<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1996
REGISTRATION N.2-30771
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[X] POST-EFFECTIVE AMENDMENT NO. 39
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[X] AMENDMENT NO. 39
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
(Exact Name of Registrant)
<TABLE>
<S> <C>
AMERICAN FIDELITY ASSURANCE COMPANY
(Name of Insurance Company)
2000 CLASSEN CENTER
OKLAHOMA CITY, OKLAHOMA 73106
(Address of Insurance Company's (Zip Code)
Principal Executive Offices)
</TABLE>
Insurance Company's Telephone Number, Including Area Code (405) 523-2000
<TABLE>
<S> <C>
STEPHEN P. GARRETT Copies to:
SENIOR VICE PRESIDENT THEODORE M. ELAM, ESQ.
LAW AND GOVERNMENT AFFAIRS CONNIE S. STAMETS, ESQ.
AMERICAN FIDELITY ASSURANCE COMPANY MCAFEE & TAFT
2000 CLASSEN CENTER A PROFESSIONAL CORPORATION
OKLAHOMA CITY, OKLAHOMA 73106 211 N. ROBINSON, 10TH FLOOR
(Name and Address of Agent for Service) OKLAHOMA CITY, OKLAHOMA 73102
</TABLE>
It is proposed that this filing will become effective (check appropriate
box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
An indefinite amount of securities has been registered hereunder pursuant
to Rule 24f-2(a)(1) of the Investment Company Act of 1940.
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- --------------------------------------------------------------------------------
<PAGE> 2
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A)
<TABLE>
<CAPTION>
ITEM
NO. ITEM LOCATION IN PROSPECTUS
- ---- ---- ----------------------
<S> <C> <C>
1 Cover Page......................................... Cover Page
2 Definitions........................................ "Definitions"
3 Synopsis........................................... "Fee Table"; "Participant
Questions"
4 Condensed Financial Information.................... "Condensed Financial Information"
5 General Description of Registrant and the Insurance
Company.......................................... "General Description of the Fund
and the Company"
6 Management......................................... "Management of the Fund"
7 Deductions and Expenses............................ "Deductions and Expenses"
8 General Description of Variable Annuity
Contracts........................................ "General Description of Variable
Annuity Contracts"
9 Annuity Period..................................... "Annuity Period"
10 Death Benefit...................................... "Death Benefit"
11 Purchases and Contract Value....................... "Purchases and Contract Value"
12 Redemptions........................................ "Redemptions"
13 Taxes.............................................. "Federal Tax Matters"
14 Legal Proceedings.................................. "Legal Proceedings"
15 Table of Contents of the Statement of Additional
Information...................................... "Contents of Statement of
Additional Information"
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION -- DATED DECEMBER 11, 1996
PROSPECTUS
[AMERICAN FIDELITY ASSURANCE COMPANY LOGO]
GROUP VARIABLE ANNUITY CONTRACTS
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
2000 CLASSEN CENTER, OKLAHOMA CITY, OKLAHOMA 73106 -- (405) 523-2000
American Fidelity Variable Annuity Fund A ("Fund") is offering group
variable annuity contracts issued by American Fidelity Assurance Company (the
"Company") to employers and the self-employed, for use in connection with
certain retirement programs which receive favorable tax deferred treatment under
Federal income tax law. The Fund has as its primary investment objective long
term growth of capital which the Fund endeavors to achieve through a diversified
investment portfolio consisting primarily of common stock. A secondary
investment objective of the Fund is the production of income.
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund dated , 1996 (the "Statement of Additional Information") has
been filed with the Securities and Exchange Commission and is available, without
charge, by calling or by writing the Fund at the above telephone number or
address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus. The table of contents of the Statement of
Additional Information appears at the end of this Prospectus.
The minimum initial premium deposit for each Participant is $20.00 and the
minimum amount of each subsequent deposit is $10.00. A deduction is made from
each premium deposit to reimburse the Company for certain sales and other
expenses. See "Deductions and Expenses." The variable annuity contract permits a
Participant to redeem his account, except where prohibited by Federal income tax
law, prior to commencement of annuity payments. See "Federal Tax Matters."
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 SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE
, 1996
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions........................................................................... 2
Fee Table............................................................................. 3
Participant Questions................................................................. 3
Condensed Financial Information....................................................... 5
Financial Highlights................................................................ 5
Financial Statements................................................................ 5
Performance Results................................................................. 5
General Description of the Fund and the Company....................................... 6
The Company......................................................................... 6
The Fund............................................................................ 6
Investment Objectives and Policies of the Fund...................................... 6
Management of the Fund................................................................ 7
Deductions and Expenses............................................................... 8
General Description of Variable Annuity Contracts..................................... 9
Voting Rights....................................................................... 9
Amendments.......................................................................... 9
Annuity Period........................................................................ 10
Annuity Options..................................................................... 10
Death Benefit......................................................................... 11
Purchases and Contract Value.......................................................... 11
How Do I Purchase Units?............................................................ 11
How Are Accumulation Units Valued?.................................................. 11
Redemptions........................................................................... 12
Federal Tax Matters................................................................... 13
General............................................................................. 13
Taxes Payable by Participants and Annuitants........................................ 13
Section 403(b) Annuities for Employees of Certain Tax-Exempt Organizations or
Public Educational Institutions.................................................. 13
Section 401 Qualified Pension, Profit-Sharing or Annuity Plans...................... 14
Individual Retirement Annuities (IRAs).............................................. 15
Simplified Employee Pension Plans................................................... 15
Legal Proceedings..................................................................... 16
Participant Inquiries................................................................. 16
Contents of Statement of Additional Information....................................... 16
</TABLE>
<PAGE> 5
DEFINITIONS
AS USED IN THIS PROSPECTUS, THE FOLLOWING TERMS HAVE THE INDICATED MEANINGS
UNLESS THE CONTEXT EXPRESSLY OR BY NECESSARY IMPLICATION OTHERWISE DICTATES:
ACCUMULATION PERIOD: The period of time between becoming a Participant and
the commencement of annuity payments.
ACCUMULATION UNIT: A standard of measurement used to measure the value of
each account.
ADVISORY AGREEMENT: The Management and Investment Advisory Contract between
the Fund and the Company pursuant to which the Company provides investment
advisory services to the Fund.
ANNUITANT: The Participant on whose life annuity payments will be based and
who will receive annuity payments pursuant to a Contract.
ANNUITY: A series of installment payments for the life of the Annuitant, or
for the joint lifetime of the Annuitant and another person and thereafter during
the lifetime of their survivor, with either a minimum number of payments or an
ascertainable sum certain.
ANNUITY OPTIONS: The four alternative methods to receive annuity payments
available under the Contract.
ANNUITY PAYMENTS: Payments made after retirement to Annuitants pursuant to
the Contract.
ANNUITY PERIOD: The period of time between commencement of annuity payments
and the payment of the last annuity payment due under the Contract.
BENEFICIARY: The person who will receive payments, if any, on the
Annuitant's death.
CODE: The Internal Revenue Code of 1986, as amended.
CONTRACT OWNER: The entity to which a Contract is issued, which is normally
the employer of Participants or an organization representing such employer.
MINIMUM DEATH PAYMENT: An amount payable to the named beneficiaries of a
Participant in the event of death of a Participant prior to commencement of
annuity payments.
NET INVESTMENT FACTOR: A factor used to determine the value of an
Accumulation Unit which is based upon the investment performance of the Fund.
PARTICIPANT: A person having an interest in the Fund through premium
deposits by him or on his behalf, but who has not begun to receive annuity
payments.
PREMIUM DEPOSIT: Sums paid to the Company by the Contract Owner pursuant to
the Contract on behalf of the Participant.
SUB-ADVISORS: Lawrence W. Kelly & Associates, Inc. ("Kelly") and Todd
Investment Advisors, Inc. ("Todd Investment"), sub-advisors to the Fund pursuant
to investment sub-advisory agreements with the Company.
VALUATION DATE: A day on which the value of the Fund is determined.
VALUATION PERIOD: The period between successive valuation dates.
VARIABLE ANNUITY: An annuity providing for payments varying in amount in
accordance with the investment experience of the Fund.
VARIABLE ANNUITY CONTRACT: The master group contract between the Company
and a Contract Owner. Also sometimes referred to as a "Contract."
VARIABLE ANNUITY UNIT: A measure used to calculate the amount of annuity
payments.
2
<PAGE> 6
FEE TABLE
<TABLE>
<S> <C>
Contract Owner Transaction Expenses (as a percentage of purchase payments)
Sales Load Imposed on Purchases.................................................. 3.00%
Administrative Expense........................................................... 0.25%
Minimum Death Benefit Expense.................................................... 0.75%
Deferred Sales Load.............................................................. None
Surrender Fees................................................................... None
Exchange Fee..................................................................... None
Per Payment Charge................................................................. $ 0.50
One-time Contract Fee.............................................................. $15.00
Annual Expenses (as a percentage of average net assets)
Management Fee................................................................... .50000%
Mortality and Expense Risk Fees.................................................. .96025%
---------
Total Annual Expenses.................................................... 1.46025%
</TABLE>
The purpose of the fee table is to assist Contract Owners in understanding
the various costs and expenses that they will bear directly or indirectly. For a
more complete explanation of each of these costs and expenses, see "Deductions
and Expenses." Premium taxes are not shown in the fee table, but may be charged
by some states on purchase payments or amounts annuitized.
EXAMPLE
If you surrender your contract or annuitize at the end of the applicable
time period, you would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets and implementation of the management fee
shown in the table above:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 69 $99 $ 131 $221
</TABLE>
This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown above.
Similarly, the 5% annual rate of return assumed in the example is not an
estimate or guarantee of future performance. Under Federal income tax laws, a
penalty tax may be assessed upon withdrawal of amounts accumulated under any
Variable Annuity Contract.
PARTICIPANT QUESTIONS
HOW WILL THE FUND ACHIEVE ITS INVESTMENT OBJECTIVES?
The Fund's primary investment objective is long-term growth of capital and
secondarily the production of income. To achieve these objectives the Fund
invests primarily in common stocks. In order to diversify, the Fund will invest
not more than 5% of its assets in any one issuer, except obligations of the
United States Government and instrumentalities thereof, and will acquire not
more than 10% of the voting securities of any one issuer. The Fund will invest
not more than 25% of its assets in any one industry and not more than 10% of its
assets in real estate. In addition, the Fund may invest up to 35% of its assets
in equity securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), other Depository Receipts or ordinary shares if U.S. dollar
denominated and publicly traded in the United States. Investment in companies of
any one foreign country will be limited to 20% of Fund assets. The Fund's
investment objectives and policies are discussed in more detail under "General
Description of the Fund and the Company" and in the Statement of Additional
Information.
WHAT ARE THE RISKS I FACE IN INVESTING IN THE FUND?
Achievement of the Fund's investment objectives cannot, of course, be
assured due to the risks of loss of capital or income inherent in any investment
in equity securities and the special risks associated with investing
3
<PAGE> 7
in the equity securities of foreign corporations. The Fund's investments are
subject to the negative changes in the general economy of the United States and
of various foreign countries where Fund assets are invested. The Fund is also
vulnerable to changes that affect capital markets.
WHO IS THE INVESTMENT ADVISOR FOR THE FUND?
The Company has been the Fund's investment advisor since 1968. In 1995, the
Company retained Lawrence W. Kelly & Associates, Inc. ("Kelly") and Todd
Investment Advisors, Inc. ("Todd Investment" and, together with Kelly, the
"Sub-Advisors") to act as sub-advisors to the Fund. Subject to the fundamental
objectives and policies of the Fund and any other guidelines provided by the
Company, each Sub-Advisor has complete discretion and authority in the
investment and reinvestment of the Fund assets under its management. Effective
October 2, 1995, the Company allocated Fund assets equally between Kelly and
Todd Investment. The asset allocation between the Sub-Advisors will be reviewed
at least annually.
HOW DO I PURCHASE UNITS OF THE FUND?
A detailed description of the steps you must take to purchase units of the
Fund is included under "Purchases and Contract Value."
HOW CAN I REDEEM MONIES I HAVE INVESTED IN THE FUND?
A detailed description of the steps you must take to redeem all or a
portion of your investment is set out under "Redemptions."
ARE THERE ANY RESTRICTIONS ON WITHDRAWAL OF MY INVESTMENT?
Although the Fund does not have a "ten-day free look" provision or policy,
you do have the right to withdraw all or a part of your investment at any time.
See "Redemptions" for the method of making such withdrawals. You should keep in
mind, however, that there may be adverse tax consequences when such withdrawals
are made. Federal income tax law restricts withdrawals from qualified retirement
plans, but you are permitted to transfer your account from the Fund to another
qualified fund. You should carefully read the section entitled "Federal Tax
Matters" before you make any decision to redeem your investment.
4
<PAGE> 8
CONDENSED FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
The following annual financial highlights of the Fund have been derived
from schedules which have been audited for the six years ended December 31, 1995
by KPMG Peat Marwick LLP, independent auditors, and for the four years ended
December 31, 1989 by Arthur Andersen & Co., independent certified public
accountants. Information for the six months ended June 30, 1996 is derived from
the Fund's unaudited financial statements. Per share data are for an
Accumulation Unit outstanding throughout the year, with an average Accumulation
Unit used for 1990 and later years. Ratios are determined using Fund totals for
the period.
FINANCIAL HIGHLIGHTS
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1996 --------------------------------------------------------------------------------------------------
(UNAUDITED) 1995(A) 1994 1993 1992 1991 1990 1989 1988 1987 1986
------------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME AND
EXPENSES:
Investment
income..... $ .1321 $ .2163 $0.2105 $0.2113 $0.2267 $0.2329 $0.2507 $0.2077 $0.1750 $0.0624 $0.0834
Operating
expenses... .0822 .1364 0.1193 0.1180 0.1113 0.1000 0.0856 0.0829 0.0515 0.0254 0.0304
------------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net
investment
income..... .0499 .0799 0.0912 0.0933 0.1154 0.1329 0.1651 0.1248 0.1235 0.0370 0.0530
CAPITAL
CHANGES:
Net realized
and
unrealized
gains
(losses) on
securities... 1.4836 3.0251 (0.7066) 0.5074 0.1266 1.8089 0.2452 1.2791 0.3859 0.0970 0.6236
------------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase
(decrease)
in
Accumulation
Unit
value...... 1.5335 3.1050 (0.6154) 0.6007 0.2420 1.9418 0.4103 1.4039 0.5094 0.1340 0.6766
Accumulation
Unit value,
beginning
of
period..... 12.1986 9.0936 9.7090 9.1083 8.8663 6.9245 6.5142 5.1103 4.6009 4.4669 3.7903
------------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Accumulation
Unit value,
end of
period..... $ 13.7321 $12.1986 $9.0936 $9.7090 $9.1083 $8.8663 $6.9245 $6.5142 $5.1103 $4.6009 $4.4669
============ ======== ======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS/OTHER
DATA:
Ratio of
expenses to
average net
assets..... .6304% 1.2880% 1.2826% 1.2783% 1.2812% 1.2800% 1.2879% 1.2844% 1.2911% 1.2991% 1.2836%
Ratio of net
investment
income to
average net
assets..... .3829% .7542% 0.9797% 1.0110% 1.3289% 1.7004% 2.4849% 1.9328% 3.0992% 1.8896% 2.2342%
Portfolio
turnover
rate....... 23.65% 66.1% 43.5% 51.2% 31.7% 41.2% 41.1% 50.1% 34.0% 78.3% 103.8%
Number of
Accumulation
Units
outstanding,
end of
period
(000's).... 6,128 5,997 5,616 5,114 4,644 4,268 4,041 3,806 3,840 3,733 3,513
</TABLE>
- ---------------
(a) Management of Fund assets by the Sub-Advisors commenced October 2, 1995.
FINANCIAL STATEMENTS
The foregoing financial highlights should be read in conjunction with the
Fund's audited financial statements and the notes thereto included in the
Statement of Additional Information and the financial information for the six
months ended June 30, 1996 included in the Fund's 1996 semiannual report. The
audited consolidated financial statements of the Company and the notes thereto
also appear in the Statement of Additional Information.
PERFORMANCE RESULTS
The fund may from time to time advertise certain performance results in
sales literature, advertisements and reports to Contract Owners. The results
will be calculated on a total return basis and on an average annual total return
basis for various time periods, with all sales charges and other expenses
deducted from investment results. The Fund may also advertise the ending value
of investing $100 per month for various time periods, with all sales charges and
other expenses deducted from investment results.
The Fund's total return for the twelve months ended June 30, 1996 and
average annual total returns over the five and ten year periods ended June 30,
1996 were 19.07%, 11.26% and 10.54%, respectively. These results were calculated
in accordance with the Securities and Exchange Commission rules which require
that the maximum sales charge be deducted. These figures reflect past results
and are not an indication of future results. Further information regarding the
Fund's investment results is contained in the Fund's Statement of Additional
Information.
5
<PAGE> 9
GENERAL DESCRIPTION OF THE FUND AND THE COMPANY
THE COMPANY
The Company is an Oklahoma stock life insurance company organized in 1960.
Its principal executive offices are located at 2000 Classen Center, Oklahoma
City, Oklahoma 73106, telephone number (405) 523-2000. The Company is licensed
to conduct life, annuity and accident and health insurance business in forty-
eight (48) states and the District of Columbia.
The Company has been a wholly owned subsidiary of American Fidelity
Corporation since 1974. The stock of American Fidelity Corporation is controlled
by a family investment partnership, Cameron Enterprises, A Limited Partnership,
whose managing general partners are William M. Cameron, William E. Durrett,
Edward C. Joullian, III, John W. Rex and Theodore M. Elam. The address of both
American Fidelity Corporation and Cameron Enterprises, A Limited Partnership is
2000 Classen Center, Oklahoma City, Oklahoma 73106. The Company has served as
the investment advisor to the Fund since 1968. The Company does not serve as
investment advisor to any other variable annuity, mutual fund or other company.
THE FUND
Since 1968, the Company has maintained a separate account under Oklahoma
insurance law designated as American Fidelity Variable Annuity Fund A (the
"Fund"). The Fund is registered with the Securities and Exchange Commission as
an open-end diversified management investment company under the Investment
Company Act of 1940, which means that at least 75% of the value of the total
assets of the Fund is represented by cash and cash items, government securities,
securities of other investment companies and other securities, limited in
respect of any one issuer to an amount not greater than 5% of the value of the
total assets of the Fund and to not more than 10% of the outstanding voting
securities of such issuer.
The assets of the Fund are segregated from the assets of the Company and,
under Oklahoma law, may not be charged with the liabilities arising out of other
business activities of the Company. Any Fund income, gains or losses, realized
or unrealized, are credited to or charged against the Fund without regard to
income, gains or losses of the Company. The obligations arising under the
Variable Annuity Contracts are not obligations of the Company. The Fund has no
sub-accounts.
At December 31, 1995, 14.59% of the assets of the Fund were attributable to
the Variable Annuity Contract of the American Fidelity Companies Employee
Savings Plan Trust. Its address is the same as that of the Company. No more than
10% of the assets of the Fund were attributable to any other Variable Annuity
Contract at such date.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
The Fund's investment objectives are primarily long-term growth of capital
and secondarily the production of income. Such objectives do not preclude
infrequent investments for short-term capital appreciation. Income and realized
capital gains are reinvested at no charge to the Participant. The Fund's
fundamental investment policies cannot be changed without approval by Contract
Owners representing a majority vote of shares of the Fund. See Item 19 of the
Statement of Additional Information for a list of the Fund's fundamental
investment policies.
In order to achieve its investment objectives, the Fund normally invests in
a diversified portfolio consisting primarily of common stocks based upon an
assessment of particular industries or companies. The Fund invests not more than
5% of its assets in any one issuer, except obligations of the United States
Government and instrumentalities thereof, and will acquire not more than 10% of
the voting securities of any one issuer. In addition, the Fund invests not more
than 25% of the Fund's assets in any one industry and not more than 10% of the
Fund's assets in real estate (including real estate investment trusts). The Fund
is normally fully invested, apart from cash balances needed to meet Variable
Annuity Contract payments and Participant redemptions. The Fund's assets may
also be held in cash equivalents or securities which are direct
6
<PAGE> 10
obligations of the United States Government for this purpose. The Fund has a
policy of not purchasing puts, calls or other options.
The Fund may invest up to 35% of its assets in equity securities of foreign
issuers in the form of ADRs, other Depository Receipts or ordinary shares if
U.S. dollar denominated and publicly traded in the United States. Investments in
companies of any one foreign country are limited to not more than 20% of Fund
assets. ADRs are certificates issued by a U.S. bank or trust company and
represent the right to receive securities of a foreign issuer which are
deposited in a domestic bank or foreign branch of a U.S. bank. ADRs are traded
on a U.S. exchange or in the over-the-counter market. Investment in ADRs has
certain advantages over direct investment in the underlying foreign securities
since (i) ADRs are U.S. dollar-denominated investments that are easily
transferable and for which market quotations are readily available, and (ii)
issuers whose securities are represented by ADRs generally provide more
financial information than non-ADR foreign issuers. ADR investments also involve
risks not present in domestic investments, such as exposure to fluctuations in
foreign currencies, less publicly available information, nonuniform accounting,
auditing and financial reporting standards, less liquidity and more volatility,
foreign withholding or other taxes, and political or economic instability
affecting foreign investments.
The Fund's Sub-Advisors may determine that prevailing market and economic
conditions indicate investment in other than common stocks may be advantageous,
in which event investments may be made on a short-term basis in securities which
are a direct obligation or guaranteed by the United States Government, bonds,
notes or other evidences of indebtedness, issued publicly or privately, of a
type customarily purchased for investment by institutional investors. Such
nongovernmental investments may be convertible into stock or may be accompanied
by stock purchase options or warrants for the purchase of stock.
Achievement of the Fund's investment objectives cannot, of course, be
assured due to the risks of loss of capital or income inherent in any investment
in equity securities and the special risks associated with investing in the
equity securities of foreign corporations. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and overall market and economic conditions.
MANAGEMENT OF THE FUND
The Board of Managers of the Fund, which is elected annually by the
Contract Owners, is responsible for overseeing the management of the Fund,
including the establishment and supervision of the Fund's investment policies
and objectives, reviewing and approving the Fund's contracts and other
arrangements and monitoring Fund performance and operations.
The Company has served as the investment advisor to the Fund since 1968 and
is, subject to the authority of the Board of Managers of the Fund, responsible
for overall management of the Fund's business affairs. The Company has
sub-advisory agreements with Kelly and Todd Investment under which the
Sub-Advisors have managed the Fund's investment portfolio since October 1995.
Subject to the fundamental investment objectives and policies of the Fund
and any other guidelines provided by the Company, each Sub-Advisor has complete
discretion and authority in the investment and reinvestment of the Fund assets
under its management. The Company allocated Fund assets equally between Kelly
and Todd Investment in October 1995 and reevaluates this allocation at least
annually. Each Sub-Advisor determines what securities are acquired, held or
disposed of and, subject to any instructions from the Company as to the Fund's
cash requirements from time to time, the portion of Fund assets which will be
held uninvested. The Sub-Advisors are also authorized to exercise all voting
rights pertaining to the Fund assets they manage. The Sub-Advisors are
authorized to select brokers to effect securities transactions on behalf of the
Fund. Neither Sub-Advisor nor any of their respective affiliates may act as a
broker with respect to securities transactions for the Fund.
