumulation Fund Inc. On December 18, 1990, the A.G. High Yield
Accumulation Fund Inc. changed its name to the A.G. Fixed-Income Accumulation
Fund Inc. From December 18, 1990 to October 1, 1991, historical performance
for the Division was that of the A.G. Fixed Income Accumulation Fund Inc. On
October 1, 1991, pursuant to a substitution, Division One commenced investing
in shares of the Capital Conservation Fund. Historical performance for the
Division since October 1, 1991 is that of the Capital Conservation Fund.
- - Division Two was initiated on February 4, 1982. On October 1, 1991, pursuant
to a substitution, Division Two commenced investing in shares of the Money
Market Fund. Historical performance for the Division since October 1, 1991 is
that of the Money Market Fund.
- - 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.
- - Division Ten was initiated as Division Three on July 28, 1982. Effective May
1, 1992, AGSPC Quality Growth Fund merged with AGSPC Stock Index Fund and
Division Three was renamed Division Ten.
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. The standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Division (including any 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.
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The Divisions may, in addition, advertise total return performance
information computed on different bases. First, the Divisions may present total
return information computed on the same basis 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 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.
Third, 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.")
Finally, the Divisions may present a hypothetical example that applies the
Annual Change in Accumulation Unit Value to an initial investment of $10,000.
(VALIC 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 yield and effective yield
performance information. The yield of the Money Market Division refers to the
income generated by an investment 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 seven day current yield for the seven days
ended December 31, 1996 was 3.92%. 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 seven day effective yield for the seven days ended December 31, 1996 was
3.99%.
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
11
<PAGE> 13
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. 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 & Poor's Ratings Group may be referred to in advertisements or in
reports to Contract Owners. A Standard & 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 & Poor's ratings range from AAA to D.
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
Service ratings range from Aaa to C. 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 performance 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.
ANNUAL AND CUMULATIVE CHANGE IN ACCUMULATION UNIT VALUE
<TABLE>
<CAPTION>
STOCK MIDCAP TIMED CAPITAL MONEY
INDEX INDEX OPPORTUNITY CONSERVATION MARKET
FOR EACH FISCAL DIVISION 10 DIVISION 4(1) DIVISION 5(2) DIVISION 1 DIVISION 2
PERIOD ------------------- ------------------- ------------------- ------------------- -------------------
END SINCE CUM- CUM- CUM- CUM- CUM-
12/31/86 ANNUAL ULATIVE ANNUAL ULATIVE ANNUAL ULATIVE ANNUAL ULATIVE ANNUAL ULATIVE
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12-31-96........... 21.52% 214.98% 17.61% 142.14% 9.99% 121.24% 0.74% 39.32% 3.96% 56.09%
12-31-95........... 35.95 159.20 29.24 105.89 23.55 101.14 19.58 38.29 4.51 50.15
12-31-94........... (0.30) 90.69 (4.70) 59.31 (2.29) 62.81 (7.04) 15.68 2.77 43.69
12-31-93........... 8.78 91.27 11.78 67.17 8.19 66.62 10.88 24.44 1.67 39.83
12-31-92........... 2.62 75.83 8.79 49.55 (1.71) 54.01 7.55 12.25 2.22 37.54
12-31-91........... 30.96 71.35 20.81 37.47 20.13 56.69 22.48 4.38 4.43 34.55
12-31-90........... (4.21) 30.84 (10.20) 13.80 (3.38) 30.43 (10.45) (14.78) 6.68 28.85
12-31-89........... 27.66 36.58 18.10 26.72 15.81 35.00 (12.99) (4.84) 7.90 20.78
12-31-88........... 2.90 6.99 13.06 7.30 8.63 16.57 10.81 9.36 6.25 11.94
12-31-87........... 3.97 3.97 (5.10) (5.10) 7.31 7.31 (1.30) (1.30) 5.35 5.35
</TABLE>
- ---------------
For the year in which the Division was initiated, less than a full year's
performance has been reflected. Actual, not annualized, performance is
reflected.
(1) Initiated 10/13/82. 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: from the period of October 1, 1991 to December 31, 1991 the
change in accumulation 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, 1995 the cumulative change in accumulation
unit value was 67.18%; for the period from October, 1991 to December 31,
1996 the cumulative change in accumulation unit value was 96.61%.
(2) Initiated 9/6/83.
12
<PAGE> 14
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 similarly
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, Annuitants and Beneficiaries of the Contracts.
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, five of which are available as variable investment
options under the Contracts to receive Net Purchase Payments allocated to the
five variable subaccounts (Divisions One, Two, Four, Five, and Ten). 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.")
Each Fund is one of thirteen investment portfolios of American General
Series Portfolio Company (the "Series Company"), an open-end, management
investment company registered under the 1940 Act.
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers of Accumulation Units and Annuity Units among Divisions of the
Separate Account, or between the General Account and the Separate Account, are
permitted subject to the conditions discussed below. The right to make transfers
is exercisable by the Contract Owner 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
The Company's current policy is that transfers among Divisions of the
Separate Account or from the Separate Account to the General Account may be made
at any time during the Accumulation Period.
Transfers to the General Account from a Division of the Separate Account
will result in no further transfers from the General Account being permitted for
a period of 90 days.
Plan loans from the portion of the Contract attributable to the General
Account 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 Divisions of the Separate
Account or from the Separate Account to the General Account are accomplished by
transferring Annuity Units
13
<PAGE> 15
among the Separate Account's Divisions or to the General Account. These
transfers may be made at intervals of at least 365 days. During the Annuity
Period, transfers from the General Account 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.
Request 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 instructs the Company not to accept telephone transfers or
reallocations, anyone who represents that he or she is authorized by the
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 the 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 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 three Divisions of the Separate Account or two Divisions of the
Separate Account and the General Account may be used 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" and "Annuity Payment Options.")
THE FUNDS
The Company serves as the investment adviser to the Series Company, five
portfolios of which are the five Funds constituting Divisions One, Two, Four,
Five and Ten of the Separate Account. Each of these five investment portfolios
is, in effect, a separate "fund" for which the Series Company issues a separate
series (class) of stock. These five Funds also serve as investment media for
variable annuity contracts issued by affiliates of the Company.
A brief summary of the principal characteristics of each Fund appears
below. For more complete information about these Funds, including their charges
and expenses, refer to their respective Prospectuses, additional copies of which
can be obtained from the 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 the Prospectus).
14
<PAGE> 16
PERFORMANCE DATA. Certain performance data related to each Division follows
the description of investment objectives of the Fund in which that Division
invests. (See "Performance Information" for a description of the methods of
calculating the performance data shown and the fees and charges included.)
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 Payments. (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 Contract owner.
15
<PAGE> 17
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
Index.
HYPOTHETICAL $10,000 ACCOUNT
INVESTED IN STOCK INDEX DIVISION 10 AT JANUARY 1, 1987
<TABLE>
<CAPTION>
ANNUAL VALUE OF A
$10,000 STIPULATED PAYMENT VALUE AT MONTHLY INTERVALS OF A $10,000
MADE JANUARY 1, 1987 STIPULATED PAYMENT MADE JANUARY 1, 1987
- --------------------------------- ---------------------------------------
<S> <C> <C>
01/01/87............... $10,000
12/31/87............... 10,397
12/31/88............... 10,699
12/31/89............... 13,658
12/31/90............... 13,084
12/31/91............... 17,135 [CHART]
12/31/92............... 17,583
12/31/93............... 19,127
12/31/94............... 19,069
12/31/95............... 25,920
12/31/96............... 31,498
</TABLE>
CUMULATIVE RETURN
<TABLE>
<CAPTION>
SINCE
INCEPTION** 10 YEARS 5 YEARS 3 YEARS 1 YEAR
----------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Cumulative Return..................... 404.91% 214.98% 83.82% 64.68% 21.52%
</TABLE>
- ------------
* "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)" and "S&P MidCap 400 Index" are
trademarks of Standard & 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.
** This Division was initiated on July 28, 1982.
16
<PAGE> 18
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. Hypothetical performance information from October 1,
1991 and from January 1, 1987 are shown below.
HYPOTHETICAL $10,000 ACCOUNT
INVESTED IN MIDCAP INDEX DIVISION 4 AT OCTOBER 1, 1991
<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>
10/01/91............... $10,000
12/31/91............... 11,163
12/31/92............... 12,143
12/31/93............... 13,574 [CHART]
12/31/94............... 12,936
12/31/95............... 16,718
12/31/96............... 19,661
</TABLE>
HYPOTHETICAL $10,000 ACCOUNT
INVESTED IN MIDCAP INDEX DIVISION 4 AT JANUARY 1, 1987
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
JANUARY 1, 1987 STIPULATED PAYMENT MADE JANUARY 1, 1987
- --------------------------------- ---------------------------------------
<S> <C> <C>
01/01/87............... $10,000
12/31/87............... 9,490
12/31/88............... 10,730
12/31/89............... 12,672
12/31/90............... 11,380
12/31/91............... 13,747 [CHART]
12/31/92............... 14,955
12/31/93............... 16,717
12/31/94............... 15,931
12/31/95............... 20,589
12/31/96............... 24,214
</TABLE>
CUMULATIVE RETURN
<TABLE>
<CAPTION>
SINCE
CUMULATIVE RETURN INCEPTION* 10 YEARS 5 YEARS 3 YEARS 1 YEAR
- -------------------------------------------- ---------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Period from 10/01/91 through 12/31/96....... 96.61% -- -- 44.84% 17.61%
Period from 10/13/82 through 12/31/96....... 227.26% 142.14% 76.13% 44.84% 17.61%
</TABLE>
- ------------
Selected accumulation unit data for the last ten years for this Fund appears on
page 9 of this Prospectus.
* This Division was initiated on October 13, 1982.
17
<PAGE> 19
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.
HYPOTHETICAL $10,000 ACCOUNT
INVESTED IN TIMED OPPORTUNITY DIVISION 5 AT JANUARY 1, 1987
<TABLE>
<CAPTION>
ANNUAL VALUE OF A $10,000
STIPULATED PAYMENT MADE VALUE AT MONTHLY INTERVALS OF A $10,000
JANUARY 1, 1987 STIPULATED PAYMENT MADE JANUARY 1, 1987
- --------------------------------- ---------------------------------------
<S> <C> <C>
01/01/87............... $10,000
12/31/87............... 10,731
12/31/88............... 11,657
12/31/89............... 13,500
12/31/90............... 13,043
12/31/91............... 15,669 [CHART]
12/31/92............... 15,401
12/31/93............... 16,662
12/31/94............... 16,281
12/31/95............... 20,114
12/31/96............... 22,124
</TABLE>
CUMULATIVE RETURN
<TABLE>
<CAPTION>
SINCE
INCEPTION* 10 YEARS 5 YEARS 3 YEARS 1 YEAR
---------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Cumulative Return.................. 165.19% 121.24% 41.19% 32.78% 9.99%
</TABLE>
- ------------
* This Division was initiated on September 6, 1983.
18
<PAGE> 20
CAPITAL CONSERVATION FUND (DIVISION ONE*). 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.
HYPOTHETICAL $10,000 ACCOUNT
INVESTED IN CAPITAL CONSERVATION DIVISION 1 AT JANUARY 1, 1987
<TABLE>
<CAPTION>
ANNUAL VALUE OF A
$10,000 STIPULATED PAYMENT VALUE AT MONTHLY INTERVALS OF A $10,000
MADE JANUARY 1, 1987 STIPULATED PAYMENT MADE JANUARY 1, 1987
- --------------------------------- ---------------------------------------
<S> <C> <C>
01/01/87............... $10,000
12/31/87............... 9,870
12/31/88............... 10,936
12/31/89............... 9,516
12/31/90............... 8,522
12/31/91............... 10,438 [CHART]
12/31/92............... 11,225
12/31/93............... 12,444
12/31/94............... 11,568
12/31/95............... 13,829
12/31/96............... 13,932
</TABLE>
CUMULATIVE RETURN
<TABLE>
<CAPTION>
SINCE
INCEPTION** 10 YEARS 5 YEARS 3 YEARS 1 YEAR
----------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Cumulative Return................... 226.24% 39.32% 33.47% 11.96% 0.74%
</TABLE>
- ------------
* This Division changed its name and investment policies, effective December
18, 1990, to provide for investment in longer term higher rated securities.
Effective October 1, 1991, the Division substituted AGSPC Capital
Conservation Fund for the A. G. Fixed-Income Accumulation Fund.
** This Division was initiated on February 11, 1982.
19
<PAGE> 21
MONEY MARKET FUND (DIVISION TWO*). 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.
Money Market Division Return Calculations
(7 days ended 12/31/96):
7-Day Current Yield for Money Market
Division 2: 3.92%
7-Day Effective Yield For Money
Market Division 2: 3.99%
HYPOTHETICAL $10,000 ACCOUNT
INVESTED IN MONEY MARKET DIVISION 2 AT JANUARY 1, 1987
<TABLE>
<CAPTION>
ANNUAL VALUE OF A
$10,000 STIPULATED PAYMENT VALUE AT MONTHLY INTERVALS OF A $10,000
MADE JANUARY 1, 1987 STIPULATED PAYMENT MADE JANUARY 1, 1987
- --------------------------------- ---------------------------------------
<S> <C> <C>
01/01/87............... $10,000
12/31/87............... 10,535
12/31/88............... 11,194
12/31/89............... 12,078
12/31/90............... 12,885 [CHART]
12/31/91............... 13,455
12/31/92............... 13,754
12/31/93............... 13,983
12/31/94............... 14,369
12/31/95............... 15,015
12/31/96............... 15,609
</TABLE>
CUMULATIVE RETURN
<TABLE>
<CAPTION>
SINCE
INCEPTION** 10 YEARS 5 YEARS 3 YEARS 1 YEAR
----------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Cumulative Return..................... 127.74% 56.09% 16.01% 11.63% 3.96%
</TABLE>
- ------------
* Effective October 1, 1991, the Division substituted AGSPC Money Market Fund
for A. G. Money Market Accumulation Fund.
** This Division was initiated on February 4, 1982.
20
<PAGE> 22
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 amount deducted,
as adjusted, to increase the number of Accumulation Units or Annuity Units under
the Contract 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 Contract which are withdrawn. 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 pursuant to any exchange offered by the Company are not
considered to be Purchase Payments for purposes of calculating a surrender
charge. For such Contract exchanges, exchanged amounts shall be deemed to be
withdrawn only after all other Purchase Payments have been withdrawn.
The surrender charge is equal to 5% of the lesser of (a) all Purchase
Payments received during the most recent 36 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 Contract Year of 10% or less of
Accumulation Value 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) 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 36 months. The second or any subsequent
surrenders during a Contract 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 of a Contract at the
Annuity Date or upon any payments received by an Annuitant or Beneficiary in
lieu of annuity payments during the Annuity Period except when a lump sum
payment is elected by the Annuitant during the Annuity Period under the fifth
annuity option. (See "Annuity Payment Options" and "Death of Annuitant During
Annuity Period.") Nor is the surrender charge imposed on the payment of benefits
to a Beneficiary when an Annuitant dies during the Accumulation Period. (See
"Death Benefits During Accumulation Period.")
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."
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This surrender charge will not be assessed on surrenders under Contracts
purchased by American General Corporation's Thrift and Incentive Plan, an
employee benefit program under section 401 of the Internal Revenue Code (the
"Code"), because no sales representative was involved in the sale of such
Contracts and the Company paid no sales commissions to any party in connection
with such sales.
Examples of calculation of the surrender charges upon partial and total
surrenders are set forth in the Statement of Additional Information --
"Calculation of Surrender Charge."
CHARGE FOR ANNUAL CONTRACT MAINTENANCE
A Contract maintenance charge of $30 will be assessed on each Contract by
the Company on the last day of the calendar quarter in which the Company
receives the first Purchase Payment, and annually on that date thereafter during
the Accumulation Period. This charge will be assessed proportionately among the
Divisions of the Separate Account and the General Account which make up the
Accumulation Value of the Contract. The Contract maintenance charge is not
guaranteed and may, with prior regulatory approval if required, be changed for
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 Contract maintenance charge may be reduced or waived on
Contracts purchased by American General Corporation's Thrift and Incentive Plan
because such Contracts do not occasion the administrative expenses which the
Contract maintenance charge usually covers. For example, these Contracts are
purchased in large numbers only once a year, thereby dramatically lowering the
cost of processing such Contracts.
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 daily net asset value of the Separate Account
attributable to the Contracts. This charge is guaranteed and may not be
increased by the Company.
In assuming the mortality risks, the Company is taking the chance 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
Contract. 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.
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 the Contract Owners.
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. Under existing federal income tax law, the investment
income and capital gains from the sale of investments realized by the Separate
Account are not taxable. The Company may charge each Division in the Separate
Account for its portion of any income tax charged to the Company or the Division
or its assets. Under present laws, the Company may incur state and local taxes
(in addition to federal 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
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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 Contract Owner 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 by or
accompanied by a properly completed application. Except in the case of IRAs,
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 individual Contract held pursuant to the employer's
retirement plan.
