<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1997
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. 41
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[X] AMENDMENT NO. 41
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)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 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. To the amount of
securities presently registered there is hereby added, pursuant to this
post-effective amendment, an indefinite amount of such securities. The
Registrant filed a Form 24F-2 Annual Notice for its most recent fiscal year on
February 26, 1997.
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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
- ---- ---- ----------------------
<C> <S> <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
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 April 21, 1997 (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
APRIL 21, 1997
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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<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:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<C> <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 in the
equity securities of foreign corporations. The Fund's investments are subject to
the negative changes in
3
<PAGE> 7
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. At the
beginning of the fourth quarter of 1995 and again at year end 1996, the Company
allocated Fund assets equally between Kelly and Todd Investment. The asset
allocation between the Sub-Advisors is 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 seven years ended December 31,
1996 by KPMG Peat Marwick LLP, independent auditors, and for the three years
ended December 31, 1989 by Arthur Andersen & Co., independent certified public
accountants. 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>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1996 1995(A) 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Investment income........... $ .2817 $ .2163 $0.2105 $0.2113 $0.2267 $0.2329 $0.2507 $0.2077 $0.1750 $0.0624
Operating expenses.......... .1882 .1364 0.1193 0.1180 0.1113 0.1000 0.0856 0.0829 0.0515 0.0254
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income....... .0935 .0799 0.0912 0.0933 0.1154 0.1329 0.1651 0.1248 0.1235 0.0370
CAPITAL CHANGES:
Net realized and unrealized
gains (losses) on
securities................ 3.0468 3.0251 (0.7066) 0.5074 0.1266 1.8089 0.2452 1.2791 0.3859 0.0970
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease) in
Accumulation Unit value... 3.1403 3.1050 (0.6154) 0.6007 0.2420 1.9418 0.4103 1.4039 0.5094 0.1340
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
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Accumulation Unit value, end
of period................. $15.3389 $12.1986 $9.0936 $9.7090 $9.1083 $8.8663 $6.9245 $6.5142 $5.1103 $4.6009
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
RATIOS/OTHER DATA:
Ratio of expenses to average
net assets................ 1.3777% 1.2880% 1.2826% 1.2783% 1.2812% 1.2800% 1.2879% 1.2844% 1.2911% 1.2991%
Ratio of net investment
income to average net
assets.................... .6850% .7542% 0.9797% 1.0110% 1.3289% 1.7004% 2.4849% 1.9328% 3.0992% 1.8896%
Portfolio turnover rate..... 36.9% 66.1% 43.5% 51.2% 31.7% 41.2% 41.1% 50.1% 34.0% 78.3%
Number of Accumulation Units
outstanding, end of period
(000's)................... 6,443 5,997 5,616 5,114 4,644 4,268 4,041 3,806 3,840 3,733
</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. 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 December 31, 1996 and
average annual total returns over the five and ten year periods ended December
31, 1996 were 18.77%, 10.32% and 12.49%, 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 49 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, 1996, 11.0% 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. Beginning in 1997, the
Fund does not invest in tobacco-producing companies.
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.
Kelly is a growth stock manager. Its strategy is to invest in high quality
companies with strong earnings growth and superior product leadership. Todd
Investment is a value-oriented equity manager. It emphasizes a diversified
portfolio of predominantly undervalued, large capitalization, high quality
securities. The identification of a catalyst for change is the most important
factor to Todd Investment in including a stock in the Fund's portfolio.
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 at the beginning of the fourth quarter of 1995 and again at
year end 1996 and reviews the asset allocation between Sub-Advisors 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-
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<PAGE> 11
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 provided under a separate consulting agreement. Lawrence W. Kelly, the
founder of Kelly, has 30 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, 1996, Kelly managed 48 client securities portfolios on
a discretionary basis with an aggregate market value of $331.8 million. It also
managed or supervised 14 client securities portfolios on a non-discretionary
basis with an aggregate market value of $937.3 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 29 years of experience managing investments for
institutional clients. At December 31, 1996, Todd Investment managed over $2.4
billion for 30 clients, of which $1.0 billion represented equity assets. Todd
Investment generates all of its revenues from fee-based investment counseling
and employs six 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 27 years. Todd Investment has not acted as an investment advisor to
a registered investment company other than the Fund. 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 1996 as a percentage of average net assets was
.026%. 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.
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<PAGE> 12
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. 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 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
9
<PAGE> 13
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.
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.
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<PAGE> 14
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.
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
11
<PAGE> 15
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.
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;
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<PAGE> 16
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.
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).
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<PAGE> 17
Other distributions from a Section 403(b) annuity Contract are taxed as
ordinary income to the recipient in accordance with Section 72 of the Code.
Distributions received before the recipient attains age 59 1/2 generally are
subject to a 10% penalty tax in addition to regular income tax. Certain
distributions are excepted from this penalty tax, including distributions
following (1) death, (2) disability, (3) separation from service during or after
the year the Participant reaches age 55, (4) separation from service at any age
if the distribution is in the form of substantially equal periodic payments over
the life (or life expectancy) of the Participant (or the Participant and
beneficiary), and (5) distributions in excess of tax deductible medical
expenses.
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.
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<PAGE> 18
Required Distributions. The minimum distribution requirements for qualified
plans are generally the same as described with respect to Section 403(b) annuity
Contracts, except that no amounts are exempted from the minimum distribution
requirements.
Tax-Free Rollovers. The taxable portion of certain distributions from a
plan qualified under 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, as modified by the Small
Business Job Protection Act of 1996, 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 spouse during
the tax year if the combined compensation of both spouses is at least equal to
the contributed amount. 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 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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<PAGE> 19
not exceed $7,000 indexed for inflation in later years. Employees of tax-exempt
organizations are not eligible for this type of SEP. Additionally, only certain
small employers who have SEPs that permit salary reduction contributions on
December 31, 1996 may continue to allow salary reduction contributions.
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 APRIL 21, 1997. 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: April 21, 1997
<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 10
Financial Statements........................................ B-10 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.
The Fund has also adopted a significant investment policy that,
beginning in 1997, it will not invest in the securities of
tobacco-producing companies.
(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 the Sub-Advisors believe 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 1994, 1995 and 1996
was 43.5%, 66.1% and 36.9%, 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, 63 Manager and Chairman of Director (1982 to present), President
2000 Classen Center the Board(1)(2)(3) and Chief Operating Officer (1992
Oklahoma City, OK 73106 to 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
Oklahoma City, OK 73106 Fidelity Corporation.
Jean G. Gumerson, 74 Manager President, Presbyterian Health
711 Stanton L. Young Blvd., Foundation
Suite 604
Oklahoma City, OK 73104
Edward C. Joullian, III, 67 Manager(2)(3) Chairman of the Board of Directors
2000 Classen Center, 800 East and Chief Executive Officer,
Oklahoma, City, OK 73106 Mustang Fuel Corporation; Director
of the Company and American
Fidelity Corporation; Director,
Fleming Companies, Inc.; Director,
The LTV Corporation
Gregory M. Love, 35 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., 36 Manager Managing Partner, Marco Capital
6301 N. Western Group; Director, Mustang Fuel
Suite 200 Corporation
Oklahoma City, OK 73118
</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 1996, such fees
totaled $2,500.
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 paid an investment and advisory fee by the Fund pursuant
to the Advisory Agreement. The fee was $163,189 in 1994, $200,769 in
1995, and $353,001 in 1996. Through June 30, 1996, 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. 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. 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, when 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 and 1996 the Company paid Kelly $27,150 and $131,000,
respectively, and Todd Investment $34,700 and $165,300, respectively.
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.
B-6
<PAGE> 26
The Company paid all of Kelly's fees under the consulting agreement, of which
$25,000 and $20,100 in 1994 and 1995, respectively, were allocated to the Fund.
(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.
In mid-1997, the Fund expects to employ a different custodian, Bank of
Oklahoma, N.A., 6307 Waterford Boulevard, Oklahoma City, Oklahoma
73118.