Kelly has provided the Company research and investment advice since 1985.
Beginning in the fourth quarter of 1995, Kelly's services relating to Fund
assets have been rendered pursuant to its sub-advisory agreement with the
Company, and its services relating to other assets managed by the Company have
been
7
<PAGE> 11
provided under a separate consulting agreement. Lawrence W. Kelly, the founder
of Kelly, has 29 years of experience in the investment advisory business and he
and his wife, Janice M. Kelly, are the sole shareholders of Kelly. From 1980 to
1985, Mr. Kelly was chairman of Webster Management Corporation, an investment
advisory firm which provided investment advice to the Company. In addition, Mr.
Kelly was a vice president (1974 to 1988) and director (1981 to 1985) of Kidder,
Peabody & Co., Inc. and the chairman of five mutual funds managed by Webster and
Kidder from various dates between 1981 and 1984 until 1986. As of December 31,
1995, Kelly managed 43 client securities portfolios on a discretionary basis
with an aggregate market value of $251 million. It also managed or supervised 16
client securities portfolios on a non-discretionary basis with an aggregate
market value of $934.4 million. Kelly has not acted as an investment advisor to
any investment company registered under the Investment Company Act other than
the Fund. Kelly is located at 200 South Los Robles Avenue, Suite 510, Pasadena,
California 91101.
Todd Investment has 28 years of experience managing investments for
institutional clients. At December 31, 1995, Todd Investment managed over $2.5
billion for 30 clients, of which $941 million represented equity assets. Todd
Investment generates all of its revenues from fee-based investment counseling
and employs four portfolio managers. The primary portfolio manager for the Fund
is Robert Bordogna, who has been with Todd Investment since 1980 and in the
business for 26 years. Todd Investment has not previously acted as an investment
advisor to a registered investment company. It is located at 3160 National City
Tower, Louisville, Kentucky 40202 and, since December 1993, has been an indirect
wholly-owned subsidiary of Stifel Financial Corporation, a financial services
holding company based in St. Louis, Missouri.
DEDUCTIONS AND EXPENSES
A deduction of 4% is made from each premium deposit received (4.17% of the
amount invested). Of the 4%, 1/4% is for administrative expenses, 3/4% is for
the minimum death payment, and 3% is for sales. The deduction for administrative
expenses is designed to reimburse the Company for its actual administrative
expenses, including salaries, rent, postage, telephone, travel, legal, actuarial
and accounting fees and office equipment and stationery. The deduction for
administrative expenses for 1995 as a percentage of average net assets was .05%.
The deduction of 3/4% for the minimum death benefit is not applicable after a
Participant attains age 65. The sales charge is intended to recover all
distribution expenses associated with marketing Contracts. In the event the
sales charge is not adequate to recover all distribution expenses, the resulting
"shortfall" is borne by the Company. Any such shortfall amounts paid by the
Company may consist, among other things, of proceeds derived from mortality and
expense risk charges discussed below. The sales charge for lump sum or periodic
payments of $2,000 or greater may be less than 3%, depending on the actual
commission paid.
In addition to the 4% deduction, there is an additional administrative
charge against each premium deposit of $.50 and a one-time certificate issuance
fee of $15.00. These charges have been set at a level to recover no more than
the actual costs of administering Contracts. Such deductions will not be
increased until premium deposits on behalf of a Participant equal twice the
amount of premium deposits made during the first year of participation. Such
deductions may be increased on premium deposits in excess of such amount.
All the Fund's expenses are paid by the Company. The Company monitors the
actual costs it incurs on behalf of the Fund for sales and administrative
expenses compared with the amounts deducted for sales and administrative
expenses. If actual costs exceed the amount deducted, which has been the case
historically, no additional deductions are made.
The Company receives a daily fee of .0013698% (.50% on an annual basis) of
the current value of the Fund as an investment advisory and management fee. The
Company pays the Sub-Advisors' fees. Kelly receives an annual fee of .30% of
Fund assets under its management, and Todd Investment receives an annual fee of
.38% of Fund assets under its management or $50,000, whichever is greater. Under
the Contract, the Company assumes the risk that the actuarial estimate of
mortality rates among variable annuitants may be erroneous and the reserves
based on such estimate will not be sufficient to meet annuity payment
obligations. For mortality and expense risks assumed, the Company receives
.96025% on an annual basis (.0026308% for
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each one-day valuation period) of the current value of the Fund's assets. Of
this amount, .85% is for mortality risks and .11025% is for expense risks.
Once a Participant elects an annuity option, certain jurisdictions may
impose premium taxes with respect to subsequent premium deposits. Such premium
taxes presently range from 0% to 3% of premium deposits. Premium taxes are
deducted either from premium deposits 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 Fund applies the excess amount
deducted to increase the number of units under the Participant account at the
time such determination is made. If no amount for premium tax was deducted, but
tax subsequently is determined to be due, the Fund reserves the right to reduce
the number of units under a Participant account by the amount of the tax due at
the time such determination is made.
GENERAL DESCRIPTION OF VARIABLE ANNUITY CONTRACTS
VOTING RIGHTS
Each Contract Owner may cast votes equal to the number of Accumulation
Units under its Contract. During the Accumulation Period, the Contract Owner may
cast the number of votes equal to (i) the amount of the assets established in
the Fund to meet the annuity obligations related to such Contract Owner's
Participants divided by (ii) the value of an Accumulation Unit.
Fractional votes are counted, but each Contract Owner has a minimum of one
vote.
The number of votes which each Contract Owner may cast is determined as of
a record date chosen by the Board of Managers which cannot be more than 90 days
before a meeting of Contract Owners. At least 20 days' prior written notice of a
meeting must be given. To be entitled to vote, a Contract Owner must have been
such on the record date.
During the Accumulation Period, a Participant under a Contract issued in
connection with an H.R. 10 Plan, or pursuant to Code Section 403(b) or 408(b),
has the right to instruct the Contract Owner with respect to the votes
attributable to his individual account, and a Participant under a qualified
employee pension or profit-sharing trust or a qualified annuity plan (other than
one involving an H.R. 10 Plan) has the right to instruct the Contract Owner with
respect to votes attributable to payments made by him, and to his vested portion
of payments made by his employer, if any. All other votes entitled to be cast
during such period under such a trust or plan may be cast by the Contract Owner
in its sole discretion.
During the Annuity Period, each Annuitant may instruct the Contract Owner
with respect to all votes attributable to the amount of assets established in
the Fund to meet the annuity obligations related to such Annuitant. Each Annuity
Payment reduces the votes attributable to such assets. Proxy materials are sent
to each Contract Owner, Participant, beneficiary of a deceased Participant and
Annuitant.
Each Contract Owner must vote in accordance with instructions, and, in the
absence of instructions (other than those as to which no employee or Participant
is entitled to give instructions), must cast votes in the same proportion as the
votes for which instructions have been received.
AMENDMENTS
The Company may change the Contract at any time if required by state or
Federal laws. After a Contract has been in force for three years, the Company
may change any term of the Contract except that benefits already earned by
Participants cannot be decreased and guaranteed monthly life incomes cannot be
decreased. The Company will notify Contract Owners of any change at least 90
days before the change will take effect.
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ANNUITY PERIOD
Variable annuity payments, which are paid monthly, are determined on the
two-fold basis of (a) the mortality table stipulated in the Contract; and (b)
the investment performance of the Fund. The amount of variable annuity payment
is not affected by adverse mortality experience or by the Company's expenses in
excess of contractual deductions. The amount of the monthly annuity payment
reflects investment income, gains and losses of the Fund both before and after
retirement. Accordingly, annuity payments will vary with the investment
experience of the Fund. The assumed investment rate of return upon which the
annuity payment calculation is based is 4.5%. Therefore, when the Fund
experiences returns in excess of 4.5%, monthly payments increase. When the
investment return is less than 4.5%, payments decrease.
Annuity commencement may begin at any time as elected by the Participant.
However, withdrawals not made in accordance with the Federal income tax laws
will be subject to penalties. See "Federal Tax Matters."
ANNUITY OPTIONS
In order to elect an annuity option, the Participant's account must be at
least $1,000. If it is less than $1,000 the Company reserves the right to pay
the value of such account in one lump sum.
Once an annuity option has been elected, the Participant does not have the
right to change options. If no annuity option has been elected by the required
distribution date, the Annuitant will receive a life variable annuity with 120
monthly payments certain.
Option 1 -- Life Variable Annuity:
A variable annuity payable monthly during the lifetime of and terminating
with the last monthly payment preceding the death of the Annuitant. This option
offers the maximum level of monthly payments, since there is no promise of a
minimum number of payments or provision for a death benefit for beneficiaries.
Option 2 -- Life Variable Annuity with 120, 180 or 240 Monthly Payments
Certain:
A variable annuity payable monthly during the lifetime of the Annuitant
with the provision that if, at the death of the Variable Annuitant, payments
have been made for less than 120, 180 or 240 months, as elected, variable
annuity payments will continue during the remainder of such period to the
beneficiary designated by the Participant. If the Annuitant's beneficiary dies
before the variable annuity payments cease, the present value of the current
dollar amount of the remaining certain payment will be paid to the estate of the
beneficiary based on an annual compound interest rate of 3 1/2%.
Option 3 -- Unit Refund Life Variable Annuity:
A variable annuity payable monthly during the lifetime of the Annuitant and
upon death an additional payment will be made of the value at the date of death
of the number of variable annuity units equal to the excess, if any, of (a) the
total amount applied under this option divided by the variable annuity unit
value on the date variable annuity installments commenced over (b) the variable
annuity units represented by each installment multiplied by the number of
installments paid prior to death.
Option 4 -- Joint and Last Survivor Variable Annuity:
A variable annuity providing a monthly benefit payable during the joint
lifetime of the Annuitant and a designated second person, and thereafter
two-thirds of such monthly benefit payable during the remaining lifetime of the
survivor. There is no predetermined number of annuity payments. This option may
not be elected if, as of the date the variable annuity is effected, the present
value of the payment to which the designated second person may become entitled
exceeds 49% of the present value of all payments provided for the Annuitant and
the designated second person; however, such limitations do not apply if the
designated second person is the spouse of the Annuitant.
Other Options:
A Participant has the further option to elect forms of fixed annuities
having essentially the same characteristics as Annuity Options 1 through 4
above.
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DEATH BENEFIT
In the event of the Participant's death prior to commencement of annuity
payments, death proceeds are payable to a named beneficiary in an amount equal
to the greater of (a) the value of the Participant's account as of the valuation
date coincident with or next following the date written notice of death is
received; or (b) if such death occurs prior to the Participant's 65th birthday,
100% of the total deposits made on behalf of the Participant, less any
redemptions. Payments normally are made within seven days of receipt of such
notice.
The Code requires that annuity contracts issued after January 18, 1985
restrict the length of time over which non-spouse beneficiaries may elect to
receive death benefit proceeds. Variable annuity contracts issued after this
date provide that non-spouse beneficiaries must either take a total distribution
within five years of the death of the Participant, or within one year of the
Participant's death begin periodic payments for a period not to exceed the
expected lifetime of the beneficiary.
If the Participant dies during the annuity period, the Company will pay any
remaining guaranteed payments to: (1) the Participant's beneficiary; or (2) the
Participant's estate, if no beneficiary survives. Any payments made to a
beneficiary must be on a payment schedule at least as rapid as that made to the
Participant.
PURCHASES AND CONTRACT VALUE
HOW DO I PURCHASE UNITS?
Accumulation Units in the Fund are being continuously offered through the
Company's wholly owned subsidiary, American Fidelity Securities, Inc. ("AFS"),
2000 Classen Center, Oklahoma City, Oklahoma 73106. AFS has been the sole
underwriter of the Fund since 1972. AFS distributes the Contracts through
licensed life insurance representatives of the Company. Premium deposits are
credited on the basis of Accumulation Units. A request for purchase of
Accumulation Units received by the Fund before 3:00 p.m. Central Time will
receive same day pricing; otherwise, pricing on the next trading day following
receipt of a purchase request is used. The minimum initial premium deposit for
each Participant is $20, and the minimum amount of each subsequent deposit is
$10. A deduction is made from each premium deposit to reimburse the Company for
certain sales and other expenses.
The Underwriting Agreement between AFS and the Fund is subject to annual
renewal by the Board of Managers (including a majority of the Board of Managers
who are not interested persons as defined in the Investment Company Act of
1940), but may be terminated by the Board of Managers or by a majority in
interest of Contract Owners, without penalty, on not more than 60 days written
notice, and is automatically terminated upon assignment.
HOW ARE ACCUMULATION UNITS VALUED?
The Fund's Accumulation Unit value is computed once daily. Portfolio
securities are valued as of the close of regular trading of the New York Stock
Exchange, currently 4:00 p.m. Eastern Time, on each business day when the New
York Stock Exchange is open. The New York Stock Exchange is scheduled to be open
Monday through Friday throughout the year, except for certain Federal and other
holidays. The value of the Fund's securities and assets, except certain
short-term debt securities, is determined on the basis of their market values.
Short-term debt securities having remaining maturities of 180 days or less are
valued by the amortized cost method, which approximates market value. Equity
securities held by the Fund are valued at the last sales price on a national
securities exchange or the Nasdaq National Market or, lacking any sales, at the
last reported bid price. Over-the-counter securities not quoted in the Nasdaq
National Market are valued at the reported bid price. Investments for which
market quotations are not readily available, if any, are valued at their fair
value as determined in good faith by the Board of Managers. The value of an
Accumulation Unit is determined by dividing the value of the Fund's securities,
cash and other assets (including accrued but uncollected interest and
dividends), less all liabilities (including accrued expenses but excluding
capital and surplus) by the number of Accumulation Units outstanding.
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<PAGE> 15
The value of a Participant's individual account at any time prior to
commencement of annuity payments is determined by multiplying the total number
of Accumulation Units credited to his account by the current Accumulation Unit
value. Each Participant is advised semiannually of the number of Accumulation
Units credited to his account, the current Accumulation Unit value, and the
total value of his account.
The value of an Accumulation Unit may be determined at any date by
multiplying the value of an Accumulation Unit on the last day of the immediately
preceding Valuation Period by the "net investment factor" for the current
Valuation Period. A Valuation Period is the interval between Valuation Dates.
At each Valuation Date, a gross investment rate is determined from the
investment performance of the Fund for the Valuation Period. Such rate is (i)
the investment income, if any, for the Valuation Period, plus or minus realized
or unrealized capital gains and losses, if any, for the period, less a deduction
for any applicable income taxes divided by (ii) the value of the Fund at the
beginning of the Valuation Period. The gross investment rate may be positive or
negative.
The net investment rate is then determined by deducting .00004(representing
the investment advisory and management fee and the mortality and expense risk
fee described under "Deductions and Expenses") from the gross investment rate.
See "Item 26 -- Annuity Payments" of the Statement of Additional Information.
The net investment factor is then calculated at 1.0 plus the net investment rate
for the period. If the combined capital losses, the Valuation Period deduction
and taxes exceed the investment income and capital gains, the net investment
factor may be less than 1.0, and the value of an Accumulation Unit at the end of
a Valuation Period may be less than the value for the previous Valuation Period.
REDEMPTIONS
Prior to commencement of annuity payments, a Participant may redeem all or
a portion of his individual account. The redemption value of a Participant's
account is equal to the Accumulation Unit value under the account next computed
after the request for redemption is received by the Company. There is no
assurance that the redemption value of a Participant's account will equal or
exceed the aggregate amount of premium deposits at any time. There are no
administrative fees for withdrawals.
A partial redemption will result in a reduction of the Accumulation Units
in a Participant's account. The reduction in the number of Accumulation Units
will equal the amount redeemed divided by the applicable Accumulation Unit value
next computed after receipt of the redemption request. If a partial redemption
results in reduction of a Participant's accumulation account to less than
$1,000, the Company, at its option, may cancel all Accumulation Units and remit
the entire amount thereof to the Participant. After full redemption and
cancellation of a Participant's account, no further premium deposits may be made
on behalf of such Participant without the consent of the Company.
A Participant's request for redemption should be submitted in writing
directly to the Fund, 2000 Classen Center, Oklahoma City, Oklahoma 73106. A
redemption request requires the signature of each person in whose name the units
are registered, signed exactly as the name appears on the Company's register. In
certain instances, the Fund may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. ALL PROPER REDEMPTION
REQUESTS RECEIVED BEFORE 3:00 P.M. CENTRAL TIME WILL RECEIVE SAME DAY PRICING.
Payment for units redeemed are made within three days after receipt of a
properly tendered request. Redemption rights may be suspended or payment
postponed at times when the New York Stock Exchange is closed (other than
customary weekend and holiday closings) or trading on the New York Stock
Exchange is restricted; when an emergency exists as a result of which disposal
by the Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund to determine the value of its net assets; or
for such other periods as the Securities and Exchange Commission may by order
permit for the protection of Participants of the Fund. The Fund may delay the
mailing of a redemption check for recently purchased units until such time as
the payment check has cleared.
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The Fund is required by Federal income tax law to restrict certain
redemptions. In addition, certain adverse tax consequences may result from an
election by a Participant to redeem all or a part of his individual account. See
"Federal Tax Matters."
FEDERAL TAX MATTERS
GENERAL
The following description of Federal income tax consequences under the
Contracts is not exhaustive, and special rules may apply to situations not
discussed herein. For further information, consult a qualified tax adviser
before establishing any retirement program.
The Company files its income tax returns as a "life insurance company"
under the Internal Revenue Code of 1986 (the "Code"). The Fund is part of the
operations of the Company and is not taxed as a "regulated investment company."
To date, the assets of the Fund have not been subject to Federal income tax, nor
is it contemplated that the Fund will be so taxed.
TAXES PAYABLE BY PARTICIPANTS AND ANNUITANTS
The Contracts offered by this Prospectus are used with retirement programs
which receive favorable tax deferred treatment under Federal income tax law.
Increases in the value of a Participant's account are not subject to income tax
until annuity payments commence, at which time the amount of each payment is
considered as ordinary income.
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
Premium Deposits. Under Section 403(b) of the Code, payments made by
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 premium deposits do not exceed the limitations prescribed by
Section 402(g), Section 403(b)(2) and Section 415 of the Code. This gross income
exclusion applies to employer contributions and voluntary salary reduction
contributions.
An individual's voluntary salary reduction contributions under Section
403(b) are generally limited to the lesser of $9,500 or 20% of includible
salary. Additional catch-up contributions are permitted under certain
circumstances. Combined employer and salary reduction contributions are
generally limited to approximately 20% of includible salary. In addition,
employer contributions must comply with various nondiscrimination rules; these
rules may have the effect of further limiting the rate of employer contributions
for highly compensated employees.
Taxation of Distributions. Distributions of voluntary salary reduction
amounts are restricted. The restrictions apply to amounts accumulated after
December 31, 1988 (including voluntary contributions after that date and
earnings on prior and current voluntary contributions). These restrictions
require that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3) death,
(4) disability, or (5) hardship (hardship distributions will be limited to the
amount of salary reduction contributions exclusive of earnings thereon).
Other distributions from a Section 403(b) annuity Contract are taxed as
ordinary income to the recipient in accordance with Section 72 of the Code.
Distributions received before the recipient attains age 59 1/2 generally are
subject to a 10% penalty tax in addition to regular income tax. Certain
distributions are excepted
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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
calendar year in which the Participant attains age 70 1/2 and such distributions
must be made over a period that does not exceed the life expectancy of the
Participant (or the Participant and beneficiary). Participants employed by
governmental entities and certain church organizations may delay the
commencement of payments until April 1 of the calendar year following retirement
if they remain employed after attaining age 70 1/2. Following the death of the
Participant prior to the commencement of annuity payments, the amount
accumulated under the account must be distributed within five years or, if
distributions to a beneficiary designated under the account start within one
year of the Participant'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 Participant has started receiving annuity distributions prior
to his death, distributions must continue at least as rapidly as under the
method in effect at the date of his death. However, amounts accumulated under an
account on December 31, 1986 are not subject to these minimum distribution
requirements. 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 Internal Revenue Service has ruled
(Revenue Ruling 90-24) that total or partial amounts may be transferred tax free
between Section 403(b) annuity contracts and/or Section 403(b)(7) custodial
accounts under certain circumstances. In addition, Section 403(b)(8) of the Code
permits tax-free rollovers from Section 403(b) programs to IRAs or other Section
403(b) programs under certain circumstances. Such a rollover must be completed
within 60 days of receipt of the distribution. The portion of any distribution
which is eligible to be rolled over to an IRA or another Section 403(b) program
is subject to 20% Federal income tax withholding unless the Participant elects a
direct rollover of such distribution to an IRA or other Section 403(b) program.
SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS
Premium Deposits. Premium deposits made by an employer (or a self-employed
individual) under a pension, profit-sharing or annuity plan qualified under
Section 401(a) or Section 403(a) of the Code are excluded from the gross income
of the employee for Federal income tax purposes. Payments made by an employee
generally are made on an after-tax basis unless they are made on a pre-tax basis
by reason of Sections 401(k) or 414(h) of the Code.
Taxation of Distributions. Distributions from Contracts purchased under
qualified plans are taxable as ordinary income, except to the extent allocable
to an employee's after-tax contributions (which constitute "investment in the
Contract"). However, if an employee or the beneficiary receives a lump sum
distribution, as defined in the Code, from an exempt employees' trust, the
taxable portion of the distribution may be subject to special tax treatment. For
most individuals receiving lump sum distributions after attainment of age
59 1/2, the rate of tax may be determined under a special 5-year income
averaging provision. Those who attained age 50 by January 1, 1986 may instead
elect to use a 10-year income averaging provision based on the income tax rates
in effect for 1986. In addition, individuals who attained age 50 by January 1,
1986 may elect capital gains treatment (at a 20% rate) for the taxable portion
of a lump sum distribution attributable to years of service before 1974; such
capital gains treatment has otherwise been repealed. Taxable distributions
received from an account 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.
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Tax-Free Rollovers. The taxable portion of certain distributions from a
plan qualified under Sections 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 another Section 401(a) or 403(a) plan is subject to 20%
Federal income tax withholding unless the Participant elects direct rollover of
such distribution to an IRA or other Section 401(a) or 403(a) plan.
INDIVIDUAL RETIREMENT ANNUITIES (IRAS)
Premium Deposits. 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 premium deposits for both spouses' Contracts cannot exceed the
lesser of $2,250 or 100% of the working spouse's earned income; and no more than
$2,000 may be contributed to either spouse's IRA for any year. Individuals who
are active participants in other retirement plans and whose adjusted gross
income exceeds the cut-off point ($25,000 for unmarried and $40,000 for married)
by less than $10,000 are entitled to make deductible IRA contributions in
proportionately reduced amounts.
An individual may make nondeductible IRA contributions to the extent of the
excess of (i) the lesser of $2,000 ($2,250 in the case of contributions to both
the individual's IRA and spousal IRA) or 100% of compensation over (ii) the IRA
deduction limit with respect to the individual.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient. In addition, a 10% penalty tax will be imposed
on taxable distributions received before the year in which the recipient attains
age 59 1/2, except that distributions made on account of death, disability or in
the form of substantially equal periodic payments over the life (or life
expectancy) of the Participant (or the Participant and beneficiary) are not
subject to the penalty tax.