The initial and subsequent Purchase Payments for a periodic payment
Contract must be at least $30. This minimum applies separately to the amount of
each Purchase Payment directed to each Division of the Separate Account or the
General Account. For single payment Contracts, the minimum Purchase Payment is
$1,000 per Contract. 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 to purchase a
Contract (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, and credit Accumulation
Units to the Contract 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.
If the Company receives Purchase Payments from your employer before the
Company receives your completed application or enrollment form, the Company will
not be able to open an account for you. Under these circumstances, the Company
will take one of the following actions:
Return Purchase Payments. If the Company does not have your name, address or
social security number, the Company will return the Purchase Payment to your
employer unless this information is immediately provided to the Company.
Employer-Directed Account. If the Company has your name, address and social
security number and the Company has an Employer-Directed Account Agreement
from your employer, generally the Company will deposit your Purchase Payment
in an "Employer-Directed" account invested in the Money Market Division
Option. You may not transfer these amounts until the Company has received a
completed application or enrollment form.
Starter Account. If the Company has your name, address and social security
number, but the Company does not have an Employer-Directed Account Agreement
from your employer, the Company will deposit your Purchase Payment in a
"starter" account invested in the Money Market Division. The Company will send
you follow-up letters requesting the information necessary to complete the
application, including your allocation instructions. Unless a completed
application or enrollment form is received by the Company within 105 days of
establishment of your starter account, the account balance, including
earnings, will be returned to your employer. The Company is not responsible
for any adverse tax consequences to you that may result from the return of
your employer's contributions.
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.
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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 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 an individual's
account attributable to the Variable Investment Options can be determined at any
time by multiplying the number of Accumulation Units outstanding in each
Separate Account Division under the Contract or account by the current
Accumulation Unit value of that Separate Account Division adding the results
plus any amounts attributable to the General Accounts. During the Accumulation
Period, the value of the Contract attributable to the Variable Investment
Options varies with the performance of the investments of the Separate Account
Divisions, 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 Division.
The Accumulation Unit value is calculated as follows. First, a gross
investment rate is determined from the investment performance of each Separate
Account Division. 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 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."
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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 Contract 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. (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. Payments 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 the 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 Contract 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
Contract has not been surrendered and the Contract has not otherwise been
terminated.
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, the applicable annuity rates. 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. (See Statement of Additional
Information -- "Amount of Annuity Payments" and "Annuity Unit Value.") 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
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Investment Rate will be used in the absence of a selection otherwise.
Up to three Divisions of the Separate Account, or two Divisions of the
Separate Account and the General Account may be selected to provide an annuity.
The first payment provided under the variable and the fixed annuity must each be
at least $25.
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 pension 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 Contract
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, General Account accumulations will be used to provide a
fixed annuity, and Separate Account accumulations will be used to provide a
variable annuity based on the same Divisions of the Separate Account in which
the Contract was invested immediately prior thereto. An Annuitant wishing to
receive a lump sum rather than an annuity may surrender the Contract as
described below under "Surrender."
An Annuitant or Beneficiary receiving Annuity Payments under the fifth
option can elect at any time, if the Annuitant or Beneficiary has previously
elected rights of commutation, to terminate such option and receive the current
value of all remaining Annuity Payments owed under the Contract, discounted to
present value (at the Assumed Investment Rate previously selected) based on
values next determined after the request for such payment is received at the
Company's Home Office. A surrender charge will be imposed on the Purchase
Payments made within 36 months preceding such election by an Annuitant.
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 an 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 Contract 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 Contract 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
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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 fifteen. At any
time during such period, if the Annuitant or Beneficiary has previously elected
rights of commutation, the Annuitant may elect to receive in one sum the present
value of the remaining payments, calculated on the basis of an interest rate per
annum equal to that rate used to calculate the Annuitant's first annuity
payment. If an election to receive such present value is made by an Annuitant,
the surrender charge will be applied to Purchase Payments made within 36 months
of the time of the election. Under the federal tax laws, the election of this
lump-sum option 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, subject to possible special tax treatment for some
distributions from retirement programs. If payments would amount 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 have been made
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 periods. Further, Option Four is available with a one to twenty
payment certain period. 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 elect one of the
following three alternatives:
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 at any time
thereafter to receive the present value of remaining 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, either on
a fixed or variable basis, or a combination of both, 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 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 the ordinary rate.
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SURRENDER
All or part of the Surrender Value of a Contract may be withdrawn by the
Contract Owner 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. The
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 Contract at any time is equal to the Accumulation
Value under the Contract 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 will equal or exceed the aggregate amount of
Purchase Payments at any time.
A partial surrender will result in a reduction of the Accumulation Value
credited to a Contract. The reduction will equal the dollar amount surrendered
plus the surrender charge, if any, and will be allocated among the General
Account value and the values in the Divisions in the same proportion as the
surrender requested by the Contract Owner. The reduction in the number of
Accumulation Units credited to a Division of the Separate Account will equal the
amount surrendered from that Division plus the surrender charge allocable to
that Division, 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 Division is surrendered in a partial
surrender, the dollar amount surrendered will be reduced by the surrender charge
allocable to that Division.
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 Statement of
Additional Information for a discussion of the circumstances under which each
Fund may suspend or postpone redemption of its shares.) Payments attributable to
a Division of the Separate Account may also be suspended or postponed during any
period when trading on the New York Stock Exchange is suspended or restricted,
when an emergency makes it impracticable for the company fairly to determine the
value of its net assets or for such time as the Securities and Exchange
Commission may by order permit.
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.
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OTHER CONTRACT FEATURES
CHANGE OF BENEFICIARY
The Beneficiary is designated in the application by the Contract Owner, and
may be changed 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
The Contract Owner may 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, unless a larger refund is required by state law.
RESERVATION OF RIGHTS
The Company reserves the right to amend the Contract (1) to conform with
substitutions of investments or (2) to comply with tax or other laws applicable
to these types of Contracts. The Company also reserves the right (3) 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 (4) to deregister the Separate Account under the 1940 Act
in the event such registration is no longer required.
RELATIONSHIP TO EMPLOYER'S PLAN
Since it is contemplated that all 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 employers' plan in
connection with this description of the Contracts.
Plan loans from the portion of the Contract attributable to the General
Account 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 used with
retirement programs which receive favorable tax deferred treatment under federal
income tax law.
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
29
<PAGE> 31
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).
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.
Required Distributions. Generally, distributions from section 403(b)
annuities must commence no later than April 1 of the calendar year following the
later of the calendar year in which the Participant attains age 70 1/2 or the
calendar year in which the Participant retires. 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). 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 commence 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 commenced 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. 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 annuitants, 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 Ruling 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 conditions.
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
30
<PAGE> 32
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 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).
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; however, 5-year forward averaging has been repealed for
distributions occurring after December 31, 1999. 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 receipt of the qualifying
distribution. The portion of any distribution which is eligible to be rolled
over to an IRA or 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 $4,000 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 ($4,000 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
31
<PAGE> 33
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 (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
Contracts or plan or a section 403(b) annuity Contract to an IRA Contract under
certain conditions. Amounts accumulated under such a rollover IRA generally 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 an SEP, which generally must be made at a
rate representing a uniform percent of the compensation and 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. No new salary reduction SEPs may be
established after 1996.
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.
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 (indexed for inflation) or 33 1/3% of the
individual's includible compensation. (Includible compensation means
compensation from the employer which is currently includable 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 gener-
32
<PAGE> 34
ally held for the exclusive benefit of plan participants, although certain
contracts may remain subject to the claims of the employer's creditors until
1999. 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 or in amounts under $3,500 for inactive Participants.
These 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.
Where a Contract is purchased under a 457 or private employer unfunded
deferred compensation plan, it constitutes a non-qualified contract
("Non-Qualified Contract"). Ordinary Non-Qualified Contracts, not sold pursuant
to such an employer's plan, are not available under this Contract. Purchase
Payments made under ordinary Non-Qualified Contracts are not excludible from the
gross income of the Contract Owner or deductible for tax purposes. Private
employer unfunded deferred compensation plans, however, allow individuals to
defer receipt of up to 100% of compensation which would otherwise be includable
in income and to therefore defer the payment of federal income taxes on the
amounts. Increases in the Accumulation Value of Non-Qualified Contracts
resulting from the investment performance of the Separate Account are 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.
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.
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.
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.
33
<PAGE> 35
TAX-DEFERRED ACCUMULATION
[BAR CHART]
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 the
later of age 70 1/2 or retirement. There may be restrictions on withdrawals of
certain types of contributions before 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, 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
Non-qualified contracts, as discussed above, are not sold under this
Contract. Separate Account investments for non-qualified contracts are available
under other Company Contracts, however.
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 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. 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-
34
<PAGE> 36
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
of the Separate Account attributable to the Contract should be voted at meetings
of shareholders of the Fund or 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
Contract 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
Contract 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 Contract
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
Contract and the applicable Annuity Unit value on the record date. During the
Annuity Period, the number of votes attributable to a Contract 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 (i) the shares for which voting instructions are received and (ii) 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.
35
<PAGE> 37
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... 2
Types of Variable Annuity Contracts......................... 2
Calculation of Surrender Charge............................. 3
Illustration of Surrender Charge on Total Surrender.... 3
Illustration of Surrender Charge on Partial
Surrender............................................. 3
Accumulation Unit Value..................................... 4
Illustration of Calculation of Accumulation Unit
Value................................................. 4
Illustration of Purchase of Accumulation Units......... 4
Performance Calculations.................................... 4
Calculation of Yield for Money Market Division Two..... 4
Illustration of Calculation of Yield for Money Market
Division Two.......................................... 4
Calculation of Effective Yield for Money Market
Division Two.......................................... 4
Illustration of Calculation of Effective Yield for
Money Market Division Two............................. 4
Standardized Yield for Capital Conservation Division
One................................................... 5
Calculation of Standardized Yield................. 5
Illustration of Calculation of Standardized
Yield............................................. 5
Calculation of Average Annual Total Return........ 5
Performance Information..................................... 6
Performance Compared to Market Indices................. 6
Stock Index Division Ten Performance Compared to S&P
500 Index............................................. 7
MidCap Index Division Four Performance Compared to
Relevant Index........................................ 8
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......... 9
Capital Conservation Division One Performance Compared
to Merrill Lynch U.S. Corporate High Yield Index and
Merrill Lynch Corporate Master Index.................. 10
Money Market Division Two Performance Compared to
Certificate of Deposit Primary Offering by New York
City Banks, 30 Day Index.............................. 11
Annuity Payments............................................ 11
Assumed Investment Rate................................ 11
Amount of Annuity Payments............................. 11
Annuity Unit Value..................................... 12
Illustration of Calculation of Annuity Unit Value...... 12
Illustration of Annuity Payments....................... 13
Distribution of Variable Annuity Contracts.................. 13
Experts..................................................... 13
Comments on Financial Statements............................ 14
</TABLE>
<PAGE> 38
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 The Variable Annuity Life Insurance Company 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 that 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
</TABLE>
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.
<PAGE> 39
Please tear off, complete and return the form below to order a Statement of
Additional Information for the Contracts offered under the prospectus (Contract
Forms UIT-981). Address the form to any Regional Office, the addresses of which
appear on the inside back cover of this prospectus. A Statement of Additional
Information may also be ordered by calling 1-800-44-VALIC.
- --------------------------------------------------------------------------------
UIT-981 CONTRACTS
Please send me a free copy of the Statement of Additional Information for The
Variable Annuity Life Insurance Company Separate Account A (Contract Form
UIT-981).
(Please Print or Type)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Name: G.A. #
------------------------------------------------ ------------------------------------------------
Address: Policy: #
------------------------------------------------ ------------------------------------------------
------------------------------------------------
Social Security Number:
------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 40
================================================================================
FOR ADDITIONAL INFORMATION ABOUT THE CONTRACTS
CONTACT YOUR NEAREST REGIONAL OFFICE:
10851 N. Black Canyon Hwy. 8500 Normandale Lake Blvd.
Suite 700 Suite 750
Phoenix, AZ 85029 Bloomington, MN 55437
(602) 678-1700 (612) 893-1099
222 South Harbour Blvd. 410 Amherst Street
10th Floor Suite 250
Anaheim, CA 92805 Nashua, NH 03063
(714) 774-7844 (603) 883-3840
1900 O'Farrell St. 90 Woodbridge Ctr. Dr.
Suite 390
San Mateo, CA 94403 Suite 300
(415) 574-5433
Woodbridge, NJ 07095
165 South Union Blvd.
Suite 1050 University Tower
Lakewood, CO 80228 3100 Tower Blvd.
(303) 988-3344 Suite 1601, Box 50
(919) 489-6529
10006 N. Dale Mabry Hwy.
Suite 113 Two Summit Park Drive
Tampa, FL 33618 Suite 410
(813) 961-1611 Independence, OH 44131
(216) 520-2028
100 Ashford Center North
Suite 100 1800 S.W. First Avenue
Atlanta, GA 30338 Suite 505
(770) 395-4700 Portland, OR 97201
(503) 223-6288
230 West Monroe
Suite 1550 1767 Sentry Pkwy. West 19
Chicago, IL 60606 Suite 300
(312) 368-1001 Blue Bell, PA 19422
(215) 646-8030
550 Congressional Blvd. 5400 LBJ Freeway
Suite 280
Carmel, IN 46032
(317) 574-7145 Suite 1280
Houston, TX 77024
7310 Ritchie Highway (713) 465-2253
Suite 800
Glen Burnie, MD 21061
(410) 768-2330
1301 West Long Lake Road
Suite 340
Troy, MI 48098
(810) 641-0022
There are also more than thirty seven branch offices located throughout the
country.
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019 1-800-44VALIC
TDD NUMBER 1-800-35VALIC
FOR UNIT VALUE INFORMATION CALL: 1-800-42VALIC
FOR ASSET TRANSFERS BY TELEPHONE CALL: 1-800-42-VALIC
================================================================================
<PAGE> 41
[VALIC LOGO]
Printed Matter
Printed in U.S.A. VA 2620 REV 5/97
(C)The Variable Annuity Life Insurance Company, Houston, Texas
<PAGE> 42
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
SEPARATE ACCOUNT A
UNITS OF INTEREST UNDER
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(CONTRACT FORM UIT-981)
----------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
----------------------------------------------------------------
FORM N-4 PART B
MAY 1, 1997
This Statement of Additional Information is not a prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus for the Contracts dated May 1, 1997 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 or
1-800-44-VALIC. Prospectuses are also available from regional sales offices of
the Underwriters or from its registered sales representatives.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information..................... 2
Types of Variable Annuity Contracts..... 2
Calculation of Surrender Charge......... 3
Illustration of Surrender Charge on
Total Surrender.................... 3
Illustration of Surrender Charge on
Partial Surrender.................. 3
Accumulation Unit Value................. 4
Illustration of Calculation of
Accumulation Unit Value............ 4
Illustration of Purchase of
Accumulation
Units.............................. 4
Performance Calculations................ 4
Calculation of Yield for Money
Market Division Two.............. 4
Illustration of Calculation of
Yield for Money Market Division
Two.............................. 4
Calculation of Effective Yield for
Money Market Division Two........ 4
Illustration of Calculation of
Effective Yield for Money Market
Division Two..................... 4
Standardized Yield for Capital
Conservation Division One............. 5
Calculation of Standardized
Yield............................ 5
Illustration of Calculation of
Standardized Yield............... 5
Calculation of Average Annual Total
Return........................... 5
Performance Information................. 6
Performance Compared to Market
Indices............................ 6
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Stock Index Division Ten Performance
Compared to S&P 500 Index.......... 7
MidCap Index Division Four Performance
Compared to Relevant Index......... 8
Timed Opportunity Division Five
Performance Compared to S&P 500(R)
Index, Merrill Lynch Corporate and
Government Master Index and
Certificate of Deposit Primary
Offering by New York City Banks, 30
Day Index.......................... 9
Capital Conservation Division One
Performance Compared to Merrill
Lynch U.S. Corporate High Yield
Index and Merrill Lynch Corporation
Master Index....................... 10
Money Market Division Two Performance
Compared to Certificate of Deposit
Primary Offering by New York City
Banks, 30 Day Index................ 11
Annuity Payments........................ 11
Assumed Investment Rate............... 11
Amount of Annuity Payments............ 11
Annuity Unit Value.................... 12
Illustration of Calculation of
Annuity Unit Value............... 12
Illustration of Annuity Payments... 13
Distribution of Variable Annuity
Contracts............................. 13
Experts................................. 13
Comments on Financial Statements........ 14
</TABLE>
VA 2620-1, Rev. 5/97
1
<PAGE> 43
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 eighteen Divisions, five of which are available
as variable investment options under the Contracts (Divisions One, Two, Four,
Five and Ten). Divisions Four, Five and Ten also are available through certain
other variable annuity contracts issued by the Company through the Separate
Account. Divisions Six, Seven, Eight, Eleven, Twelve, Thirteen and Fourteen are
offered only through other variable annuity contracts issued by the Company
through the Separate Account.
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.
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.