The consolidated financial statements of the Company and its
subsidiaries as of December 31, 1996 and 1995 and for the three years
ended December 31, 1996 and the financial statements of the Fund as of
December 31, 1996 and 1995 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
3, 1996 to appoint KPMG Peat Marwick LLP as the Fund's independent
certified public accountants for 1996 and this decision was ratified by
the Contract Owners at their annual meeting on June 7, 1996.
ITEM 22 -- BROKERAGE ALLOCATION
For the years 1994, 1995 and 1996, the Fund paid brokerage commissions of
$90,000, $137,100 and $87,100. The higher commissions in 1995 were largely
because of the increased trading in the fourth quarter after the Sub-Advisors
started managing the Fund's portfolio. As a percentage of net assets,
commissions were .18% in 1994, .18% in 1995 and .09% in 1996.
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.
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 1996, Todd Investment internally allocated brokerage
transactions to certain brokers based on the furnishing of such services.
Research services
B-7
<PAGE> 27
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, 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's 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 1994, 1995 and 1996 were $256,894, $255,986
and $312,794, 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 December 31, 1996
and average annual total returns for the five and ten year periods
ended December 31, 1996 were 18.77%, 10.32% and 12.49%, 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
B-8
<PAGE> 28
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 December 31, 1996 was
18.77%, 63.41% and 224.33%, 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 December 31, 1996
was $1,281, $8,770 and $23,685, 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>
<C> <S> <C>
Number of Variable Annuity Units = Dollar Amount of First Monthly Payment
--------------------------------------------------------
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.
ITEM 27 -- FINANCIAL STATEMENTS
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, 1996 and 1995
Statements of Operations for the Years Ended December 31, 1996 and 1995
Statements of Changes in Net Assets for the Years Ended December 31, 1996
and 1995
Schedule of Portfolio Investments as of December 31, 1996
Financial Highlights for the Five Years Ended December 31, 1996
Notes to Financial Statements
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholder's Equity for the Years Ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
B-10
<PAGE> 30
[KPMG PEAT MARWICK LLP 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, 1996
and 1995, 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, 1996, and the Schedule of Portfolio
Investments as of December 31, 1996. 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, 1996 and 1995, 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, 1996 and 1995, 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, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
January 15, 1997
B-11
<PAGE> 31
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Investments, at market value (cost $66,094,445 and
$55,469,201 in 1996 and 1995, respectively) $98,234,687 72,928,693
Cash 469,711 224,163
Receivable from broker -- 1,500,277
Accrued interest and dividends 191,430 113,477
----------- -----------
Total assets 98,895,828 74,766,610
Liabilities
-----------
Accounts payable -- 50
Payable to broker 66,429 1,614,026
----------- -----------
Total liabilities 66,429 1,614,076
----------- -----------
Net assets $98,829,399 73,152,534
=========== ===========
Accumulation units outstanding 6,443,056 5,996,795
=========== ===========
Net asset value per unit $ 15.3389 12.1986
=========== ===========
</TABLE>
See accompanying notes to financial statements.
B-12
<PAGE> 32
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Investment income:
Income:
Dividends $ 1,538,540 1,097,364
Interest 201,294 161,264
----------- -----------
1,739,834 1,258,628
----------- -----------
Expenses:
Mortality and expense guaranty fees (note 3) 809,048 593,042
Investment management fees (note 3) 353,001 200,769
----------- -----------
1,162,049 793,811
----------- -----------
Net investment income 577,785 464,817
----------- -----------
Realized gains on investments:
Proceeds from sales 31,697,825 38,990,793
Cost of securities sold 27,483,951 35,180,383
----------- -----------
Net realized gains 4,213,874 3,810,410
----------- -----------
Unrealized appreciation on investments:
End of year 32,140,242 17,459,492
Beginning of year 17,459,492 3,663,198
----------- -----------
Increase in unrealized appreciation 14,680,750 13,796,294
----------- -----------
Net increase in net assets resulting
from operations $19,472,409 18,071,521
=========== ===========
</TABLE>
See accompanying notes to financial statements.
B-13
<PAGE> 33
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Increase in net assets from operations:
Net investment income $ 577,785 464,817
Net realized gains on investments 4,213,874 3,810,410
Increase in unrealized appreciation
on investments 14,680,750 13,796,294
------------ ------------
Net increase in net assets resulting
from operations 19,472,409 18,071,521
------------ ------------
Changes from principal transactions:
Net purchase payments received (note 3) 15,914,163 11,269,062
Withdrawal of funds (9,709,707) (7,254,521)
------------ ------------
Increase in net assets derived from
principal transactions 6,204,456 4,014,541
------------ ------------
Increase in net assets 25,676,865 22,086,062
Net assets:
Beginning of year 73,152,534 51,066,472
------------ ------------
End of year $ 98,829,399 73,152,534
============ ============
Accumulation units:
Outstanding, beginning of year 5,996,795 5,615,645
Increase for payments received 1,159,575 1,061,993
Decrease for withdrawal of funds (713,314) (680,843)
------------ ------------
Outstanding, end of year 6,443,056 5,996,795
============ ============
</TABLE>
See accompanying notes to financial statements.
B-14
<PAGE> 34
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1996
<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 83,000 $ 2,936,125
Pfizer, Inc. 29,800 2,469,675
American Home Products Corporation 40,700 2,386,038
Johnson & Johnson 44,000 2,189,000
Merck & Company, Inc. 11,700 927,225
Abbott Laboratories 16,800 852,600
DuPont 7,200 679,500
Eli Lilly and Company 6,400 467,200
-------------
12,907,363 13.06%
-------------
Business services:
Reuters Holdings PLC ADR 31,300 2,394,450
Interpublic Group of Companies 44,300 2,104,250
Cisco Systems, Inc. * 32,200 2,048,725
Automatic Data Processing 34,000 1,457,750
First Data Corporation 37,200 1,357,800
Microsoft Corporation * 8,100 669,263
Computer Associates 9,000 447,750
-------------
10,479,988 10.61%
-------------
Petroleum and coal products:
Texaco, Inc. 27,600 2,708,250
Royal Dutch Petroleum 15,300 2,612,475
Exxon Corporation 18,000 1,764,000
Kerr-McGee Corporation 19,800 1,425,600
-------------
8,510,325 8.61%
-------------
Depository institutions:
Citicorp 16,500 1,699,500
MBNA 30,000 1,245,000
Bank America Corporation 10,000 997,500
J.P. Morgan & Company 10,000 976,250
Nationsbank Corporation 9,700 948,175
CoreStates Financial Corporation 18,200 944,125
Wachovia Corporation 13,500 762,750
Regions Financial Corporation 8,800 454,846
-------------
8,028,146 8.12%
-------------
Insurance carriers:
American International Group 26,100 2,825,325
AFLAC, Inc. 59,775 2,555,381
Allstate Corporation 21,000 1,215,375
United Healthcare Corporation 16,700 751,500
-------------
7,347,581 7.44%
-------------
</TABLE>
B-15
<PAGE> 35
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:
Communications:
Cox Communications * 88,000 $ 2,035,000
Nynex Corporation 22,000 1,058,750
Ameritech 16,700 1,012,437
SBC Communications, Inc. 18,800 972,900
Central & South West Corporation 29,000 743,125
Bellsouth Corporation 15,000 605,625
-------------
6,427,837 6.50%
-------------
Electronic and other electric equipment:
Intel Corporation 25,900 3,391,268
General Electric Company 18,000 1,779,750
-------------
5,171,018 5.23%
-------------
Holding and other investment offices:
Wells Fargo & Company 5,000 1,348,750
CALI Realty Corporation 20,400 629,850
Meditrust 15,600 624,000
Felcor Suite Hotels, Inc. 17,300 611,987
First Industrial Realty Trust 20,000 607,500
Federal Realty Investment Trust 22,300 604,888
-------------
4,426,975 4.48%
-------------
Nondepository institutions:
Federal National Mortgage Association 72,400 2,696,900
Capital One Financial Corporation 41,000 1,476,000
-------------
4,172,900 4.22%
-------------
Industrial machinery and equipment:
Hewlett-Packard Company 36,600 1,839,150
International Business Machines Corporation 7,000 1,057,000
United Technologies 10,000 660,000
-------------
3,556,150 3.60%
-------------
Food and kindred products:
The Coca-Cola Company 57,600 3,031,200 3.07%
-------------
Fabricated metal products:
The Gillette Company 38,900 3,024,475 3.06%
-------------
Food stores:
Safeway, Inc. * 68,600 2,932,650 2.97%
-------------
</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
Electric, gas and sanitary services:
GTE 27,800 $ 1,264,900
Texas Utilities 19,500 794,625
Teco Energy, Inc. 21,000 506,625
-------------
2,566,150 2.60%
-------------
Eating and drinking places:
McDonald's Corporation 44,200 2,000,050 2.02%
-------------
General merchandise:
Sears Roebuck & Company 40,300 1,858,837 1.88%
-------------
Personal services:
Loewen Group, Inc. 42,000 1,643,250 1.66%
-------------
Miscellaneous retail:
Price/Costco, Inc. 57,700 1,449,712 1.47%
-------------
Motion pictures:
Disney (Walt) Company 19,200 1,336,800 1.35%
-------------
Hotels and other lodging places:
Mirage Resorts, Inc. * 61,800 1,336,425 1.35%
-------------
Railroad transportation:
Burlington Northern/Santa Fe 10,300 889,663 0.90%
-------------
Transportation equipment:
Chrysler Corporation 24,000 792,000 0.80%
-------------
Building materials and gardening supplies:
Home Depot, Inc. 7,000 350,875 0.36%
------------ ----------
Total common stocks (cost $62,100,128) 94,240,370 95.36%
------------ ----------
Short-term investments:
Associates Corporation of North America master
note (5.31% at December 31, 1996) 3,994,317 4.04%
------------ ----------
Total investments (cost $66,094,445) 98,234,687 99.40%
Other assets and liabilities, net 594,712 .60%
------------ ----------
Total net assets $ 98,829,399 100.00%
============ ==========
</TABLE>
*Presently not producing dividend income.