Required Distributions. The minimum distribution requirements for IRA
Contracts are generally the same as described with respect to Section 403(b)
annuity Contracts, except that no amounts are exempted from the minimum
distribution requirements and in all events such distributions must commence no
later than April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2.
Tax-Free Rollovers. Federal law permits funds to be transferred in a
tax-free rollover from a qualified employer pension, profit-sharing, or annuity
plan, or a Section 403(b) annuity Contract to an IRA Contract under certain
conditions. Amounts accumulated under such a rollover IRA may subsequently be
rolled over on a tax-free basis to another such plan or Section 403(b) annuity
Contract. In addition, a tax-free rollover may be made from one IRA to another,
provided that not more than one such rollover may be made during any
twelve-month period. In order to qualify for tax-free treatment, all rollovers
must be completed within 60 days after the distribution is received.
SIMPLIFIED EMPLOYEE PENSION PLANS
Premium Deposits. Under Section 408(k) of the Code, employers may establish
a type of IRA plan referred to as a simplified employee pension plan ("SEP").
Employer contributions under a SEP, which generally must be made at a rate
representing a uniform percent of the compensation of participating employees,
are excluded from the gross income of employees for Federal income tax purposes.
Employer contributions to a SEP cannot exceed the lesser of $30,000 or 15% of an
employee's compensation.
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
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not exceed $7,000 indexed for inflation in later years. Employees of tax-exempt
organizations are not eligible for this type of SEP.
Taxation of Distributions. SEP distributions are subject to taxation in the
same manner as other IRA distributions.
Required Distributions. SEP distributions are subject to the same minimum
required distribution rules applicable to other IRAs.
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.
LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary routine
litigation to which the Fund, the Company or AFS is a party.
PARTICIPANT INQUIRIES
Contract Owner and Participant inquiries should be placed in writing and
directed to American Fidelity Assurance Company, P.O. Box 25523, Oklahoma City,
Oklahoma 73125.
CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM DESCRIPTION
- ---- -----------
<C> <S>
18 General Information and History
19 Investment Objectives and Policies
20 Management
21 Investment Advisory and Other Services
22 Brokerage Allocation
23 Purchase and Pricing of Securities Being Offered
24 Underwriters
25 Calculation of Performance Data
26 Annuity Payments
27 Financial Statements
</TABLE>
16
<PAGE> 20
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
(Registrant)
AMERICAN FIDELITY ASSURANCE COMPANY
(Insurance Company)
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, AND SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS DATED , 1996. A COPY OF THE
PROSPECTUS MAY BE OBTAINED BY WRITING:
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
2000 Classen Center
Oklahoma City, Oklahoma 73106
(405) 523-2000
Dated: , 1996
B-1
<PAGE> 21
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
BY PAGE TO
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information and History.......................................... B-3 6
Investment Objectives and Policies....................................... B-3 6
Management............................................................... B-5 7
Investment Advisory and Other Services................................... B-6 7
Brokerage Allocation..................................................... B-7 7
Purchase and Pricing of Securities Being Offered......................... B-8 11
Underwriters............................................................. B-8 11
Calculation of Performance Data.......................................... B-8 5
Annuity Payments......................................................... B-9 9
Financial Statements..................................................... B-11 N/A
</TABLE>
B-2
<PAGE> 22
ITEM 18 -- GENERAL INFORMATION AND HISTORY
American Fidelity Assurance Company ("Company") was organized in the State
of Oklahoma in 1960 and during its existence has never changed its name. Neither
the sales of variable annuity contracts nor the sales of any other insurance
product by the Company have ever been suspended by any state where the Company
has done or is presently doing business.
The Company is a wholly owned subsidiary of American Fidelity Corporation,
an insurance holding company. The stock of American Fidelity Corporation is
controlled by a family investment partnership, Cameron Enterprises, A Limited
Partnership, an Oklahoma limited partnership ("CELP"). In accordance with the
partnership agreement, management of the affairs of CELP is vested in five
managing general partners: William M. Cameron, William E. Durrett, Edward C.
Joullian, III, John W. Rex and Theodore M. Elam.
ITEM 19 -- INVESTMENT OBJECTIVES AND POLICIES
(a) The investment policies and objectives of the Fund are contained in the
Prospectus under the heading "Investment Objectives and Policies of the
Fund."
(b) The Fund's fundamental policies include the following:
(1) not more than 5% of the value of the Fund's assets will be invested
in securities of any one issuer, except obligations of the United
States Government and instrumentalities thereof;
(2) not more than 10% of the voting securities of any one issuer will
be acquired;
(3) not more than 25% of the value of the Fund's assets will be
invested in any one industry;
(4) no borrowings will be made except that the right is reserved to
borrow from banks for emergency purposes, provided that such
borrowings do not exceed 5% of the value of the assets of the Fund
and that there always will be asset coverage of at least 300% for
all outstanding borrowings of the Fund;
(5) the Fund will not act as an underwriter of securities of other
issuers, except to the extent that the Fund might be construed to
be a statutory underwriter by virtue of its investment in
restricted securities;
(6) not more than 10% of the value of the assets of the Fund may be
invested in real estate (including shares of real estate investment
trusts), securities for which there is no established market, or
securities (including bonds, notes or other evidences of
indebtedness) which are not readily marketable without registration
under Federal or state securities laws;
(7) no purchase of commodities or commodity contracts will be effected;
(8) purchase of puts, calls or other options will not be made;
(9) loans will not be made except through the acquisition of bonds,
debentures or other evidences of indebtedness of a type customarily
purchased by institutional investors, whether or not publicly
distributed;
(10) investment will not be made in the securities of a company for the
purpose of exercising management or control;
(11) although it is not intended that investments be made in securities
of other investment companies, the Fund may make such investments
up to a maximum of 10% of its assets, provided that not more than
3% of the total outstanding voting stock of any one investment
company may be held;
(12) although the Fund does not intend to engage to a large extent in
short-term trading, it may make investments for the purpose of
seeking short-term capital appreciation;
B-3
<PAGE> 23
(13) investments in repurchase agreements will be limited to the top
thirty-five U.S. Banks, by deposits, that are rated at least "B/C"
by Keefe, Bruyette, Woods, a national bank rating agency, or a
comparable rating from a similar bank rating service. Additionally,
there must be an appropriate amount of excess collateralization
depending upon the length of the agreement, to protect against
downward market fluctuation and the Fund must take delivery of the
collateral. The market value of the securities held as collateral
will be valued daily. In the event the market value of the
collateral falls below the repurchase price, the bank issuing the
repurchase agreement will be required to provide additional
collateral sufficient to cover the repurchase price.
(14) short sales of securities will not be made;
(15) purchases will not be made on margin, except for such short-term
credits as are necessary for the clearance of transactions;
(16) the Company should generally conform to the issuer guidelines noted
below with exceptions noted at time of recommendation and variances
reviewed annually with the Investment Committee:
1. $150,000,000 or more in assets,
2. Operational for at least 10 years,
3. $50,000,000 or more in stockholders' equity;
(17) investments in high-yield or non-investment grade bonds will not be
made; and
(18) investments in the equity securities of foreign corporations will
be limited to American Depositary Receipts ("ADRs"), other
Depository Receipts or ordinary shares if U.S. dollar denominated
and publicly traded in the United States. Not more than 35% of the
Fund's assets will be invested in foreign issues. In addition, not
more than 20% of the Fund's assets will be invested in issuers of
any one foreign country.
(c) The Prospectus and subsection (b) above fully describe the investment
policies of the Fund. None of these policies may be changed without the
approval of Contract Owners representing a majority vote of shares of
the Fund.
(d) The rate of portfolio turnover is not a limiting factor when changes
are deemed appropriate. Under normal circumstances the annual portfolio
turnover will not exceed 80% although, in any particular year,
conditions could result in portfolio activity at a greater rate than
anticipated. A turnover ratio is the lesser of the cost of securities
purchased or the consideration of securities sold divided by the
monthly average value of securities held during a year. A higher
turnover rate than anticipated does not in and of itself, indicate a
variation of investment policy. During periods of increased market
volatility, or after a prolonged advance in the equity market, a
turnover rate of more than 100% may be incurred in order to shift
assets from securities that are more fully valued to securities that
are perceived to be undervalued. A high portfolio turnover rate may
involve correspondingly greater broker commissions and other
transaction costs which will be borne by the Fund. The Fund will not
engage in transactions contributing to a high portfolio turnover rate
unless in the Company's opinion their added benefit exceeds their added
cost. To date, the assets of the Fund have not been subject to Federal
income tax, nor is it contemplated that they will be taxed. Therefore,
any change in portfolio activity is not expected to have any adverse
tax consequences at this time. See "Federal Tax Matters" in the
Prospectus.
The annual portfolio turnover rate during the years 1993, 1994 and 1995
was 51.2%, 43.5% and 66.1%, respectively.
B-4
<PAGE> 24
ITEM 20 -- MANAGEMENT
(a) and (b) Information about each member of the Board of Managers is as
follows:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE WITH REGISTRANT DURING PAST 5 YEARS
--------------------- ---------------- -----------------------
<S> <C> <C>
John W. Rex, 62 Manager and Chairman of Director (1982 to present), President
2000 Classen Center the Board(1)(2)(3) and Chief Operating Officer (1992 to
Oklahoma City, OK 73106 present), Executive Vice President
(1990-1992) and Treasurer (1972 to
1995) of the Company; Director (1982
to present), Executive Vice
President (1990 to present) and
Treasurer (1972 to 1995) of American
Fidelity Corporation; Director,
Boatmen's Trust Company, an Oklahoma
Trust Company
Daniel D. Adams, Jr., 54 Manager and Secre- Vice President and Investment Officer
2000 Classen Center tary(1)(2) of the Company and American Fidelity
Oklahoma City, OK 73106 Corporation.
Jean G. Gumerson, 73 Manager President, Presbyterian Health
711 Stanton L. Young Blvd., Foundation
Suite 604
Oklahoma City, OK 73104
Edward C. Joullian, III, 66 Manager(2)(3) Chairman of the Board of Directors and
2000 Classen Center, 800 East Chief Executive Officer, Mustang
Oklahoma, City, OK 73106 Fuel Corporation; Director of the
Company and American Fidelity
Corporation; Director, Fleming
Companies, Inc.; Director, The LTV
Corporation
Gregory M. Love, 34 Manager President and Chief Operating Officer
10601 N. Pennsylvania Avenue (1995 to present), Vice
Oklahoma City, OK 73120 President -- Real Estate and
Development (1990 to 1995) of Love's
Country Stores, Inc.; Director,
Affiliated Food
Stores, Inc.
J. Dean Robertson, D.D.S., 79 Manager Private practice in pediatric
5222 North Portland dentistry; Professor Emeritus,
Oklahoma City, OK 73112 University of Oklahoma, College of
Dentistry
G. Rainey Williams, Jr., 35 Manager Managing Partner, Marco Investment
9520 N. May Avenue, Company; Director, Mustang Fuel
Suite 200 Corporation
Oklahoma City, OK 73120
</TABLE>
- ---------------
(1) Member of the Investment Committee of the Fund
(2) "Interested Person" of the Fund under Section 2(a)(19) of the Investment
Company Act of 1940.
(3) Also a director of the Company.
B-5
<PAGE> 25
(c) The Company pays all expenses of the Fund's operation. No member of the
Board of Managers of the Fund, and no officer or director of the
Company, receives any remuneration from the Fund. Members of the Board
of Managers who are not employees of the Company receive a fee, paid by
the Company, of $500 for each meeting attended. For 1995, such fees
totaled $4,500.
ITEM 21 -- INVESTMENT ADVISORY AND OTHER SERVICES
(a) American Fidelity Corporation is the parent of the Company, the Fund's
investment advisor. American Fidelity Corporation is itself controlled
by Cameron Enterprises, A Limited Partnership ("CELP"). The general
partners of CELP are Lynda L. Cameron, William M. Cameron, Theodore M.
Elam and, in their capacities as trustees, William E. Durrett, Edward C.
Joullian, III, John W. Rex and the Bank of Oklahoma, N.A. In accordance
with the CELP partnership agreement, management of the affairs of CELP
is vested in five managing general partners: Messrs. Cameron, Durrett,
Joullian, Rex and Elam. Information concerning persons affiliated with
the Fund and the Company is incorporated herein by reference to Item
20 -- Management. The Company is compensated pursuant to the Advisory
Agreement. Through 1995, the Company received an investment advisory and
management fee of .0008904% (.325% on an annual basis) of the current
value of the Fund for each day during the Valuation Period. The fee paid
by the Fund was $146,229 in 1993, $163,189 in 1994, and $200,769 in
1995.
On September 1, 1995, the Advisory Agreement was amended to provide for
an increased fee to the Company of .0013698% daily (.50% on an annual
basis). The increased fee became effective July 1, 1996. The amendment
to the Advisory Agreement was approved by the Board of Managers of the
Fund on May 23, 1995 (including approval by a majority of the managers
who are not interested persons of the Company or the Fund) and by a
majority in interest of the Fund's Contract Owners on September 1, 1995.
Effective October 2, 1995, the Sub-Advisors were retained by the Company
as sub-advisors of the Fund pursuant to agreements dated June 26, 1995.
The sub-advisory agreements were approved by the Board of Managers of
the Fund on May 23, 1995 (including approval by a majority of the
managers who are not interested persons of the Company or the Fund) and
by a majority in interest of the Fund's Contract Owners on September 1,
1995. The fees of the Sub-Advisors are paid by the Company. Kelly
receives an annual fee of .30% of Fund assets under its management and
Todd Investment receives an annual fee of .38% of Fund assets under its
management or $50,000, whichever is greater. The Sub-Advisors' fees are
payable quarterly and, if based on Fund assets, are calculated on the
value of Fund assets on the last trading day of each calendar quarter.
Pursuant to the sub-advisory agreements, in 1995 the Company paid Kelly
$27,150 and Todd Investment $34,700.
Lawrence W. Kelly and his wife, Janice M. Kelly, are the sole
shareholders of Kelly, each holding 50% of Kelly's outstanding stock.
Todd Investment is a wholly-owned subsidiary of Stifel Asset Management
Corp., which is a wholly-owned subsidiary of Stifel Financial
Corporation.
(b) The Company performs all management and administrative services for the
Fund for which the Company receives no compensation except for the above
described investment advisory and management fee.
(c) All fees, expenses and costs of the Fund are paid for by the Company.
(d) There are no management related services contracts except those
described herein.
(e) Kelly served as a research consultant to the Fund from 1985 until it
became a sub-advisor in October 1995. Under its consulting agreement
with the Company, Kelly provided investment research and specific
investment recommendations to the Company and the Fund for an annual fee
of $50,000. The Company paid all of Kelly's fees under the consulting
agreement, of which $25,700, $25,000 and $20,100 in 1993, 1994 and 1995,
respectively, were allocated to the Fund.
B-6
<PAGE> 26
(f) All of the Fund's expenses are paid for by the Company.
(g) All of the assets of the Fund are held under a custodial safekeeping
agreement by Boatmen's Trust Company, an Oklahoma Trust Company, 211
North Robinson, Post Office Box 25189, Oklahoma City, Oklahoma 73125.
Boatmen's maintains securities in safekeeping on its premises, or in a
recognized clearing corporation, or in the Federal Reserve book-entry
system, in the Fund's or Custodian's name, or in the name of the
clearing corporation, or in the nominee name of any of the foregoing.
The consolidated financial statements of the Company and its
subsidiaries and the financial statements of the Fund as of December 31,
1995 and 1994, and for the years then ended, included in this
Registration Statement, have been audited by KPMG Peat Marwick LLP, 700
Oklahoma Tower, Oklahoma City, Oklahoma 73102, independent certified
public accountants, as indicated in their reports with respect thereto,
and are included herein in reliance upon such reports and upon the
authority of said firm as experts in accounting and auditing.
The Board of Managers voted at its Board of Managers Meeting on April
11, 1995 to appoint KPMG Peat Marwick LLP as the Fund's independent
certified public accountants for 1995 and this decision was ratified by
the Contract Owners at their annual meeting on September 1, 1995.
ITEM 22 -- BROKERAGE ALLOCATION
Each of the Sub-Advisors is authorized to select brokers to effect
transactions in Fund securities under its management. Neither Sub-Advisor nor
any of their respective affiliates may act as a broker with respect to
securities transactions for the Fund. Prior to October 1995, the Company
selected the brokers effecting transactions in Fund securities based upon such
factors as execution capability, financial stability, research provided and
clearance and settlement capability. For the years 1993, 1994 and 1995, the Fund
paid brokerage commissions of $98,800, $90,000 and $137,100. The increase in
commissions in 1995 over the prior two years was largely because of the increase
in Fund assets. As a percentage of net assets, commissions were .20% in 1993,
.18% in 1994 and .18% in 1995.
In selecting a broker to execute portfolio transactions, Kelly's objective
is to obtain the best execution, while at the same time obtaining research used
to service its clients. The selection of a broker takes into account the quality
of brokerage services, including such factors as execution capability, financial
stability and clearance and settlement capability. Research furnished by brokers
may be used in serving any or all of Kelly's clients, including clients which
have not paid commissions to the broker providing the research. Kelly evaluates
the reasonableness of brokerage commissions on an on-going basis in light of the
general level of commissions being paid from time to time and the value of
research services received. In order to obtain lower commission rates for
clients, Kelly engages from time to time in block trades, i.e., grouping orders
with a single broker. Accounts involved in such transactions receive the average
executed price, except that brokers may charge smaller accounts a minimum
commission resulting in smaller accounts paying slightly more in commissions per
share than larger accounts.
In selecting brokers to effect portfolio transactions, Todd Investment uses
its best efforts to obtain for its clients the most favorable price and
execution available except to the extent that it determines that clients should
pay a higher brokerage commission for brokerage and research services. In
evaluating the overall reasonableness of brokerage commissions paid, Todd
Investment reviews the type and quality of the execution services rendered and
the quantity and nature of the portfolio transactions effected and compares
generally the commissions paid to brokers with the commissions believed to be
charged by other brokers for effecting similar transactions as well as with
commissions generally charged by brokers prior to the introduction of negotiated
commission rates. In addition, it takes into account the quality and usefulness
of the brokerage and research services, if any, that may be furnished by such
brokers. During 1995, Todd Investment internally allocated brokerage
transactions to certain brokers based on the furnishing of such services.
Research services provided by brokers may be used by Todd Investment in advising
all of its clients and not all such services may be used by the clients which
paid the commissions. Conversely, however, a client of Todd Investment may
benefit from research services provided by brokers whose commissions are paid by
other clients. As a result,
B-7
<PAGE> 27
Todd Investment may cause clients to pay a broker which provides brokerage and
research services to Todd Investment a higher brokerage commission than would
have been charged by another broker which was not providing such services.
Research services provided by brokers may include research reports on
companies, industries and securities; economic and financial data, including
reports on macro-economic trends and monetary and fiscal policy; financial
publications; computer data bases; quotation equipment and services; and
research-oriented computer hardware, software and services.
ITEM 23 -- PURCHASE AND PRICING OF SECURITIES BEING OFFERED
(a) The Fund's variable annuity contracts are marketed to the public
through American Fidelity Securities, Inc. ("AFS"). AFS uses licensed
life insurance representatives of the Company to sell the shares. There
are no special purchase plans or exchange privileges.
(b) See "Deductions and Expenses" in the Prospectus for determining the
sales load.
(c) See "How Are Accumulation Units Valued?" under "Purchases and Contract
Value" in the Prospectus for a description of the method used to value
the Fund's assets.
(d) See "How Do I Purchase Units?" under "Purchases and Contract Value" in
the Prospectus for the way purchase payments are credited to the
Variable Annuity Contract.
(e) The Fund has not received an order of exemption from or filed a notice
of election pursuant to Section 18(f) of the Investment Company Act of
1940.
ITEM 24 -- UNDERWRITERS
(a) The Company, through its wholly owned subsidiary, AFS, has acted as
principal underwriter of the contracts since 1972.
(b) The offering of Variable Annuity Contracts is continuous.
(c) A sales fee, which includes compensation for underwriting commissions
paid, is deducted from all premium deposits received for contracts. The
aggregate sales fees for 1993, 1994 and 1995 were $208,912, $256,894
and $255,986, respectively.
(d) The Fund made no payments to any underwriter or dealer other than AFS
during the last fiscal year.
ITEM 25 -- CALCULATION OF PERFORMANCE DATA
(a) The Fund does not have a money market subaccount.
(b) The Fund's total return for the twelve months ended June 30, 1996 and
average annual total returns for the five and ten year periods ended
June 30, 1996 were 19.07%, 11.26% and 10.54%, respectively. The average
total return (T) is computed by equating the value at the end of the
period (ERV) with a hypothetical initial investment of $1,000 (P) over a
period of years (n) according to the following formula as required by
the Securities and Exchange Commission: P(1 + T)(n) = ERV.
To calculate total return, an initial investment is multiplied by 96%
(which gives effect to the 3.00% sales charge, 0.25% administrative fee
and 0.75% minimum death benefit expense). The product is then reduced by
the $0.50 per payment expense and the one-time contract fee of $15.00.
The resulting amount is divided by the Accumulation Unit value as of the
first day of the period in order to determine the initial number of
Accumulation Units purchased. The number of Accumulation Units purchased
is multiplied by the Accumulation Unit value as of the end of the period
in order to determine the ending value. The difference between the
ending value and the initial investment divided by the initial
investment converted to a percentage equals total return. Total return
may be calculated for the one, five and ten year periods and for other
time periods. The Fund's total return for the one, five and ten year
time periods ended June 30, 1996 was 19.07%, 70.53% and 172.47%,
B-8
<PAGE> 28
respectively. The average annual total return over periods greater than
one year may also be computed by utilizing the ending values and the
formula above.
The following assumptions are reflected in computations made in
accordance with the formula stated above and in calculating total
return: (1) reinvestment of daily income from Fund investments, (2) a
complete redemption at the end of any period illustrated and (3) no
deduction for premium taxes.
The Fund may also advertise the ending value of investing $100 per month
over one, five and ten year time periods, with all sales charges and
other expenses deducted from investment results and using the
assumptions described above. The total number of Accumulation Units
purchased each month is multiplied by the Accumulation Unit value as of
the end of the time period in order to determine the ending value. The
ending value, calculated in this manner, of an investment of $100 per
month over the one, five and ten year periods ended June 30, 1996 was
$1,284, $8,276 and $22,381, respectively.
ITEM 26 -- ANNUITY PAYMENTS
See "Annuity Options" in the Prospectus for the method used in determining
the amount of annuity payments.
To determine value of an Accumulation Unit, the following sets out in
general terms the method of computation of the Accumulation Unit value on each
Valuation Date.