2
<PAGE> 44
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>
2/1/93......................... Purchase Payment $10,000
2/1/94......................... Purchase Payment 5,000
2/1/95......................... Purchase Payment 15,000
2/1/96......................... Purchase Payment 2,000
7/1/96......................... Total Surrender Assumes
Accumulation is $38,000
</TABLE>
Surrender Charge is lesser of (a) or (b):
<TABLE>
<S> <C> <C> <C>
a. Surrender Charge calculated on 36 months of Purchase Payments
prior to surrender:
1. Surrender Charge against Purchase Payment of 2/1/93......... $ 0
2. Surrender Charge against Purchase Payment of 2/1/94 (0.05 X
$5,000)..................................................... $ 250
3. Surrender Charge against Purchase Payment of 2/1/95 (0.05 X
$15,000).................................................... $ 750
4. Surrender Charge against Purchase Payment of 2/1/96 (0.05 X
$2,000)..................................................... $ 100
Surrender Charge based on Purchase Payments (1+2+3+4)....... $1,100
b. Surrender Charge calculated on the excess over 10% of the
Accumulation Value at the time of surrender:
Accumulation Value at time of surrender $ 38,000
Less 10% not subject to surrender charge -3,800
---------
Subject to Surrender Charge 34,200
X .05
---------
Surrender Charge based on Accumulation Value $ 1,710 ..... $1,710
c. Surrender Charge is the lesser of a or b......................... $1,100
</TABLE>
ILLUSTRATION OF SURRENDER CHARGE ON PARTIAL SURRENDER
Example 2.
TRANSACTION HISTORY
<TABLE>
<CAPTION>
DATE TRANSACTION AMOUNT
---- ----------- ------
<S> <C> <C>
2/1/93......................... Purchase Payment $4,000
2/1/94......................... Purchase Payment 0
2/1/95......................... Purchase Payment 0
2/1/96......................... Purchase Payment 1,000
7/1/96......................... Partial Surrender (Assumes $2,500
Accumulation Value is $10,000)
</TABLE>
a. Since this is the first partial surrender in this contract year, calculate
the excess over 10% of the value of the accumulation units 10% of $10,000 =
$1,000
b. The maximum amount upon which surrender charge may be calculated (levied)
is $2,500 - $1,000 = $1,500
c. Since only $1,000 has been paid in purchase payments in the 36 months prior
to the surrender, the charge can only be calculated on $1,000. Thus, the
charge is $1,000 X (0.05) = $50.00
3
<PAGE> 45
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> <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 risk 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> <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 TWO
7-Day Current Yield: 3.92%
ILLUSTRATION OF CALCULATION OF YIELD FOR MONEY MARKET DIVISION TWO
Example 5.
The yield quotation above is based on the seven days ended December 31,
1996, 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 TWO
7-Day Effective Yield: 3.99%
ILLUSTRATION OF CALCULATION OF EFFECTIVE YIELD FOR MONEY MARKET DIVISION TWO
Example 6.
The effective yield quotation above is based on the seven days ended
December 31, 1996, 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
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
4
<PAGE> 46
STANDARDIZED YIELD FOR CAPITAL CONSERVATION DIVISION ONE
CALCULATION OF STANDARDIZED YIELD
Standardized Yield: 5.34%
ILLUSTRATION OF CALCULATION OF STANDARDIZED YIELD
Example 7.
The yield quotation based on a 30-day period ending December 31, 1996, the
date of the most recent balance sheet of the Registrant included in the
registration statement is computed by divid-
ing 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>
<S> <C> <C>
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 is earned from dividends declared and paid by the Fund, which are
automatically reinvested in Fund shares.
CALCULATION OF AVERAGE ANNUAL TOTAL RETURN
Example 8.
Average Annual Total Return quotations for the 1, 3, 5, and 10 year periods
ended December 31, 1996, 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>
<S> <C> <C>
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 period
of a hypothetical $1,000 Purchase Payment made at the
beginning of the 1, 3, 5, or 10 year period (or fractional
portion thereof)
</TABLE>
The calculation above applies to Contracts offered through the Prospectus
and includes the surrender charge of up to 5% of Gross Purchase Payments
received during the most recent 36 months.
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 1, 3, 5 or 10 year
period and deduction of all nonrecurring charges at the end of each such period.
5
<PAGE> 47
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 Funds.")
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 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 Capital Conservation Division One may be compared to the
Merrill Lynch U.S. Corporate High Yield Index or the Merrill Lynch Corporate
Master Index. The Merrill Lynch U.S. Corporate High Yield Index consists of
publicly placed, nonconvertible, coupon-bearing domestic debt. The Index is
composed of approximately 850 issues which are rated by Standard & Poor's
Corporation or by Moody's Investor's Service's as less than investment grade
(i.e., BB+ or Ba1) but not in default (i.e., D or less). The Merrill Lynch
Corporate Master Index consists of approximately 3,600 corporate bond holdings
of which assets are rated BBB- to AAA. The average years to maturity of these
corporate bond holdings are approximately 12 years.
The performance of Money Market Division Two 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 MidCap Index Division Four may be compared to the record
of the Standard & Poor's(R) Corporation (S&P(R)) 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 $1.37 billion. 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 Composite
Price Index ("S&P 500(R) Index") are included in the S&P MidCap 400 Index.
The performance of Stock Index Division Ten may be compared to the record
of the 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
70% 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.
Timed Opportunity Division Five invests its assets in three market
segments: equity securities, intermediate or long-term debt securities and
6
<PAGE> 48
money market or short-term debt securities. The performance of the equity
segment of the Division may be compared to the S&P 500 Index. The performance of
the intermediate or long-term debt segment may be compared to the Merrill Lynch
Corporate and Government Master Index. The performance of the money market or
short-term debt securities may be compared to the Certificate of Deposit Primary
Offering by New York Banks, 30 Day Index.
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.
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 JULY 28, 1982
<TABLE>
<CAPTION>
STOCK INDEX S&P 500
DIVISION TEN INDEX
- ------------------------------------------------------------------ ---------
<S> <C> <C>
07/28/82................................................ $10,000 $ 10,000
12/31/82................................................ 11,880 13,395
12/31/83................................................ 13,789 16,416
12/31/84................................................ 13,746 17,446
12/31/85................................................ 16,289 22,981
12/31/86................................................ 16,030 27,271
12/31/87................................................ 16,667 28,703
12/31/88................................................ 17,150 33,470
12/31/89................................................ 21,894 44,076
12/31/90................................................ 20,973 42,707
12/31/91................................................ 27,467 55,719
12/31/92................................................ 28,186 59,964
12/31/93................................................ 30,660 66,008
12/31/94................................................ 30,568 66,879
12/31/95................................................ 41,551 92,011
12/31/96................................................ 50,491 113,144
</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
Stock Index Division
Ten...................... 404.91% 214.98% 83.82% 64.68% 21.52%
Benchmark Comparison
S&P 500 Index............ 1031.44% 314.88% 103.06% 71.41% 22.97%
</TABLE>
- ---------------
* Effective May 1, 1992, AGSPC Quality Growth Fund merged with AGSPC Stock
Index Fund, and Division Three was renamed Division Ten.
** "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.
*** This Division was initiated on July 28, 1982.
7
<PAGE> 49
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 500 S&P MIDCAP 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
12/31/96............................... 32,726 95,892 102,009
</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............... 227.26% 142.14% 76.13% 44.84% 17.61%
Benchmark Comparison
S&P 500 Index............... 858.92% 314.88% 103.06% 71.41% 22.97%
S&P MidCap 400 Index........ 920.09% 338.81% 91.98% 50.54% 19.24%
</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.
8
<PAGE> 50
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
12/31/96................................ 26,519 69,995 51,871
</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
Timed Opportunity Division
Five........................... 165.19% 121.24% 41.19% 32.78% 9.99%
Benchmark Comparison
S&P 500 Index.................. 599.95% 314.88% 103.06% 71.41% 22.97%
Blended Index*................. 418.71% 213.69% 70.61% 45.01% 13.84%
</TABLE>
- ------------
* 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.
** This Division was initiated on September 6, 1983.
9
<PAGE> 51
Capital Conservation Division One Performance Compared to Merrill Lynch U.S.
Corporate High Yield Index and Merrill Lynch Corporate Master Index
HYPOTHETICAL $10,000 ACCOUNT VALUE
ANNUAL VALUE OF A $10,000 STIPULATED PAYMENT MADE FEBRUARY 11, 1982
<TABLE>
<CAPTION>
MERRILL LYNCH U.S. MERRILL LYNCH
CAPITAL CONSERVATION CORPORATE HIGH YIELD CORPORATE MASTER
DIVISION ONE INDEX** INDEX
- ------------------------------------------------------- -------------------- ----------------
<S> <C> <C> <C>
02/11/82................................ $ 10,000 N/A $ 10,000
12/31/82................................ 14,604 N/A 13,477
12/31/83................................ 16,618 N/A 14,733
10/31/84................................ 17,493 $ 17,493 16,574
12/31/84................................ 17,709 17,769 17,121
12/31/85................................ 21,854 22,143 21,462
12/31/86................................ 23,417 25,762 24,960
12/31/87................................ 23,112 26,964 25,420
12/31/88................................ 25,610 30,597 27,900
12/31/89................................ 22,285 31,890 31,838
12/31/90................................ 19,957 30,504 34,185
12/31/91................................ 24,443 41,053 40,420
12/31/92................................ 26,285 48,506 44,106
12/31/93................................ 29,140 56,842 49,588
12/31/94................................ 27,090 56,163 47,920
12/31/95................................ 32,384 67,330 58,261
12/31/96................................ 32,624 74,819 60,236
</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
Capital Conservation Division One..... 226.24% 39.32% 33.47% 11.96% 0.74%
Benchmark Comparison
Merrill Lynch U.S. Corp High Yield
Index............................... ** 190.43% 82.25% 31.63% 11.12%
Merrill Lynch Corporate Master
Index............................... 502.36% 141.33% 49.02% 21.47% 3.39%
</TABLE>
- ------------
* This Division was initiated on February 11, 1982.
** The Merrill Lynch U.S. Corporate High Yield Index commenced on October 31,
1984. The cumulative return since commencement through December 31, 1996 was
327.71%.
For comparative purposes the hypothetical account value of the A.G. High
Yield Accumulation Division was used as the October 31, 1984 initial account
value of the Merrill Lynch U.S. Corporate High Yield Index benchmark.
10
<PAGE> 52
Money Market Division Two 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 FEBRUARY 4, 1982
<TABLE>
<CAPTION>
CERTIFICATE OF DEPOSIT
MONEY MARKET PRIMARY OFFERING BY NEW YORK
DIVISION TWO CITY BANKS, 30 DAY INDEX
- -------------------------------------------------------- ----------------------------
<S> <C> <C>
02/04/82................................. $ 10,000 $ 10,000
12/31/82................................. 11,032 11,074
12/31/83................................. 11,893 12,068
12/31/84................................. 12,972 13,291
12/31/85................................. 13,859 14,330
12/31/86................................. 14,590 15,221
12/31/87................................. 15,372 16,173
12/31/88................................. 16,332 17,366
12/31/89................................. 17,622 18,871
12/31/90................................. 18,799 20,381
12/31/91................................. 19,631 21,493
12/31/92................................. 20,067 22,171
12/31/93................................. 20,401 22,745
12/31/94................................. 20,964 23,556
12/31/95................................. 21,907 24,721
12/31/96................................. 22,774 25,842
</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
Money Market Division Two............ 127.74% 56.09% 16.01% 11.63% 3.96%
Benchmark Comparison
Certificate of Deposit Primary
Offering by
New York City Banks, 30 Day
Index........................... 158.42% 69.78% 20.23% 13.61% 4.53%
</TABLE>
- ------------
* This Division was initiated on February 4, 1982.
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. 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 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 Progressive Annuity Table assuming births for
the year 1900 and an Assumed Investment Rate of 3 1/2% per annum, unless
otherwise selected.
11
<PAGE> 53
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 out of the Division.
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
of the Separate Account 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.
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 9.
<TABLE>
<S> <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>
12
<PAGE> 54
ILLUSTRATION OF ANNUITY PAYMENTS
Example 10. Any Annuitant age 65, Life Annuity with 120 Payments Certain
<TABLE>
<S> <S> <C>
1. Number of Accumulation Units at Annuity Date................ 10,000.00
2. Accumulation Unit value (see Example 9)..................... $ 1.800000
3. Accumulation Value of Contract (1)X(2)...................... $18,000.00
4. First monthly annuity payment per $1,000 of Accumulation
Value..................................................... $ 6.57
5. First monthly annuity payment (3)X(4)/1,000................. $ 118.26
6. Annuity Unit value (see Example 5).......................... $ .980000
7. Number of Annuity Units (5)/(6)............................. 120.673
8. Assume Annuity Unit value for second month equal to......... $ .997000
9. Second monthly Annuity Payment (7)X(8)...................... $ 120.31
10. Assume Annuity Unit value for third month equal to.......... $ .953000
11. Third monthly Annuity Payment (7)X(10)...................... $ 115.00
</TABLE>
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
The Company has qualified the Contracts for sale in all fifty states and
the District of Columbia. 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. VAMCO'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 in the Prospectus 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 attributable to the
Contracts paid by the Company for the years 1994, 1995, and 1996 were $98,000,
$61,000 and $42,000 respectively.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
and the financial statements of the Company's Separate Account A at December 31,
1996 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.
13
<PAGE> 55
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 One, Two, Four, Five and Ten are the only Divisions available
under Contracts described in the Prospectus. The Separate Account financial
statements contained herein reflect the composition of the Separate Account as
of December 31, 1996.
14
<PAGE> 56
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 Subsidiaries as of December 31,
1996 and 1995, 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, 1996. 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 Subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG
Houston, Texas
February 14, 1997
<PAGE> 57
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
At December 31
In Thousands
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Investments - Notes 2, 6, 7, 8:
Fixed maturity securities
(amortized cost: $19,667,491 in 1996 and $18,590,102 in 1995) $20,189,473 $19,745,726
Equity securities (cost: $8,624 in 1996 and $56,825 in 1995) 8,589 71,770
Mortgage loans on real estate 1,349,855 1,443,817
Real estate, net of accumulated depreciation
of $69 in 1996 and $99 in 1995 37,130 23,365
Policy loans 639,200 557,637
Other long-term invested assets 35,945 16,929
Short-term investments 53,000 39,277
----------- -----------
Total investments 22,313,192 21,898,521
----------- -----------
Investment income receivable 315,118 292,967
Cash on deposit and on hand 24,360 27,794
Receivable for securities sold 18,654 51,947
Deferred policy acquisition costs - Note 3 557,748 182,546
Due from reinsurer, net 15,700 16,873
Other assets 45,798 37,912
Assets held in Separate Accounts 7,134,412 4,540,889
----------- -----------
Total assets $30,424,982 $27,049,449
----------- -----------
LIABILITIES
Policy reserves for fixed annuity investment contracts $21,067,429 $20,146,697
Payable for securities purchased 575 26,885
Remittances not allocated 66,473 52,913
Commissions, general expenses, and taxes (other than income taxes) 41,642 44,380
Other liabilities 75,636 51,768
Income tax liabilities - Note 4 265,160 387,076
Liabilities related to Separate Accounts 7,134,412 4,540,889
----------- -----------
Total liabilities 28,651,327 25,250,608
----------- -----------
STOCKHOLDER'S EQUITY
Common stock (voting) par value $1 per share, 5,000 shares authorized
and 3,575 issued and outstanding in 1996 and 1995 - Note 5 3,575 3,575
Additional paid-in capital 459,281 384,126
Retained earnings 1,143,947 1,014,520
Net unrealized investment gains - Note 2 166,852 396,620
----------- -----------
Total stockholder's equity 1,773,655 1,798,841
----------- -----------
Total liabilities and stockholder's equity $30,424,982 $27,049,449
----------- -----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 58
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31,
In Thousands
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Surrender charges $ 12,348 $ 9,967 $ 9,964
Mortality charges 59,955 34,965 21,136
Expense charges 5,654 5,122 5,528
Net investment income - Note 2 1,654,496 1,597,681 1,493,942
Net reinsurance income 1,528 1,573 1,908
Realized investment gains (losses) - Note 2 21,551 (7,149) (71,950)
Other income 10,920 6,878 6,517
----------- ----------- -----------
Total revenues 1,766,452 1,649,037 1,467,045
----------- ----------- -----------
COSTS AND EXPENSES
Policy costs:
Increase in policy reserves for fixed annuity contracts 1,243,993 1,203,986 1,133,547
----------- ----------- -----------
Total costs 1,243,993 1,203,986 1,133,547
----------- ----------- -----------
Expenses:
Commissions 97,630 84,670 73,198
Salaries 54,016 48,227 42,742
Data processing 12,088 13,200 10,908
Postage and telephone 11,308 10,710 8,137
Sales promotion 10,394 9,361 8,024
Printing and supplies 5,290 4,721 4,372
Guaranty association assessments - Note 9 2,678 18,961 6,300
Other expenses 49,875 44,055 43,029
Amortization of deferred policy acquisition costs - Note 3 31,201 16,841 13,263
Policy acquisition costs deferred - Note 3 (116,818) (104,702) (88,046)
----------- ----------- -----------
Total expenses 157,662 146,044 121,927
----------- ----------- -----------
Total costs and expenses 1,401,655 1,350,030 1,255,474
----------- ----------- -----------
EARNINGS
Income before income tax expense 364,797 299,007 211,571
Income tax expense - Note 4 124,370 99,720 70,183
----------- ----------- -----------
Net income $ 240,427 $ 199,287 $ 141,388
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 59
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the Years Ended December 31,
In Thousands
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning and end of year $ 3,575 $ 3,575 $ 3,575
----------- ----------- -----------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year 384,126 382,733 382,727
Capital contribution from stockholder 75,155 1,393 6
----------- ----------- -----------
Balance at end of year 459,281 384,126 382,733
----------- ----------- -----------
RETAINED EARNINGS
Balance at beginning of year 1,014,520 910,233 821,845
Net income 240,427 199,287 141,388
Dividends paid to stockholder (111,000) (95,000) (53,000)
----------- ----------- -----------
Balance at end of year 1,143,947 1,014,520 910,233
----------- ----------- -----------
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Balance at beginning of year 396,620 (563,481) 348,470
Change during year (229,768) 960,101 (911,951)
----------- ----------- -----------
Balance at end of year 166,852 396,620 (563,481)
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Balance at end of year $ 1,773,655 $ 1,798,841 $ 733,060
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 60
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,
In Thousands
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 240,427 $ 199,287 $ 141,388
Reconciling adjustments to net cash provided by
operating activities:
Insurance and annuity liabilities 1,243,993 1,203,986 1,133,547
Deferred policy acquisition costs (85,617) (87,861) (74,783)
Other, net (50,233) 28,179 (41,944)
------------ ------------ ------------
Net cash provided by operating activities 1,348,570 1,343,591 1,158,208
------------ ------------ ------------
INVESTING ACTIVITIES
Investment purchases (14,883,271) (9,671,304) (7,827,877)
Investment calls, maturities, and sales 13,897,479 8,025,420 6,456,637
Net (increase) decrease in short-term investments (13,722) 120,745 (160,022)
------------ ------------ ------------
Net cash used for investing activities (999,514) (1,525,139) (1,531,262)
------------ ------------ ------------
FINANCING ACTIVITIES
Policyholder account deposits 2,896,090 2,553,928 2,227,803
Policyholder account withdrawals (1,276,008) (996,324) (1,004,953)
Transfers to Separate Accounts (1,936,727) (1,273,778) (723,994)
Capital contribution from stockholder 75,155 1,607 6
Net decrease in short-term debt -- -- (59,000)
Dividends paid (111,000) (95,000) (53,000)
------------ ------------ ------------
Net cash used for or provided by financing activities (352,490) 190,433 386,862
------------ ------------ ------------
NET CHANGE IN CASH
Net increase (decrease) in cash (3,434) 8,885 13,808
Cash at beginning of year 27,794 18,909 5,101
------------ ------------ ------------
Cash at end of year $ 24,360 $ 27,794 $ 18,909
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 61
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
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 through exclusive 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) and include the accounts
of VALIC and its wholly owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation. Certain items in the prior
years' financial statements have been reclassified to conform with the 1996
presentation.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities. Ultimate
results could differ from these estimates.