See accompanying notes to financial statements.
B-17
<PAGE> 37
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Per Unit Income and Capital Changes
--------------------------------------------------------------------------------------------
Years ended December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Investment income and expenses:
Investment income $ .2817 $ .2163 $ .2105 $ .2113 $ .2267
Operating expenses .1882 .1364 .1193 .1180 .1113
--------------- --------------- --------------- --------------- ---------------
Net investment income .0935 .0799 .0912 .0933 .1154
Capital changes:
Net realized and unrealized
gains (losses) from securities 3.0468 3.0251 (.7066) .5074 .1266
--------------- --------------- --------------- --------------- ---------------
Net increase (decrease) in
accumulation unit value 3.1403 3.1050 (.6154) .6007 .2420
Accumulation unit value,
beginning of period 12.1986 9.0936 9.7090 9.1083 8.8663
--------------- --------------- --------------- --------------- ---------------
Accumulation unit value,
end of period $ 15.3389 $ 12.1986 $ 9.0936 $ 9.7090 $ 9.1083
=============== =============== =============== =============== ===============
Number of accumulation units
outstanding, end of period 6,443,056 5,996,795 5,615,645 5,113,999 4,644,455
=============== =============== =============== =============== ===============
Ratios:
Ratio of expenses to average
net assets 1.3777% 1.2880% 1.2826% 1.2783% 1.2812%
Ratio of net investment income
to average net assets .6850% .7542% .9797% 1.0110% 1.3289%
Portfolio turnover rate 36.9% 66.1% 43.5% 51.2% 31.7%
Average commission rate paid $ .0636 $ .0551
</TABLE>
See accompanying notes to financial statements.
B-18
<PAGE> 38
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(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-19
<PAGE> 39
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 $34,924,178 and $43,967,652 for the years
ended December 31, 1996 and 1995, respectively. At December 31, 1996,
net unrealized appreciation on investments of $32,140,242 was composed
of gross appreciation of $32,475,048 and gross depreciation of
$334,806.
(3) VARIABLE ANNUITY CONTRACTS
Net purchase payments received represent gross payments less
deductions of $578,837 and $433,049 for the years ended December 31,
1996 and 1995, 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 .0013698% of the Fund's daily
net assets (.5% per annum). In 1996, these fees increased from .325%
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-20
<PAGE> 40
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,
1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma
March 14, 1997
B-21
<PAGE> 41
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Investments:
Fixed maturities held-to-maturity, at amortized cost
(fair value $251,034 and $241,533 in 1996 and
1995, respectively) $ 251,944 233,313
Fixed maturities available-for-sale, at fair value
(amortized cost of $551,856 and $546,401
in 1996 and 1995, respectively) 559,121 572,717
Equity securities, at fair value:
Preferred stocks (cost $4,600 in 1995) -- 2,700
Common stocks (cost $9,692 and $6,192 in
1996 and 1995, respectively) 12,046 7,460
Mortgage loans on real estate, net 130,508 121,641
Investment real estate, at cost (less accumulated
depreciation of $7,047 and $7,816 in 1996
and 1995, respectively) 18,954 25,685
Policy loans 8,359 8,165
Short-term and other investments 12,763 9,347
---------- ----------
993,695 981,028
---------- ----------
Cash 15,962 14,726
Accrued investment income 14,248 13,770
Accounts receivable:
Uncollected premiums 21,665 16,518
Reinsurance receivable 36,794 28,947
Other 12,341 10,329
---------- ----------
70,800 55,794
---------- ----------
Deferred policy acquisition costs 162,497 152,415
Other assets 6,954 7,807
Separate account assets 98,896 74,767
---------- ----------
Total assets $1,363,052 1,300,307
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
B-22
<PAGE> 42
<TABLE>
<CAPTION>
Liabilities and Stockholder's Equity 1996 1995
------------------------------------ ---- ----
<S> <C> <C>
Policy liabilities:
Reserves for future policy benefits:
Life and annuity $ 102,820 99,036
Accident and health 121,097 106,992
Unearned premiums 2,376 1,972
Benefits payable 33,178 26,027
Funds held under deposit administration contracts 556,665 542,808
Other policy liabilities 85,068 88,239
---------- ----------
901,204 865,074
---------- ----------
Other liabilities:
Net deferred income tax liability 48,278 52,115
General expenses, taxes, licenses and fees payable
and other liabilities 34,125 29,868
---------- ----------
82,403 81,983
---------- ----------
Notes payable 19,839 19,042
Separate account liabilities 98,896 74,767
---------- ----------
Total liabilities 1,102,342 1,040,866
---------- ----------
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 19,916 17,718
Net unrealized holding gain on investments
available-for-sale, net of deferred tax expense
of $3,367 and $9,656 in 1996 and
1995, respectively 6,252 16,028
Retained earnings 232,042 223,195
---------- ----------
Total stockholder's equity 260,710 259,441
Commitments and contingencies (notes 9, 10, 11, and 13)
---------- ----------
Total liabilities and stockholder's equity $1,363,052 1,300,307
========== ==========
</TABLE>
B-23
<PAGE> 43
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premiums:
Life and annuity $ 24,187 24,514 25,012
Accident and health 166,057 156,960 194,382
--------- --------- ---------
190,244 181,474 219,394
Net investment income 67,502 65,326 57,079
Other 11,250 12,190 8,102
--------- --------- ---------
Total revenues 268,996 258,990 284,575
--------- --------- ---------
Benefits:
Benefits paid or provided:
Life and annuity 18,539 18,849 17,604
Accident and health 93,858 74,219 109,796
Interest credited to funded contracts 28,386 27,635 24,251
Increase in reserves for future policy benefits:
Life and annuity (net of increase in reinsurance
reserves ceded of $11, $53, and $8 in 1996,
1995, and 1994, respectively) 4,336 4,619 4,994
Accident and health (net of increase (decrease) in
reinsurance reserves ceded of $2,941, $(441), and
$2,109 in 1996, 1995, and 1994, respectively) 13,259 15,535 7,888
--------- --------- ---------
158,378 140,857 164,533
--------- --------- ---------
Expenses:
Selling costs 47,105 48,784 56,684
Other operating, administrative and general expenses 44,942 42,586 39,066
Taxes, other than income taxes, and licenses and fees 6,535 6,250 6,184
Increase in deferred policy acquisition costs (10,082) (11,902) (6,507)
--------- --------- ---------
88,500 85,718 95,427
--------- --------- ---------
Total benefits and expenses 246,878 226,575 259,960
--------- --------- ---------
Income from continuing operations before income taxes 22,118 32,415 24,615
Income taxes from continuing operations:
Current 4,421 10,443 4,506
Deferred 4,650 554 7,248
--------- --------- ---------
9,071 10,997 11,754
--------- --------- ---------
Net income from continuing operations 13,047 21,418 12,861
Income from discontinued operations (net of applicable
income tax expense of $646) -- -- 2,006
--------- --------- ---------
Net income $ 13,047 21,418 14,867
========= ========= =========
Net income per share from continuing operations $ 52.19 85.67 51.44
========= ========= =========
Net income per share $ 52.19 85.67 59.47
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-24
<PAGE> 44
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid-in Holding Retained
Stock Capital Gain Earnings
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ 2,500 11,890 5,103 189,210
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 13,633 949 201,777
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 16,028 223,195
Net income -- -- -- 13,047
Decrease in unrealized holding gain,
net of deferred taxes -- -- (9,776) --
Capital contributed by parent -- 2,198 -- --
Dividends -- -- (4,200)
------------ ------------ ------------ ------------
Balance at December 31, 1996 $ 2,500 19,916 6,252 232,042
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
B-25
<PAGE> 45
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,047 21,418 14,867
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 935 876 1,142
Accretion of discount on investments (469) (605) (233)
Realized gains on investments (1,793) (2,423) (1,755)