Gross Investment Rate = Investment Income + Capital Gains
- Capital Losses - Taxes
----------------------------------
Value of Fund at Beginning of
Valuation Period
Net Investment Rate = Gross Investment Rate - .00004 (for a one day valuation
period)
Net Investment Factor = Net Investment Rate + 1.0
Accumulation Unit Value = Accumulation Unit Value on Preceding Valuation Date X
Net Investment Factor
ILLUSTRATION USING HYPOTHETICAL EXAMPLE
The above computations may be illustrated by the following hypothetical
example. Assume that the value of the assets of the Fund at the beginning of the
valuation period was $5,000,000; that the value of an Accumulation Unit on that
date was $1.135; and that during the valuation period the investment income was
$4,000, the net realized capital gains were $6,000, and the net unrealized
capital losses were $3,000. The value of the assets of the Fund at the end of
the valuation period, before adding contributions received during the period,
would thus be $5,007,000 ($5,000,000, plus $4,000, plus $6,000, minus $3,000).
The gross investment rate for the valuation period would be equal to (a)
$7,000 ($4,000 plus $6,000 less $3,000) divided by (b) $5,000,000 which produces
a gross investment rate of .14% (.0014). The net investment rate for the
valuation period is determined by deducting .004% (.00004) from the gross
investment rate, which results in a net investment rate of .136% (.00136). The
net investment factor for the valuation period would be determined at the net
investment rate plus 1.0, or 1.0013.
The value of the Accumulation Unit at the end of the valuation period would
be equal to the value at the beginning of the period ($1.135) multiplied by the
net investment factor for the period (1.00136), which produces $1.1365.
B-9
<PAGE> 29
TO DETERMINE VALUE OF VARIABLE ANNUITY PAYMENTS
<TABLE>
<S> <C>
Dollar Amount of First Monthly Payment
Number of Variable Annuity Units = ----------------------------------------------------------------
Variable Annuity Unit Value on Date of First Payment
Value of Variable Net Investment Factor
Variable Annuity Unit Value = Annuity Unit on X .9998794 X for 14th Day Preceding
Preceding Valuation Date Current Valuation Date
Dollar Amount of Second Number of Variable Variable Annuity Unit Value
and Subsequent = Annuity Units X for Period in Which
Annuity Payments Per Payment Payment is Due
</TABLE>
ILLUSTRATION USING HYPOTHETICAL EXAMPLE
The determination of the Variable Annuity Unit value and the annuity
payment may be illustrated by the following hypothetical example. Assume a
Participant at the date of retirement has credited to his individual account
30,000 Accumulation Units, and that the value of an Accumulation Unit on the
fourteenth calendar day immediately preceding the date the first annuity payment
is due was $1.15, producing a total value of his individual account of $34,500.
Assume also that the Participant elects an option for which the table in the
Variable Annuity Contract indicates the first monthly payment is $6.57 per
$1,000 of value applied. The Participant's first monthly payment would thus be
$34,500 divided by $1,000 and multiplied by $6.57, or $226.67.
Assume that the Variable Annuity Unit value for the valuation date on which
the first payment was due was $1.10. When this is divided into the first monthly
payment, the number of Variable Annuity Units represented by that payment is
determined to be 206.064. The value of this same number of Variable Annuity
Units will be paid in each subsequent month.
Assume further that the Variable Annuity Unit value is $1.107 for the
fourteenth calendar day prior to a subsequent valuation date. The current
monthly payment is then determined by multiplying the fixed number of Variable
Annuity Units by the current Variable Annuity Unit value or 206.064 times
$1.107, which produces a current monthly payment of $228.11.
B-10
<PAGE> 30
ITEM 27 -- FINANCIAL STATEMENTS
The Fund's financial statements as of and for the six months ended June 30,
1996 are incorporated herein by reference to its 1996 semiannual report to
Contract Owners. Other information in such report is not incorporated by this
reference and is not a part of the Registration Statement of which this
Statement of Additional Information constitutes Part B. The Fund will furnish
upon request, without charge, a copy of the Fund's June 30, 1996 semiannual
report. Such requests should be made to Annuity Services, American Fidelity
Assurance Company, P.O. Box 25523, Oklahoma City, Oklahoma 73125; telephone
number 1-800-662-1106.
The following financial statements of the Fund and the Company appear
hereafter:
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
Independent Auditors' Report
Statements of Assets and Liabilities as of December 31, 1995 and 1994
Statements of Operations for the Years Ended December 31, 1995 and 1994
Statements of Changes in Net Assets for the Years Ended December 31, 1995
and 1994
Schedule of Portfolio Investments as of December 31, 1995
Financial Highlights for the Five Years Ended December 31, 1995
Notes to Financial Statements
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended December 31, 1995,
1994 and 1993
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
B-11
<PAGE> 31
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Managers and Contract Owners
American Fidelity Variable Annuity Fund A:
We have audited the accompanying statements of assets and liabilities of
American Fidelity Variable Annuity Fund A (the Fund) as of December 31, 1995
and 1994, and the related statements of operations and changes in net assets
for the years then ended, the financial highlights for each of the years in the
five-year period ended December 31, 1995, and the Schedule of Portfolio
Investments as of December 31, 1995. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
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 and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995 and 1994, by correspondence with the custodian
and the broker. 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of
American Fidelity Variable Annuity Fund A as of December 31, 1995 and 1994, the
results of its operations and changes in its net assets for the years then
ended, and the financial highlights for each of the years in the five-year
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Oklahoma City, Oklahoma
February 7, 1996
B-12
<PAGE> 32
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Investments, at market value (cost $55,469,201 and
$46,790,323 in 1995 and 1994, respectively) $ 72,928,693 50,453,521
Cash 224,163 520,764
Receivable from broker 1,500,277 --
Accrued interest and dividends 113,477 92,237
------------ ----------
Total assets 74,766,610 51,066,522
Liabilities
-----------
Accounts payable 50 50
Payable to broker 1,614,026 --
------------ ----------
Total liabilities 1,614,076 50
------------ ----------
Net assets $ 73,152,534 51,066,472
============ ==========
Accumulation units outstanding 5,996,795 5,615,645
============ ==========
Net asset value per unit $ 12.1986 9.0936
============ ==========
</TABLE>
See accompanying notes to financial statements.
B-13
<PAGE> 33
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Investment income:
Income:
Dividends $ 1,097,364 954,180
Interest 161,264 183,858
------------ -----------
1,258,628 1,138,038
------------ -----------
Expenses:
Mortality and expense guaranty fees (note 3) 593,042 482,034
Investment management fees (note 3) 200,769 163,189
------------ -----------
793,811 645,223
------------ -----------
Net investment income 464,817 492,815
------------ -----------
Realized gains on investments:
Proceeds from sales 38,990,793 19,900,586
Cost of securities sold 35,180,383 18,499,626
------------ -----------
Net realized gains 3,810,410 1,400,960
------------ -----------
Unrealized appreciation on investments:
End of year 17,459,492 3,663,198
Beginning of year 3,663,198 8,815,460
------------ -----------
Increase (decrease) in unrealized appreciation 13,796,294 (5,152,262)
------------ -----------
Net increase (decrease) in net assets resulting
from operations $ 18,071,521 (3,258,487)
============ ===========
</TABLE>
See accompanying notes to financial statements.
B-14
<PAGE> 34
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Increase (decrease) in net assets from operations:
Net investment income $ 464,817 492,815
Net realized gains on investments 3,810,410 1,400,960
Increase (decrease) in unrealized appreciation
on investments 13,796,294 (5,152,262)
------------ -----------
Net increase (decrease) in net assets resulting
from operations 18,071,521 (3,258,487)
------------ -----------
Changes from principal transactions:
Net purchase payments received (note 3) 11,269,062 9,827,945
Withdrawal of funds (7,254,521) (5,154,540)
------------ -----------
Increase in net assets derived from
principal transactions 4,014,541 4,673,405
------------ -----------
Increase in net assets 22,086,062 1,414,918
Net assets:
Beginning of year 51,066,472 49,651,554
------------ -----------
End of year $ 73,152,534 51,066,472
============ ===========
Accumulation units:
Outstanding, beginning of year 5,615,645 5,113,999
Increase for payments received 1,061,993 1,054,765
Decrease for withdrawal of funds (680,843) (553,119)
------------ -----------
Outstanding, end of year 5,996,795 5,615,645
============ ===========
</TABLE>
See accompanying notes to financial statements.
B-15
<PAGE> 35
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Market Value
-----------------------------------
Shares or Percentage
Principal of Net
Amount Amount Assets
------------- ------------- -------------
<S> <C> <C> <C>
Common stocks:
Chemicals and allied products:
Avery-Dennison Corporation 44,600 $ 2,235,575
American Home Products Corporation 22,800 2,211,600
Johnson & Johnson 20,600 1,763,875
Abbott Laboratories 42,100 1,757,675
Pfizer, Inc. 18,500 1,165,500
Merck & Company, Inc. 11,700 769,275
DuPont 7,200 503,100
-------------
10,406,600 14.22%
-------------
Depository institutions:
Bank America Corporation 29,800 1,929,550
Mellon Bank Corporation 32,250 1,733,437
Citicorp 16,800 1,028,925
MBNA 20,000 737,500
CoreStates Financial Corporation 18,200 689,325
J.P. Morgan & Company 8,500 682,125
First Interstate 4,900 668,850
Wachovia Corporation 7,500 343,125
Regions Financial Corporation 7,600 335,400
-------------
8,148,237 11.14%
-------------
Food and kindred spirits:
PepsiCo, Inc. 41,800 2,335,575
The Coca-Cola Company 28,800 2,138,400
Philip Morris Company 15,000 1,357,500
-------------
5,831,475 7.97%
-------------
Petroleum and coal products:
Texaco, Inc. 27,600 2,166,600
Kerr-McGee Corporation 18,100 1,149,350
Exxon Corporation 12,500 1,001,563
Repsol S.A. ADR 21,900 719,963
Royal Dutch Petroleum 5,000 705,625
-------------
5,743,101 7.85%
-------------
Insurance:
American International Group 26,100 2,414,250
AFLAC, Inc. 39,850 1,728,494
U.S. Healthcare, Inc. 12,300 571,950
United Healthcare Company 8,700 569,850
-------------
5,284,544 7.22%
-------------
Electronics:
Intel Corporation 28,000 1,589,000
Motorola, Inc. 25,000 1,425,000
General Electric Company 15,000 1,080,000
Duracell International 19,900 1,029,825
-------------
5,123,825 7.00%
-------------
</TABLE>
B-16
<PAGE> 36
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
<TABLE>
<CAPTION>
Market Value
-----------------------------------
Shares or Percentage
Principal of Net
Amount Amount Assets
------------- ------------- -------------
<S> <C> <C> <C>
Common stocks, continued:
Business services:
Interpublic Group of Companies 49,600 $ 2,151,400
Cisco Systems, Inc.* 8,000 597,000
Microsoft Corporation* 5,550 487,013
Reuters Holdings PLC ADR 31,300 1,725,413
-------------
4,960,826 6.78%
-------------
Communications:
Nynex Corporation 14,000 756,000
Ameritech 12,700 749,300
Capital Cities/ABC, Inc. 5,400 666,225
Airtouch Communications* 11,400 322,050
Vodafone Group PLC ADR 18,800 662,700
-------------
3,156,275 4.31%
-------------
Industrial machinery and equipment:
Hewlett-Packard Company 24,900 2,085,375
Silicon Graphics 12,100 332,750
-------------
2,418,125 3.31%
-------------
Food stores:
Safeway, Inc.* 43,800 2,255,700 3.08%
-------------
Nondepository institutions:
Federal National Mortgage Association 18,100 2,246,663 3.07%
-------------
Engineering and management services:
Dun & Bradstreet Corporation 17,700 1,146,075
Foster Wheeler Corporation 24,100 1,024,250
-------------
2,170,325 2.97%
-------------
Fabricated metal products:
The Gillette Company 38,900 2,027,663 2.77%
-------------
Eating and drinking places:
McDonald's Corporation 44,200 1,994,525 2.73%
-------------
General merchandise:
Sears Roebuck & Company 42,300 1,649,700 2.26%
-------------
Building materials and gardening supplies:
Home Depot, Inc. 27,600 1,321,350 1.81%
-------------
Hotels and other lodging places:
Mirage Resorts, Inc.* 30,900 1,066,050 1.46%
-------------
Rubber and miscellaneous plastics products:
Titan Wheel International 62,900 1,022,124 1.40%
-------------
</TABLE>
B-17
<PAGE> 37
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
<TABLE>
<CAPTION>
Market Value
-----------------------------------
Shares or Percentage
Principal of Net
Amount Amount Assets
------------- ------------- -------------
<S> <C> <C> <C>
Common stocks, continued
Railroad transportation:
Burlington Northern Santa Fe 10,300 $ 803,400 1.10%
-------------
Electric, gas, and sanitary services:
Texas Utilities 19,500 801,937 1.10%
-------------
Transportation equipment:
Chrysler Corporation 12,000 664,500 0.91%
-------------
Holding and other investment offices:
Medityrust 11,000 383,624
Federal Realty Investment Trust 11,000 250,250
-------------
633,874 0.87%
-------------
Tobacco products:
UST, Inc. 12,000 400,500 0.55%
------------- ------
Total common stocks (cost $52,671,827) 70,131,319 95.88%
Short-term investments:
Associates Corporation of North America
master note (6.62% at December 31, 1995) 2,797,374 2,797,374 3.82%
-------------
Total investments (cost $55,469,201) 72,928,693 99.70%
Other assets and liabilities, net 223,841 0.30%
------------- ------
Total net assets $ 73,152,534 100.00%
============= ======
</TABLE>
*Presently not producing dividend income.
See accompanying notes to financial statements.
B-18
<PAGE> 38
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Per Unit Income and Capital Changes
---------------------------------------------------------------------
Years ended December 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment income and expenses:
Investment income $.2163 .2105 $ .2113 $ .2267 $ .2329
Operating expenses .1364 .1193 .1180 .1113 .1000
---------- --------- ----------- --------- ---------
Net investment income .0799 .0912 .0933 .1154 .1329
Capital changes:
Net realized and unrealized gains
(losses) from securities 3.0251 (.7066) .5074 .1266 1.8089
---------- --------- ----------- --------- ---------
Net increase (decrease) in
accumulation unit value 3.1050 (.6154) .6007 .2420 1.9418
Accumulation unit value, beginning
of period 9.0936 9.7090 9.1083 8.8663 6.9245
---------- --------- ----------- --------- ---------
Accumulation unit value,
end of period $ 12.1986 $ 9.0936 $ 9.7090 $ 9.1083 $ 8.8663
========== ========= =========== ========= =========
Number of accumulation units
outstanding, end of period 5,996,797 5,615,645 5,113,999 4,644,455 4,267,756
========== ========= =========== ========= =========
Ratios:
Ratio of expenses to average
net assets 1.2880% 1.2826% 1.2783% 1.2812% 1.2800%
Ratio of net investment income to
average net assets .7542% .9797% 1.0110% 1.3289% 1.7004%
Portfolio turnover rate 66.1% 43.5% 51.2% 31.7% 41.2%
</TABLE>
See accompanying notes to financial statements.
B-19
<PAGE> 39
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
American Fidelity Variable Annuity Fund A (the Fund) is a separate
account of American Fidelity Assurance Company (AFA). The Fund is
registered as an open-end, diversified management investment company
under the Investment Company Act of 1940, as amended. The purpose of the
Fund is to provide a means of investing for supplemental retirement
income. Shares are only available in connection with variable annuity
policies issued by AFA.
The Fund's investment objectives are primarily long-term growth of
capital and secondarily the production of income. In order to achieve
these investment objectives, the Fund normally invests in a diversified
portfolio consisting primarily of common stocks.
INVESTMENTS
Investments in corporate stocks are valued by Merrill Lynch Pricing
Service. Domestic securities for which published quotations are not
available are valued at the quotation obtained from the Fund's primary
broker. Short-term investments are valued on the basis of amortized
cost, which approximates market.
The Fund's portfolio of investments is diversified such that not more
than five percent (5%) of the value of the total assets of the Fund are
invested in any one issuer and not more than twenty-five percent (25%)
are invested in any one industry or group of industries. Management does
not believe the Fund has any significant concentrations of credit risk.
Realized gains and losses from investment transactions and unrealized
appreciation or depreciation of investments are determined on the
specific-identification basis.
Dividend income is recorded on the ex-dividend date, and interest income
is recorded on the daily accrual basis. For certain securities in which
the exact dividend is unknown on the ex-dividend date, such as stock in
foreign companies, an estimate of the dividend is recorded on the
ex-dividend date, and any necessary adjustments are added to the Fund's
investment income on the date the dividend is received by the Fund. Any
taxes withheld by foreign governments or any foreign exchange expenses
(gains or losses) incurred by investment in such securities are paid by
the Fund. The Fund does not expect these costs to be significant.
INCOME TAXES
The Fund is not taxed separately because the operations of the Fund are
part of the total operations of AFA. AFA files its federal income tax
returns under sections of the Internal Revenue Code applicable to life
insurance companies. The Fund's net increase in net assets from
operations is not expected to result in taxable income under present
regulations. The Fund will not be taxed as a "Regulated Investment
Company" under Subchapter "M" of the Internal Revenue Code.
B-20
<PAGE> 40
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS, CONTINUED
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increase and decrease in
net assets from operations during the period. Actual results could
differ from those estimates.
(2) INVESTMENTS
The aggregate dollar amount of investment purchases (exclusive of
short-term investments) was $43,967,652 and $26,850,916 for the years
ended December 31, 1995 and 1994, respectively. At December 31, 1995,
net unrealized appreciation on investments of $17,459,492 was composed of
gross appreciation of $17,616,115 and gross depreciation of $156,623.
(3) VARIABLE ANNUITY CONTRACTS
Net purchase payments received represent gross payments less deductions
of $433,049 and $422,102 for the years ended December 31, 1995 and 1994,
respectively. The deductions are comprised of sales and administrative
expenses, minimum death benefits, administrative charges, and certificate
issuance fees. These deductions were paid to AFA.
AFA acts as the Fund's investment manager and assumes certain mortality
and expense risks under the variable annuity contracts. Investment
management fees are equal to .0008904% of the Fund's daily net assets
(.325% per annum). These fees are to increase to .5% upon approval of
all states. Mortality and expense guaranty fees are equal to .0026308%
of the Fund's daily net assets (.96025% per annum). Such fees were paid
to AFA.
During the accumulation period, contract owners may partially or totally
withdraw from the Fund by surrendering a portion or all of their
accumulation units. The Internal Revenue Code may limit certain
withdrawals based upon age, disability, and other factors. When contract
owners withdraw, they receive the current value of their accumulation
units.
B-21
<PAGE> 41
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
American Fidelity Assurance Company:
We have audited the accompanying consolidated balance sheets of American
Fidelity Assurance Company and subsidiaries (the Company) as of December 31,
1995 and 1994, and the related consolidated statements of income, stockholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Fidelity
Assurance Company and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in notes 1 and 3 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in
1994. As discussed in notes 1 and 9 to the consolidated financial statements,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," in 1993.