1.3 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity and equity
securities are 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 fair 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
and loans for which management has a concern based on its 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 unpaid principal balance.
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 delinquent mortgage loans is
recorded as income when received. Dividends are recorded as income on
ex-dividend dates.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method.
1.4 DERIVATIVES RELATED TO INVESTMENTS
VALIC's use of derivative financial instruments is generally limited to
interest rate and currency swap agreements. The difference between amounts paid
and received on swap agreements is recorded on an accrual basis as an
adjustment to investment income 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 swap agreements are recognized in the consolidated
balance sheet if they hedge investments carried at fair value or if they hedge
anticipated purchases of such investments. In this event, changes in the fair
value of a swap agreement are reported in net unrealized gains (losses) on
securities included in stockholder's equity, consistent with the treatment of
the related investment security.
For swap agreements hedging anticipated investment 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.
Swap agreements generally have terms of two to ten years. Any gain or loss
from early termination of a swap agreement is deferred and amortized into
income over the remaining term of the related investment. If the underlying
investment is extinguished or sold, any related gain or loss on swap agreements
is recognized in income.
6
<PAGE> 62
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1996
- --------------------------------------------------------------------------------
1.5 DEFERRED POLICY ACQUISITION COSTS
(DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC. DPAC
is charged to expense in relation to the estimated gross profits of the
insurance contracts, including realized gains (losses).
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 value of DPAC on at least an annual basis.
Management considers estimated future gross profit margins as well as expected
mortality, interest earned and credited rates, persistency, and expenses in
determining whether the carrying amount is recoverable.
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
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. 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 fixed maturity securities is included in net unrealized
gains (losses) in stockholder's equity.
1.10 STATUTORY ACCOUNTING
State insurance laws and regulations 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>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net Income $ 213,686 $ 157,622 $ 171,486
---------- ---------- ----------
Stockholder's equity $1,077,366 $ 926,654 $ 869,026
---------- ---------- ----------
</TABLE>
7
<PAGE> 63
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1996
- --------------------------------------------------------------------------------
2
===============================================================================
INVESTMENTS
===============================================================================
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Non-affiliated fixed
maturity securities $1,471,879 $1,414,644 $1,300,028
Affiliated fixed
maturity securities 2,851 3,181 3,342
Equity securities 782 4,281 2,529
Mortgage loans on
real estate 140,492 149,974 163,263
Other 51,040 36,473 36,226
---------- ---------- ----------
Gross investment income 1,667,044 1,608,553 1,505,388
Investment expenses 12,548 10,872 11,446
---------- ---------- ----------
Net investment income $1,654,496 $1,597,681 $1,493,942
---------- ---------- ----------
</TABLE>
The carrying value of investments that produced no investment income
during 1996 totaled $6,455 or 0.03% 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 or financial position.
Derivative financial instruments related to investment securities did not
have a material effect on net investment income in any of the three years ended
December 31, 1996.
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Fixed maturity securities $ 1,417 $ 832 $(83,950)
Equity securities 15,795 7,706 2,143
Mortgage loans on real estate 4,635 (24,465) (11,640)
Real estate 389 3,767 1,608
Other (685) 5,011 19,889
-------- -------- --------
Realized gains (losses)
before taxes 21,551 (7,149) (71,950)
Income tax expense (benefit) 7,543 (1,414) (25,183)
-------- -------- --------
Net realized investment
gains (losses) $ 14,008 $ (5,735) $(46,767)
-------- -------- --------
</TABLE>
Proceeds from sales of fixed maturity securities were $3,052,550,
$1,432,183, and $1,128,925 during 1996, 1995, and 1994, respectively. Gross
gains of $28,173, $15,722, and $7,610 and gross losses of $36,802, $30,518, and
$89,917, were realized on those sales during 1996, 1995, and 1994,
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. Amortized cost and fair value of fixed maturity and equity
securities at December 31 were as follows:
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gains
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 219,426 $ 173,879 $ 20,025 $ 33,063
Obligations of states and
political subdivisions 32,308 32,349 840 1,467
Debt securities issued by
foreign governments 241,908 238,592 10,958 19,639
Corporate securities 13,211,735 11,338,933 457,461 792,302
Mortgage-backed securities 5,932,878 6,771,473 150,021 333,436
Affiliated fixed maturity securities 29,236 32,275 -- --
Redeemable preferred stock -- 2,601 -- --
----------- ----------- ----------- -----------
Total fixed maturity securities $19,667,491 $18,590,102 $ 639,305 $ 1,179,907
----------- ----------- ----------- -----------
Equity securities $ 8,624 $ 56,825 $ 61 $ 14,966
=========== =========== =========== ===========
<CAPTION>
Gross Unrealized Losses Fair Value
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ (465) $ (25) $ 238,986 $ 206,917
Obligations of states and
political subdivisions (197) (15) 32,951 33,801
Debt securities issued by
foreign governments (122) -- 252,744 258,231
Corporate securities (76,389) (20,225) 13,592,807 12,111,010
Mortgage-backed securities (40,150) (3,924) 6,042,749 7,100,985
Affiliated fixed maturity securities -- -- 29,236 32,275
Redeemable preferred stock -- (94) -- 2,507
----------- ----------- ----------- -----------
Total fixed maturity securities $ (117,323) $ (24,283) $20,189,473 $19,745,726
----------- ----------- ----------- -----------
Equity securities $ (96) $ (21) $ 8,589 $ 71,770
=========== =========== =========== ===========
</TABLE>
8
<PAGE> 64
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1996
- --------------------------------------------------------------------------------
2.3 FIXED MATURITY AND EQUITY SECURITIES-
(CONTINUED)
MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1996 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 $ 125,977 $ 127,799
In years two through five 2,601,072 2,705,686
In years six through ten 7,872,259 8,097,598
After ten years 3,135,304 3,215,641
Mortgage-backed securities 5,932,879 6,042,749
----------- -----------
Total fixed maturity securities $19,667,491 $20,189,473
----------- -----------
</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>
1996 1995
----------- -----------
<S> <C> <C>
Gross unrealized gains $ 639,366 $ 1,194,873
Gross unrealized losses (117,419) (24,304)
DPAC adjustments (261,363) (551,624)
Deferred federal income taxes (93,732) (222,325)
----------- -----------
Net unrealized gains
on securities $ 166,852 $ 396,620
----------- -----------
</TABLE>
2.5 MORTGAGE LOANS ON REAL ESTATE -
(CONTINUED)
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.
2.5 MORTGAGE LOANS ON REAL ESTATE -
(CONTINUED)
At December 31 the mortgage loan portfolio was distributed as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Geographic distribution:
Atlantic $ 656,073 $ 677,739
Pacific and Mountain 406,948 455,009
Central 331,411 365,282
Allowance for losses (44,577) (54,213)
----------- -----------
Total mortgage loans $ 1,349,855 $ 1,443,817
----------- -----------
Property type:
Office $ 456,818 $ 478,493
Retail 451,668 461,272
Industrial 221,532 223,374
Apartments 190,583 242,469
Residential and other 73,831 92,422
Allowance for losses (44,577) (54,213)
----------- -----------
Total mortgage loans $ 1,349,855 $ 1,443,817
----------- -----------
</TABLE>
ALLOWANCE. The allowance for mortgage loan losses was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1 $ 54,213 $ 55,665 $ 48,612
Net additions (a) (3,845) 12,619 9,926
Deductions (b) (5,791) (14,071) (2,873)
--------- --------- ---------
Balance at December 31 $ 44,577 $ 54,213 $ 55,665
--------- --------- ---------
</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>
1996 1995
--------- ---------
<S> <C> <C>
Impaired loans:
With allowance* $ 46,346 $ 63,167
Without allowance 236 2,577
--------- ---------
Total impaired loans $ 46,582 $ 65,744
--------- ---------
Average investment $ 56,163 $ 83,049
Interest income earned 4,816 7,012
Interest income - cash basis 4,617 6,539
--------- ---------
</TABLE>
* Represents gross amounts before allowance for mortgage loan losses of
$6,848 and $17,701, respectively.
9
<PAGE> 65
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1996
- --------------------------------------------------------------------------------
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>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1 $ 182,546 $ 910,479 $ 113,116
Deferrals:
Commissions 62,760 52,959 44,899
Other acquisition costs 54,058 51,743 43,147
Amortization:
Accretion of interest 59,810 54,086 47,170
Operating earnings (91,011) (70,927) (60,433)
Offset to realized
(gains) losses (676) 4,991 19,812
Effect of net unrealized
(gains) losses on securities 290,261 (820,785) 702,768
--------- --------- ---------
Balance at December 31 $ 557,748 $ 182,546 $ 910,479
--------- --------- ---------
</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.
4.2 TAX LIABILITIES
Components of income tax liabilities and assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current tax liabilities (assets) $ (4,551) $ 10,740
Deferred tax liabilities, applicable to:
Basis differential of investments 201,122 428,863
DPAC 192,815 61,915
Other 8,025 2,480
--------- ---------
Total deferred tax liabilities 401,962 493,258
--------- ---------
Deferred tax assets, applicable to:
Policy reserves (118,595) (100,014)
Basis differential of investments (6,219) (7,527)
Other (7,437) (9,381)
--------- ---------
Total deferred tax assets (132,251) (116,922)
--------- ---------
Net deferred tax liabilities 269,711 376,336
--------- ---------
Total income tax liabilities $ 265,160 $ 387,076
--------- ---------
</TABLE>
4.3 TAX EXPENSE
Components of income tax expense were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 99,560 $ 99,273 $ 52,973
State 2,842 3,224 2,368
--------- --------- ---------
Total current income
tax expense 102,402 102,497 55,341
--------- --------- ---------
Deferred, applicable to:
DPAC 29,308 32,174 32,800
Policy reserves (18,581) (28,780) (31,085)
Basis differential of
investments 2,754 (786) 7,189
Other, net 8,487 (5,385) 5,938
--------- --------- ---------
Total deferred income
tax expense (benefit) 21,968 (2,777) 14,842
--------- --------- ---------
Income tax expense $ 124,370 $ 99,720 $ 70,183
--------- --------- ---------
</TABLE>
A reconciliation between the federal income tax rate and the effective tax
rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
Income tax expense at
applicable rate $ 127,679 $ 104,652 $ 74,050
Dividends received
deduction (4,935) (3,883) (3,392)
Tax-exempt interest (ESOP) (3,865) (4,426) (4,670)
State income taxes 3,311 2,918 7,051
Other items 2,180 459 (2,856)
--------- --------- ---------
Income tax expense $ 124,370 $ 99,720 $ 70,183
--------- --------- ---------
</TABLE>
Federal income taxes paid in 1996, 1995, and 1994 were $114,478, $52,790,
and $122,608, respectively. State income taxes paid in 1996, 1995 and 1994 were
$3,060, $2,653, and $3,390 respectively.
10
<PAGE> 66
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1996
- --------------------------------------------------------------------------------
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 1997 is
$205,992.
6
================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS
================================================================================
Derivative financial instruments related to investment securities at
December 31, 1996 were as follows:
<TABLE>
<S> <C>
Interest rate swap agreements to pay fixed rate
Notional amount $27,000
Average receive rate 6.88%
Average pay rate 5.61
Currency swap agreements (receive U.S.$/pay Canadian$)
Notional amount (in U.S.$) $89,535
Average exchange rate 1.56
</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>
1996 1995
------------------------------ -----------------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Fixed maturity and equity securities $20,198,062* $20,198,062* $19,817,496* $19,817,496*
Mortgage loans on real estate 1,352,994 1,349,855 1,473,598 1,443,817
Policy loans 637,870 639,200 567,199 557,637
Liabilities
Insurance investment contracts 19,753,088 21,067,429 19,883,419 20,146,697
----------- ----------- ----------- -----------
</TABLE>
* Includes derivative financial instruments with negative fair value of $7,872
in 1996 and negative fair value of $1,121 in 1995.
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
risk-adjusted discount rates.
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 was estimated using cash flows discounted at market interest rates.
11
<PAGE> 67
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1996
- --------------------------------------------------------------------------------
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, 1996 were as follows:
Operating expenses include $17,533 in 1996, $21,173 in 1995, and $23,138
in 1994 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 $455 in 1996, $1,662 in 1995, and $525 in 1994.
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, 1996, 1995, and 1994. VALIC recognized $1,372 in interest income
during 1996, $1,452 for 1995, and $1,532 for 1994.
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, 1996, December 29,
1995, and December 31, 1994. VALIC recognized $1,479, $1,729, and $1,810 of
interest income on the note during 1996, 1995, and 1994, respectively.
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 $111,000, $31.05 per share; $95,000,
$26.57 per share, and $53,000, $14.83 per share, in 1996, 1995, and 1994,
respectively.
On May 15, 1996, VALIC sold SC Financial Corp Mortgage Notes with a book
value of $13,000 to American General Life Insurance Company of NY. Proceeds
from the sale totaled $13,033 with a profit of $33 recognized on the
transaction.
On December 30, 1996, VALIC received a capital contribution of $75,000
from AGL.
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 $2,678, $18,961, and
$6,300, for the years ended December 31, 1996, 1995, and 1994, respectively.
The accrued liability for anticipated assessments was $13,661, $20,249, and
$10,214, at December 31, 1996, 1995, and 1994, respectively. The 1996 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> 68
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1996
- --------------------------------------------------------------------------------
10.1 PENSION PLANS - (CONTINUED)
The components of pension expense and underlying assumptions for the
defined benefit plan were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost (benefits earned)
during period $ 917 $ 601 $ 759
Interest cost on projected
benefit obligation 843 635 551
Actual (return) loss on
plan assets (2,785) (1,249) 414
Amortization of unrecognized
net asset existing at date of
initial application (23) (72) (58)
Amortization of unrecognized
prior service cost 44 44 35
Deferral of net asset gain (loss) 2,210 749 (920)
------- ------- -------
Total pension expense $ 1,206 $ 708 $ 781
------- ------- -------
Weighted-average discount rate
on benefit obligation 7.50% 7.25% 8.50%
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, 1996 and 1995 for VALIC's
defined benefit pension plan:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 8,265 $ 6,983
Nonvested 1,251 1,127
-------- --------
Accumulated benefit obligation 9,516 8,110
Effect of increase in compensation levels 2,474 2,219
-------- --------
Projected benefit obligation 11,990 10,329
Plan assets at fair value 9,120 6,406
-------- --------
Plan assets in excess of projected
benefit obligation (2,870) (3,923)
Unrecognized net loss 1,266 2,037
Unrecognized prior service cost 62 105
Unrecognized net obligation at
January 1, net of amortization -- (23)
-------- --------
Net pension liability $ (1,542) $ (1,804)
-------- --------
</TABLE>
Equity and fixed maturity securities were 60% and 35%, respectively, of
the plan's assets at the plan's 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. Postretirement benefit expense in 1996, 1995,
and 1994 was $282, $228, and $281, respectively.