Increase in deferred policy acquisition costs (10,082) (11,902) (6,507)
Increase in accrued investment income (478) (1,819) (899)
(Increase) decrease in accounts receivable (15,006) 847 (11,360)
Increase in policy liabilities 36,130 66,489 43,438
Increase (decrease) in general expenses, taxes, licenses and
fees payable and other liabilities 4,257 256 (3,704)
Deferred income taxes 4,650 554 7,248
Other 840 471 (1,508)
--------- --------- ---------
Total adjustments 18,984 52,744 25,862
--------- --------- ---------
Net cash provided by operating activities 32,031 74,162 40,729
--------- --------- ---------
Cash flows from investing activities:
Sale, maturity or repayment of investments:
Fixed maturities held-to-maturity 26,867 73,984 96,526
Fixed maturities available-for-sale 166,678 36,640 25,419
Equity securities 5,708 5,635 3,286
Mortgage loans on real estate 15,736 12,426 18,657
Real estate 9,101 7,677 627
Net (increase) decrease in short-term and other investments (3,416) 3,283 23,149
Purchase of investments:
Fixed maturities held-to-maturity (45,961) (60,439) (105,841)
Fixed maturities available-for-sale (171,753) (164,417) (91,023)
Equity securities (4,580) (4,249) (6,981)
Mortgage loans on real estate (24,671) (14,328) (14,972)
Real estate (907) (2,820) (891)
Policy loans, net (194) (305) (281)
Cash received from sale of AFI to AFC, net of cash transferred -- 21,005 --
Contributions from discontinued operations -- -- 2,006
--------- --------- ---------
Net cash used in investing activities (27,392) (85,908) (50,319)
--------- --------- ---------
</TABLE>
(Continued)
B-26
<PAGE> 46
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends paid to parent $ (4,200) -- (2,300)
Capital contribution from parent -- 4,085 --
Proceeds from notes payable 9,075 7,095 16,396
Repayment of notes payable (8,278) (5,849) (10,221)
-------- -------- --------
Net cash (used in) provided by financing activities (3,403) 5,331 3,875
-------- -------- --------
Net increase (decrease) in cash 1,236 (6,415) (5,715)
Cash at beginning of year 14,726 21,141 26,856
-------- -------- --------
Cash at end of year $ 15,962 14,726 21,141
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on notes payable $ 1,340 1,478 1,420
======== ======== ========
Federal income taxes $ 7,100 12,500 4,068
======== ======== ========
Supplemental disclosure of noncash investing activities:
Change in unrealized holding gain on investments
available-for-sale, net of deferred tax (benefit) expense of
$(6,289), $15,554, and $(1,746) in 1996, 1995, and 1994,
respectively $ (9,776) 15,079 (4,154)
======== ======== ========
Investments transferred to available-for-sale $ -- 300,850 86,493
======== ======== ========
Supplemental disclosure of noncash financing activities:
Capital contribution from parent in the form of a
note receivable $ -- -- 1,743
======== ======== ========
Capital contribution from parent through forgiveness
of deferred tax liability $ 2,198 -- --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
B-27
<PAGE> 47
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
American Fidelity Assurance Company (AFA or the Company) and subsidiaries
provide a variety of financial services. The principal subsidiary of AFA
for the years ended December 31, 1996 and 1995, is Security General Life
Insurance Company (SGLI), a life insurance company. Principal subsidiaries
for the year ended December 31, 1994, 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 49 states and the District of Columbia. AFA is
represented by approximately 250 salaried managers and agents, and over
3,000 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 year ended December 31, 1994, 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. 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-28
<PAGE> 48
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 consolidated 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
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 are based on
quoted market prices.
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.
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 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.
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.
B-29
<PAGE> 49
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, regulatory
agencies 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 regulatory 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.
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.
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
B-30
<PAGE> 50
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
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 benefits payable are determined using case-basis evaluations
and statistical analyses. These reserves represent the estimate of all
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.
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
Income taxes are accounted for under the asset and liability method.
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.
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.
B-31
<PAGE> 51
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares
outstanding. During the years ended December 31, 1996, 1995, and 1994, the
weighted average number of shares was 250,000.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
(2) STATUTORY FINANCIAL INFORMATION
The Company and its insurance subsidiaries are required to file statutory
financial statements with state insurance re gulatory authorities.
Accounting principles used to prepare these statutory financial statements
differ from financial statements prepared on the basis of generally
accepted accounting principles.
The Company and its principal insurance subsidiary reported statutory net
income for the years ended December 31 as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
AFA $13,227 30,510 11,882
SGLI 176 306 610
</TABLE>
The Company and its principal insurance subsidiary reported statutory
stockholder's equity at December 31 as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
AFA $146,033 137,099
SGLI 3,302 3,158
</TABLE>
B-32
<PAGE> 52
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 greater of (a) 10% of statutory
capital and surplus, or (b) the statutory net gain from operations. 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, 1996, 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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest on fixed maturities $ 58,271 53,931 47,177
Dividends on equity securities 44 139 457
Interest on mortgage loans 11,747 11,543 11,922
Investment real estate income 3,295 4,055 2,990
Interest on policy loans 1,281 1,200 1,128
Interest on short-term investments 120 571 348
Net realized gains on investments 1,793 2,423 1,755
Other 1,186 1,071 (94)
-------- -------- --------
77,737 74,933 65,683
Less investment expenses (10,235) (9,607) (8,604)
-------- -------- --------
Net investment income $ 67,502 65,326 57,079
======== ======== ========
</TABLE>
B-33
<PAGE> 53
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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>
1996 1995 1994
------------------------- ------------------------ -----------------------
Realized Unrealized Realized Unrealized Realized Unrealized
----------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities
held-to-maturity $ (1,127) -- 581 -- 216 --
Fixed maturities
available-for-sale 573 (19,051) 271 31,529 129 (4,703)
Equity securities 27 2,986 611 (896) 1,396 (1,197)
Real estate 2,398 -- 1,436 -- (129) --
Mortgage loans (68) -- (196) -- 116 --
Other (10) -- (280) -- 27 --
-------- -------- -------- -------- -------- --------
--------
$ 1,793 (16,065) 2,423 30,633 1,755 (5,900)
======== ======== ======== ======== ======== ========
</TABLE>
Included in the above realized gains (losses) is the (decrease) increase in the
allowance for possible losses on mortgage loans of $(790,000), $235,000, and
$(248,000) in 1996, 1995, and 1994, respectively, and the increase (decrease)
in the allowance for losses on investment real estate of $117,000 and $(70,000)
in 1996 and 1995, respectively. In addition, the Company realized net gains
(losses) of approximately $1,000, $(11,000), and $106,000 during 1996, 1995,
and 1994, respectively, on investments in fixed maturities that were called or
prepaid.