/s/ KPMG PEAT MARWICK LLP
Oklahoma City, Oklahoma
March 15, 1996
B-22
<PAGE> 42
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Investments:
Fixed maturities held-to-maturity, at amortized cost
(fair value $241,533 and $545,015 in 1995 and
1994, respectively) $ 233,313 581,003
Fixed maturities available-for-sale, at fair value
(amortized cost of $546,401 and $153,101
in 1995 and 1994, respectively) 572,717 147,888
Equity securities, at fair value:
Preferred stocks (cost $4,600 in 1995 and 1994) 2,700 4,600
Common stocks (cost $6,192 and $8,903 in
1995 and 1994, respectively) 7,460 9,167
Mortgage loans on real estate, net 121,641 120,458
Investment real estate, at cost (less accumulated
depreciation of $7,816 and $9,698 in 1995
and 1994, respectively) 25,685 31,407
Policy loans 8,165 7,860
Short-term and other investments 9,347 12,630
--------- ----------
981,028 915,013
--------- ---------
Cash 14,726 21,141
Accrued investment income 13,770 13,129
Accounts receivable:
Uncollected premiums 16,518 22,302
Reinsurance receivable 28,947 47,960
Other 10,329 29,042
--------- ----------
55,794 99,304
--------- ----------
Deferred policy acquisition costs 152,415 147,895
Prepaid reinsurance premiums - 17,281
Deferred income tax asset 13,342 13,339
Other assets 7,807 9,555
Separate account assets 74,767 51,067
--------- ----------
Total assets $ 1,313,649 1,287,724
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-23
<PAGE> 43
<TABLE>
<CAPTION>
Liabilities and Stockholder's Equity 1995 1994
------------------------------------ ---- ----
<S> <C> <C>
Policy liabilities:
Reserves for future policy benefits:
Life and annuity $ 99,036 94,364
Accident and health 106,992 91,898
Unearned premiums 1,972 53,438
Claims and benefits payable 26,027 86,952
Funds held under deposit administration contracts 542,808 483,397
Other policy liabilities 88,239 88,267
----------- ---------
865,074 898,316
----------- ---------
Other liabilities:
Deferred income tax liability 65,456 52,040
General expenses, taxes, licenses and fees payable
and other liabilities 29,869 39,876
----------- ---------
95,325 91,916
----------- ---------
Notes payable 19,042 27,566
Separate account liabilities 74,767 51,067
----------- ---------
Total liabilities 1,054,208 1,068,865
----------- ---------
Stockholder's equity:
Common stock, par value $10 per share. 250,000
shares authorized, issued and outstanding 2,500 2,500
Additional paid-in capital 17,718 13,633
Net unrealized holding gain (loss) on investments
available-for-sale, net of deferred tax expense
(benefit) of $13,808 and $(1,746) in 1995 and
1994, respectively 11,917 (3,162)
Retained earnings 227,306 205,888
----------- ---------
Total stockholder's equity 259,441 218,859
Commitments and contingencies (notes 9, 10, 11, and 14)
----------- ---------
Total liabilities and stockholder's equity $ 1,313,649 1,287,724
=========== =========
</TABLE>
B-24
<PAGE> 44
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premiums:
Life and annuity $ 24,514 25,012 22,865
Accident and health 156,960 194,382 199,496
--------- ------- -------
181,474 219,394 222,361
Net investment income 65,326 57,079 51,939
Other 12,190 8,102 8,265
--------- ------- -------
Total revenues 258,990 284,575 282,565
--------- ------- -------
Benefits:
Benefits paid or provided:
Life and annuity 18,849 17,604 16,273
Accident and health 74,219 109,796 122,999
Interest credited to funded contracts 27,635 24,251 25,074
Increase in reserves for future policy benefits:
Life and annuity (net of increase in reinsurance
reserves ceded of $53, $8, and $80 in 1995,
1994, and 1993, respectively) 4,619 4,994 3,667
Accident and health (net of (decrease) increase in
reinsurance reserves ceded of $(441), $2,109,
and $10,997 in 1995, 1994, and 1993, respectively) 15,535 7,888 6,406
--------- ------- -------
140,857 164,533 174,419
--------- ------- -------
Expenses:
Selling costs 48,784 56,684 55,275
Other operating, administrative and general expenses 42,586 39,066 41,968
Taxes, other than income taxes, and licenses and fees 6,250 6,184 4,508
Increase in deferred policy acquisition costs (11,902) (6,507) (17,194)
--------- ------- -------
85,718 95,427 84,557
--------- ------- -------
Total benefits and expenses 226,575 259,960 258,976
--------- ------- -------
Income from continuing operations before
income taxes 32,415 24,615 23,589
Income taxes from continuing operations:
Current 10,443 4,506 3,802
Deferred 554 7,248 4,394
--------- ------- -------
10,997 11,754 8,196
--------- ------- -------
Net income from continuing operations, before
cumulative effect of change in accounting
principle 21,418 12,861 15,393
Cumulative effect at January 1, 1993, of change in
accounting for income taxes - - 1,676
--------- ------- -------
21,418 12,861 17,069
Income (loss) from discontinued operations (net of
applicable income tax expense (benefit) of $646 in
1994 and $(2,797) in 1993 and cumulative effect at
January 1, 1993, of change in accounting for income
taxes of $(1,010)) - 2,006 (2,280)
--------- ------- -------
Net income $ 21,418 14,867 14,789
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
B-25
<PAGE> 45
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid-in Holding Retained
Stock Capital Gain (Loss) Earnings
----- ------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $ 2,500 5,497 1,190 179,032
Net income - - - 14,789
Decrease in unrealized appreciation
of equity securities - - (198) -
Capital contributed by parent - 6,393 - -
Dividends - - - (500)
------- ------ ------ -------
Balance at December 31, 1993 2,500 11,890 992 193,321
Net income - - - 14,867
Investments transferred to available-
for-sale, net of deferred taxes - - 4,400 -
Decrease in unrealized holding
gain, net of deferred taxes - - (8,554) -
Capital contributed by parent - 1,743 - -
Dividends - - - (2,300)
------- ------ ------ -------
Balance at December 31, 1994 2,500 13,633 (3,162) 205,888
Net income - - - 21,418
Investments transferred to available-
for-sale, net of deferred taxes - - 8,828 -
Increase in unrealized holding gain,
net of deferred taxes - - 6,251 -
Capital contributed by parent on
sale of AFI - 4,085 - -
------- ------ ------ -------
Balance at December 31, 1995 $ 2,500 17,718 11,917 227,306
======= ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
B-26
<PAGE> 46
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 21,418 14,867 14,789
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 876 1,142 1,495
Accretion of discount on investments (605) (233) (1,384)
Realized (gains) losses on investments (2,423) (1,755) 4,243
Increase in deferred policy acquisition costs (11,902) (6,507) (17,194)
Increase in accrued investment income (1,819) (899) (712)
Decrease (increase) in accounts receivable 847 (11,360) (19,971)
Increase in policy liabilities 66,489 43,438 89,981
Increase (decrease) in general expenses, taxes,
licenses and fees payable and other liabilities 256 (3,704) (10,289)
Increase in deferred income taxes 554 7,248 4,394
Other 471 (1,508) 6,662
---------- -------- --------
Total adjustments 52,744 25,862 57,225
---------- -------- --------
Net cash provided by operating activities 74,162 40,729 72,014
---------- -------- --------
Cash flows from investing activities:
Sale, maturity or repayment of investments:
Fixed maturities held-to-maturity 73,984 96,526 176,569
Fixed maturities available-for-sale 36,640 25,419 -
Equity securities 5,635 3,286 6,031
Mortgage loans on real estate 12,426 18,657 9,812
Real estate 7,677 627 4,039
Net decrease (increase) in short-term and other investments 3,283 23,149 (130)
Purchase of investments:
Fixed maturities held-to-maturity (60,439) (105,841) (244,871)
Fixed maturities available-for-sale (164,417) (91,023) -
Equity securities (4,249) (6,981) (6,133)
Mortgage loans on real estate (14,328) (14,972) (12,502)
Real estate (2,820) (891) (3,376)
Policy loans, net (305) (281) (590)
Cash received from sale of AFI to AFC, net of cash transferred 21,005 - -
Contributions from discontinued operations - 2,006 (2,280)
---------- -------- --------
Net cash used in investing activities (85,908) (50,319) (73,431)
---------- -------- --------
Cash flows from financing activities:
Dividends paid to parent - (2,300) -
Capital contribution from parent 4,085 - -
Proceeds from notes payable 7,095 16,396 4,677
Repayment of notes payable (5,849) (10,221) (4,790)
---------- -------- --------
Net cash provided by (used in) financing activities 5,331 3,875 (113)
---------- -------- --------
Net decrease in cash (6,415) (5,715) (1,530)
Cash at beginning of year 21,141 26,856 28,386
---------- -------- --------
Cash at end of year $ 14,726 21,141 26,856
========== ======== ========
</TABLE>
(Continued)
B-27
<PAGE> 47
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on notes payable $ 1,478 1,420 1,710
========= ====== =====
Federal income taxes $ 12,500 4,068 4,600
========= ====== =====
Supplemental disclosure of noncash investing activities:
Net unrealized holding gain (loss) on investments available-
for-sale, net of deferred tax expense (benefit) of $15,554
and $(1,746) in 1995 and 1994, respectively $ 15,079 (3,162) -
========= ====== =====
Investments transferred to available-for-sale $ 300,850 86,493 -
========= ====== =====
Mortgage loans foreclosed - - 167
Net loss on foreclosures - - 65
--------- ------ -----
Real estate acquired through foreclosures $ - - 102
========= ====== =====
Supplemental disclosure of noncash financing activities:
Capital contribution from parent in the form of a
note receivable $ - 1,743 6,393
========= ====== =====
Real estate transferred to parent as a dividend $ - - 500
========= ====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
B-28
<PAGE> 48
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
American Fidelity Assurance Company (AFA or the Company) and
subsidiaries provide a variety of financial services. The principal
subsidiary for the year ended December 31, 1995, was Security General
Life Insurance Company (SGLI), a life insurance company. Principal
subsidiaries for the years ended December 31, 1994 and 1993, include
SGLI; American Fidelity Insurance Company (AFI), a property and
casualty insurance company; and Cimarron Insurance Company (CIC), a
property and casualty insurance company. The Company and its insurance
subsidiaries are subject to state insurance regulations and periodic
examinations by state insurance departments.
AFA is licensed in 48 states and the District of Columbia with
approximately 42% of total premiums being written in Oklahoma, Texas,
and Georgia. AFA is represented by approximately 300 salaried managers
and agents, and over 2,000 brokers. Activities of AFA are largely
concentrated in the group disability income, group and individual
annuity, and individual medical markets. In addition, individual and
group life business is also conducted. The main thrust of AFA's sales
is worksite marketing of voluntary products through the use of payroll
deduction. The Company sells these voluntary products through a
salaried sales force that is broken down into two divisions: the
Association Group Division (AGD) and American Fidelity Educational
Services (AFES). AGD specializes in voluntary disability income
insurance programs aimed at selected groups and associations and is
funded by employees through payroll deductions. AFES focuses on
marketing to public school employees with ancillary insurance products
such as disability income, tax sheltered annuities, life insurance,
dread disease, and accidental death and dismemberment. The expertise
gained by the Company in worksite marketing of voluntary products is
used by the Brokerage Division in developing products to meet special
situations and focuses on marketing to a broad range of employers
through independent broker agencies and agents interested in getting
into or enhancing their payroll deduction capability.
A significant portion of the Company's business consists of group and
individual annuities. The Company's earnings related to these products
are impacted by conditions in the overall interest rate environment.
Additionally, the Company has recently taken measures to reduce its
involvement with major medical products in order to concentrate on its
more profitable lines of business.
For the years ended December 31, 1994 and 1993, AFI was a subsidiary of
AFA. AFI specializes in the underwriting of preferred and standard
private passenger automobile, full coverage commercial automobile,
commercial property, and ocean marine coverages. Other products
include inland marine, miscellaneous casualty lines, and general fire
lines. Miscellaneous liability products insuring service contracts and
mechanical breakdown insurance are offered via financial institutions,
manufacturers, and franchised automobile dealers. In 1995, AFI
discontinued offering personal property, farm owners, and commercial
habitational risk. All business, except for certain mechanical
breakdown insurance, is produced by approximately 800 independent
agents throughout Texas, Oklahoma, Kansas, and Louisiana. In 1995, AFA
sold AFI to its parent, American Fidelity Corporation (AFC). See note
12.
B-29
<PAGE> 49
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, which vary in some
respects from statutory accounting practices prescribed or permitted by
state insurance departments (see note 2). The consolidated financial
statements include the accounts and operations of AFA and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial
statements.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Principal estimates that could change in the future are the actuarial
assumptions used in establishing deferred policy acquisition costs and
policy liabilities.
INVESTMENTS
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (Statement 115). Statement
115 requires that debt and equity securities be reported at fair value,
rather than amortized cost, except where there is a positive intent and
ability to hold the securities to maturity. Under Statement 115, the
effect of any unrealized holding gains or losses on securities
available-for-sale are reported as a separate component of
stockholder's equity, net of deferred taxes. Transfers of securities
between categories are recorded at fair value at the date of transfer.
The Company adopted Statement 115 as of January 1, 1994.
Management determines the appropriate classification of investments at
the time of purchase. If management has the intent and the Company has
the ability at the time of purchase to hold the investments until
maturity, they are classified as held-to-maturity and carried at
amortized cost. Investments to be held for indefinite periods of time
and not intended to be held-to-maturity are classified as
available-for-sale and carried at fair value. Fair value of
investments available-for-sale is based on quoted market prices.
Fixed maturities held-to-maturity and short-term investments (bonds,
notes, and redeemable preferred stocks) are reported at cost, adjusted
for amortization of premium or accretion of discount. Amounts reported
at adjusted cost are expected to be realized because it is management's
intent to hold these investments to maturity. Equity securities
(common and nonredeemable preferred stocks) are reported at current
fair value. Mortgage loans on real estate are reported at the unpaid
balance less an allowance for possible losses. Investment in real
estate is carried at cost less accumulated depreciation. Investment in
real estate, excluding land, is depreciated on a straight-line basis
using estimated lives ranging from 6 to 35 years. Policy loans are
reported at the unpaid balance.
B-30
<PAGE> 50
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Realized gains or losses on disposal of investments are determined on a
specific-identification basis and are included in the accompanying
consolidated statements of income.
Because the Company's primary business is in the insurance industry,
the Company holds a significant amount of assets that are matched with
its liabilities in relation to maturity and interest margin. In order
to maximize earnings and minimize risk, the Company invests in a
diverse portfolio of investments. The portfolio is diversified by
geographic region, investment type, underlying collateral, maturity,
and industry. Management does not believe the Company has any
significant concentrations of credit risk.
The investment portfolio includes fixed maturities, equity securities,
mortgage loans, real estate, policy loans, and short-term investments.
The Company's portfolio does not include any fixed maturities that are
low investment-grade and have a high-yield ("junk bonds"). The Company
limits its risks by investing in fixed maturities and equity securities
of rated companies; mortgage loans adequately collateralized by real
estate; selective real estate supported by appraisals; and policy loans
collateralized by policy cash values. In addition, the Company
performs due diligence procedures prior to making mortgage loans.
These procedures include evaluations of the creditworthiness of the
mortgagees and/or tenants and independent appraisals. Certain fixed
maturities are guaranteed by the United States government.
The Company periodically reviews its investment portfolio to determine
if allowances for possible losses are necessary. In connection with
this determination, management reviews published market values, credit
ratings, independent appraisals, and other valuation information.
While management believes that the allowances are adequate, adjustments
may be necessary in the future due to changes in economic conditions.
In addition, state insurance department examiners periodically review
investment valuation as an integral part of their examination process.
Such agencies may require the Company to recognize adjustments to the
losses based upon available information and judgments of the state
insurance department examiners at the time of their examination.
RECOGNITION OF PREMIUM REVENUE AND COSTS
Revenues from life, payout annuity (with life contingencies), and
accident and health policies represent premiums recognized over the
premium-paying period and are included in life, annuity, and accident
and health premiums. Expenses are associated with earned premiums to
result in recognition of profits over the life of the policies.
Expenses include benefits paid to policyholders and the change in the
reserves for future policy benefits.
Revenues from accumulation policies, which are included in other
revenues, represent amounts assessed against policyholders. Such
assessments are principally surrender charges. Policyholder account
balances for accumulation annuities consist of premiums received, plus
credited interest, less accumulated policyholder assessments.
Policyholder account balances are reported in the consolidated balance
sheets as funds held under deposit administration contracts. Expenses
for accumulation annuities represent interest credited to policyholder
account balances.
B-31
<PAGE> 51
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Revenues from most universal life policies, which are included in other
revenues, represent amounts assessed against policyholders. Such
assessments are principally mortality charges, surrender charges, and
policy service fees. Policyholder account balances consist of premiums
received plus credited interest, less accumulated policyholder
assessments. Policyholder account balances are reported in the
consolidated balance sheets as other policy liabilities. Expenses
include interest credited to policyholder account balances and benefits
in excess of account balances returned to policyholders.
Revenues from most property and casualty policies represent premiums
recognized ratably over the policy period and are included in property
and casualty premiums. Expenses include benefits paid and the change
in the reserves for losses and loss adjustment expenses. Reserves for
losses and loss adjustment expenses are provided based on case-basis
estimates for reported losses and experience for claims incurred but
not reported. Such reserves are included in the reserves for claims
and benefits payable.
POLICY ACQUISITION COSTS
The Company defers costs which vary with and are primarily related to
the production of new business. Deferred costs associated with life,
annuity, universal life, and accident and health insurance policies
consist principally of field sales compensation, direct response costs,
underwriting and issue costs, and related expenses. Deferred costs
associated with life policies are amortized (with interest) over the
anticipated premium paying period of the policies using assumptions
that are consistent with the assumptions used to calculate policy
reserves. Deferred costs associated with annuities and universal life
policies are amortized over the life of the policies at a constant rate
based on the present value of the estimated gross profit to be
realized. Deferred costs related to accident and health insurance
policies are amortized over the anticipated premium paying period of
the policies based on each subsidiary's experience.
Deferred costs associated with property and casualty insurance policies
consist principally of commissions, direct response costs, and
underwriting and issue costs, which vary with and are primarily related
to the production of new business. These costs are charged to
operations over the periods in which the related premiums are earned.
POLICY LIABILITIES
Life and annuity and accident and health policy benefit reserves are
primarily calculated using the net level reserve method. The net level
reserve method includes assumptions as to future investment yields,
withdrawal rates, mortality rates, and other assumptions based on each
subsidiary's experience. These assumptions are modified as necessary
to reflect anticipated trends and include provisions for possible
unfavorable deviation.
Reserves for claims and benefits payable are determined using
case-basis evaluations and statistical analyses. These reserves
represent the estimate of all claims and benefits incurred but unpaid.
The estimates are periodically reviewed and, as adjustments become
necessary, they are reflected in current operations. Although such
estimates are the Company's best estimate of the ultimate value, the
actual results may vary from these values in either direction.
B-32
<PAGE> 52
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
REINSURANCE
The Company accounts for reinsurance transactions as prescribed by
Statement of Financial Accounting Standards No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" (Statement 113). Statement 113 requires the reporting of
reinsurance transactions relating to the balance sheet on a gross basis
and precludes immediate gain recognition on reinsurance contracts.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Statement 109 requires a change from the deferred
method of accounting for income taxes of APB Opinion 11 to the asset
and liability method of accounting for income taxes. Under the asset
and liability method of Statement 109, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Effective January 1, 1993, the Company adopted Statement 109 and has
reported the cumulative effect of that change in the method of
accounting for income taxes in the 1993 consolidated statement of
income.
EQUIPMENT
Equipment, which is included in other assets, is stated at cost and is
depreciated on a straight-line basis using estimated lives of 3 to 10
years. Additions, renewals, and betterments are capitalized.
Expenditures for software, maintenance, and repairs generally are
expensed. Upon retirement or disposal of an asset, the asset and
related accumulated depreciation are eliminated and any related gain or
loss is included in income.
SEPARATE ACCOUNT
The Company maintains a separate account under Oklahoma insurance law
designated as American Fidelity Variable Annuity Fund A (the Fund).
The Fund is an open-end, diversified management investment company
under the Investment Company Act of 1940, as amended. Under Oklahoma
law, the assets of the Fund are segregated from the Company's assets.
The Fund's assets primarily consist of equity securities, cash, and
cash equivalents. The Company acts as investment manager of the Fund,
assumes certain expense risks, and provides sales and administrative
services.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent with
the current year presentation.
B-33
<PAGE> 53
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) STATUTORY FINANCIAL INFORMATION
The Company and its insurance subsidiaries are required to file
statutory financial statements with state insurance regulatory
authorities. Accounting principles used to prepare these statutory
financial statements differ from financial statements prepared on the
basis of generally accepted accounting principles.
Reconciliations of net income and stockholder's equity as reported on a
combined statutory basis to the amounts included in the accompanying
consolidated financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
Net Income Stockholder's Equity
--------------------------------- --------------------
Years ended December 31, December 31,
--------------------------------- --------------------
1995 1994 1993 1995 1994
-------- ------ ------ --------- --------
<S> <C> <C> <C> <C> <C>
Amounts as reported on a combined statutory basis $ 30,816 12,492 6,882 140,257 156,406
-------- ------ ------ ------- -------
Additions (deductions):
Deferred policy acquisition costs, net of amortization 11,902 6,507 17,194 152,415 147,895
Policy liabilities (5,255) 434 (1,668) (10,812) (16,517)
Deferred income taxes (554) (7,248) (4,394) (49,951) (38,701)
Provision for mortgage and real estate losses (79) - (3,957) (2,343) (2,264)
Unrealized gain/loss - - - 26,625 (3,802)
Asset valuation and interest maintenance reserves 142 111 475 6,268 15,030
Nonadmitted assets - - - 2,926 1,737
Other (7,296) 7,732 (132) (1,585) 7,232
-------- ------ ------ ------- -------
Net increase (decrease) (1,140) 7,536 7,518 123,543 110,610
Net income and stockholder's equity of noninsurance
subsidiaries and discontinued operations, net of
consolidating eliminations (8,258) (5,161) 389 (4,359) (48,157)
-------- ------ ------ ------- -------
Amounts as reported herein $ 21,418 14,867 14,789 259,441 218,859
======== ====== ====== ======= =======
</TABLE>
The Company's combined statutory net income for the years ended
December 31, as noted herein, includes the unaudited statutory net
income (loss) of the following principal insurance companies for the
years ended December 31 as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
AFA $ 30,510 11,882 6,309
SGLI 306 610 573
</TABLE>
The Company's combined statutory stockholder's equity at December 31,
as noted herein, includes the unaudited statutory capital and surplus
of the following principal insurance companies at December 31 as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
(Unaudited)
<S> <C> <C>
AFA $ 137,099 116,680
SGLI 3,158 11,008
AFI and affiliates consolidated - 28,718
</TABLE>
B-34
<PAGE> 54
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The excess of the Company's stockholder's equity as reported in the
accompanying consolidated financial statements over statutory capital
and surplus ($119,184,000 and $62,453,000 at December 31, 1995 and
1994, respectively) is restricted and cannot be distributed to the
stockholder.
Retained earnings of the Company and its insurance subsidiaries are
restricted as to payment of dividends by statutory limitations
applicable to insurance companies. Without prior approval of the state
insurance department, dividends that can be paid by the Company or an
insurance subsidiary are generally limited to the lesser of (a) 10% of
statutory capital and surplus, or (b) the statutory net gain from
operations for life insurance subsidiaries or net investment income for
property and casualty insurance subsidiaries. These limitations are
based on the amounts reported for the previous calendar year.
The Oklahoma Insurance Department has adopted risk based capital (RBC)
requirements for life insurance companies. These requirements are
applicable to the Company and its principal subsidiary, SGLI. The RBC
calculation serves as a benchmark for the regulation of life insurance
companies by state insurance regulators. RBC provides for surplus
formulas similar to target surplus formulas used by commercial rating
agencies. The formulas specify various weighting factors that are
applied to statutory financial balances or various levels of activity
based on the perceived degree of risk, and are set forth in the RBC
requirements. The amount determined under such formulas is called the
authorized control level RBC (ACLC).
The RBC guidelines define specific capital levels based on a company's
ACLC that are determined by the ratio of the company's total adjusted
capital (TAC) to its ACLC. TAC is equal to statutory capital, plus the
Asset Valuation Reserve and any voluntary investment reserves, 50% of
dividend liability, and certain other specified adjustments. Companies
where TAC is less than or equal to 2.0 times ACLC are subject to
certain corrective actions, as set forth in the RBC requirements.
At December 31, 1995, the statutory TAC of the Company and SGLI
significantly exceeds the level requiring corrective action.
(3) INVESTMENTS
Investment income for the years ended December 31 is summarized below
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest on fixed maturities $ 53,931 47,177 45,834
Dividends on equity securities 139 457 364
Interest on mortgage loans 11,543 11,922 12,086
Investment real estate income 4,055 2,990 5,070
Interest on policy loans 1,200 1,128 1,013
Interest on short-term investments 571 348 867
Net realized gains (losses) on investments 2,423 1,755 (4,243)
Other 1,071 (94) 1,111
-------- ------ -------
74,933 65,683 62,102
Less investment expenses (9,607) (8,604) (10,163)
-------- ------ -------
Net investment income $ 65,326 57,079 51,939
======== ====== =======
</TABLE>
B-35
<PAGE> 55
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Investment expenses include approximately $1,482,000, $1,366,000, and
$1,752,000 of interest on notes payable in 1995, 1994, and 1993,
respectively.
Net realized gains (losses) and the changes in unrealized gains
(losses) on investments for the years ended December 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Realized Unrealized Realized Unrealized Realized Unrealized
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities
held-to-maturity $ 581 - 216 - 1,605 -
Fixed maturities
available-for-sale 271 31,529 129 (5,213) - -
Equity securities 611 (896) 1,396 (1,197) 518 312
Real estate 1,436 - (129) - (5,571) -
Mortgage loans (196) - 116 - (246) -
Other (280) - 27 - (549) -
------- ------ ----- ------ ------ ---
$ 2,423 30,633 1,755 (6,410) (4,243) 312
======= ====== ===== ====== ====== ===
</TABLE>
Included in the above realized gains (losses) is the increase
(decrease) in the allowance for possible losses on mortgage loans of
$235,000, $(248,000), and $249,000 in 1995, 1994, and 1993,
respectively, and the increase (decrease) in the allowance for losses
on investment real estate of $(117,000), $(70,000), and $4,079,000 in
1995, 1994, and 1993, respectively. In addition, the Company realized
net gains (losses) of approximately $(11,000), $106,000, and $127,000
during 1995, 1994, and 1993, respectively, on investments in fixed
maturities that were called or prepaid.
As disclosed in note 1, the Company adopted Statement 115 as of January
1, 1994. The effect of this change in accounting principle of
$4,400,000, net of deferred taxes, is determined as of January 1, 1994,
and is a separate component of stockholder's equity. Prior year's
financial statements have not been restated to apply the provisions of
Statement 115.
In December 1995, the Company transferred investments with an estimated
fair value and an amortized cost of $300,849,924 and $287,269,191,
respectively, from the held to-maturity portfolio to the
available-for-sale portfolio at their estimated fair value in response
to the guidance included in the Financial Accounting Standards Board
Special Report, "A Guide to Implementation of Statement 115." This
guidance offered a one-time reassessment opportunity, without calling
into question the intent of the Company to hold other securities to
maturity in the future. At the date of transfer, the net unrealized
gain on the transferred securities was approximately $13,580,733 and
was included as an increase in stockholder's equity, net of deferred
taxes.