The plans' combined funded status and the accrued postretirement benefit
cost included in other liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations
Retirees $ 21 $ 115
Fully eligible active plan participants 103 26
Other active plan participants 1,479 1,509
--------- ---------
Accumulated postretirement
benefit obligations 1,603 1,650
Unrecognized net loss (66) (393)
Net funding (17) --
--------- ---------
Accrued benefit cost $ 1,520 $ 1,257
--------- ---------
Discount rate on postretirement
benefit obligations 7.50% 7.25%
--------- ---------
</TABLE>
13
<PAGE> 69
================================================================================
CHAIRMAN'S LETTER SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
TO OUR PARTICIPANTS:
We are pleased to present the December 31, 1996 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 1, Portfolio Director 2, Independence Plus, Group Unit
Purchase and Impact) appears on page two.
Economic conditions in 1996 continued the recent pattern of modest growth and
low inflation. Gross Domestic Product has been increasing at a 2.5% annual
rate, slightly above the level in 1995 and in line with expectations for 1997.
Inflation, as measured by the Consumer Price Index, has been reported at 3.3%
and is expected to remain at that level through 1997.
The equity markets provided a second year of exceptional returns. The S&P
500(R) recorded a total return of 22.97%. Smaller capitalization stocks returns
were lower but still very satisfactory. The Standard & Poor's MidCap 400 Index
returned 19.24% and the Russell 2000(R) Index produced 16.49%.
The bond market followed an elliptical pattern declining in the first seven
months and rising in the last four months. Yields on the long-term Treasury
bond rose from 6.0% at the beginning of the year to 7.2% in July and declined
to 6.6% at year end. Bond market returns were less than 3.5%, with coupon
returns offsetting a decline in market value.
VALIC's domestic indexed funds provided returns ranging from 15.57% to 21.53%.
Managed domestic equity funds' returns varied widely from 3.53% to 22.75%. A
large part of the variance was caused by the spread in returns as large
capitalization stocks, on balance, outperformed smaller capitalization issues.
In the Morningstar rankings, twelve of VALIC's equity funds were in the top
half of their categories. Of those, eight 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 24, 1997
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.
"S&P 500(R)" and "Standard & Poor's MidCap 400 Index" are trademarks of
Standard & Poor's Corporation (S&P). The Stock Index Fund and MidCap Index Fund
are not sponsored, endorsed, sold or promoted by S&P and S&P makes no
representation regarding the advisability of investing in the funds. The
Russell 2000(R) Index is a trademark / service mark of the Frank Russell
Company. Russell(TM) is a trademark of the Frank Russell Company.
14
<PAGE> 70
================================================================================
CHAIRMAN'S LETTER - CONTINUED SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morningstar, Inc.(1) One Year
- ------------------------ Total Returns
Ranking Portfolio Portfolio Indepen- Group For Year Ending
- ---------------- Director Director dence Unit December 31,
Percen- Average 2 1 Plus Impact Purchase -------------------
Position tile Return Division Division Division Division Division 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
56/356 84 18.52 AGSPC Stock Index Fund .................... 10C 10C 10C 10D 10A, 10B 21.53% 35.95%
279/587 52 16.79 AGSPC MidCap Index Fund ................... - 4 4 4 - 17.61 29.24
128/249 49 14.57 AGSPC Small Cap Index Fund ................ - 14 14 - - 15.57 26.39
347/369 6 13.83 AGSPC International Equities Fund ......... - 11 11 - - 5.75 9.67
262/587 55 16.79 AGSPC Growth Fund ......................... 15 15 - - - 18.18 46.40
46/356 87 18.52 AGSPC Growth & Income Fund ................ - 16 - - - 22.10 30.55
69/127 46 18.52 AGSPC Science & Technology Fund ........... 17 17 - - - 12.68 60.07
26/356 93 18.52 AGSPC Social Awareness Fund ............... 12 12 12 - - 22.75 37.57
331/416 20 12.33 AGSPC Timed Opportunity Fund .............. - 5 5 5 - 9.99 23.55
139/249 44 14.57 Dreyfus Small Cap Portfolio ............... - 18 - - - 15.14 27.78
360/587 39 16.79 Founders Growth Fund ...................... 30 - - - - 15.35 44.15
262/356 26 18.52 Neuberger&Berman Guardian Trust ........... 29 - - - - 16.54 30.70
116/369 69 13.83 Putnam Global Growth Fund ................. 28 - - - - 15.37 13.68
168/249 33 14.57 Putnam New Opportunities Fund ............. 26 - - - - 9.70 44.87
207/249 17 14.57 Putnam OTC & Emerging Growth Fund ......... 27 - - - - 3.53 54.45
132/356 63 18.52 Scudder Growth and Income Fund ............ 21 - - - - 20.63 29.58
31/416 93 12.33 Templeton Asset Allocation Fund ........... - 19 - - - 17.40 21.02
92/369 75 13.83 Templeton Foreign Fund .................... 32 - - - - 16.74 10.07
39/369 89 13.83 Templeton International Fund .............. - 20 - - - 22.50 14.34
155/249 38 14.57 Twentieth Century Ultra Fund .............. 31 - - - - 12.43 36.23
74/416 82 12.33 Vanguard/Wellington Fund .................. 25 - - - - 14.69 31.30
35/356 90 18.52 Vanguard/Windsor II ....................... 24 - - - - 22.56 37.14
255/295 14 2.86 AGSPC Capital Conservation Fund ........... - 7 7 1 - 0.75 19.58
103/143 28 1.50 AGSPC Government Securities Fund .......... - 8 8 - - 0.90 16.31
54/77 30 7.55 AGSPC Intl Government Bond Fund ........... 13 13 13 - - 3.36 17.63
77/262 71 3.79 AGSPC Money Market Fund ................... 6 6 6 2 - 3.97 4.51
280/295 5 2.86 Vanguard Fixed Income Securities Fund -
Long-Term Corporate Portfolio .......... 22 - - - - (0.72) 24.86
138/143 3 1.50 Vanguard Fixed Income Securities Fund -
Long-Term U. S. Treasury Portfolio ..... 23 - - - - (3.08) 28.51
</TABLE>
(1) SOURCE: Morningstar Variable Annuity/Life Performance Report, January 1997
The Portfolio Director 1 and 2 rankings shown in this publication indicate the
total return rankings of Separate Account A's divisions compared to
Morningstar categories for the twelve month period ending 12/31/96. 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 1 and 2 prospectuses. 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.
15
<PAGE> 71
================================================================================
FINANCIAL STATEMENTS SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
ASSETS: ALL DIVISIONS
--------------
<S> <C>
Total investment in shares of mutual funds, at market (cost $5,613,414,313) ................... $6,848,720,710
Balance due from VALIC general account ........................................................ 7,839,650
--------------
NET ASSETS .................................................................................... $6,856,560,360
--------------
CONTRACT OWNER RESERVES:
Reserves for redeemable annuity contracts
(Net of applicable contract loans - partial withdrawals with right of reinvestment) .. $6,840,617,496
Reserves for annuity contracts on benefit ..................................................... 15,942,864
--------------
TOTAL CONTRACT OWNER RESERVES ................................................................. $6,856,560,360
==============
</TABLE>
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME: ALL DIVISIONS
-------------
<S> <C>
Dividends from mutual funds ................................................................... $ 88,556,732
-------------
EXPENSES:
Mortality and expense risk charge ............................................................. 57,564,107
Reimbursement of expenses (Note C) ............................................................ (167,038)
-------------
Total expenses ....................................................................... 57,397,069
-------------
NET INVESTMENT INCOME ......................................................................... 31,159,663
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments .............................................................. 96,618,063
Capital gains distributions from mutual funds ................................................. 175,625,286
Net unrealized appreciation of investments during the year .................................... 539,282,575
-------------
Net realized and unrealized gain on investments ............................................. 811,525,924
-------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............................................. $ 842,685,587
=============
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
ALL DIVISIONS
----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income ..................................................................... $ 31,159,663 $ 34,191,940
Net realized gain on investments .......................................................... 96,618,063 54,777,042
Capital gains distributions from mutual funds ............................................. 175,625,286 110,007,833
Net unrealized appreciation of investments during the year ................................ 539,282,575 640,017,922
--------------- ---------------
Increase in net assets resulting from operations ........................................ 842,685,587 838,994,737
--------------- ---------------
PRINCIPAL TRANSACTIONS:
Purchase payments ......................................................................... 1,307,543,093 820,355,349
Surrenders of accumulation units by terminations, withdrawals, and maintenance fees ....... (210,060,345) (114,759,722)
Annuity benefit payments .................................................................. (1,897,648) (1,588,610)
Amounts transferred from VALIC general account ............................................ 647,659,402 220,818,448
--------------- ---------------
Increase in net assets resulting from principal transactions ............................ 1,743,244,502 924,825,465
--------------- ---------------
TOTAL INCREASE IN NET ASSETS .............................................................. 2,585,930,089 1,763,820,202
NET ASSETS:
Beginning of year ......................................................................... 4,270,630,271 2,506,810,069
--------------- ---------------
End of year ............................................................................... $ 6,856,560,360 $ 4,270,630,271
=============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 72
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
AGSPC 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 ... $ 378,856,928 $ 30,721,138 $1,529,744,413 $ 42,481,642
Balance due (to) from VALIC general account ....... (207,899) 4,786 601,957 (10,515)
-------------- -------------- -------------- --------------
NET ASSETS ........................................ $ 378,649,029 $ 30,725,924 $1,530,346,370 $ 42,471,127
============== ============== ============== ==============
CONTRACT OWNER RESERVES:
Reserves for redeemable annuity contracts (Net of
applicable contract loans - partial withdrawals
with right of reinvestment) ..................... $ 367,264,137 $ 29,086,370 $1,529,060,822 $ 42,319,960
Reserves for annuity contracts on benefit ......... 11,384,892 1,639,554 1,285,548 151,167
-------------- -------------- -------------- --------------
TOTAL CONTRACT OWNER RESERVES ..................... $ 378,649,029 $ 30,725,924 $1,530,346,370 $ 42,471,127
============== ============== ============== ==============
</TABLE>
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
AGSPC NEUBERGER&
TIMED DREYFUS FOUNDERS BERMAN
OPPORTUNITY SMALL CAP GROWTH GUARDIAN
FUND PORTFOLIO FUND TRUST
DIVISION 5 DIVISION 18 DIVISION 30 DIVISION 29
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of mutual funds, at market ... $173,145,150 $657,404,003 $ 31,872,619 $ 9,144,621
Balance due (to) from VALIC general account ....... 84,325 982,056 245,857 58,685
------------ ------------ ------------ ------------
NET ASSETS ........................................ $173,229,475 $658,386,059 $ 32,118,476 $ 9,203,306
============ ============ ============ ============
CONTRACT OWNER RESERVES:
Reserves for redeemable annuity contracts (Net of
applicable contract loans - partial withdrawals
with right of reinvestment) ..................... $173,149,425 $658,204,551 $ 32,118,476 $ 9,203,306
Reserves for annuity contracts on benefit ......... 80,050 181,508 -- --
------------ ------------ ------------ ------------
TOTAL CONTRACT OWNER RESERVES ..................... $173,229,475 $658,386,059 $ 32,118,476 $ 9,203,306
============ ============ ============ ============
</TABLE>
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
AGSPC
TWENTIETH VANGUARD/ CAPITAL
CENTURY ULTRA WELLINGTON VANGUARD/ CONSERVATION
FUND FUND WINDSOR II FUND
DIVISION 31 DIVISION 25 DIVISION 24 DIVISION 1
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of mutual funds, at market ... $17,259,437 $25,025,702 $41,436,294 $ 6,488,667
Balance due (to) from VALIC general account ....... 58,221 163,816 363,484 13,203
----------- ----------- ----------- -----------
NET ASSETS ........................................ $17,317,658 $25,189,518 $41,799,778 $ 6,501,870
=========== =========== =========== ===========
CONTRACT OWNER RESERVES:
Reserves for redeemable annuity contracts (Net of
applicable contract loans - partial withdrawals
with right of reinvestment) ..................... $17,317,658 $25,189,518 $41,799,778 $ 6,497,192
Reserves for annuity contracts on benefit ......... -- -- -- 4,678
----------- ----------- ----------- -----------
TOTAL CONTRACT OWNER RESERVES ..................... $17,317,658 $25,189,518 $41,799,778 $ 6,501,870
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 73
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGSPC AGSPC AGSPC AGSPC AGSPC AGSPC
MIDCAP SMALL CAP INTERNATIONAL AGSPC GROWTH & SCIENCE & SOCIAL
INDEX INDEX EQUITIES GROWTH INCOME TECHNOLOGY AWARENESS
FUND FUND FUND FUND FUND FUND FUND
DIVISION 4 DIVISION 14 DIVISION 11 DIVISION 15 DIVISION 16 DIVISION 17 DIVISION 12
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<C> <C> <C> <C> <C> <C> <C>
$ 565,680,826 $ 184,521,204 $ 191,110,175 $ 633,819,402 $ 171,283,956 $ 709,577,919 $ 104,772,608
30,567 (42,882) 116,353 1,296,205 244,249 1,386,245 143,421
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
$ 565,711,393 $ 184,478,322 $ 191,226,528 $ 635,115,607 $ 171,528,205 $ 710,964,164 $ 104,916,029
============== ============== ============== ============== ============== ============== ==============
$ 565,558,770 $ 184,473,371 $ 191,050,097 $ 634,868,931 $ 171,510,875 $ 710,720,450 $ 104,916,029
152,623 4,951 176,431 246,676 17,330 243,714 -
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
$ 565,711,393 $ 184,478,322 $ 191,226,528 $ 635,115,607 $ 171,528,205 $ 710,964,164 $ 104,916,029
============== ============== ============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
PUTNAM PUTNAM PUTNAM OTC & SCUDDER
GLOBAL NEW EMERGING GROWTH AND TEMPLETON TEMPLETON TEMPLETON
GROWTH OPPORTUNITIES GROWTH INCOME ASSET ALLOCATION FOREIGN INTERNATIONAL
FUND FUND FUND FUND FUND FUND FUND
DIVISION 28 DIVISION 26 DIVISION 27 DIVISION 21 DIVISION 19 DIVISION 32 DIVISION 20
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<C> <C> <C> <C> <C> <C> <C>
$ 17,494,577 $ 49,812,851 $ 43,542,866 $ 18,325,255 $ 194,271,899 $ 39,066,749 $ 529,645,484
114,481 410,128 224,089 98,230 328,988 388,324 378,327
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
$ 17,609,058 $ 50,222,979 $ 43,766,955 $ 18,423,485 $ 194,600,887 $ 39,455,073 $ 530,023,811
============== ============== ============== ============== ============== ============== ==============
$ 17,609,058 $ 50,222,979 $ 43,766,955 $ 18,423,485 $ 194,377,876 $ 39,455,073 $ 529,901,911
- - - - 223,011 - 121,900
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
$ 17,609,058 $ 50,222,979 $ 43,766,955 $ 18,423,485 $ 194,600,887 $ 39,455,073 $ 530,023,811
============== ============== ============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
VANGUARD VANGUARD
AGSPC AGSPC AGSPC FIXED INCOME FIXED INCOME
CAPITAL GOVERNMENT INTERNATIONAL SECURITIES FUND - SECURITIES FUND -
CONSERVATION SECURITIES GOVERNMENT AGSPC MONEY MARKET FUND L/T CORPORATE L/T U.S. TREASURY
FUND FUND BOND FUND -------------------------------- PORTFOLIO PORTFOLIO
DIVISION 7 DIVISION 8 DIVISION 13 DIVISION 2 DIVISION 6 DIVISION 22 DIVISION 23
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<C> <C> <C> <C> <C> <C> <C>
$ 55,255,834 $ 85,570,274 $ 178,021,807 $ 4,870,208 $ 120,378,551 $ 3,528,351 $ 4,589,300
33,645 1,665 150,364 9,293 380,075 2,506 (212,599)
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
$ 55,289,479 $ 85,571,939 $ 178,172,171 $ 4,879,501 $ 120,758,626 $ 3,530,857 $ 4,376,701
============== ============== ============== ============== ============== ============== ==============
$ 55,289,479 $ 85,571,939 $ 178,161,619 $ 4,879,501 $ 120,740,347 $ 3,530,857 $ 4,376,701
- - 10,552 - 18,279 - -
- -------------- -------------- -------------- -------------- -------------- -------------- --------------
$ 55,289,479 $ 85,571,939 $ 178,172,171 $ 4,879,501 $ 120,758,626 $ 3,530,857 $ 4,376,701
============== ============== ============== ============== ============== ============== ==============
</TABLE>
18
<PAGE> 74
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
AGSPC STOCK INDEX FUND
------------------------------------------------------------------
DIVISION 10A DIVISION 10B DIVISION 10C DIVISION 10D
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends from mutual funds ...................... $ 6,791,052 $ 559,035 $ 24,619,582 $ 775,055
-------------- -------------- -------------- --------------
EXPENSES:
Mortality and expense risk charge ................ 3,604,468 170,656 12,878,174 411,146
Reimbursement of expenses (Note C) ............... -- (73,695) -- --
-------------- -------------- -------------- --------------
Total expenses ................................ 3,604,468 96,961 12,878,174 411,146