In December 1995, the Company transferred investments with an estimated fair
value and an amortized cost of approximately $300,850,000 and $287,269,000,
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 $13,581,000 and was included as an increase in stockholder's
equity, net of deferred taxes.
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, 1996
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obli-
gations of U.S. government
corporations and agencies $ 9,925 365 -- 10,290
Corporate securities 142,209 1,078 (2,271) 141,016
Mortgage-backed securities 99,810 1,146 (1,228) 99,728
-------- -------- -------- --------
Totals $251,944 2,589 (3,499) 251,034
======== ======== ======== ========
</TABLE>
B-34
<PAGE> 54
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<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. government
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>
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>
1996
-------------------------
Estimated
Amortized Fair
Cost Value
--------- ----------
<S> <C> <C>
Due in one year or less $ 6,006 6,020
Due after one year through five years 9,979 10,122
Due after five years through ten years 51,479 51,488
Due after ten years 84,670 83,676
-------- --------
152,134 151,306
Mortgage-backed securities 99,810 99,728
-------- --------
$251,944 251,034
</TABLE>
Proceeds from sales of investments in fixed maturities held-to-maturity during
1996, 1995, and 1994 were approximately $7,948,000, $33,685,000, and
$10,946,000, respectively. Gross gains of approximately $33,000, $1,022,000,
and $31,000 and gross losses of approximately $1,161,000, $430,000, and
$141,000, respectively, were realized on those sales. In 1996, 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 1996, 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 $2,369,000 and $1,367,000 in 1996 and 1995, respectively. Gross
unrealized holding losses on equity securities available-for-sale were $15,000
and $1,999,000 in 1996 and 1995, respectively.
B-35
<PAGE> 55
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amortized cost and estimated fair value of investments in fixed maturities
available-for-sale are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gains Losses Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 86,884 1,627 (674) 87,837
Corporate securities 353,707 7,074 (2,414) 358,367
Mortgage-backed securities 111,265 2,135 (483) 112,917
-------- -------- -------- --------
Totals $551,856 10,836 (3,571) 559,121
======== ======== ======== ========
</TABLE>
<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
obligations 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-36
<PAGE> 56
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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>
1996
--------------------------
Estimated
Amortized Fair
Cost Value
--------- ----------
<S> <C> <C>
Due in one year or less $ 19,197 19,362
Due after one year through five years 138,587 142,004
Due after five years through ten years 222,672 224,815
Due after ten years 60,135 60,023
Mortgage-backed securities 111,265 112,917
-------- --------
$551,856 559,121
======== ========
</TABLE>
Proceeds from sales of investments in fixed maturities available-for-sale were
approximately $136,577,000, $31,944,000, and $24,344,000 in 1996, 1995, and
1994, respectively. Gross gains of approximately $1,257,000, $359,000, and
$441,000 and gross losses of approximately $684,000, $88,000, and $312,000 were
realized on those sales in 1996, 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, 1996 and 1995, investments with carrying values of
approximately $5,282,000 and $5,279,000, respectively, were on deposit with
state insurance departments as required by statute.
B-37
<PAGE> 57
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) FAIR VALUE OF 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>
1996 1995
------------------------ -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 15,962 15,962 14,726 14,726
Short-term and other investments 12,763 12,763 9,347 9,347
Accounts receivable 34,006 34,006 26,847 26,847
Accrued investment income 14,248 14,248 13,770 13,770
Reinsurance receivables on paid and
unpaid benefits 36,794 36,794 28,947 28,947
Policy loans 8,359 8,359 8,165 8,165
Fixed maturities held-to-maturity 251,944 251,034 233,313 241,533
Fixed maturities available-for-sale 559,121 559,121 572,717 572,717
Equity securities 12,046 12,046 10,160 10,160
Mortgage loans 130,508 137,978 121,641 128,300
Financial liabilities:
Certain policy liabilities 613,151 596,386 590,638 575,100
Other liabilities 34,125 34,125 29,868 29,868
Notes payable 19,839 19,758 19,042 19,459
</TABLE>
CASH, SHORT-TERM AND OTHER INVESTMENTS, ACCOUNTS RECEIVABLE, ACCRUED
INVESTMENT INCOME, REINSURANCE RECEIVABLES ON PAID AND UNPAID BENEFITS, 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 6.6% and 7.6% as of December
31, 1996 and 1995, respectively, 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.
B-38
<PAGE> 58
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
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,
and have average net yield rates of 8.92% and 9.25% for December 31, 1996 and
1995, respectively. The fair value of mortgage loans was calculated by
discounting scheduled cash flows to maturity using estimated market discount
rates of 7.71% and 7.08% for December 31, 1996 and 1995, respectively. These
rates reflect the credit and interest rate risk inherent in the loan.
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.
CERTAIN 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, 1996 December 31, 1995
------------------------- ------------------------
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 $556,665 540,105 542,808 527,400
Annuities 56,486 56,281 47,830 47,700
</TABLE>
B-39
<PAGE> 59
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
(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 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, 1996:
Deferred costs $ 7,088 22,145 29,233
Amortization (6,437) (12,714) (19,151)
------- ------- -------
Net increase $ 651 9,431 10,082
======= ======= =======
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
======= ======= =======
</TABLE>
B-40
<PAGE> 60
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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
1996 1995 Assumptions
---- ---- -----------
<S> <C> <C> <C>
Life and annuity reserves:
Issued prior to 1970 $ 3,305 3,342 4.75%
Issued 1970 through 1980 28,792 28,831 6.75% to 5.25%
Issued after 1982 (indeterminate premium products) 530 486 10.00% to 8.50%
Issued through 1987 (SGLI acquisition) 1,423 1,378 11.00%
Issued 1981 - 1994 (all other)) 27,357 26,335 8.50% to 7.00%
Issued after 1994 (all other) 1,701 737 7.00%
Life contingent annuities 30,151 29,262 Various *
Group term life waiver of premium disabled lives 5,105 4,530 6.00%
All other life reserves 4,456 4,135 Various
--------- ------
$ 102,820 99,036
========= ======
</TABLE>
* These reserves are revalued as limited-pay contracts. 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.
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 BENEFITS PAYABLE
The provisions for benefits pertaining to prior years decreased in 1996 by
approximately $1,850,000 primarily due to the improvement in the loss
ratios of life cancer products. The provisions for benefits pertaining to
prior years decreased in 1995 by approximately $8,858,000 primarily due to
releasing reserves of a group terminated in 1995 and improvement in the
loss ratios of cancer products.
B-41
<PAGE> 61
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
5.91% line of credit, due in 1998, interest due monthly $ 3,500 --
5.971% line of credit, due in 1998, interest due monthly 5,000 --
6.84% line of credit, due in 2000, interest due monthly 4,000 4,000
8.4% mortgage loan, due in monthly installments of $25,000
(including interest) to 2010 2,383 2,472
8.4% mortgage loan, due in monthly installments of $22,000
(including interest) to 2027 2,902 2,921
Other 2,054 1,996
Various notes payable, paid in 1996 -- 7,653
------- -------
$19,839 19,042
======= =======
</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,
1996. The collateral required for this line of credit at December 31,
1996, was $14,706,000. 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 and an additional 4,314 shares in 1996,
with a total carrying value of approximately $3,322,600 at December 31,
1996. AFA has outstanding advances of $5,000,000, $4,000,000 and
$3,500,000 at December 31, 1996, at fixed interest rates of 5.971%, 6.84%,
and 5.91%, respectively.