B-36
<PAGE> 56
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Held-to-Maturity
The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. govern-
ment corporations and
agencies $ 5,701 617 - 6,318
Corporate securities 125,939 4,520 (216) 130,243
Mortgage-backed securities 101,673 3,432 (133) 104,972
--------- ----- ---- -------
Totals $ 233,313 8,569 (349) 241,533
========= ===== ==== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. govern-
ment corporations and
agencies $ 30,102 321 (657) 29,766
Obligations of states and
political subdivisions 16,227 18 (1,168) 15,077
Corporate securities 364,952 852 (23,959) 341,845
Mortgage-backed securities 169,722 845 (12,240) 158,327
--------- ----- ------- -------
Totals $ 581,003 2,036 (38,024) 545,015
========= ===== ======= =======
</TABLE>
B-37
<PAGE> 57
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity at December 31 are shown below (in
thousands) by contractual maturity. Expected maturities will differ
from contractual maturities because the issuers of such securities may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1995
------------------------------
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less $ 12,700 12,853
Due after one year through five years 24,900 25,380
Due after five years through ten years 29,932 31,057
Due after ten years 64,108 67,271
--------- -------
131,640 136,561
Mortgage-backed securities 101,673 104,972
--------- -------
$ 233,313 241,533
========= =======
</TABLE>
Proceeds from sales of investments in fixed maturities held-to-maturity
during 1995, 1994, and 1993 were approximately $33,685,000,
$10,946,000, and $56,281,000, respectively. Gross gains of
approximately $1,022,000, $31,000, and $1,521,000 and gross losses of
approximately $430,000, $141,000, and $43,000, respectively, were
realized on those sales. In 1995 and 1994, changes in circumstances
caused the Company to change its intent to hold these securities to
maturity. These changes primarily consisted of the significant
deterioration in the issuers' creditworthiness in 1995 and 1994, and
the impact of a subsidiary's coinsurance and assumption agreement with
an unaffiliated company in 1994.
AVAILABLE-FOR-SALE
The gross unrealized holding gains on equity securities
available-for-sale were $1,367,000 and $971,000 in 1995 and 1994,
respectively. Gross unrealized holding losses on equity securities
available-for-sale were $1,999,000 and $707,000 in 1995 and 1994,
respectively.
The amortized cost and estimated fair value of investments in fixed
maturities available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obli-
gations of U.S. government
corporations and agencies $ 89,143 4,462 - 93,605
Obligations of states and political
subdivisions 11,564 159 - 11,723
Corporate securities 330,140 17,336 (134) 347,342
Mortgage-backed securities 115,554 4,912 (419) 120,047
--------- ------ ---- -------
Totals $ 546,401 26,869 (553) 572,717
========= ====== ==== =======
</TABLE>
B-38
<PAGE> 58
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obli-
gations of U.S. government
corporations and agencies $ 37,080 178 (1,193) 36,065
Obligations of states and political
subdivisions 7,743 47 (74) 7,716
Corporate securities 95,324 374 (3,423) 92,275
Mortgage-backed securities 12,954 - (1,122) 11,832
--------- --- ------ -------
Totals $ 153,101 599 (5,812) 147,888
========= === ====== =======
</TABLE>
The amortized cost and estimated fair value of investments in fixed
maturities available-for-sale at December 31 are shown below (in
thousands) by contractual maturity. Expected maturities will differ
from contractual maturities because the issuers of such securities may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1995
------------------------------
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less $ 20,692 20,987
Due after one year through five years 168,739 175,139
Due after five years through ten years 207,980 220,617
Due after ten years 33,436 35,927
--------- -------
430,847 452,670
Mortgage-backed securities 115,554 120,047
--------- -------
$ 546,401 572,717
========= =======
</TABLE>
Proceeds from sales of investments in fixed maturities
available-for-sale were approximately $31,944,000 and $24,344,000 in
1995 and 1994, respectively. Gross gains of approximately $359,000 and
$441,000 and gross losses of approximately $88,000 and $312,000 were
realized on those sales in 1995 and 1994, respectively.
The home office building is included in real estate investments. The
Company and its subsidiaries occupy approximately 45% of the building.
An additional 35% of the building is occupied by companies affiliated
through common ownership.
At December 31, 1995 and 1994, investments with carrying values of
approximately $5,279,000 and $7,593,000, respectively, were on deposit
with state insurance departments as required by statute.
B-39
<PAGE> 59
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (Statement 107), requires that the
Company disclose estimated fair values for its financial instruments.
A summary of the Company's financial instruments (in thousands) and the
fair value estimates, methods, and assumptions are set forth below:
<TABLE>
<CAPTION>
1995 1994
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 14,726 14,726 21,141 21,141
Short-term and other investments 9,347 9,347 12,630 12,630
Accounts receivable 26,847 26,847 51,344 51,344
Accrued investment income 13,770 13,770 13,129 13,129
Reinsurance receivables on paid and
unpaid policy and contract claims 28,947 28,947 47,960 47,960
Policy loans 8,165 8,165 7,860 7,860
Fixed maturities held-to-maturity 233,313 241,533 581,003 545,015
Fixed maturities available-for-sale 572,717 572,717 147,888 147,888
Equity securities 10,160 10,160 13,767 13,767
Mortgage loans 121,641 128,300 120,458 120,300
Financial liabilities:
Policy liabilities 865,074 849,500 898,316 874,100
Other liabilities 29,869 29,869 39,876 39,876
Notes payable 19,042 19,459 27,566 24,563
</TABLE>
CASH, SHORT-TERM AND OTHER INVESTMENTS, ACCOUNTS RECEIVABLE, ACCRUED
INVESTMENT INCOME, REINSURANCE RECEIVABLES ON PAID AND UNPAID POLICY
AND CONTRACT CLAIMS, AND OTHER LIABILITIES
The carrying amount of these financial instruments approximates fair
value because they mature within a relatively short period of time and
do not present unanticipated credit concerns.
POLICY LOANS
Policy loans have average interest rates of 7.6% as of December 31,
1995 and 1994, and have no specified maturity dates. The aggregate
fair value of policy loans approximates the carrying value reflected on
the consolidated balance sheets. These loans typically carry an
interest rate that is tied to the crediting rate applied to the related
policy and contract reserves. Policy loans are an integral part of the
life insurance policies which the Company has in force and cannot be
valued separately.
FIXED MATURITY INVESTMENTS
The fair value of fixed maturity investments is estimated based on bid
prices published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain securities is not
readily available through market sources other than dealer quotations,
so fair value estimates are based on quoted market prices of similar
instruments, adjusted for the differences between the quoted
instruments and the instruments being valued.
B-40
<PAGE> 60
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
EQUITY SECURITIES
The fair value of equity securities investments of the Company is based
on bid prices published in financial newspapers or bid quotations
received from securities dealers.
MORTGAGE LOANS
Fair values are estimated for portfolios of loans with similar
characteristics. Mortgage loans are segregated into either commercial
or residential categories.
The fair value of mortgage loans was calculated by discounting
scheduled cash flows to maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan.
Because the size of the residential loan portfolio is small in
relationship to total mortgage loans, residential loans were valued as
a portfolio, rather than on an individual basis.
For certain commercial loans, estimated cash flows are discounted using
a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount
rates are judgmentally determined using available market information
and specific borrower information. The fair value of certain
residential loans is based on the approximate fair value of the
underlying real estate securing the mortgages.
The following table presents the fair value information for the
Company's mortgage loan portfolio (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------
Average Estimated Calculated
Carrying Net Discount Fair
Amount Yield Rate * Value
--------- ------- --------- ----------
<S> <C> <C> <C> <C>
Commercial $ 120,468 9.25% 7.08% $ 127,100
Residential 1,173 9.56% 6.78% 1,200
--------- ---------
$ 121,641 $ 128,300
========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------------------
Average Estimated Calculated
Carrying Net Discount Fair
Amount Yield Rate * Value
--------- ------- --------- ----------
<S> <C> <C> <C> <C>
Commercial $ 118,737 9.39% 9.51% $ 118,600
Residential 1,721 9.41% 9.06% 1,700
--------- ---------
$ 120,458 $ 120,300
========= =========
</TABLE>
* Management has made estimates of fair value discount rates that
it believes to be reasonable. However, because there is no
established exchange for trading many of these financial instruments,
management has no basis to determine whether the fair value
presented above would be indicative of the value negotiated in an
actual sale.
B-41
<PAGE> 61
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Policy Liabilities
Certain policies sold by the Company are investment-type contracts.
These liabilities are segregated into two categories: deposit
administration funds and immediate annuities which do not have life
contingencies. The fair value of the deposit administration funds is
estimated as the cash surrender value of each policy less applicable
surrender charges. The fair value of the immediate annuities without
life contingencies is estimated as the discounted cash flows of
expected future benefits less the discounted cash flows of expected
future premiums, using the current pricing assumptions. The carrying
amount of all other policy liabilities approximates fair value.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
--------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Funds held under deposit
administration contracts $ 542,808 527,400 483,397 458,200
Annuities 47,830 47,700 41,753 42,700
</TABLE>
NOTES PAYABLE
The fair value of the Company's notes payable is estimated by
discounting the scheduled cash flows of each instrument through the
scheduled maturity. The discount rates used are similar to those used
for the valuation of the Company's commercial mortgage loan portfolio.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument, nor do they
reflect income taxes on differences between fair value and tax basis of
the assets. Because no established exchange exists for a significant
portion of the Company's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
B-42
<PAGE> 62
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs principally represent field sales
compensation, direct response costs, underwriting and issue costs, and
related expenses. Information relating to the increase (decrease) in
deferred policy acquisition costs, is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Life Accident
and Annuity and Health Total
------------ ---------- -----
<S> <C> <C> <C>
Year ended December 31, 1995:
Deferred costs $ 9,234 17,516 26,750
Amortization (3,385) (11,463) (14,848)
-------- ------- -------
Net increase $ 5,849 6,053 11,902
======== ======= =======
Year ended December 31, 1994:
Deferred costs 6,253 21,766 28,019
Amortization (3,344) (18,168) (21,512)
-------- ------- -------
Net increase $ 2,909 3,598 6,507
======== ======= =======
Year ended December 31, 1993:
Deferred costs 7,836 26,158 33,994
Amortization (4,018) (12,782) (16,800)
-------- ------- -------
Net increase $ 3,818 13,376 17,194
======== ======= =======
</TABLE>
(6) RESERVES FOR FUTURE POLICY BENEFITS
Reserves for life and annuity future policy benefits as of December 31
are principally based on the interest assumptions set forth below (in
thousands):
<TABLE>
<CAPTION>
Interest
1995 1994 Assumptions
---- ---- -----------
<S> <C> <C> <C>
Life and annuity reserves:
Issued prior to 1970 $ 3,342 3,321 4.75%
Issued 1970 through 1980 28,831 28,035 6.75% to 5.25%
Issued after 1982 (indeterminate premium products) 486 452 10.00% to 8.50%
Issued through 1987 (SGLI acquisition) 1,378 1,495 11.00%
Issued after 1980 (all other) 26,335 24,793 8.50% to 7.00%
Issued after 1994 (all other) 737 - 7.00%
Life contingent annuities 29,262 27,161 Various*
Group term life waiver of premium disabled lives 4,530 4,287 6.00%
All other life reserves 4,135 4,820 Various
-------- ------
$ 99,036 94,364
======== ======
</TABLE>
* These reserves are revalued as limited-pay contracts under FASB
97. As a result, the reserve is somewhat greater than the
present value of future benefits and expenses at these interest
rates, i.e., the actual interest rates required to support the reserves
are somewhat lower than the rates shown.
B-43
<PAGE> 63
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Assumptions as to mortality are based on the Company's prior
experience. This experience approximates the 1955-60 Select and
Ultimate Table (individual life issued prior to 1981), the 1965-70
Select and Ultimate Table (individual life issued in 1981 and after)
and the 1960 Basic Group Table (all group issues). Assumptions for
withdrawals are based on the Company's prior experience. All
assumptions used are adjusted to provide for possible adverse
deviations.
(7) LIABILITY FOR CLAIMS AND BENEFITS PAYABLE
Activity in the liability for claims and benefits payable can be
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Balance at January 1 $ 86,952 91,319
Less reinsurance recoverables 24,083 20,607
--------- -------
Net balance at January 1 62,869 70,712
Incurred related to:
Current year 95,926 137,381
Prior years (2,858) (9,981)
--------- -------
Total incurred 93,068 127,400
Paid related to:
Current year 69,561 98,697
Prior years 35,772 34,938
--------- -------
Total paid 105,333 133,635
Net change in liability related to
discontinued operations - (1,608)
Net balance at December 31 50,604 62,869
Plus reinsurance recoverables 5,588 24,083
Less liability transferred to AFC (30,165) -
--------- -------
Balance at December 31 $ 26,027 86,952
========= =======
</TABLE>
The provisions for benefits pertaining to prior years decreased in 1995
primarily due to the improvement in the loss ratios of cancer products.
The provisions for benefits, claims, and claim adjustment expenses
pertaining to prior years decreased in 1994 primarily due to the
improvement of experience factors used in the calculation of disability
reserves, improvement in cancer claims data base, and lower than
anticipated losses on major medical business.
B-44
<PAGE> 64
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) NOTES PAYABLE
Notes payable as of December 31 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
7.026% promissory note, due in 1996, interest due monthly $ 2,500 2,500
9.875% mortgage loan, due in monthly installments of $21,000
(including interest) with balance due in 1996 2,054 2,106
9.5% mortgage loan, due in monthly installments of $11,000
(including interest) with balance due in 1996 1,119 1,148
9.5% mortgage loan, due in monthly installments of $20,000
(including interest) with balance due in 1997 1,980 2,030
6.84% promissory note, due in 2000, interest due monthly 4,000 -
8.4% mortgage loan, due in monthly installments of $25,000
(including interest) to 2010 2,472 -
8.4% mortgage loan, due in monthly installments of $22,000
(including interest) to 2027 2,921 2,939
Other 1,996 2,806
Various notes payable, paid in 1995 - 14,037
-------- ------
$ 19,042 27,566
======== ======
</TABLE>
The promissory notes are guaranteed by AFC. The mortgage loans are
secured by mortgages on the home office building and other investment
real estate. The mortgage loans are also secured by an assignment of
the leases on investment real estate and the portion of the home office
building leased to others.
AFA has a $20,000,000 line of credit with the Federal Home Loan Bank of
Topeka. The line of credit is secured by securities pledged as
collateral by AFA with carrying amount of approximately $26,000,000 at
December 31, 1995. The collateral required for this line of credit at
December 31, 1995, was $7,500,000. The pledged securities are held in
the Company's name in a custodial account at Boatmen's First National
Bank of Oklahoma to secure current and future borrowings. To
participate in this available credit, AFA purchased 28,912 shares of
Federal Home Loan Bank of Topeka common stock for $2,844,550 in 1994,
with a carrying value of approximately $2,891,000 at December 31, 1995.
AFA has outstanding advances of $4,000,000 and $2,500,000 at December
31, 1995, at fixed interest rates of 6.84% and 7.026%, respectively.
The Company has unused lines of credit of $13,500,000 available at
December 31, 1995.
Interest expense for the years ended December 31, 1995, 1994, and 1993,
totaled approximately $1,482,000, $1,366,000, and $1,752,000,
respectively.
B-45
<PAGE> 65
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Scheduled maturities (excluding interest) of the above indebtedness at
December 31, 1995, are as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 6,009
1997 2,117
1998 1,076
1999 191
2000 4,208
Thereafter 5,441
--------
$ 19,042
========
</TABLE>
(9) INCOME TAXES
As discussed in note 1, the Company adopted Statement 109 as of January
1, 1993. The cumulative effect of this change in accounting for income
taxes of $1,676,000 is determined as of January 1, 1993, and is
reported separately in the consolidated statement of income for the
year ended December 31, 1993. Prior years' financial statements have
not been restated to apply the provisions of Statement 109.
Total income tax expense in the accompanying consolidated statements of
income differs from the federal statutory rate of 35% principally due
to state income taxes.
The significant components of deferred income tax expense for the years
ended December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of other
components listed below) $ 5,944 7,724 2,035
Change in the valuation allowance for deferred tax assets (5,390) (476) 1,537
Change in the tax rate (1%) on cumulative deferred tax - - 822
-------- ----- -----
$ 554 7,248 4,394
======== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities at December 31, are presented
below (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Fixed maturities $ - 1,279
Investment real estate, principally due to
valuation allowances 101 -
Other investments 677 259
Life and health reserves 12,309 9,537
Property and casualty reserves - 2,895
Unearned premium reserves - 3,099
Other liabilities 255 -
Net operating loss carryforwards - 1,660
-------- ------
Total gross deferred tax assets 13,342 18,729
Less valuation allowance - (5,390)
-------- ------
Net deferred tax assets $ 13,342 13,339
========= ======
</TABLE>
B-46
<PAGE> 66
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax liabilities:
Fixed maturities $ (9,694) -
Equity securities, principally due to difference in
fair value and cost (2,643) (40)
Investment real estate, principally due to depreciation - (169)
Deferred policy acquisition costs (49,010) (45,102)
Other assets (4,109 ) (6,729)
---------- -------
Total gross deferred tax liabilities $ (65,456) (52,040)
========== =======
Net deferred tax liability $ (52,114) (38,701)
========== =======
</TABLE>
The valuation allowance for deferred tax assets as of December 31
consists of the following components (in thousands):
<TABLE>
<CAPTION>
1994
----
<S> <C>
Net operating loss carryforwards $ 1,660
Property and casualty reserves and
unearned premium reserves 3,730
-------
$ 5,390
=======
</TABLE>
The valuation allowance was reduced to zero during 1995 due to AFA's
sale of AFI to AFC. The total valuation allowance at December 31,
1994, was related to AFI and its subsidiaries.
Management believes that it is more likely than not that the results of
operations will generate sufficient taxable income to realize the
deferred tax assets reported on the consolidated balance sheets.
The Company and its subsidiaries are included in AFC's consolidated
federal income tax return. Income taxes are reflected in the
accompanying consolidated financial statements as if the Company and
its subsidiaries were separate tax paying entities. At December 31,
1995 and 1994, other accounts receivable includes income taxes
receivable from AFC of approximately $4,859,000 and $3,200,000,
respectively, and income taxes receivable from AFI and its subsidiaries
of approximately $926,000 at December 31, 1995.
Prior to 1984, life insurance companies were taxed under the 1959 Tax
Act on the lesser of taxable income or gain from operations plus
one-half of any excess of gain from operations over taxable investment
income. The one-half of the excess of gain from operations was
accumulated in a special memorandum tax account known as the
"policyholders surplus account" (PSA). Accumulations at December 31,
1995, were approximately $8,161,000 for AFA. Pursuant to the Tax
Reform Act of 1984, the PSA was "frozen" at the December 31, 1983,
amount and, accordingly, no further additions to the PSA will be made.
These excess amounts in the PSA will become taxable at the regular
corporate tax rate, if distributions to stockholders exceed certain
stated amounts or if certain criteria are not met. No provision for
deferred federal income taxes applicable to the PSA has been made
because management is of the opinion that no distribution of the PSA
will be made in the foreseeable future.
B-47
<PAGE> 67
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations
to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. Management believes
that all reinsurers presently used are financially sound and will be
able to meet their contractual obligations; therefore, no allowance for
uncollectible amounts has been included in the financial statements.
At December 31, 1995, reinsurance receivables with a carrying value of
approximately $8,962,000 were associated with a single reinsurer. At
December 31, 1994, reinsurance receivables with a carrying value of
approximately $24,323,000 and prepaid reinsurance premiums of
approximately $16,400,000 were associated with two reinsurers.
Reinsurance agreements in effect for life insurance policies vary
according to the age of the insured and the type of risk. Retention
amounts for life insurance range from $500,000 on group life to
$250,000 on individual life coverages, with slightly lower limits on
accidental death benefits. At December 31, 1995 and 1994, the face
amounts of life insurance in force that are reinsured amounted to
approximately $278,000,000 (approximately 5.0% of total life insurance
in force) and $347,000,000 (approximately 6.5% of total life insurance
in force), respectively.
Reinsurance agreements in effect for accident and health insurance
policies vary with the type of coverage. Retention limits range from
$100,000 for individual cancer coverage to $250,000 for major medical
coverage.
Reinsurance agreements in effect for property and casualty insurance
policies vary with the lines of business and include excess of loss,
quota share, facultative, and catastrophe agreements. Retention limits
range from $125,000 to $200,000 on the excess of loss agreements.
Certain auto coverages were reinsured under an 85% quota share
agreement in 1994.
The effects of reinsurance agreements on earned and written premiums,
prior to deductions for benefits and commission allowances were
$(76,143), $(56,712), and $(40,243) for life and accident and health
reinsurance ceded, and $2,745, $2,610, and $2,474 for life and accident
and health reinsurance assumed, for the years ended December 31, 1995,
1994, and 1993, respectively.
Reinsurance agreements reduced benefits paid for life and accident and
health policies by approximately $52,318,000, $33,127,000, and
$20,100,000 for the years ended December 31, 1995, 1994, and 1993,
respectively.
Since 1990, the Company has been involved in a reinsurance agreement
with one of its subsidiaries, SGLI. This agreement was amended in 1994
which allowed SGLI to cede most of its individual major medical
business to an unaffiliated company. This transaction consists of a
coinsurance agreement. The transaction was approved by the Oklahoma
Insurance Department. The resulting gain of approximately $2,500,000
is included in other revenue in the 1994 consolidated statement of
income. In 1995, AFA and SGLI entered into an assumption agreement
whereby AFA will assume all of SGLI's remaining rights and insurance
liability in force. The assumption is pending policyholder approval.
B-48
<PAGE> 68
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries participate in a pension plan (the
Plan) covering all employees who have satisfied longevity and age
requirements. The Company's funding policy is to contribute annually
the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned
in the future.
The Plan's funded status as of December 31 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 11,150 10,399
Nonvested benefits 1,582 1,490
-------- ------
Total accumulated benefit obligation $ 12,732 11,889
======== ======
Projected benefit obligation for service rendered
to date 14,809 13,597
Plan assets, at fair value 14,175 13,793
-------- ------
Plan assets in excess of (less than) projected benefit
obligation (634) 196
Unrecognized transition amount (605) (988)
Unrecognized prior service cost due to plan
amendment 607 276
Unrecognized net loss 3,542 3,082
-------- ------
Prepaid pension cost included in other assets $ 2,910 2,566
======== ======
</TABLE>
In determining the projected benefit obligation, the weighted average
assumed discount rate used was 7% and 7.25% in 1995 and 1994,
respectively. The rate of increase in future salary levels was 5.0% in
1995 and 1994. The expected long-term rate of return on assets used in
determining net periodic pension cost was 8.25% and 7% in 1995 and
1994, respectively. Plan assets are invested in short-term investments
and in an unallocated deposit administration contract with SGLI.