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS) ..................... 3,186,584 462,074 11,741,408 363,909
-------------- -------------- -------------- --------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments ................. 12,767,086 2,085,848 10,129,542 2,391,364
Capital gains distributions from mutual funds .... 2,739,498 222,372 11,061,404 307,213
Net unrealized appreciation (depreciation)
of investments during the year ................ 51,675,655 3,182,195 222,475,966 4,964,983
-------------- -------------- -------------- --------------
Net realized and unrealized gain on investments .. 67,182,239 5,490,415 243,666,912 7,663,560
-------------- -------------- -------------- --------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ..................... $ 70,368,823 $ 5,952,489 $ 255,408,320 $ 8,027,469
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
AGSPC AGSPC AGSPC
SCIENCE & SOCIAL TIMED DREYFUS
STATEMENTS OF OPERATIONS TECHNOLOGY AWARENESS OPPORTUNITY SMALL CAP
For the year ended December 31, 1996 FUND FUND FUND PORTFOLIO
DIVISION 17 DIVISION 12 DIVISION 5 DIVISION 18
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends from mutual funds ........................... $ -- $ 1,339,307 $ 5,922,604 $ 1,224,730
-------------- -------------- -------------- --------------
EXPENSES:
Mortality and expense risk charge ..................... 5,521,307 792,838 1,788,197 6,549,419
Reimbursement of expenses (Note C) .................... -- -- -- --
-------------- -------------- -------------- --------------
Total expenses ..................................... 5,521,307 792,838 1,788,197 6,549,419
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS) .......................... (5,521,307) 546,469 4,134,407 (5,324,689)
-------------- -------------- -------------- --------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments ...................... 20,659,560 778,115 7,668,485 1,994,033
Capital gains distributions from mutual funds ......... 32,117,202 10,715,745 18,741,770 19,221,026
Net unrealized appreciation (depreciation)
of investments during the year ..................... 15,569,750 4,483,540 (13,565,417) 56,124,110
-------------- -------------- -------------- --------------
Net realized and unrealized gain (loss) on investments 68,346,512 15,977,400 12,844,838 77,339,169
-------------- -------------- -------------- --------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .......................... $ 62,825,205 $ 16,523,869 $ 16,979,245 $ 72,014,480
============== ============== ============== ==============
</TABLE>
* For the period from July 1, 1996 to December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 75
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGSPC AGSPC AGSPC AGSPC
MIDCAP SMALL CAP INTERNATIONAL AGSPC GROWTH &
INDEX INDEX EQUITIES GROWTH INCOME
FUND FUND FUND FUND FUND
DIVISION 4 DIVISION 14 DIVISION 11 DIVISION 15 DIVISION 16
- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
$ 6,776,195 $ 2,324,957 $ 3,599,021 $ 2,128,889 $ 799,107
- -------------- -------------- -------------- -------------- --------------
5,262,899 1,687,562 2,007,600 4,407,390 1,201,329
-- -- -- -- --
5,262,899 1,687,562 2,007,600 4,407,390 1,201,329
- -------------- -------------- -------------- -------------- --------------
1,513,296 637,395 1,591,421 (2,278,501) (402,222)
- -------------- -------------- -------------- -------------- --------------
17,436,698 4,544,601 10,405,298 130,878 483,596
33,690,174 11,216,991 6,021,502 11,891,551 3,131,642
33,029,566 7,711,563 (6,663,813) 58,161,783 19,205,904
- -------------- -------------- -------------- -------------- --------------
84,156,438 23,473,155 9,762,987 70,184,212 22,821,142
- -------------- -------------- -------------- -------------- --------------
$ 85,669,734 $ 24,110,550 $ 11,354,408 $ 67,905,711 $ 22,418,920
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
NEUBERGER& PUTNAM PUTNAM PUTNAM OTC &
FOUNDERS BERMAN GLOBAL NEW EMERGING
GROWTH GUARDIAN GROWTH OPPORTUNITIES GROWTH
FUND TRUST FUND FUND FUND
DIVISION 30* DIVISION 29* DIVISION 28* DIVISION 26* DIVISION 27*
- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
$ 31,678 $ 33,512 $ 386,503 $ -- $ --
- -------------- -------------- -------------- -------------- --------------
74,336 22,319 39,664 113,933 108,371
(14,593) (4,401) (7,712) (22,122) (21,011)
- -------------- -------------- -------------- -------------- --------------
59,743 17,918 31,952 91,811 87,360
- -------------- -------------- -------------- -------------- --------------
(28,065) 15,594 354,551 (91,811) (87,360)
- -------------- -------------- -------------- -------------- --------------
-- 10,864 1,237 9,737 9,014
2,106,129 128,127 765,977 333,297 2,846,114
(1,697,540) 348,451 (504,554) (1,619,779) (4,620,592)
- -------------- -------------- -------------- -------------- --------------
408,589 487,442 262,660 (1,276,745) (1,765,464)
- -------------- -------------- -------------- -------------- --------------
$ 380,524 $ 503,036 $ 617,211 $ (1,368,556) $ (1,852,824)
============== ============== ============== ============== ==============
</TABLE>
20
<PAGE> 76
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
SCUDDER
GROWTH AND TEMPLETON TEMPLETON
INCOME ASSET ALLOCATION FOREIGN
FUND FUND FUND
DIVISION 21* DIVISION 19 DIVISION 32*
---------------- ---------------- ----------------
<S> <C> <C> <C>
INVESTMENT INCOME: .................................... $ 158,744 $ 3,271,039 $ 550,688
Dividends from mutual funds ........................... --
EXPENSES:
Mortality and expense risk charge ..................... 38,490 1,812,817 84,678
Reimbursement of expenses (Note C) .................... -- -- (16,623)
Total expenses ..................................... 38,490 1,812,817 68,055
NET INVESTMENT INCOME (LOSS) .......................... 120,254 1,458,222 482,633
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments ...................... 22,419 430,651 125
Capital gains distributions from mutual funds ......... 607,596 2,566,073 285,587
Net unrealized appreciation (depreciation)
of investments during the year ..................... 84,718 19,843,521 1,121,790
Net realized and unrealized gain on investments ....... 714,733 22,840,245 1,407,502
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .......................... $ 834,987 $ 24,298,467 $ 1,890,135
================ ================ ================
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
AGSPC
GOVERNMENT
AGSPC CAPITAL CONSERVATION FUND SECURITIES
-------------------------------- FUND
DIVISION 1 DIVISION 7 DIVISION 8
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends from mutual funds ................................ $ 454,827 $ 3,599,885 $ 4,872,690
-------------- -------------- --------------
EXPENSES:
Mortality and expense risk charge .......................... 69,783 545,929 795,753
Reimbursement of expenses (Note C) ......................... -- -- --
Total expenses .......................................... 69,783 545,929 795,753
-------------- -------------- --------------
NET INVESTMENT INCOME ...................................... 385,044 3,053,956 4,076,937
-------------- -------------- --------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments .................... 60,355 (425,696) (378,294)
Capital gains distributions from mutual funds .............. -- -- --
Net unrealized appreciation (depreciation)
of investments during the year .......................... (428,426) (2,170,354) (2,658,037)
-------------- -------------- --------------
Net realized and unrealized gain (loss) on investments ..... (368,071) (2,596,050) (3,036,331)
-------------- -------------- --------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............................... $ 16,973 $ 457,906 $ 1,040,606
============== ============== ==============
</TABLE>
* For the period from July 1, 1996 to December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE> 77
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TEMPLETON TWENTIETH VANGUARD/
INTERNATIONAL CENTURY ULTRA WELLINGTON VANGUARD/
FUND FUND FUND WINDSOR II
DIVISION 20 DIVISION 31* DIVISION 25* DIVISION 24*
- -------------- -------------- -------------- --------------
<S> <C> <C> <C>
$ 4,540,296 $ -- $ 379,677 $ 576,345
- -------------- -------------- -------------- --------------
4,934,897 43,940 53,077 88,288
-- (6,881) -- --
- -------------- -------------- -------------- --------------
4,934,897 37,059 53,077 88,288
- -------------- -------------- -------------- --------------
(394,601) (37,059) 326,600 488,057
- -------------- -------------- -------------- --------------
3,551,468 18,993 -- 11,774
1,324,253 884,238 818,129 1,554,790
- -------------- -------------- -------------- --------------
78,888,709 (659,907) (444,072) (217,368)
- -------------- -------------- -------------- --------------
83,764,430 243,324 374,057 1,349,196
- -------------- -------------- -------------- --------------
$ 83,369,829 $ 206,265 $ 700,657 $ 1,837,253
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
VANGUARD VANGUARD
AGSPC FIXED INCOME FIXED INCOME
INTERNATIONAL SECURITIES FUND- SECURITIES FUND-
GOVERNMENT AGSPC MONEY MARKET FUND L/T CORPORATE L/T U.S. TREASURY
BOND FUND ------------------------------- PORTFOLIO PORTFOLIO
DIVISION 13 DIVISION 2 DIVISION 6 DIVISION 22* DIVISION 23*
- -------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$ 8,037,534 $ 272,228 $ 4,429,817 $ 44,221 $ 57,514
- -------------- -------------- -------------- ---------------- ----------------
1,475,858 55,691 904,012 8,054 11,232
-- -- -- -- --
- -------------- -------------- -------------- ---------------- ----------------
1,475,858 55,691 904,012 8,054 11,232
- -------------- -------------- -------------- ---------------- ----------------
6,561,676 216,537 3,525,805 36,167 46,282
- -------------- -------------- -------------- ---------------- ----------------
1,815,703 -- -- 2,260 2,349
295,588 -- -- 31,298 --
(2,362,017) -- -- (11,407) 33,654
- -------------- -------------- -------------- ---------------- ----------------
(250,726) -- -- 22,151 36,003
- -------------- -------------- -------------- ---------------- ----------------
$ 6,310,950 $ 216,537 $ 3,525,805 $ 58,318 $ 82,285
============== ============== ============== ================ ================
</TABLE>
22
<PAGE> 78
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
AGSPC STOCK INDEX FUND
---------------------------------------------------------------
DIVISION 10A DIVISION 10B
------------------------------ ------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income .......................................... $ 3,186,584 $ 3,760,733 $ 462,074 $ 493,423
Net realized gain on investments ............................... 12,767,086 5,349,737 2,085,848 631,222
Capital gains distributions from mutual funds .................. 2,739,498 6,875,040 222,372 570,166
Net unrealized appreciation
of investments during the year .............................. 51,675,655 78,996,842 3,182,195 6,528,773
------------- ------------- ------------- -------------
Increase in net assets resulting from operations .......... 70,368,823 94,982,352 5,952,489 8,223,584
------------- ------------- ------------- -------------
PRINCIPAL TRANSACTIONS:
Purchase payments .............................................. 4,265,439 5,033,111 501,306 574,384
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees ........................... (22,309,652) (16,541,542) (2,364,484) (1,698,590)
Annuity benefit payments ....................................... (1,401,028) (1,296,973) (250,350) (218,489)
Amounts transferred (to) from VALIC general account ............ (13,443,730) (23,599,151) (1,406,730) (2,885,564)
------------- ------------- ------------- -------------
Increase (decrease) in net assets
resulting from principal transactions ................... (32,888,971) (36,404,555) (3,520,258) (4,228,259)
------------- ------------- ------------- -------------
TOTAL INCREASE IN NET ASSETS ................................... 37,479,852 58,577,797 2,432,231 3,995,325
NET ASSETS:
Beginning of year .............................................. 341,169,177 282,591,380 28,293,693 24,298,368
------------- ------------- ------------- -------------
End of year .................................................... $ 378,649,029 $ 341,169,177 $ 30,725,924 $ 28,293,693
============= ============= ============= =============
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year ........................... 29,995,363 33,814,520 1,560,525 1,836,094
Purchase payments .............................................. 323,038 497,922 26,729 39,513
Surrenders ..................................................... (1,822,126) (1,718,657) (123,291) (110,735)
Transfers - interdivision and (to) from VALIC general account .. (1,116,886) (2,598,422) (83,562) (204,347)
------------- ------------- ------------- -------------
Accumulation units end of year ................................. 27,379,389 29,995,363 1,380,401 1,560,525
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31: DECEMBER 31:
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Accumulation unit value........................................ $ 13.413891 $ 11.036946 $ 21.070956 $ 17.221812
============= ============ ============= ============
Annuity unit value assuming a 3.5% discount factor............. $ 3.873132 $ 3.298369 $ 5.173716 $ 4.376632
============= ============ ============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE> 79
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGSPC STOCK INDEX FUND
- ------------------------------------------------------------------------
DIVISION 10C DIVISION 10D
- ---------------------------------- ----------------------------------
1996 1995 1996 1995
- --------------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 11,741,408 $ 10,698,331 $ 363,909 $ 472,763
10,129,542 10,775,457 2,391,364 1,335,894
11,061,404 21,483,819 307,213 831,333
222,475,966 221,238,425 4,964,983 9,456,579
- --------------- --------------- --------------- ---------------
255,408,320 264,196,032 8,027,469 12,096,569
- --------------- --------------- --------------- ---------------
210,185,191 155,833,642 1,004,698 1,280,197
(49,624,470) (30,060,583) (2,219,367) (2,417,823)
(61,625) (29,665) (10,433) (5,520)
47,055,243 (42,300,802) (5,536,446) (7,115,532)
- --------------- --------------- --------------- ---------------
207,554,339 83,442,592 (6,761,548) (8,258,678)
- --------------- --------------- --------------- ---------------
462,962,659 347,638,624 1,265,921 3,837,891
1,067,383,711 719,745,087 41,205,206 37,367,315
- --------------- --------------- --------------- ---------------
$ 1,530,346,370 $ 1,067,383,711 $ 42,471,127 $ 41,205,206
=============== =============== =============== ===============
455,255,243 416,234,288 9,885,873 12,207,684
80,768,570 76,950,994 231,458 341,405
(18,096,464) (14,254,441) (486,940) (663,263)
18,879,616 (23,675,598) (1,248,687) (1,999,953)
- --------------- --------------- --------------- ---------------
536,806,965 455,255,243 8,381,704 9,885,873
=============== =============== =============== ===============
<CAPTION>
DECEMBER 31: DECEMBER 31:
- ---------------------------------- ----------------------------------
1996 1995 1996 1995
- --------------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 2.848437 $ 2.343900 $ 5.049088 $ 4.155057
=============== =============== =============== ===============
$ 2.085358 $ 1.776053 $ 3.032347 $ 2.582770
=============== =============== =============== ===============
<CAPTION>
AGSPC
AGSPC SMALL CAP
MIDCAP INDEX FUND INDEX FUND
- ---------------------------------- ----------------------------------
DIVISION 4 DIVISION 14
- ---------------------------------- ----------------------------------
1996 1995 1996 1995
- --------------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 1,513,296 $ 2,391,702 $ 637,395 $ 563,294
17,436,698 10,603,188 4,544,601 2,963,270
33,690,174 17,377,938 11,216,991 2,945,819
33,029,566 76,322,743 7,711,563 24,766,420
- --------------- --------------- --------------- ---------------
85,669,734 106,695,571 24,110,550 31,238,803
- --------------- --------------- --------------- ---------------
76,583,041 87,946,264 31,004,229 40,608,391
(21,727,656) (15,264,152) (7,478,000) (4,632,557)
(19,036) (16,844) (563) (3,022)
(55,201,966) (69,269,652) (15,148,966) (38,506,364)
- --------------- --------------- --------------- ---------------
(365,617) 3,395,616 8,376,700 (2,533,552)
- --------------- --------------- --------------- ---------------
85,304,117 110,091,187 32,487,250 28,705,251
480,407,276 370,316,089 151,991,072 123,285,821
- --------------- --------------- --------------- ---------------
$ 565,711,393 $ 480,407,276 $ 184,478,322 $ 151,991,072
=============== =============== =============== ===============
172,613,690 171,442,018 98,335,995 100,383,839
25,301,831 35,874,094 18,844,484 30,141,511
(7,030,990) (5,995,776) (4,305,572) (3,356,851)
(18,067,553) (28,706,646) (9,554,065) (28,832,504)
- --------------- --------------- --------------- ---------------
172,816,978 172,613,690 103,320,842 98,335,995
=============== =============== =============== ===============
<CAPTION>
DECEMBER 31: DECEMBER 31:
- ---------------------------------- ----------------------------------
1996 1995 1996 1995
- --------------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 3.272588 $ 2.782677 $ 1.785442 $ 1.544896
=============== =============== =============== ===============
$ 2.044683 $ 1.799452 $ 1.520786 $ 1.361960
=============== =============== =============== ===============
</TABLE>
24
<PAGE> 80
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
AGSPC
INTERNATIONAL EQUITIES AGSPC
FUND GROWTH FUND
DIVISION 11 DIVISION 15
------------------------------ ------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ................................... $ 1,591,421 $ 1,304,847 $ (2,278,501) $ (869,578)