The Company has unused lines of credit of $7,500,000 at December 31, 1996.
Interest expense for the years ended December 31, 1996, 1995, and 1994,
totaled approximately $1,319,000, $1,482,000, and $1,366,000, respectively.
B-42
<PAGE> 62
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Scheduled maturities (excluding interest) of the above indebtedness at
December 31, 1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 422
1998 9,576
1999 191
2000 4,208
2001 227
Thereafter 5,215
-------
$19,839
=======
</TABLE>
(9) INCOME TAXES
Total income tax expense in the accompanying consolidated statements of
income differs from the federal statutory rate of 35% principally due to
correction of prior year estimate of deferred tax liability to parent in
1996 and 1994.
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>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Investment real estate, principally due to
valuation allowances $ 311 101
Other investments 428 677
Life and health reserves 12,956 12,309
Other liabilities 1,433 255
-------- --------
Total gross deferred tax assets 15,128 13,342
-------- --------
Deferred tax liabilities:
Fixed maturities (3,010) (9,694)
Equity securities, principally due to difference in
fair value and cost (824) (2,643)
Deferred policy acquisition costs (51,937) (49,011)
Other assets (7,635) (4,109)
-------- --------
Total gross deferred tax liabilities (63,406) (65,457)
-------- --------
Net deferred tax liability $(48,278) (52,115)
======== ========
</TABLE>
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, 1996 and 1995, other
accounts receivable includes income taxes receivable from AFC and other
members of the consolidated group of approximately $4,988,000 and
$4,771,000, respectively.
B-43
<PAGE> 63
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 the gain from operations was accumulated in a
special memorandum tax account known as the "policyholders surplus
account" (PSA). Accumulations at December 31, 1996 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.
(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,
1996, reinsurance receivables with a carrying value of approximately
$11,688,000 were associated with two reinsurers. At December 31, 1995,
reinsurance receivables with a carrying value of approximately $8,962,000
were associated with a single reinsurer.
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, 1996 and 1995, the face amounts of life
insurance in force that are reinsured amounted to approximately
$403,000,000 (approximately 6.3% of total life insurance in force) and
$278,000,000 (approximately 4.8% 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
$75,000 for individual cancer coverage to $250,000 for major medical
coverage.
Reinsurance agreements reduced benefits paid for life and accident and
health policies by approximately $61,730,000, $52,318,000, and $33,127,000
for the years ended December 31, 1996, 1995, and 1994, 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.
B-44
<PAGE> 64
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In 1995, AFA and SGLI entered into an assumption agreement whereby AFA
assumed all of SGLI's remaining rights and insurance liability in force.
The assumption is pending policyholder approval, as certain states allow
as much as three years for policy holders to reject an assumption.
(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>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 11,248 11,150
Nonvested benefits 1,420 1,582
-------- --------
Total accumulated benefit obligation $ 12,668 12,732
======== ========
Projected benefit obligation for service rendered to date 14,679 14,809
Plan assets, at fair value 16,864 14,175
-------- --------
Plan assets in excess of (less than) projected benefit
obligation 2,185 (634)
Unrecognized transition amount (443) (605)
Unrecognized prior service cost due to plan amendment 521 607
Unrecognized net loss 370 3,542
-------- --------
Prepaid pension cost included in other assets $ 2,633 2,910
======== ========
</TABLE>
In determining the projected benefit obligation, the weighted average
assumed discount rate used was 7.5% and 7% in 1996 and 1995, respectively.
The rate of increase in future salary levels was 5.0% in 1996 and 1995.
The expected long-term rate of return on assets used in determining net
periodic pension cost was 9.5% and 8.25% in 1996 and 1995, 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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service costs - benefits earned during period $ 1,237 1,025 1,193
Interest cost 1,054 919 951
Return on plan assets (3,711) (2,455) (547)
Net amortization and deferral 2,421 1,366 (130)
------- ------- -------
Net periodic pension cost $ 1,001 855 1,467
======= ======= =======
</TABLE>
B-45
<PAGE> 65
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 $822,000, $831,000, and $852,000 to this plan
during the years ended December 31, 1996, 1995, and 1994, respectively.
(12) DISCONTINUED OPERATIONS
Effective January 1, 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 statement of stockholder's equity. AFI's net income for the
year ended December 31, 1994 is reflected as income from discontinued
operations in the accompanying consolidated statements of income.
(13) COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 1996, 1995, and 1994, was
approximately $5,674,000, $5,133,000, and $5,219,000, respectively. A
portion of rent expense relates to leases that expire or are cancelable
within one year. The aggregate minimum annual rental commitments as of
December 31, 1996, under noncancellable long-term leases for office space
are as follows (in thousands):
<TABLE>
<S> <C>
1997 $306
1998 225
1999 116
2000 57
2001 19
</TABLE>
The Company has pledged approximately $30,940,000 of its treasury notes as
collateral on lines of credit held by affiliated companies.
The Company has outstanding mortgage loan commitments of approximately
$13,182,000 and $7,755,000 at December 31, 1996 and 1995, respectively.
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.
(14) LEASES
The Company leases various real estate properties to nonaffiliates under
operating lease agreements, with lease expiration dates ranging from 1997
through 2001. 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.
B-46
<PAGE> 66
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Investments in real estate held for lease can be summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and buildings $4,857 13,864
Less accumulated depreciation 1,567 3,612
------ ------
Net investment 3,290 10,252
Less indebtedness 884 6,119
------ ------
Investment net of indebtedness $2,406 4,133
====== ======
</TABLE>
Future minimum rentals on noncancellable operating leases can be summarized
as follows (in thousands):
<TABLE>
Year ended December 31,
<S> <C>
1997 $ 706
1998 547
1999 174
2000 111
2001 40
------
Total future minimum rentals $1,578
</TABLE>
(15) 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 cancelable upon one month's notice. During the
years ended December 31, 1996, 1995, and 1994, rentals paid under these
leases were approximately $2,966,000, $2,955,000, and $3,154,000,
respectively.
During the years ended December 31, 1996, 1995, and 1994, the Company and
its subsidiaries paid management fees and investment advisory fees to AFC
totaling approximately $16,536,000, $17,885,000, and $12,259,000,
respectively.
Short-term and other investments at December 31, 1995 include notes
receivable from AFC totaling approximately $6,485,000 which were repaid in
1996. During the years ended December 31, 1996, 1995, and 1994, the
Company recorded investment income on the notes from AFC of approximately
$481,000, $699,000, and $656,000, respectively.
AFC and several of its subsidiaries rent office space in the home office
building from the Company. During the years ended December 31, 1996,
1995, and 1994, the Company received rental income from AFC and several of
its subsidiaries of approximately $1,280,000, $1,281,000, and $1,077,000,
respectively.
During 1996, AFC contributed capital of approximately $2,198,000 through
forgiveness of a deferred tax liability owed by AFA to AFC.
An officer of AFC serves on the board of directors of a financial
institution in which the Company maintains cash balances.
B-47
<PAGE> 67
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III - BUSINESS SEGMENT INFORMATION
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
The Company's reportable segments are its strategic business units. The
components of operations for the years ended December 31, 1996, 1995, and 1994
are included in the table below.