Net periodic pension cost for the years ended December 31 included the
following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service costs - benefits earned during period $ 1,025 1,193 813
Interest cost 919 951 781
Return on plan assets (2,455) (547) (589)
Net amortization and deferral 1,366 (130) (14)
-------- ----- ----
Net periodic pension cost $ 855 1,467 991
======== ===== ====
</TABLE>
B-49
<PAGE> 69
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company participates in a defined contribution thrift and profit
sharing plan as provided under section 401(a) of the Internal Revenue
Code, which includes the tax deferral feature for employee
contributions provided by section 401(k) of the Internal Revenue Code.
The Company contributed approximately $831,000, $852,000, and $835,000
to this plan during the years ended December 31, 1995, 1994, and 1993,
respectively.
(12) DISCONTINUED OPERATIONS
During 1995, AFA sold AFI to AFC for approximately $28,717,000. In
connection with this sale, AFC contributed capital of approximately
$4,085,000 to AFA as reflected in the accompanying consolidated
statements of stockholder's equity. The total assets and liabilities
of AFI sold to AFC were approximately $149,264,000 and $123,079,000,
respectively, at December 31, 1994, and are included in the
accompanying consolidated balance sheets. These assets and liabilities
consist of the following (in thousands):
<TABLE>
<S> <C>
Assets:
Fixed maturities held-to-maturity $ 47,137
Fixed maturities available-for-sale 22,044
Equity securities 7
Mortgage loans on real estate 523
Real estate 546
Short-term and other investments 2,072
Cash 3,627
Accounts receivable 42,663
Accrued investment income 1,178
Deferred policy acquisition costs 7,382
Prepaid reinsurance premiums 17,281
Deferred income taxes 2,896
Other assets 1,908
---------
Total assets $ 149,264
=========
Liabilities:
Policy liabilities 99,731
Notes payable 9,770
General expenses, taxes, licenses and fees
payable, and other liabilities 10,263
Deferred income taxes 3,315
---------
Total liabilities $ 123,079
=========
</TABLE>
(13) SALE OF AFFILIATE
During 1994, the Company sold its investment in Plains Insurance
Company (PICO) and the investments on deposit with state insurance
departments related to PICO for cash to an unaffiliated party. AFI
entered into a reinsurance agreement with PICO in 1993 whereby AFI
assumed 100% of the business of PICO as of the date of the sale. Under
this agreement, AFI assumed all of the assets and liabilities of PICO.
As a result of the sale, the Company recorded a realized capital loss
of approximately $46,000 and other revenue of approximately $975,000 in
1994.
B-50
<PAGE> 70
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 1995, 1994, and 1993 was
approximately $5,133,000, $5,219,000, and $4,038,000, respectively. A
portion of rent expense relates to leases that expire or are
cancellable within one year. The aggregate minimum annual rental
commitments as of December 31, 1995, under noncancellable long-term
leases for office space are as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 342
1997 280
1998 141
1999 79
2000 57
Thereafter 19
</TABLE>
The Company has pledged approximately $41,500,000 of its treasury notes
as collateral on lines of credit held by affiliated companies.
In the normal course of business, there are various legal actions and
proceedings pending against the Company and its subsidiaries. In
management's opinion, the ultimate liability, if any, resulting from
these legal actions will not have a material adverse effect on the
Company's financial position.
(15) LEASES
The Company leases various real estate properties to nonaffiliates
under operating lease agreements, with lease expiration dates ranging
from 1996 through 2012. The properties leased are included in the
consolidated balance sheets as investment real estate with the related
debt included in notes payable. Rental income on these properties is
included in the consolidated statements of income as net investment
income.
Investments in real estate held for lease can be summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994
---- -------------
<S> <C> <C>
Land and buildings $ 13,864 18,375
Less accumulated depreciation 3,612 4,401
-------- ------
Net investment 10,252 13,974
Less indebtedness 6,119 7,657
-------- ------
Investment net of indebtedness $ 4,133 6,317
======== ======
</TABLE>
B-51
<PAGE> 71
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Future minimum rentals on noncancellable operating leases can be
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
1996 $ 1,774
1997 1,580
1998 1,406
1999 1,035
2000 941
Thereafter 6,719
--------
Total future minimum rentals $ 13,455
========
</TABLE>
(16) RELATED PARTY TRANSACTIONS
The Company and its subsidiaries lease automobiles, furniture, and
equipment from a partnership that owns a controlling interest in AFC.
These operating leases are cancellable upon one month's notice. During
the years ended December 31, 1995, 1994, and 1993, rentals paid under
these leases were approximately $2,955,000, $3,154,000, and $3,300,000,
respectively.
During the years ended December 31, 1995, 1994, and 1993, the Company
and its subsidiaries paid management fees and investment advisory fees
to AFC totaling approximately $17,885,000, $12,259,000, and
$17,446,000, respectively.
Short-term and other investments at December 31, 1995 and 1994, include
notes receivable from AFC maturing in various years totaling
approximately $6,485,000 and $8,496,000, respectively. During the
years ended December 31, 1995, 1994, and 1993, the Company recorded
investment income on the notes from AFC of approximately $699,000,
$656,000, and $160,000, respectively.
In 1995, 1994, and 1993, AFC and several of its subsidiaries rented
office space in the home office building from the Company. During the
years ended December 31, 1995, 1994, and 1993, the Company received
rental income from AFC and several of its subsidiaries of approximately
$1,281,000, $1,077,000, and $1,502,000, respectively.
During 1994 and 1993, AFC contributed capital of $8,136,000 to AFA in
the form of a note receivable, with a balance of $6,454,000 at December
31, 1995. The terms of the adjustable rate note (8% at December 31,
1995) provide for quarterly payments of principal and interest and
matures in 2003. The note is included in fixed maturities on the
consolidated balance sheets.
During 1994, the Company paid a cash dividend of $2,300,000 to AFC.
An officer of AFC serves on the board of directors of a financial
institution in which the Company maintains cash balances and which has
issued a promissory note to the Company and AFC with an outstanding
balance at December 31, 1995, of approximately $2,443,000.
B-52
<PAGE> 72
PART C
OTHER INFORMATION
ITEM 28 -- FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The Fund's financial statements as of and for the six months ended June 30,
1996 are incorporated herein by reference to its 1996 semiannual report to
Contract Owners. Other information in such report is not incorporated by this
reference and is not a part of the Registration Statement.
The following financial statements are included in Item 27 of Part B of the
Registration Statement:
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
Independent Auditors' Report
Statements of Assets and Liabilities as of December 31, 1995 and 1994
Statements of Operations for the Years Ended December 31, 1995 and 1994
Statements of Changes in Net Assets for the Years Ended December 31, 1995
and 1994
Schedule of Portfolio Investments as of December 31, 1995
Financial Highlights for the Five Years Ended December 31, 1995
Notes to Financial Statements
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended December 31, 1995,
1994 and 1993
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C> <C>
1 -- Resolution adopted by the Board of Directors of the Company on May 7,
1968, authorizing establishment of the Fund. Incorporated by
reference to Exhibit 1 to Registrant's original filing on Form N-8B-1
and Form S-5.
2 -- Rules and Regulations of the Registrant adopted September 3, 1968,
and all amendments through April 23, 1986. Incorporated by reference
to Exhibit 2 to Post-Effective Amendment No. 33 to Form N-3 filed
March 1, 1993.
3 -- Corporate Custodial Agreement dated December 19, 1994, between the
Registrant and Boatmen's Trust Company, an Oklahoma Trust Company.
Incorporated by reference to Exhibit 3 to Post-Effective Amendment
No. 37 to Form N-3 filed September 20, 1995.
</TABLE>
C-1
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C> <C>
4.1 -- Management and Investment Advisory Contract between the Registrant
and the Company dated May 1, 1973, as amended by Amendment dated
September 1, 1995. Incorporated by reference to Exhibit 4.1 to
Post-Effective Amendment No. 33 to Form N-3 filed March 1, 1993 and
Exhibit 4.1.1 to Post-Effective Amendment No. 37 to Form N-3 filed
September 20, 1995.
4.2 -- Investment Sub-Advisory Agreement between the Company and Lawrence W.
Kelly & Associates, Inc. dated June 26, 1995. Incorporated by
reference to Exhibit 4.3 to Post-Effective Amendment No. 37 to Form
N-3 filed September 20, 1995.
4.3 -- Investment Sub-Advisory Agreement between the Company and Todd
Investment Advisors, Inc. dated June 26, 1995. Incorporated by
reference to Exhibit 4.4 to Post-Effective Amendment No. 37 to Form
N-3 filed September 20, 1995.
5 -- Underwriting Contract between the Registrant and American Fidelity
Securities, Inc., dated December 20, 1972. Incorporated by reference
to Exhibit 5 to Post-Effective Amendment No. 33 to Form N-3 filed
March 1, 1993.
6 -- Form of Variable Annuity Contract and Amendment Rider (Investment
Management Charge). Incorporated by reference to Exhibit 6 to
Post-Effective Amendment No. 27 to Form N-3 filed April 30, 1987 and
Exhibit 6.1 to Post-Effective Amendment No. 38 to Form N-3 filed
April 26, 1996.
7 -- Form of Variable Annuity Application. Incorporated by reference to
Exhibit 7 to Post-Effective Amendment No. 27 to Form N-3 filed April
30, 1987.
8.1 -- Articles of Incorporation of the Company and all amendments through
November 4, 1987. Incorporated by reference to Exhibit 8.1 to
Post-Effective Amendment No. 33 to Form N-3 filed March 1, 1993.
8.2 -- Bylaws of the Company and all amendments through April 4, 1990.
Incorporated by reference to Exhibit 8.2 to Post-Effective Amendment
No. 33 to Form N-3 filed March 1, 1993.
9 -- Not applicable.
10 -- Not applicable.
11 -- Not applicable.
12 -- Not applicable.
13 -- Independent Auditors' Consent.
14 -- Not applicable.
15 -- Not applicable.
16 -- Schedule for computation of performance quotation provided in Item
25.
17 -- Financial Data Schedule.
24 -- Power of Attorney.
</TABLE>
C-2
<PAGE> 74
ITEM 29 -- DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND PRINCIPAL POSITIONS AND OFFICES OFFICES WITH
BUSINESS ADDRESS WITH INSURANCE COMPANY REGISTRANT
------------------ ---------------------- -------------
<S> <C> <C>
Lynda L. Cameron Director None
2000 Classen Center
Oklahoma City, OK
William M. Cameron Vice Chairman and Chief Executive None
2000 Classen Center Officer, Director
Oklahoma City, OK
David R. Carpenter Senior Vice President, Treasurer None
2000 Classen Center
Oklahoma City, OK
William E. Durrett Chairman of the Board, Director None
2000 Classen Center
Oklahoma City, OK
Stephen P. Garrett Senior Vice President, Secretary None
2000 Classen Center
Oklahoma City, OK
Edward C. Joullian, III Director Manager
2000 Classen Center
Oklahoma City, OK
Kenneth D. Klehm Senior Vice President None
2000 Classen Center
Oklahoma City, OK
Alfred L. Litchenburg Senior Vice President None
2000 Classen Center
Oklahoma City, OK
John W. Rex President, Chief Operating Officer, Manager and
2000 Classen Center Director Chairman of
Oklahoma City, OK the Board
Galen P. Robbins, M.D. Director None
3433 N.W. 56th
Oklahoma City, OK
John D. Smith Director None
P.O. Box 18832
Atlanta, GA
</TABLE>
C-3
<PAGE> 75
ITEM 30 -- PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT
** CAMERON ENTERPRISES, A LIMITED PARTNERSHIP (CELP) - OK CHART
[CHART]
* Insurance Company
** A Limited Partnership
*** AFIMC is the Attorney-In-Fact for American Fidelity Lloyds Ins. Co., a
Texas Lloyds plan insuror (74-2291275), NAIC #25470
**** No tax or registration numbers
Note: All of the above organizations are corporations that have the word
Company, Inc., or Corp. The above organizations which have the
letters L.L.C. or L.C. are limited liability companies.
C-4
<PAGE> 76
The Company's insurance company subsidiaries file with various state
insurance departments separate financial statements prepared according to the
practices prescribed or permitted by applicable state insurance laws and
regulations. Separate financial statements of the Company's broker-dealer
subsidiary, American Fidelity Securities, Inc., are prepared in accordance with
generally accepted accounting principles and filed with the Securities and
Exchange Commission.
The subsidiaries of the Company reflected in the preceding table are
included in the consolidated financial statements of the Company, and the
Company and its consolidated subsidiaries are included in the consolidated
financial statements of American Fidelity Corporation in accordance with
generally accepted accounting principles.
ITEM 31 -- NUMBER OF CONTRACT OWNERS
As of March 29, 1996 there were 1,538 Contract Owners of qualified
contracts offered by the Registrant.
ITEM 32 -- INDEMNIFICATION
Section 3 of the underwriting agreement provides that the Company will
indemnify the Fund and its managers and its officers and employees, if any, from
any failure by the underwriter to comply with any state or federal laws and
Registrant agrees to indemnify the underwriter from any liability arising out of
the registration statement. The Board of Directors of the Company adopted a
resolution on May 7, 1968, indemnifying the Board of Managers of the Fund. The
Company has undertaken to reimburse the Board of Managers for all legal and
other expenses reasonably incurred in defense of any claims or liabilities to
which the Board may become subject in the exercise of its duties and
responsibilities to the Fund. No indemnification or reimbursement will be made
in the case of willful misfeasance, bad faith, gross negligence or reckless
disregard of duties. Additionally, the Board of Managers of the Fund is included
in the Company's comprehensive dishonesty, disappearance and destruction policy,
commonly known as a blanket bond.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
In accordance with Section 17(h) of the Investment Company Act of 1940, the
members of the Board of Managers of Registrant do hereby waive any provision for
indemnification to the extent such provision violates Section 17(h). The Board
of Managers agree that indemnification is precluded for any liability, whether
or not there is an adjudication of liability, arising by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of duties
("disabling conduct") unless (1) there is a final decision on the merits by a
court or other body before whom the proceeding was brought; (2) the person to be
indemnified was not liable by reason of disabling conduct by the vote of a
majority of a quorum of directors who are neither "interested persons" of the
Registrant nor parties to the proceeding; or (3) a determination by an
independent legal counsel in a written opinion.
C-5
<PAGE> 77
ITEM 33 -- BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
American Fidelity Assurance Company is primarily engaged in writing life,
accident and health and annuity business. The officers and directors of the
Company are employed by the Company except for the following:
1. Lynda L. Cameron, a director of the Company, is President of Cameron
Arabian, Inc. and Cameron Equestrian Centers, Inc., 14150 South Air
Depot Blvd., Edmond, Oklahoma 73034.
2. Edward C. Joullian, III, a director of the Company, is Chairman of the
Board of Directors and Chief Executive Officer of Mustang Fuel
Corporation, 2000 N. Classen, Suite 800 East, Oklahoma City, Oklahoma
73106.
3. Galen P. Robbins, M.D., a director of the Company, is a physician and a
director of Cardiovascular Clinic, 3433 N.W. 56th Street, Suite 400,
Oklahoma City, Oklahoma 73112.
4. John D. Smith, a director of the Company, is President of John D. Smith
Developments, Inc., a real estate development company, 3400 Peach Tree
Road, Suite 831, Atlanta, Georgia 30326.
A description of the other investment advisory activities of the
Sub-Advisors is included in the Prospectus under "Management of the Fund."
Lawrence W. Kelly and Janice M. Kelly are the sole shareholders and directors of
Lawrence W. Kelly & Associates, Inc. The officers of Kelly and the positions
they have held since January 1, 1994 or earlier are as follows:
<TABLE>
<CAPTION>
NAME POSITIONS
------------------------------------ -----------------------------------
<S> <C>
Lawrence W. Kelly................... Chairman, Chief Executive Officer
and Treasurer
Nicholas J. Welsh................... Senior Vice President
(1996-present); Vice President
(1995-1996); Associate, Dean
Witter Reynolds, Inc. (1988-1995)
Maria Alejandra Tescher............. Vice President -- Senior Trader &
Operations Manager
Janice M. Kelly..................... Secretary
</TABLE>
Todd Investment Advisers, Inc. is a wholly-owned subsidiary of Stifel Asset
Management Corp. ("SAMC"), which is a wholly-owned subsidiary of Stifel
Financial Corporation ("SFC"). The address of both SAMC and SFC is 500 North
Broadway, St. Louis, Missouri 63102. Stifel, Nicolaus & Company ("Stifel"), a
registered broker-dealer and investment advisor, is another wholly-owned
subsidiary of SFC. Todd Investment is managed by the following persons, who have
held the positions indicated since January 1, 1994 or earlier:
C-6
<PAGE> 78
<TABLE>
<CAPTION>
NAME POSITIONS
------------------------------------ -----------------------------------
<S> <C>
Bosworth M. Todd.................... Chairman and President; Director,
First Capital Bank of Kentucky
(1996-present); Director of SAMC
Robert P. Bordogna.................. Executive Vice President; Director
of SAMC
George Herbert Walker, III.......... Chairman of SFC and SAMC
Robert B. Cregor, Jr................ Executive Vice President
Sam C. Ellington.................... Vice President (1996-present); Vice
President, PNC Bank, Louisville,
Kentucky (1993-1996)
Curtiss M. Scott, Jr................ Vice President (1996-present);
Partner and Managing Director,
Executive Investment Advisors,
Inc. (1993-1996)
Margaret C. Bell.................... Vice President of Marketing
</TABLE>
Directors of Todd Investment are also employees of Stifel.
ITEM 34 -- PRINCIPAL UNDERWRITERS
(a) American Fidelity Securities, Inc. is the sole underwriter for the
Fund. The Fund is the only company for which it acts as underwriter, depositor,
sponsor or investment advisor.
(b) Director and officer information for American Fidelity Securities, Inc.
is as follows:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS WITH UNDERWRITER OFFICES WITH FUND
- --------------------------- ------------------------------------- -----------------
<S> <C> <C>
William E. Durrett Director, Chairman of the None
P.O. Box 25523 Board, President and
Oklahoma City, OK 73125 Registered Limited Principal
David R. Carpenter Director, Senior Vice President, None
P.O. Box 25523 Treasurer, Chief Financial
Oklahoma City, OK 73125 Officer and Registered
Limited Principal
Marvin R. Ewy Director, Vice President, None
P.O. Box 25523 Secretary, Chief Operations
Oklahoma City, OK 73125 Officer and Registered
Limited Principal
Nancy K. Steeber Second Vice President, None
P.O. Box 25523 Operations Officer and
Oklahoma City, OK 73125 Registered Limited Principal
</TABLE>
(c) Information about commissions received by American Fidelity Securities,
Inc. in 1995 is as follows:
<TABLE>
<CAPTION>
NET
NAME OF UNDERWRITING COMPENSATION
PRINCIPAL DISCOUNTS ON REDEMPTION BROKERAGE OTHER
UNDERWRITER AND COMMISSIONS OR ANNUITIZATION COMMISSIONS COMPENSATION
- ------------------ --------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
American Fidelity $ 255,986* -0- -0- -0-
Securities, Inc.
</TABLE>
- ---------------
* Equal to 3% fee deducted from premium deposits to the Fund.
C-7
<PAGE> 79
ITEM 35 -- LOCATION OF ACCOUNTS AND RECORDS
All records relating to the Fund required by Section 31(a) of the
Investment Company Act of 1940 are kept at:
2000 Classen Center
Oklahoma City, Oklahoma 73106
ITEM 36 -- MANAGEMENT SERVICES
See Item 21 -- "Investment Advisory and Other Services" in Part B of this
Registration Statement.
ITEM 37 -- UNDERTAKINGS
The Fund hereby undertakes to:
(a) file a post-effective amendment, using financial statements of the Fund
which need not be certified, within four to six months from the
effective date of the Fund's 1933 Act registration statement;
(b) file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than 16 months
old for so long as payments under the variable annuity contracts may be
accepted;
(c) include either (1) as part of any application to purchase a contract
offered by the Prospectus, a space that an applicant can check to
request a Statement of Additional Information, or (2) a postcard or
similar written communication affixed to or included in the Prospectus
that the applicant can remove to send for a Statement of Additional
Information; and
(d) deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request.
The Company hereby represents that the fees and charges deducted under the
Variable Annuity Contract, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks assumed
by the Company.
C-8
<PAGE> 80
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940 the Registrant has caused this Registration Statement to be signed on its
behalf, in the City of Oklahoma City, and State of Oklahoma on this 11th day of
December, 1996.
AMERICAN FIDELITY VARIABLE
ANNUITY FUND A (REGISTRANT)
BY /s/ JOHN W. REX
------------------------------------
John W. Rex, Chairman of the Board
AMERICAN FIDELITY ASSURANCE
COMPANY (INSURANCE COMPANY)
BY /s/ JOHN W. REX
------------------------------------
John W. Rex, President
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities indicated on December 11,
1996.
/s/ JOHN W. REX
------------------------------------
John W. Rex, Chairman of the Board
/s/ DANIEL D. ADAMS, JR.
------------------------------------
Daniel D. Adams, Jr., Manager
and Secretary of the Board
/s/ JEAN G. GUMERSON
------------------------------------
Jean G. Gumerson, Manager
/s/ EDWARD C. JOULLIAN, III
------------------------------------
Edward C. Joullian, III, Manager
/s/ GREGORY M. LOVE
------------------------------------
Gregory M. Love, Manager
/s/ J. DEAN ROBERTSON
------------------------------------
J. Dean Robertson, Manager
/s/ G. RAINEY WILLIAMS, JR.
------------------------------------
G. Rainey Williams, Jr., Manager
C-9
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ----------- -----------
<S> <C> <C>
1 -- Resolution adopted by the Board of Directors of the Company on May 7,
1968, authorizing establishment of the Fund. Incorporated by
reference to Exhibit 1 to Registrant's original filing on Form N-8B-1
and Form S-5.
2 -- Rules and Regulations of the Registrant adopted September 3, 1968,
and all amendments through April 23, 1986. Incorporated by reference
to Exhibit 2 to Post-Effective Amendment No. 33 to Form N-3 filed
March 1, 1993.
3 -- Corporate Custodial Agreement dated December 19, 1994, between the
Registrant and Boatmen's Trust Company, an Oklahoma Trust Company.
Incorporated by reference to Exhibit 3 to Post-Effective Amendment
No. 37 to Form N-3 filed September 20, 1995.
4.1 -- Management and Investment Advisory Contract between the Registrant
and the Company dated May 1, 1973, as amended by Amendment dated
September 1, 1995. Incorporated by reference to Exhibit 4.1 to
Post-Effective Amendment No. 33 to Form N-3 filed March 1, 1993 and
Exhibit 4.1.1 to Post-Effective Amendment No. 37 to Form N-3 filed
September 20, 1995.
4.2 -- Investment Sub-Advisory Agreement between the Company and Lawrence W.
Kelly & Associates, Inc. dated June 26, 1995. Incorporated by
reference to Exhibit 4.3 to Post-Effective Amendment No. 37 to Form
N-3 filed September 20, 1995.
4.3 -- Investment Sub-Advisory Agreement between the Company and Todd
Investment Advisors, Inc. dated June 26, 1995. Incorporated by
reference to Exhibit 4.4 to Post-Effective Amendment No. 37 to Form
N-3 filed September 20, 1995.
5 -- Underwriting Contract between the Registrant and American Fidelity
Securities, Inc., dated December 20, 1972. Incorporated by reference
to Exhibit 5 to Post-Effective Amendment No. 33 to Form N-3 filed
March 1, 1993.