Net realized gain on investments ............................... 10,405,298 13,215,875 130,878 8,587
Capital gains distributions from mutual funds .................. 6,021,502 4,363,325 11,891,551 3,650,399
Net unrealized appreciation (depreciation)
of investments during the year .............................. (6,663,813) (725,229) 58,161,783 39,103,633
------------- ------------- ------------- -------------
Increase in net assets resulting from operations .......... 11,354,408 18,158,818 67,905,711 41,893,041
------------- ------------- ------------- -------------
PRINCIPAL TRANSACTIONS:
Purchase payments .............................................. 34,022,917 52,726,233 164,255,730 58,223,803
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees ........................... (8,616,063) (6,722,321) (10,378,550) (1,776,523)
Annuity benefit payments ....................................... (13,432) (5,870) (38,688) --
Amounts transferred (to) from VALIC general account ............ (45,208,742) (63,364,477) 172,227,639 109,893,422
------------- ------------- ------------- -------------
Increase (decrease) in net assets
resulting from principal transactions ................... (19,815,320) (17,366,435) 326,066,131 166,340,702
------------- ------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................ (8,460,912) 792,383 393,971,842 208,233,743
NET ASSETS:
Beginning of year .............................................. 199,687,440 198,895,057 241,143,765 32,910,022
------------- ------------- ------------- -------------
End of year .................................................... $ 191,226,528 $ 199,687,440 $ 635,115,607 $ 241,143,765
============= ============= ============= =============
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year ........................... 172,564,018 187,749,916 164,417,848 32,633,370
Purchase payments .............................................. 28,526,458 49,402,081 101,043,809 45,984,606
Surrenders ..................................................... (7,207,422) (6,214,230) (5,693,969) (1,266,891)
Transfers - interdivision and (to) from VALIC general account .. (37,656,740) (58,373,749) 106,504,821 87,066,763
------------- ------------- ------------- -------------
Accumulation units end of year ................................. 156,226,314 172,564,018 366,272,509 164,417,848
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31: DECEMBER 31:
------------------------------ -----------------------------
1996 1995 1996 1995
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Accumulation unit value ........................................ $ 1.222906 $ 1.156454 $ 1.733324 $ 1.466652
============= ============= ============ ============
Annuity unit value assuming a 3.5% discount factor ............. $ 0.953246 $ 0.933003 $ 1.580931 $ 1.384532
============= ============= ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE> 81
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGSPC
AGSPC AGSPC AGSPC TIMED OPPORTUNITY
GROWTH & INCOME FUND SCIENCE & TECHNOLOGY FUND SOCIAL AWARENESS FUND FUND
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
DIVISION 16 DIVISION 17 DIVISION 12 DIVISION 5
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (402,222) $ (75,425) $ (5,521,307) $ (1,432,122) $ 546,469 $ 599,922 $ 4,134,407 $ 5,452,120
483,596 19,953 20,659,560 6,545,968 778,115 371,169 7,668,485 2,006,917
3,131,642 472,785 32,117,202 37,380,606 10,715,745 3,609,468 18,741,770 3,186,462
19,205,904 8,794,032 15,569,750 41,310,631 4,483,540 10,227,915 (13,565,417) 26,710,438
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
22,418,920 9,211,345 62,825,205 83,805,083 16,523,869 14,808,474 16,979,245 37,355,937
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
41,180,652 17,507,504 181,422,903 93,027,877 18,543,307 10,849,944 15,126,160 20,940,181
(2,962,157) (641,935) (14,164,178) (3,055,711) (3,798,307) (1,516,923) (11,037,733) (7,824,702)
(1,598) -- (40,073) (824) -- -- (7,329) (6,591)
43,756,812 28,680,150 105,706,951 147,758,969 13,547,350 (2,864,774) (30,784,573) (42,300,580)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
81,973,709 45,545,719 272,925,603 237,730,311 28,292,350 6,468,247 (26,703,475) (29,191,692)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
104,392,629 54,757,064 335,750,808 321,535,394 44,816,219 21,276,721 (9,724,230) 8,164,245
67,135,576 12,378,512 375,213,356 53,677,962 60,099,810 38,823,089 182,953,705 174,789,460
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
$ 171,528,205 $ 67,135,576 $ 710,964,164 $ 375,213,356 $ 104,916,029 $ 60,099,810 $ 173,229,475 $ 182,953,705
============= ============= ============= ============= ============= ============= ============= =============
51,779,089 12,386,602 187,862,232 42,726,137 32,750,120 29,015,764 75,851,431 89,377,860
28,095,895 14,980,745 84,389,312 54,428,033 9,143,695 6,860,477 6,003,535 9,806,864
(1,842,881) (455,265) (6,049,987) (1,584,330) (1,827,332) (929,671) (4,376,494) (3,569,040)
30,309,532 24,867,007 49,608,089 92,292,392 6,507,533 (2,196,450) (12,185,855) (19,764,253)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
108,341,635 51,779,089 315,809,646 187,862,232 46,574,016 32,750,120 65,292,617 75,851,431
============= ============= ============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31: DECEMBER 31: DECEMBER 31: DECEMBER 31:
- ------------------------------ ------------------------------ ------------------------------ ------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ------------- ------------- ------------- ------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.583056 $ 1.296577 $ 2.250471 $ 1.997175 $ 2.252673 $ 1.835102 $ 2.651899 $ 2.411022
============= ============= ============= ============= ============= ============= ============= =============
$ 1.443874 $ 1.223980 $ 2.052612 $ 1.885352 $ 1.755941 $ 1.480522 $ 1.680570 $ 1.581407
============= ============= ============= ============= ============= ============= ============= =============
</TABLE>
26
<PAGE> 82
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
FOUNDERS
GROWTH
DREYFUS SMALL CAP PORTFOLIO FUND
------------------------------ -------------
DIVISION 18 DIVISION 30
------------------------------ -------------
1996 1995 1996*
------------- ------------- -------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ..................................... $ (5,324,689) $ (1,441,343) $ (28,065)
Net realized gain on investments ................................. 1,994,033 26,776 --
Capital gains distributions from mutual funds .................... 19,221,026 6,796,184 2,106,129
Net unrealized appreciation (depreciation)
of investments during the year ................................ 56,124,110 47,179,100 (1,697,540)
------------- ------------- -------------
Increase (decrease) in net assets resulting from operations . 72,014,480 52,560,717 380,524
------------- ------------- -------------
PRINCIPAL TRANSACTIONS:
Purchase payments ................................................ 168,538,535 96,201,687 8,595,522
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees ............................. (13,795,343) (3,867,838) (36,494)
Annuity benefit payments ......................................... (8,413) (915) --
Amounts transferred (to) from VALIC general account .............. 74,732,906 122,606,635 23,178,924
------------- ------------- -------------
Increase in net assets
resulting from principal transactions ..................... 229,467,685 214,939,569 31,737,952
------------- ------------- -------------
TOTAL INCREASE IN NET ASSETS ..................................... 301,482,165 267,500,286 32,118,476
NET ASSETS:
Beginning of year ................................................ 356,903,894 89,403,608 --
------------- -------------
End of year ...................................................... $ 658,386,059 $ 356,903,894 $ 32,118,476
============= ============= =============
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year ............................. 267,735,219 85,169,871 --
Purchase payments ................................................ 117,376,109 80,950,706 9,274,157
Surrenders ....................................................... (8,756,141) (2,954,777) (32,596)
Transfers - interdivision and (to) from VALIC general account .... 52,528,063 104,569,419 21,955,903
------------- ------------- -------------
Accumulation units end of year ................................... 428,883,250 267,735,219 31,197,464
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31: DECEMBER 31,
--------------------------- ------------
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Accumulation unit value ............................... $ 1.534694 $ 1.332904 $ 1.029522
============ ============ ============
Annuity unit value assuming a 3.5% discount factor .... $ 1.409551 $ 1.267071 $ 1.011867
============ ============ ============
</TABLE>
* For the period from July 1, 1996 to December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE> 83
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PUTNAM
PUTNAM PUTNAM OTC & SCUDDER
GLOBAL NEW EMERGING GROWTH AND
NEUBERGER&BERMAN GROWTH OPPORTUNITIES GROWTH INCOME
GUARDIAN TRUST FUND FUND FUND FUND
DIVISION 29 DIVISION 28 DIVISION 26 DIVISION 27 DIVISION 21
- -------------- -------------- -------------- -------------- --------------
1996* 1996* 1996* 1996* 1996*
- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
$ 15,594 $ 354,551 $ (91,811) $ (87,360) $ 120,254
10,864 1,237 9,737 9,014 22,419
128,127 765,977 333,297 2,846,114 607,596
348,451 (504,554) (1,619,779) (4,620,592) 84,718
- -------------- -------------- -------------- -------------- --------------
503,036 617,211 (1,368,556) (1,852,824) 834,987
- -------------- -------------- -------------- -------------- --------------
2,108,685 3,174,282 11,510,093 11,571,920 4,643,308
(21,439) (15,952) (87,148) (77,988) (23,004)
-- -- -- -- --
6,613,024 13,833,517 40,168,590 34,125,847 12,968,194
- -------------- -------------- -------------- -------------- --------------
8,700,270 16,991,847 51,591,535 45,619,779 17,588,498
- -------------- -------------- -------------- -------------- --------------
9,203,306 17,609,058 50,222,979 43,766,955 18,423,485
-- -- -- -- --
- -------------- -------------- -------------- -------------- --------------
$ 9,203,306 $ 17,609,058 $ 50,222,979 $ 43,766,955 $ 18,423,485
============== ============== ============== ============== ==============
-- -- -- -- --
2,109,025 3,377,941 13,342,250 13,681,504 4,726,075
(19,267) (16,466) (87,502) (82,877) (21,254)
6,121,834 13,287,125 39,746,951 35,304,201 11,819,225
- -------------- -------------- -------------- -------------- --------------
8,211,592 16,648,600 53,001,699 48,902,828 16,524,046
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, December 31,
1996 1996 1996 1996 1996
- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
$ 1.120770 $ 1.057690 $ 0.947573 $ 0.894978 $ 1.114950
============== ============== ============== ============== ==============
$ 1.101550 $ 1.039552 $ 0.931324 $ 0.879630 $ 1.095830
============== ============== ============== ============== ==============
</TABLE>
28
<PAGE> 84
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
TEMPLETON
TEMPLETON ASSET FOREIGN
ALLOCATION FUND FUND
------------------------------ -------------
DIVISION 19 DIVISION 32
------------------------------ -------------
1996 1995 1996*
------------- ------------- -------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .................................... $ 1,458,222 $ 360,608 $ 482,633
Net realized gain on investments ................................ 430,651 87,754 125
Capital gains distributions from mutual funds ................... 2,566,073 -- 285,587
Net unrealized appreciation (depreciation)
of investments during the year ............................... 19,843,521 11,935,576 1,121,790
------------- ------------- -------------
Increase in net assets resulting from operations ........... 24,298,467 12,383,938 1,890,135
------------- ------------- -------------
PRINCIPAL TRANSACTIONS:
Purchase payments ............................................... 46,026,342 26,412,918 9,386,263
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees ............................ (3,839,217) (1,156,891) (122,577)
Annuity benefit payments ........................................ (39,584) (1,361) --
Amounts transferred (to) from VALIC general account ............. 33,529,527 24,133,475 28,301,252
------------- ------------- -------------
Increase in net assets
resulting from principal transactions .................... 75,677,068 49,388,141 37,564,938
------------- ------------- -------------
TOTAL INCREASE IN NET ASSETS .................................... 99,975,535 61,772,079 39,455,073
NET ASSETS:
Beginning of year ............................................... 94,625,352 32,853,273 --
------------- ------------- -------------
End of year ..................................................... $ 194,600,887 $ 94,625,352 $ 39,455,073
============= ============= =============
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year ............................ 78,494,505 32,807,602 --
Purchase payments ............................................... 35,369,271 24,212,805 10,156,940
Surrenders ...................................................... (2,676,756) (964,768) (116,295)
Transfers - interdivision and (to) from VALIC general account ... 26,197,650 22,438,866 26,631,183
============= ============= =============
Accumulation units end of year .................................. 137,384,670 78,494,505 36,671,828
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31: DECEMBER 31,
----------------------------- -------------
1996 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Accumulation unit value ........................................... $ 1.414844 $ 1.205181 $ 1.075896
============= ============= =============
Annuity unit value assuming a 3.5% discount factor ............... $ 1.299474 $ 1.145656 $ 1.057446
============= ============= =============
</TABLE>
* For the period from July 1, 1996 to December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE> 85
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWENTIETH
CENTURY VANGUARD/
ULTRA WELLINGTON VANGUARD/
TEMPLETON INTERNATIONAL FUND FUND FUND WINDSOR II
- ------------------------------ ------------- ------------- -------------
DIVISION 20 DIVISION 31 DIVISION 25 DIVISION 24
- ------------------------------ ------------- ------------- -------------
1996 1995 1996* 1996* 1996*
- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
$ (394,601) $ (1,169,628) $ (37,059) $ 326,600 $ 488,057
3,551,468 25,628 18,993 -- 11,774
1,324,253 350,470 884,238 818,129 1,554,790
78,888,709 23,406,038 (659,907) (444,072) (217,368)
- ------------- ------------- ------------- ------------- -------------
83,369,829 22,612,508 206,265 700,657 1,837,253
- ------------- ------------- ------------- ------------- -------------
121,376,573 69,120,243 4,513,492 7,042,246 10,178,409
(9,699,818) (2,577,387) (29,941) (12,075) (103,527)
(3,367) (463) -- -- --
84,599,243 89,125,401 12,627,842 17,458,690 29,887,643
- ------------- ------------- ------------- ------------- -------------
196,272,631 155,667,794 17,111,393 24,488,861 39,962,525
- ------------- ------------- ------------- ------------- -------------
279,642,460 178,280,302 17,317,658 25,189,518 41,799,778
250,381,351 72,101,049 -- -- --
- ------------- ------------- ------------- ------------- -------------
$ 530,023,811 $ 250,381,351 $ 17,317,658 $ 25,189,518 $ 41,799,778
============= ============= ============= ============= =============
219,124,926 71,716,511 -- -- --
97,229,761 65,697,216 4,747,541 7,335,077 10,359,662
(7,187,616) (2,198,909) (27,374) (12,748) (91,924)
69,414,878 83,910,108 11,933,909 15,544,305 27,025,023
- ------------- ------------- ------------- ------------- -------------
378,581,949 219,124,926 16,654,076 22,866,634 37,292,761
============= ============= ============= ============= =============
<CAPTION>
DECEMBER 31:
- ------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1996 1996
- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
$ 1.399702 $ 1.142586 $ 1.039845 $ 1.101584 $ 1.120855
============= ============= ============= ============= =============
$ 1.285567 $ 1.086152 $ 1.022013 $ 1.082693 $ 1.101634
============= ============= ============= ============= =============
</TABLE>
30
<PAGE> 86
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
AGSPC AGSPC
CAPITAL CONSERVATION CAPITAL CONSERVATION
FUND FUND
---------------------------- ----------------------------
DIVISION 1 DIVISION 7
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income ......................................... $ 385,044 $ 449,111 $ 3,053,956 $ 2,607,547
Net realized gain (loss) on investments ....................... 60,355 65,122 (425,696) (138,616)
Capital gains distributions from mutual funds ................. -- -- -- --
Net unrealized appreciation (depreciation)
of investments during the year ............................. (428,426) 906,759 (2,170,354) 5,643,853
------------ ------------ ------------ ------------
Increase in net assets resulting from operations ......... 16,973 1,420,992 457,906 8,112,784
------------ ------------ ------------ ------------
PRINCIPAL TRANSACTIONS:
Purchase payments ............................................. 280,092 286,600 10,990,401 10,464,260
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees .......................... (624,478) (623,792) (2,515,394) (1,972,220)
Annuity benefit payments ...................................... (512) (499) -- --
Amounts transferred (to) from VALIC general account ........... (953,654) (1,306,120) (7,231,500) (3,821,311)
------------ ------------ ------------ ------------
Increase (decrease) in net assets
resulting from principal transactions .................. (1,298,552) (1,643,811) 1,243,507 4,670,729