Assets and related investment income are allocated based upon related insurance
reserves which are backed by such assets. Other operating expenses are
allocated in relation to the mix of related revenues.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
TOTAL REVENUES:
American Fidelity Education Services Division $ 142,493 129,628 113,890
Association Group Division 99,979 96,140 90,658
Brokerage Division 24,558 31,898 78,406
Non insurance operations 1,966 1,324 1,621
----------- ----------- -----------
$ 268,996 258,990 284,575
=========== =========== ===========
PRETAX EARNINGS:
American Fidelity Education Services Division 14,275 16,034 4,818
Association Group Division 9,349 5,751 13,275
Brokerage Division (1,903) 10,113 6,765
Non insurance operations 397 517 (243)
----------- ----------- -----------
$ 22,118 32,415 24,615
=========== =========== ===========
TOTAL ASSETS:
American Fidelity Education Services Division 922,671 885,216
Association Group Division 197,225 181,426
Brokerage Division 239,986 231,774
Non insurance operations 3,170 1,891
----------- -----------
$ 1,363,052 1,300,307
=========== ===========
</TABLE>
B-48
<PAGE> 68
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Ceded Assumed Percentage
Gross to Other From Other Net of Amount
Amount Companies Companies Amount Assumed to Net
---------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Life insurance in force $6,276,241 403,148 125,101 5,998,194 2.09%
========== ========= ========= ========== =========
Premiums:
Life insurance 23,240 1,907 2,854 24,187 11.80%
Accident and health insurance 248,054 82,040 43 166,057 0.03%
---------- --------- --------- ---------- ---------
Total premiums $ 271,294 83,947 2,897 190,244 11.83%
========== ========= ========= ========== =========
Year ended December 31, 1995
Life insurance in force $5,679,074 277,982 131,621 5,532,713 2.38%
========== ========= ========= ========== =========
Premiums:
Life insurance 23,527 1,758 2,745 24,514 11.20%
Accident and health insurance 231,340 74,385 5 156,960 0.00%
---------- --------- --------- ---------- ---------
Total premiums $ 254,867 76,143 2,750 181,474 11.20%
========== ========= ========= ========== =========
Year ended December 31, 1994
Life insurance in force $5,158,468 346,885 140,023 4,951,606 2.83%
========== ========= ========= ========== =========
Premiums:
Life insurance 23,199 797 2,610 25,012 10.43%
Accident and health insurance 261,729 67,347 -- 194,382 0.00%
---------- --------- --------- ---------- ---------
Total premiums $ 284,928 68,144 2,610 219,394 10.43%
========== ========= ========= ========== =========
</TABLE>
See accompanying independent auditor's report.
B-49
<PAGE> 69
PART C
OTHER INFORMATION
ITEM 28 -- FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
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, 1996 and 1995
Statements of Operations for the Years Ended December 31, 1996 and 1995
Statements of Changes in Net Assets for the Years Ended December 31, 1996
and 1995
Schedule of Portfolio Investments as of December 31, 1996
Financial Highlights for the Five Years Ended December 31, 1996
Notes to Financial Statements
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
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.
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.
</TABLE>
C-1
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C> <C>
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 -- Opinion and Consent of Counsel.
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.
</TABLE>
C-2
<PAGE> 71
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> 72
ITEM 30 -- PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT
** CAMERON ENTERPRISES, A LIMITED PARTNERSHIP (CELP) - OK CHART
73-1267299
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CELP Ltd. Agency, Inc.-OK
100%
73-1369092
North American
Ins. Agency, Inc.
(NAIA) - OK
91.5%
73-0687265
Shade Works, LLC - OK Agar Ins. Agency, Inc. - OK
33.33% 95.4%
73-1475654 73-0675989
National Ins. Marketers
Agency, Inc. - OK
100%
73-1437538
American Fidelity Corp.
(AFC) - NV
91.47%
73-0966202
Market Place Realty American Mortgage
Corp. (MPRC) - OK & Investment Co.
100% (AMICO) - OK
73-1160212 80%
73-1232134
Holiday Mortgage Corp. - OK
95%
73-1284635
Cimarron Investment *American Fidelity Shade Works, LLC American Fidelity
Co., Inc. - KS Credit Corp. (AFCC) 16.67% - OK Internet Services, Inc.
100% 100% - KS 73-1475634 100% - OK
48-0759023 NAIC #20400 73-1505641
48-089493
*American Fidelity
Assurance CO. (AFA) - OK
100%
73-0714500
NAIC #60410
AF Apartments, Inc. *Security General Life American Fidelity American Fidelity Ltd.
100% - OK Ins. Co. (SGL) - OK Securities, Inc. Agency, Inc. (AFLA) - OK
73-1512985 100% (AFS) - OK 100%
73-0741925 100% 73-1352430
NAIC #68691 73-0783902
American Fidelity General
Agency, Inc. (AFGA) - OK
100%
73-1352431
Balliet's, Inc. Apple Creek American Fidelity
75% - OK Apartments, Inc. Property Co. - OK
73-0761950 100% - OK (AFPC) - 100%
73-1408485 73-1290496
Home Rentals, Inc.
100% - OK
73-1364226
American Fidelity
International Holdings, Inc.
100% - OK
73-1421879
American Fidelity American Fidelity
Offshore Investments., LTD Care, LLC - OK
Bermuda - 100% 33%
Reg. #EC20754 73-1424864
***American Fidelity
(Cypress) Limited - Cypress
99%
Arussco, Inc. ***Soyuznik
(L.C.) - OK Insurance Co.
Three Units Russian
73-1438822 Federation - 34%
</TABLE>
* Insurance Company
** A Limited Partnership
*** 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> 73
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 28, 1997 there were 1,805 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 members
of 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> 74
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., 2000 Classen,
Oklahoma City, Oklahoma 73106.
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, 1995 or earlier are as follows:
<TABLE>
<CAPTION>
NAME POSITIONS
---- ---------
<S> <C>
Lawrence W. Kelly................... Chairman, Chief Executive Officer and
Treasurer
Nicholas J. Welsh................... Executive Vice President (1996-present);
Senior Vice President (1995-1996)
H. James Darcey..................... Executive Vice President (1996-present);
Chairman, President and Chief Executive
Officer, First Security Investment
Management, Inc., Salt Lake City, UT
(1988-1995)
Maria Alejandra Tescher............. Executive Vice President -- Senior Trader
& Operations Manager (1996-present);
Vice President (1995-1996)
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, 1995 or earlier:
C-6
<PAGE> 75
<TABLE>
<CAPTION>
NAME POSITIONS
---- ---------
<S> <C>
Bosworth M. Todd.................... Chairman and Chief Executive Officer;
Director, First Capital Bank of
Kentucky, Louisville, KY (1996-present);
Director of SAMC
Robert P. Bordogna.................. President; Director of SAMC
George Herbert Walker, III.......... Chairman of SFC and SAMC
Richard A. Loebig................... Executive Vice President (1996-present);
Vice President, Chandler Liquid Asset
Management, San Diego, CA (1996); Vice
President, PNC Bank, Kentucky,
Louisville, KY (1991-1996)
Gayle S. Dorsey..................... Executive Vice President (1997-present);
Vice President, J.J.B. Hilliard, W.L.
Lyons, Inc., Louisville, KY (1976-1997)
Sam C. Ellington.................... Vice President (1996-present); Vice
President, PNC Bank, Kentucky,
Louisville, KY (1993-1996)
Curtiss M. Scott, Jr................ Vice President (1996-present); Partner and
Managing Director, Executive Investment
Advisors, Inc., Louisville,
KY(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-7
<PAGE> 76
(c) Information about commissions received by American Fidelity Securities,
Inc. in 1996 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 $312,794* -0- -0- -0-
Securities, Inc.
- ---------------
* Equal to 3% fee deducted from premium deposits to the Fund.
</TABLE>
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> 77
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 21st day of
April, 1997.
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 April 21,
1997.
/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> 78
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 -- Opinion and consent of counsel
13 -- Independent Auditors' Consent.
14 -- Not applicable.
15 -- Not applicable.
16 -- Schedule for computation of performance quotations provided in Item
25.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
[MCAFEE & TAFT LETTERHEAD]
April 21, 1997
American Fidelity Variable
Annuity Fund A
2000 Classen Center
Oklahoma City, Oklahoma 73106
Re: Post-Effective Amendment No. 41
to Form N-3 Registration
Statement (No. N.2-30771)
Ladies and Gentlemen:
You have requested that we advise you with respect to the legality
of the securities (the "Securities") being registered under Post-Effective
Amendment No. 41 to the Registration Statement on Form N-3 (No. N.2-30771) of
American Fidelity Variable Annuity Fund A (the "Fund") to be filed with the
Securities and Exchange Commission. In rendering the opinion expressed below,
we have reviewed the form of variable annuity contract used by the Fund, filed
as Exhibit 6 to the referenced Post-Effective Amendment (the "Variable
Annuity Contract"), and conducted such investigation and examined such other
documents as we deemed appropriate.