6 -- Form of Variable Annuity Contract and Amendment Rider (Investment
Management Charge). Incorporated by reference to Exhibit 6 to
Post-Effective Amendment No. 27 to Form N-3 filed April 30, 1987 and
Exhibit 6.1 to Post-Effective Amendment No. 38 to Form N-3 filed
April 26, 1996.
7 -- Form of Variable Annuity Application. Incorporated by reference to
Exhibit 7 to Post-Effective Amendment No. 27 to Form N-3 filed April
30, 1987.
8.1 -- Articles of Incorporation of the Company and all amendments through
November 4, 1987. Incorporated by reference to Exhibit 8.1 to
Post-Effective Amendment No. 33 to Form N-3 filed March 1, 1993.
8.2 -- Bylaws of the Company and all amendments through April 4, 1990.
Incorporated by reference to Exhibit 8.2 to Post-Effective Amendment
No. 33 to Form N-3 filed March 1, 1993.
9 -- Not applicable.
10 -- Not applicable.
11 -- Not applicable.
12 -- Not applicable.
13 -- Independent Auditors' Consent.
14 -- Not applicable.
15 -- Not applicable.
16 -- Schedule for computation of performance quotations provided in Item
25.
17 -- Financial Data Schedule.
24 -- Power of Attorney.
</TABLE>
<PAGE> 1
EXHIBIT 13
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
Board of Managers
American Fidelity Variable Annuity Fund A and
Board of Directors
American Fidelity Assurance Company:
We consent to the use of our report included herein on the financial statements
of American Fidelity Variable Annuity Fund A as of December 31, 1995 and 1994,
and for the years then ended, including the financial highlights for each of the
years in the five-year period ended December 31, 1995. We also consent to the
use of our report included herein on the consolidated financial statements of
American Fidelity Assurance Company and subsidiaries as of December 31, 1995 and
1994, and for each of the years in the three-year period ended December 31,
1995, and to the references to our firm under the headings "Condensed Financial
Information" in part A of the Registration Statement and in the Prospectus and
"Item 21" in part B of the Registration Statement.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
December 10, 1996
<PAGE> 1
EXHIBIT 16
SCHEDULE OF COMPUTATIONS FOR EACH PERFORMANCE QUOTATION
PROVIDED IN THE REGISTRATION STATEMENT
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR TEN YEAR
TOTAL RETURN TOTAL RETURN TOTAL RETURN
------------ ------------ ------------
<S> <C> <C> <C>
(1) TOTAL RETURN
(A) INITIAL INVESTMENT............................ $ 1,000.00 $ 1,000.00 $ 1,000.00
Multiplied by 0.96............................ X0.96 X0.96 X0.96
Less $15.00................................... -$ 15.00 -$ 15.00 -$ 15.00
Less $.50..................................... -$ 0.50 -$ 0.50 -$ 0.50
=========== =========== ===========
EQUALS NET INITIAL INVESTMENT ................ $ 944.50 $ 944.50 $ 944.50
(B) NET INITIAL INVESTMENT........................ $ 944.50 $ 944.50 $ 944.50
DIVIDED BY ACCUMULATION UNIT VALUE ON
PURCHASE DATE.............................. /$ 10.8929 /$ 7.6056 /$ 4.7602
=========== =========== ===========
EQUALS NUMBER OF ACCUMULATION UNITS
PURCHASED.................................. 86.71 124.18 198.42
(C) ACCUMULATION UNIT VALUE AT THE END
OF TIME PERIOD............................. $ 13.7321 $ 13.7321 $ 13.7321
MULTIPLIED BY NUMBER OF ACCUMULATION UNITS
PURCHASED.................................. X86.71 X124.18 X198.42
=========== =========== ===========
EQUALS ENDING VALUE........................... $ 1,190.71 $ 1,705.25 $ 2,724.72
(D) ENDING VALUE.................................. $ 1,190.71 $ 1,705.25 $ 2,724.72
MINUS INITIAL INVESTMENT...................... -$ 1,000.00 -$ 1,000.00 -$ 1,000.00
=========== =========== ===========
EQUALS TOTAL DOLLAR RETURN.................... $ 190.71 $ 705.25 $ 1,724.72
(E) TOTAL DOLLAR RETURN........................... $ 190.71 $ 705.25 $ 1,724.72
DIVIDED BY INITIAL INVESTMENT................. /$ 1,000.00 /$ 1,000.00 /$ 1,000.00
Multiplied by 100............................. X100 X100 X100
=========== =========== ===========
EQUALS TOTAL RETURN FOR THE PERIOD EXPRESSED
AS A PERCENTAGE.............................. 19.07% 70.53% 172.47%
</TABLE>
(2) AVERAGE ANNUAL TOTAL RETURN
Average annual total return quotations for the one, five and ten year
periods ended June 30, 1996 are computed using the formula below:
P (1+T)(n) = ERV
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending value of a hypothetical $1,000 investment as of
the end of the one, five and ten year periods computed
in accordance with the formula shown in (1) above.
Thus:
<TABLE>
<CAPTION>
ONE YEAR AVERAGE FIVE YEAR AVERAGE TEN YEAR AVERAGE
ANNUAL RETURN ANNUAL RETURN ANNUAL RETURN
-------------------------- -------------------------- --------------------------
<S> <C> <C>
$1,000 (1+T)(1) = $1,190.71 $1,000 (1+T)(5) = $1,705.25 $1,000 (1+T)(10) = $2,724.72
T = 19.07% T = 11.26% T = 10.54%
</TABLE>
<PAGE> 2
(3) ENDING VALUE OF INVESTING $100 PER MONTH FOR VARIOUS TIME PERIODS
n
[ S (Mi/Vi) ] X ACCUMULATION UNIT VALUE AT END OF PERIOD
i=1
Where: M = $100 monthly investment less sales charges and other fees
V = accumulation unit value on the monthly purchase date
n = number of months in time period
ENDING VALUE OF INVESTING $100 PER MONTH FOR 1 YEAR
<TABLE>
<CAPTION>
(M)
AMOUNT TO (M/V)
(I-N) INVEST AFTER (V) ACCUMULATION
DATE OF SALES CHARGES ACCUMULATION UNITS
PURCHASE AND OTHER FEES UNIT VALUE PURCHASED
------------- -------------- ------------ ------------
<S> <C> <C> <C>
01-Jul-95....................................... $80.50 $10.8929 7.3901
01-Aug-95....................................... 95.50 10.9572 8.7157
01-Sep-95....................................... 95.50 11.1328 8.5783
01-Oct-95....................................... 95.50 11.3685 8.4004
01-Nov-95....................................... 95.50 11.6024 8.2311
01-Dec-95....................................... 95.50 11.9440 7.9956
01-Jan-96....................................... 95.50 12.1986 7.8288
01-Feb-96....................................... 95.50 12.6534 7.5474
01-Mar-96....................................... 95.50 12.9736 7.3611
01-Apr-96....................................... 95.50 13.1886 7.2411
01-May-96....................................... 95.50 13.2925 7.1845
01-Jun-96....................................... 95.50 13.5619 7.0418
--------
Total Units Purchased: 93.5159
X
Accumulation Unit Value (6/30/96): $13.7321
=
Ending Value (6/30/96): $ 1,284
========
</TABLE>
<PAGE> 3
ENDING VALUE OF INVESTING $100 PER MONTH FOR 5 YEARS
<TABLE>
<CAPTION>
(i-n) (M) (V) (M/V)
AMOUNT TO
INVEST AFTER ACCUMULATION
DATE OF SALES CHARGES ACCUMULATION UNITS
PURCHASE AND OTHER FEES UNIT VALUE PURCHASED
------------- -------------- ------------ ------------
<S> <C> <C> <C>
01-Jul-91....................................... $80.50 $ 7.6056 10.5843
01-Aug-91....................................... 95.50 7.9530 12.0080
01-Sep-91....................................... 95.50 8.1348 11.7397
01-Oct-91....................................... 95.50 8.0678 11.8372
01-Nov-91....................................... 95.50 8.2038 11.6409
01-Dec-91....................................... 95.50 8.0001 11.9374
01-Jan-92....................................... 95.50 8.8663 10.7711
01-Feb-92....................................... 95.50 8.6582 11.0300
01-Mar-92....................................... 95.50 8.6614 11.0259
01-Apr-92....................................... 95.50 8.5176 11.2121
01-May-92....................................... 95.50 8.5481 11.1721
01-Jun-92....................................... 95.50 8.6905 10.9890
01-Jul-92....................................... 95.50 8.5233 11.2046
01-Aug-92....................................... 95.50 8.7179 10.9545
01-Sep-92....................................... 95.50 8.6883 10.9918
01-Oct-92....................................... 95.50 8.6729 11.0113
01-Nov-92....................................... 95.50 8.7472 10.9178
01-Dec-92....................................... 95.50 8.9620 10.6561
01-Jan-93....................................... 95.50 9.1081 10.4852
01-Feb-93....................................... 95.50 9.2553 10.3184
01-Mar-93....................................... 95.50 9.0701 10.5291
01-Apr-93....................................... 95.50 9.2795 10.2915
01-May-93....................................... 95.50 8.9096 10.7188
01-Jun-93....................................... 95.50 9.1733 10.4106
01-Jul-93....................................... 95.50 9.0810 10.5165
01-Aug-93....................................... 95.50 9.1075 10.4859
01-Sep-93....................................... 95.50 9.4526 10.1030
01-Oct-93....................................... 95.50 9.4595 10.0957
01-Nov-93....................................... 95.50 9.6088 9.9388
01-Dec-93....................................... 95.50 9.3918 10.1684
01-Jan-94....................................... 95.50 9.7488 9.7961
01-Feb-94....................................... 95.50 9.9856 9.5638
01-Mar-94....................................... 95.50 9.3822 10.1788
01-Apr-94....................................... 95.50 9.0780 10.5199
01-May-94....................................... 95.50 9.1072 10.4862
01-Jun-94....................................... 95.50 9.3466 10.2176
01-Jul-94....................................... 95.50 9.0101 10.5992
01-Aug-94....................................... 95.50 9.4414 10.1150
01-Sep-94....................................... 95.50 9.6275 9.9195
01-Oct-94....................................... 95.50 9.3450 10.2194
01-Nov-94....................................... 95.50 9.4603 10.0948
01-Dec-94....................................... 95.50 9.0420 10.5618
01-Jan-95....................................... 95.50 9.0288 10.5773
01-Feb-95....................................... 95.50 9.1534 10.4333
01-Mar-95....................................... 95.50 9.4018 10.1576
01-Apr-95....................................... 95.50 9.7214 9.8237
01-May-95....................................... 95.50 9.9893 9.5602
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
(i-n) (M) (V) (M/V)
AMOUNT TO
INVEST AFTER ACCUMULATION
DATE OF SALES CHARGES ACCUMULATION UNITS
PURCHASE AND OTHER FEES UNIT VALUE PURCHASED
-------- -------------- ---------- ---------
<S> <C> <C> <C>
01-Jun-95....................................... 95.50 10.3774 9.2027
01-Jul-95....................................... 95.50 10.8929 8.7672
01-Aug-95....................................... 95.50 10.9572 8.7157
01-Sep-95....................................... 95.50 11.1328 8.5783
01-Oct-95....................................... 95.50 11.3685 8.4004
01-Nov-95....................................... 95.50 11.6024 8.2311
01-Dec-95....................................... 95.50 11.9440 7.9956
01-Jan-96....................................... 95.50 12.1986 7.8288
01-Feb-96....................................... 95.50 12.6534 7.5474
01-Mar-96....................................... 95.50 12.9736 7.3611
01-Apr-96....................................... 95.50 13.1886 7.2411
01-May-96....................................... 95.50 13.2925 7.1845
01-Jun-96....................................... 95.50 13.5619 7.0418
--------
Total Units Purchased: 602.6656
X
Accumulation Unit Value (6/30/96): $13.7321
=
Ending Value (6/30/96): $ 8,276
========
</TABLE>
<PAGE> 5
ENDING VALUE OF INVESTING $100 PER MONTH FOR 10 YEARS.
<TABLE>
<CAPTION>
(i-n) (M) (V) (M/V)
AMOUNT TO
INVEST AFTER ACCUMULATION
DATE OF SALES CHARGES ACCUMULATION UNITS
PURCHASE AND OTHER FEES UNIT VALUE PURCHASED
------------- -------------- ------------ ------------
<S> <C> <C> <C>
01-Jul-86....................................... $80.50 $ 4.7602 16.9111
01-Aug-86....................................... 95.50 4.5083 21.1832
01-Sep-86....................................... 95.50 4.6845 20.3864
01-Oct-86....................................... 95.50 4.3326 22.0422
01-Nov-86....................................... 95.50 4.4970 21.2364
01-Dec-86....................................... 95.50 4.5226 21.1162
01-Jan-87....................................... 95.50 4.4670 21.3790
01-Feb-87....................................... 95.50 5.0209 19.0205
01-Mar-87....................................... 95.50 5.1912 18.3965
01-Apr-87....................................... 95.50 5.2691 18.1245
01-May-87....................................... 95.50 5.1471 18.5541
01-Jun-87....................................... 95.50 5.1553 18.5246
01-Jul-87....................................... 95.50 5.4260 17.6004
01-Aug-87....................................... 95.50 5.6539 16.8910
01-Sep-87....................................... 95.50 5.7793 16.5245
01-Oct-87....................................... 95.50 5.8216 16.4044
01-Nov-87....................................... 95.50 4.7590 20.0672
01-Dec-87....................................... 95.50 4.4781 21.3260
01-Jan-88....................................... 95.50 4.6011 20.7559
01-Feb-88....................................... 95.50 4.7031 20.3058
01-Mar-88....................................... 95.50 4.8754 19.5881
01-Apr-88....................................... 95.50 4.7715 20.0147
01-May-88....................................... 95.50 4.7924 19.9274
01-Jun-88....................................... 95.50 4.8829 19.5580
01-Jul-88....................................... 95.50 4.9671 19.2265
01-Aug-88....................................... 95.50 4.9710 19.2114
01-Sep-88....................................... 95.50 4.7979 19.9045
01-Oct-88....................................... 95.50 5.0030 19.0885
01-Nov-88....................................... 95.50 5.0790 18.8029
01-Dec-88....................................... 95.50 4.9835 19.1632
01-Jan-89....................................... 95.50 5.1104 18.6874
01-Feb-89....................................... 95.50 5.4220 17.6134
01-Mar-89....................................... 95.50 5.2663 18.1342
01-Apr-89....................................... 95.50 5.4073 17.6613
01-May-89....................................... 95.50 5.6444 16.9194
01-Jun-89....................................... 95.50 5.9490 16.0531
01-Jul-89....................................... 95.50 5.8820 16.2360
01-Aug-89....................................... 95.50 6.3159 15.1206
01-Sep-89....................................... 95.50 6.4430 14.8223
01-Oct-89....................................... 95.50 6.5212 14.6445
01-Nov-89....................................... 95.50 6.4616 14.7796
01-Dec-89....................................... 95.50 6.5830 14.5071
01-Jan-90....................................... 95.50 6.5141 14.6605
01-Feb-90....................................... 95.50 6.2247 15.3421
01-Mar-90....................................... 95.50 6.2876 15.1886
01-Apr-90....................................... 95.50 6.4357 14.8391
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
(i-n) (M) (V) (M/V)
AMOUNT TO
INVEST AFTER ACCUMULATION
DATE OF SALES CHARGES ACCUMULATION UNITS
PURCHASE AND OTHER FEES UNIT VALUE PURCHASED
-------------- ----------------- -------------- ---------------
<S> <C> <C> <C>
01-May-90....................................... 95.50 6.4985 14.6957
01-Jun-90....................................... 95.50 7.0847 13.4798
01-Jul-90....................................... 95.50 7.1936 13.2757
01-Aug-90....................................... 95.50 7.1271 13.3996
01-Sep-90....................................... 95.50 6.6939 14.2667
01-Oct-90....................................... 95.50 6.6191 14.4279
01-Nov-90....................................... 95.50 6.4726 14.7545
01-Dec-90....................................... 95.50 6.7525 14.1429
01-Jan-91....................................... 95.50 6.9247 13.7912
01-Feb-91....................................... 95.50 7.1938 13.2753
01-Mar-91....................................... 95.50 7.6383 12.5028
01-Apr-91....................................... 95.50 7.6810 12.4333
01-May-91....................................... 95.50 7.8259 12.2031
01-Jun-91....................................... 95.50 7.8695 12.1355
01-Jul-91....................................... 95.50 7.6056 12.5565
01-Aug-91....................................... 95.50 7.9530 12.0080
01-Sep-91....................................... 95.50 8.1348 11.7397
01-Oct-91....................................... 95.50 8.0678 11.8372
01-Nov-91....................................... 95.50 8.2038 11.6409
01-Dec-91....................................... 95.50 8.0001 11.9374
01-Jan-92....................................... 95.50 8.8663 10.7711
01-Feb-92....................................... 95.50 8.6582 11.0300
01-Mar-92....................................... 95.50 8.6614 11.0259
01-Apr-92....................................... 95.50 8.5176 11.2121
01-May-92....................................... 95.50 8.5481 11.1721
01-Jun-92....................................... 95.50 8.6905 10.9890
01-Jul-92....................................... 95.50 8.5233 11.2046
01-Aug-92....................................... 95.50 8.7179 10.9545
01-Sep-92....................................... 95.50 8.6883 10.9918
01-Oct-92....................................... 95.50 8.6729 11.0113
01-Nov-92....................................... 95.50 8.7472 10.9178
01-Dec-92....................................... 95.50 8.9620 10.6561
01-Jan-93....................................... 95.50 9.1081 10.4852
01-Feb-93....................................... 95.50 9.2553 10.3184
01-Mar-93....................................... 95.50 9.0701 10.5291
01-Apr-93....................................... 95.50 9.2795 10.2915
01-May-93....................................... 95.50 8.9096 10.7188
01-Jun-93....................................... 95.50 9.1733 10.4106
01-Jul-93....................................... 95.50 9.0810 10.5165
01-Aug-93....................................... 95.50 9.1075 10.4859
01-Sep-93....................................... 95.50 9.4526 10.1030
01-Oct-93....................................... 95.50 9.4595 10.0957
01-Nov-93....................................... 95.50 9.6088 9.9388
01-Dec-93....................................... 95.50 9.3918 10.1684
01-Jan-94....................................... 95.50 9.7488 9.7961
01-Feb-94....................................... 95.50 9.9856 9.5638
01-Mar-94....................................... 95.50 9.3822 10.1788
01-Apr-94....................................... 95.50 9.0780 10.5199
01-May-94....................................... 95.50 9.1072 10.4862
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
(i-n) (M) (V) (M/V)
AMOUNT TO
INVEST AFTER ACCUMULATION
DATE OF SALES CHARGES ACCUMULATION UNITS
PURCHASE AND OTHER FEES UNIT VALUE PURCHASED
------------ ----------------- -------------- --------------
<S> <C> <C> <C>
01-Jun-94....................................... 95.50 9.3466 10.2176
01-Jul-94....................................... 95.50 9.0101 10.5992
01-Aug-94....................................... 95.50 9.4414 10.1150
01-Sep-94....................................... 95.50 9.6275 9.9195
01-Oct-94....................................... 95.50 9.3450 10.2194
01-Nov-94....................................... 95.50 9.4603 10.0948
01-Dec-94....................................... 95.50 9.0420 10.5618
01-Jan-95....................................... 95.50 9.0288 10.5773
01-Feb-95....................................... 95.50 9.1534 10.4333
01-Mar-95....................................... 95.50 9.4018 10.1576
01-Apr-95....................................... 95.50 9.7214 9.8237
01-May-95....................................... 95.50 9.9893 9.5602
01-Jun-95....................................... 95.50 10.3774 9.2027
01-Jul-95....................................... 95.50 10.8929 8.7672
01-Aug-95....................................... 95.50 10.9572 8.7157
01-Sep-95....................................... 95.50 11.1328 8.5783
01-Oct-95....................................... 95.50 11.3685 8.4004
01-Nov-95....................................... 95.50 11.6024 8.2311
01-Dec-95....................................... 95.50 11.9440 7.9956
01-Jan-96....................................... 95.50 12.1986 7.8288
01-Feb-96....................................... 95.50 12.6534 7.5474
01-Mar-96....................................... 95.50 12.9736 7.3611
01-Apr-96....................................... 95.50 13.1886 7.2411
01-May-96....................................... 95.50 13.2925 7.1845
01-Jun-96....................................... 95.50 13.5619 7.0418
----------
Total Units Purchased: 1,629.8661
X
Accumulation Unit Value (6/30/96): $ 13.7321
=
Ending Value (6/30/96): $ 22,381
==========
</TABLE>
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned officers and members of the board of managers of
American Fidelity Variable Annuity Fund A (hereinafter, the "Fund"), hereby
severally constitute John W. Rex and Daniel D. Adams, Jr., and each of them,
severally, our true and lawful attorneys-in-fact with full power to them and
each of them to sign for us, and in our names as officers or members of the
board of managers, or both, of the Fund, one or more post-effective amendments
to the Fund's Registration Statement on Form N-3 (No. N.2-30771), as amended by
Post-Effective Amendment No. 39 thereto, for the purpose of revising the
nonfinancial disclosure contained in such Post-Effective Amendment No. 39,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and to perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, may lawfully do or cause
to be done by virtue hereof.
DATED this 11th day of December, 1996.
<TABLE>
<S> <C>
/s/ JOHN W. REX /s/ DANIEL D. ADAMS, JR.
- -------------------------------------------- --------------------------------------------
John W. Rex, Chairman of the Board Daniel D. Adams, Jr., Manager and Secretary
of the Board
/s/ JEAN G. GUMERSON /s/ EDWARD C. JOULLIAN, III
- -------------------------------------------- --------------------------------------------
Jean G. Gumerson, Manager Edward C. Joullian, III, Manager
/s/ GREGORY M. LOVE /s/ J. DEAN ROBERTSON
- -------------------------------------------- --------------------------------------------
Gregory M. Love, Manager J. Dean Robertson, Manager
/s/ G. RAINEY WILLIAMS, JR.
- --------------------------------------------
G. Rainey Williams, Jr., Manager
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 60,267,333
<INVESTMENTS-AT-VALUE> 84,009,491
<RECEIVABLES> 136,030
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 84,145,521
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 6,127,658
<SHARES-COMMON-PRIOR> 5,996,795
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 84,145,521
<DIVIDEND-INCOME> 703,063
<INTEREST-INCOME> 92,507
<OTHER-INCOME> 0
<EXPENSES-NET> 496,188
<NET-INVESTMENT-INCOME> 301,382
<REALIZED-GAINS-CURRENT> 2,695,274
<APPREC-INCREASE-CURRENT> 6,282,666
<NET-CHANGE-FROM-OPS> 9,279,322
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 521,213
<NUMBER-OF-SHARES-REDEEMED> 390,350
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 10,992,987
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 496,188
<AVERAGE-NET-ASSETS> 78,707,961
<PER-SHARE-NAV-BEGIN> 12.199
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 1.483
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 13.732
<EXPENSE-RATIO> .630
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