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ....................... (1,281,579) (222,819) 1,701,413 12,783,513
NET ASSETS:
Beginning of year ............................................. 7,783,449 8,006,268 53,588,066 40,804,553
------------ ------------ ------------ ------------
End of year ................................................... $ 6,501,870 $ 7,783,449 $ 55,289,479 $ 53,588,066
============ ============ ============ ============
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year .......................... 2,402,085 2,953,861 29,573,808 26,859,219
Purchase payments ............................................. 87,169 96,297 6,098,740 6,253,935
Surrenders .................................................... (196,821) (207,008) (1,343,357) (1,058,493)
Transfers - interdivision and (to) from VALIC
general account . ........................................... (300,897) (441,065) (4,042,697) (2,480,853)
------------ ------------ ------------ ------------
Accumulation units end of year ................................ 1,991,536 2,402,085 30,286,494 29,573,808
============ ============ ============ ============
<CAPTION>
DECEMBER 31: DECEMBER 31:
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Accumulation unit value ....................................... $ 3.262402 $ 3.238370 $ 1.825549 $ 1.812011
============ ============ ============ ============
Annuity unit value assuming a 3.5% discount factor ............ $ 1.794552 $ 1.843690 $ 1.255251 $ 1.289558
============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE> 87
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGSPC AGSPC
GOVERNMENT SECURITIES INTERNATIONAL GOVERNMENT AGSPC
FUND BOND FUND MONEY MARKET FUND
- ----------------------------- ------------------------------ ----------------------------------------------------------------
DIVISION 8 DIVISION 13 DIVISION 2 DIVISION 6
- ----------------------------- ------------------------------ ------------------------------ ------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 4,076,937 $ 2,982,495 $ 6,561,676 $ 3,459,290 $ 216,537 $ 306,524 $ 3,525,805 $ 3,277,326
(378,294) (28,711) 1,815,703 911,852 -- -- -- --
-- -- 295,588 114,019 -- -- -- --
(2,658,037) 5,103,399 (2,362,017) 3,111,995 -- -- -- --
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
1,040,606 8,057,183 6,310,950 7,597,156 216,537 306,524 3,525,805 3,277,326
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
18,451,360 15,047,915 48,300,297 31,073,737 163,293 355,756 40,448,483 26,840,702
(3,354,710) (1,987,445) (4,925,561) (1,946,252) (465,203) (681,366) (13,617,200) (7,793,169)
-- -- (33) -- -- -- (1,584) (1,574)
(2,269,092) 9,219,172 16,174,338 42,026,449 (1,426,148) (806,250) 10,145,727 (54,484,648)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
12,827,558 22,279,642 59,549,041 71,153,934 (1,728,058) (1,131,860) 36,975,426 (35,438,689)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
13,868,164 30,336,825 65,859,991 78,751,090 (1,511,521) (825,336) 40,501,231 (32,161,363)
71,703,775 41,366,950 112,312,180 33,561,090 6,391,022 7,216,358 80,257,395 112,418,758
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
$ 85,571,939 $ 71,703,775 $ 178,172,171 $ 112,312,180 $ 4,879,501 $ 6,391,022 $ 120,758,626 $ 80,257,395
============= ============= ============= ============= ============= ============= ============= =============
39,847,053 26,667,073 73,369,250 25,691,713 2,917,361 3,442,237 51,907,757 75,765,781
10,391,393 9,058,310 31,815,367 21,413,110 73,255 165,743 25,572,924 18,072,687
(1,871,516) (1,149,951) (3,112,236) (1,286,336) (208,252) (316,475) (8,565,366) (5,090,822)
(1,236,761) 5,271,621 10,529,212 27,550,763 (639,830) (374,144) 6,208,780 (36,839,889)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
47,130,169 39,847,053 112,601,593 73,369,250 2,142,534 2,917,361 75,124,095 51,907,757
============= ============= ============= ============= ============= ============= ============= =============
<CAPTION>
December 31: December 31: December 31: December 31:
- ----------------------------- ------------------------------ ------------------------------ ------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.815651 $ 1.799475 $ 1.582230 $ 1.530780 $ 2.277444 $ 2.190686 $ 1.607212 $ 1.545802
============= ============= ============= ============= ============= ============= ============= =============
$ 1.248443 $ 1.280634 $ 1.321708 $ 1.323493 $ 1.399179 $ 1.392992 $ 1.093041 $ 1.088077
============= ============= ============= ============= ============= ============= ============= =============
</TABLE>
32
<PAGE> 88
================================================================================
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31:
<TABLE>
<CAPTION>
VANGUARD VANGUARD
FIXED FIXED
INCOME INCOME
SECURITIES SECURITIES
FUND - FUND - L/T
L/T CORPORATE U.S. TREASURY
PORTFOLIO PORTFOLIO
------------ ------------
DIVISION 22 DIVISION 23
------------ ------------
1996* 1996*
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................................... $ 36,167 $ 46,282
Net realized gain on investments ................................ 2,260 2,349
Capital gains distributions from mutual funds ................... 31,298 --
Net unrealized appreciation (depreciation)
of investments during the year ............................... (11,407) 33,654
------------ ------------
Increase in net assets resulting from operations ........... 58,318 82,285
------------ ------------
PRINCIPAL TRANSACTIONS:
Purchase payments ............................................... 1,030,635 1,117,289
Surrenders of accumulation units by terminations,
withdrawals, and maintenance fees ............................ (3,212) (9,447)
Annuity benefit payments ........................................ -- --
Amounts transferred (to) from VALIC general account ............. 2,445,116 3,186,574
------------ ------------
Increase in net assets
resulting from principal transactions .................... 3,472,539 4,294,416
------------ ------------
TOTAL INCREASE IN NET ASSETS .................................... 3,530,857 4,376,701
NET ASSETS:
Beginning of year ............................................... -- --
------------ ------------
End of year ..................................................... $ 3,530,857 $ 4,376,701
============ ============
CHANGE IN UNITS OUTSTANDING:
Accumulation units beginning of year ............................ -- --
Purchase payments ............................................... 1,099,573 1,138,211
Surrenders ...................................................... (3,347) (9,203)
Transfers - interdivision and (to) from VALIC general account ... 2,274,215 3,045,361
------------ ------------
Accumulation units end of year .................................. 3,370,441 4,174,369
============ ============
<CAPTION>
December 31, December 31,
1996 1996
------------ ------------
<S> <C> <C>
Accumulation unit value ......................................... $ 1.047595 $ 1.048470
============ ============
Annuity unit value assuming a 3.5% discount factor .............. $ 1.029630 $ 1.030490
============ ============
</TABLE>
* For the period from July 1, 1996 to December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE> 89
================================================================================
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 thirty-three 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"):
AGSPC Stock Index Fund (Divisions 10A, B, C, and D)
AGSPC MidCap Index Fund (Division 4)
AGSPC Small Cap Index Fund (Division 14)
AGSPC International Equities Fund (Division 11)
AGSPC Growth Fund (Division 15)
AGSPC Growth & Income Fund (Division 16)
AGSPC Science & Technology Fund (Division 17)
AGSPC Social Awareness Fund (Division 12)
AGSPC Timed Opportunity Fund (Division 5)
AGSPC Capital Conservation Fund (Divisions 1 and 7)
AGSPC Government Securities Fund (Division 8)
AGSPC International Government Bond Fund (Division 13)
AGSPC Money Market Fund (Divisions 2 and 6)
Dreyfus Variable Investment Fund --
Dreyfus Small Cap Portfolio (Division 18)
Founders Growth Fund (Division 30)
Neuberger&Berman Guardian Trust (Division 29)
Putnam Global Growth Fund (Division 28)
Putnam New Opportunities Fund (Division 26)
Putnam OTC & Emerging Growth Fund (Division 27)
Scudder Growth and Income Fund (Division 21)
Templeton Foreign Fund (Division 32)
Templeton Variable Products Series Fund:
Templeton Asset Allocation Fund (Division 19)
Templeton International Fund (Division 20)
Twentieth Century Ultra Fund (Division 31)
Vanguard Fixed Income Securities Fund:
Long-Term Corporate Portfolio (Division 22)
Long-Term U.S. Treasury Portfolio (Division 23)
Vanguard/Wellington Fund (Division 25)
Vanguard/Windsor II (Division 24)
Divisions 21 through 32 commenced operations on July 1, 1996.
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 as
reported by the Fund.
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 1983(a) Individual Mortality 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.
34
<PAGE> 90
================================================================================
NOTES TO FINANCIAL STATEMENTS - CONTINUED SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
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, 0.85% on the first
$10,000,000, 0.425% on the next $90,000,000, and 0.21% 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 through 32, 1.25%. Certain
unaffiliated mutual funds reimburse to VALIC a portion of the distribution or
administrative costs associated with offering their funds through a VALIC
annuity contract. VALIC, in turn reduces the separate account charge to that
division by the amount of the reimbursement. The expense reduction is credited
daily based on the following annual rates: for Divisions 26 through 30 and
Division 32, 0.25%; for Division 31, 0.20%.
Pursuant to the reorganization agreement entered into on April 17, 1987,
which transferred VALIC Separate Accounts One and Two into Separate Account A
Divisions 10A and 10B, respectively, expenses of each division (as defined to
include underlying mutual fund expenses) are limited to the following rates
based on average daily net assets: Division 10A, 1.4157% on the first
$359,065,787, 1.36% on the next $40,934,213, and 1.32% on the excess over
$400,000,000; Division 10B, 0.6966% on the first $25,434,267, 0.5% on the next
$74,565,733, and 0.25% on the excess over $100,000,000. Accordingly, during the
years ended December 31, 1996 and 1995, VALIC reduced expenses of Division 10B
by $73,695 and $69,586, 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 $3,625,368 and $2,494,903 for the years
ended December 31, 1996, and December 31, 1995, respectively.
VALIC received surrender charges of $1,998,356 and $1,299,069 for the years
ended December 31, 1996, and December 31, 1995, respectively. In addition,
VALIC received $76,330 and $11,846 for the year ended December 31, 1996, in
sales load on variable annuity purchase payments for Divisions 10A and 10B,
respectively. 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.
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, 1996:
<TABLE>
<CAPTION>
UNREALIZED
MARKET APPRECIATION
UNDERLYING FUND DIVISION SHARES PRICE MARKET COST (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AGSPC Stock Index Fund ............... 10A,B,C,D 87,073,994 $22.76 $1,981,804,121 $1,327,746,117 $ 654,058,004
AGSPC MidCap Index Fund .............. 4 29,632,311 19.09 565,680,826 449,572,385 116,108,441
AGSPC Small Cap Index Fund ........... 14 11,997,478 15.38 184,521,204 153,924,818 30,596,386
AGSPC International Equities Fund .... 11 17,597,622 10.86 191,110,175 186,523,328 4,586,847
AGSPC Growth Fund .................... 15 37,305,439 16.99 633,819,402 536,223,583 97,595,819
AGSPC Growth & Income Fund ........... 16 11,029,231 15.53 171,283,956 143,198,387 28,085,569
AGSPC Science & Technology Fund ...... 17 36,314,121 19.54 709,577,919 650,004,665 59,573,254
AGSPC Social Awareness Fund .......... 12 6,746,465 15.53 104,772,608 92,520,041 12,252,567
AGSPC Timed Opportunity Fund ......... 5 14,900,615 11.62 173,145,150 164,668,872 8,476,278
Dreyfus Small Cap Portfolio .......... 18 12,622,965 52.08 657,404,003 554,202,812 103,201,191
Founders Growth Fund ................. 30 2,008,357 15.87 31,872,619 33,570,159 (1,697,540)
Neuberger&Berman Guardian Trust ...... 29 576,221 15.87 9,144,621 8,796,170 348,451
Putnam Global Growth Fund ............ 28 1,616,874 10.82 17,494,577 17,999,131 (504,554)
Putnam New Opportunities Fund ........ 26 1,226,012 40.63 49,812,851 51,432,630 (1,619,779)
Putnam OTC & Emerging Growth Fund .... 27 2,978,308 14.62 43,542,866 48,163,458 (4,620,592)
Scudder Growth and Income Fund ....... 21 788,862 23.23 18,325,255 18,240,537 84,718
Templeton Asset Allocation Fund ...... 19 9,215,934 21.08 194,271,899 163,221,896 31,050,003
Templeton Foreign Fund ............... 32 3,770,922 10.36 39,066,749 37,944,959 1,121,790
Templeton International Fund ......... 20 28,785,081 18.40 529,645,484 429,586,719 100,058,765
Twentieth Century Ultra Fund ......... 31 614,433 28.09 17,259,437 17,919,344 (659,907)
Vanguard/Wellington Fund ............. 25 957,006 26.15 25,025,702 25,469,774 (444,072)
Vanguard/Windsor II .................. 24 1,738,829 23.83 41,436,294 41,653,662 (217,368)
AGSPC Capital Conservation Fund ...... 1 & 7 6,540,731 9.44 61,744,501 62,635,525 (891,024)
AGSPC Government Securities Fund ..... 8 8,740,580 9.79 85,570,274 87,080,789 (1,510,515)
AGSPC Intl Government Bond Fund ...... 13 14,664,070 12.14 178,021,807 177,770,389 251,418
AGSPC Money Market Fund .............. 2 & 6 125,248,759 1.00 125,248,759 125,248,759 --
Vanguard Fixed Income Securities Fund:
Long-Term Corporate Portfolio ..... 22 401,405 8.79 3,528,351 3,539,758 (11,407)
Long-Term Treasury Portfolio ...... 23 460,773 9.96 4,589,300 4,555,646 33,654
-------------- -------------- --------------
$6,848,720,710 $5,613,414,313 $1,235,306,397
============== ============== ==============
</TABLE>
35
<PAGE> 91
================================================================================
SEPARATE ACCOUNT A
- --------------------------------------------------------------------------------
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, 1996, the aggregate cost of purchases and
proceeds from sales of investments were:
<TABLE>
<CAPTION>
PURCHASES SALES
-------------- --------------
<S> <C> <C>
AGSPCStock Index Fund:
Division 10A ....................................... $ 17,021,738 $ 43,812,850
Division 10B ....................................... 2,580,971 5,429,098
Division 10C ....................................... 256,325,254 25,747,213
Division 10D ....................................... 2,027,471 8,102,453
AGSPCMidCap Index Fund Division 4 ..................... 82,810,931 47,686,904
AGSPCSmall Cap Index Fund Division 14 ................. 39,025,150 19,167,355
AGSPCInternational Equities Fund Division 11 .......... 86,696,926 98,467,340
AGSPCGrowth Fund Division 15 .......................... 335,262,129 301,789
AGSPCGrowth & Income Fund Division 16 ................. 86,012,396 1,299,897
AGSPCScience & Technology Fund Division 17 ............ 352,574,477 53,374,853
AGSPCSocial Awareness Fund Division 12 ................ 42,813,000 3,268,198
AGSPCTimed Opportunity Fund Division 5 ................ 28,638,442 32,465,770
Dreyfus Small Cap Portfolio Division 18 ............... 249,716,319 6,505,702
Founders Growth Fund Division 30 ...................... 33,570,159 --
Neuberger&Berman Guardian Trust Division 29 ........... 8,898,099 112,793
Putnam Global Growth Fund Division 28 ................. 18,021,308 23,414
Putnam New Opportunities Fund Division 26 ............. 51,544,430 121,537
Putnam OTC & Emerging Growth Fund Division 27 ......... 48,276,161 121,717
Scudder Growth and Income Fund Division 21 ............ 18,402,759 184,641
Templeton Asset Allocation Fund Division 19 ........... 82,157,269 2,508,019
Templeton Foreign Fund Division 32 .................... 37,950,945 6,111
Templeton International Fund Division 20 .............. 218,306,492 20,995,568
Twentieth Century Ultra Fund Division 31 .............. 18,018,419 118,068
Vanguard/Wellington Fund Division 25 .................. 25,469,774 --
Vanguard/Windsor II Division 24 ....................... 41,722,849 80,961
AGSPCCapital Conservation Fund:
Division 1 ......................................... 693,471 1,607,591
Division 7 ......................................... 14,085,173 9,602,267
AGSPCGovernment Securities Fund Division 8 ............ 25,289,634 8,298,547
AGSPCInternational Government Bond Fund Division 13 ... 90,682,754 24,293,817
AGSPCMoney Market Fund:
Division 2 ......................................... 1,864,996 3,374,351
Division 6 ......................................... 234,317,827 194,495,674
Vanguard Fixed Income Securities Fund:
Long-Term Corporate Portfolio Division 22 .......... 3,689,310 151,812
Long-Term U.S. Treasury Portfolio Division 23 ...... 4,877,356 324,059
-------------- --------------
Total ........................................... $2,559,344,389 $ 612,050,369
============== ==============
</TABLE>
36
<PAGE> 92
================================================================================
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, and 11 through
32, inclusive) comprising Separate Account A as of December 31, 1996. 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
21 through 32, inclusive, for which we audited the statements of operations and
the statements of changes in net assets for the period from July 1, 1996
(inception) to December 31, 1996. 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, 1996,
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, 1996, 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 24, 1997
37
<PAGE> 93
[VALIC LOGO]
PRINTED MATTER
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(C)The Variable Annuity Life Insurance Company, Houston, Texas
[RECYCLED PAPER LOGO]