Based upon the foregoing, it is our opinion that the Variable
Annuity Contract is in compliance with the Oklahoma Insurance Code and that the
Securities, when issued in accordance with the terms of a Variable Annuity
Contract, will be legally issued and that the Variable Annuity Contracts will
represent binding obligations of American Fidelity Assurance Company.
This opinion is being furnished to you solely for use in the
filing of the Registration Statement, and we hereby consent to its use therein.
This opinion is not to be used, circulated or quoted or otherwise referred to
for any other purpose without our express written consent.
Very truly yours,
/s/ MCAFEE & TAFT A PROFESSIONAL CORPORATION
--------------------------------------------
McAfee & Taft A Professional Corporation
<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, 1996 and 1995,
and for the years then ended, including the financial highlights for each of the
years in the five-year period ended December 31, 1996. 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, 1996 and
1995, and for each of the years in the three-year period ended December 31,
1996, 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
April 18, 1997
<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.............................. /$ 12.1986 /$ 8.8663 /$ 4.4670
EQUALS NUMBER OF ACCUMULATION UNITS
PURCHASED.................................. 77.43 106.53 211.44
=========== =========== ===========
(C) ACCUMULATION UNIT VALUE AT THE END
OF TIME PERIOD............................. $ 15.3389 $ 15.3389 $ 15.3389
MULTIPLIED BY NUMBER OF ACCUMULATION UNITS
PURCHASED.................................. X77.43 X106.53 X211.44
EQUALS ENDING VALUE........................... $ 1,187.69 $ 1,634.05 $ 3,243.26
=========== =========== ===========
(D) ENDING VALUE.................................. $ 1,187.69 $ 1,634.05 $ 3,243.26
MINUS INITIAL INVESTMENT...................... -$ 1,000.00 -$ 1,000.00 -$ 1,000.00
EQUALS TOTAL DOLLAR RETURN.................... $ 187.69 $ 634.05 $ 2,243.26
=========== =========== ===========
(E) TOTAL DOLLAR RETURN........................... $ 187.69 $ 634.05 $ 2,243.26
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.............................. 18.77% 63.41% 224.33%
=========== =========== ===========
</TABLE>
(2) AVERAGE ANNUAL TOTAL RETURN
Average annual total return quotations for the one, five and ten year
periods ended December 31, 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 = $1,187.69 $1,000 (1+T)**5 = $1,634.05 $1,000 (1+T)**10 = $3,243.26
T = 18.77% T = 10.32% T = 12.49%
</TABLE>
** Raise to the power of
<PAGE> 2
(3) ENDING VALUE OF INVESTING $100 PER MONTH FOR VARIOUS TIME PERIODS
n
[ E (Mi/Vi) ] X ACCUMULATION UNIT VALUE AT END OF PERIOD
i=1
Where: E = summation
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-Jan-96....................................... 80.50 12.1986 6.5991
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
01-Jul-96....................................... 95.50 13.8247 6.9079
01-Aug-96....................................... 95.50 13.4421 7.1045
01-Sep-96....................................... 95.50 13.4077 7.1228
01-Oct-96....................................... 95.50 14.3005 6.6781
01-Nov-96....................................... 95.50 14.5744 6.5526
01-Dec-96....................................... 95.50 15.5372 6.1465
--------
Total Units Purchased: 83.4874
X
Accumulation Unit Value (12/31/96): $15.3389
=
Ending Value (12/31/96): $ 1,281
========
</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-Jan-92....................................... 80.50 8.8663 9.0793
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
01-Jul-96....................................... 95.50 13.8247 6.9079
01-Aug-96....................................... 95.50 13.4421 7.1045
01-Sep-96....................................... 95.50 13.4077 7.1228
01-Oct-96....................................... 95.50 14.3005 6.6781
01-Nov-96....................................... 95.50 14.5744 6.5526
01-Dec-96....................................... 95.50 15.5372 6.1465
--------
Total Units Purchased: 571.7387
X
Accumulation Unit Value (12/31/96): $15.3389
=
Ending Value (12/31/96): $ 8,770
========
</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-Jan-87....................................... 80.50 4.4670 18.0210
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
01-Jul-96....................................... 95.50 13.8247 6.9079
01-Aug-96....................................... 95.50 13.4421 7.1045
01-Sep-96....................................... 95.50 13.4077 7.1228
01-Oct-96....................................... 95.50 14.3005 6.6781
01-Nov-96....................................... 95.50 14.5744 6.5526
01-Dec-96....................................... 95.50 15.5372 6.1465
----------
Total Units Purchased: 1,544.1450
X
Accumulation Unit Value (12/31/96): $ 15.3389
=
Ending Value (12/31/96): $ 23,685
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000005007
<NAME> AMERICAN FINANCIAL VARIABLE ANNUITY FUND A
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<INVESTMENTS-AT-COST> 66,564,156 55,693,364
<INVESTMENTS-AT-VALUE> 98,704,398 73,152,856
<RECEIVABLES> 191,430 1,613,754
<ASSETS-OTHER> 0 0
<OTHER-ITEMS-ASSETS> 0 0
<TOTAL-ASSETS> 98,895,828 74,766,610
<PAYABLE-FOR-SECURITIES> 68,429 1,614,026
<SENIOR-LONG-TERM-DEBT> 0 0
<OTHER-ITEMS-LIABILITIES> 0 50
<TOTAL-LIABILITIES> 66,429 1,614,076
<SENIOR-EQUITY> 0 0
<PAID-IN-CAPITAL-COMMON> 0 0
<SHARES-COMMON-STOCK> 6,443,056 5,996,795
<SHARES-COMMON-PRIOR> 5,996,795 5,615,645
<ACCUMULATED-NII-CURRENT> 0 0
<OVERDISTRIBUTION-NII> 0 0
<ACCUMULATED-NET-GAINS> 0 0
<OVERDISTRIBUTION-GAINS> 0 0
<ACCUM-APPREC-OR-DEPREC> 0 0
<NET-ASSETS> 98,829,399 73,152,534
<DIVIDEND-INCOME> 1,538,540 1,097,364
<INTEREST-INCOME> 201,294 161,264
<OTHER-INCOME> 0 0
<EXPENSES-NET> 1,162,049 793,811
<NET-INVESTMENT-INCOME> 577,785 464,817
<REALIZED-GAINS-CURRENT> 4,213,874 3,810,410
<APPREC-INCREASE-CURRENT> 14,880,750 13,796,294
<NET-CHANGE-FROM-OPS> 19,472,409 18,071,521
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> 0 0
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 1,159,575 1,061,993
<NUMBER-OF-SHARES-REDEEMED> 713,314 680,843
<SHARES-REINVESTED> 0 0
<NET-CHANGE-IN-ASSETS> 25,676,865 22,086,062
<ACCUMULATED-NII-PRIOR> 0 0
<ACCUMULATED-GAINS-PRIOR> 0 0
<OVERDISTRIB-NII-PRIOR> 0 0
<OVERDIST-NET-GAINS-PRIOR> 0 0
<GROSS-ADVISORY-FEES> 0 0
<INTEREST-EXPENSE> 0 0
<GROSS-EXPENSE> 1,162,049 793,811
<AVERAGE-NET-ASSETS> 84,347,737 61,629,900
<PER-SHARE-NAV-BEGIN> 12.199 9.094
<PER-SHARE-NII> 0.094 0.080
<PER-SHARE-GAIN-APPREC> 3.047 3.026
<PER-SHARE-DIVIDEND> 0.000 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000 0.000
<RETURNS-OF-CAPITAL> 0.000 0.000
<PER-SHARE-NAV-END> 15.339 12.199
<EXPENSE-RATIO> 1.378 1.288
<AVG-DEBT-OUTSTANDING> 0 0
<AVG-DEBT-PER-SHARE> 0.000 0.000
</TABLE>
