<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NO. 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. 42
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[X] AMENDMENT NO. 42
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 CONNIE S. STAMETS, ESQ.
LAW AND GOVERNMENT AFFAIRS MCAFEE & TAFT
AMERICAN FIDELITY ASSURANCE COMPANY A PROFESSIONAL CORPORATION
2000 CLASSEN CENTER 211 N. ROBINSON, 10TH FLOOR
OKLAHOMA CITY, OKLAHOMA 73106 OKLAHOMA CITY, OKLAHOMA 73102
(Name and Address of Agent for Service)
</TABLE>
Approximate Date of Proposed Public Offering: As soon as practicable after
effectiveness of the Registration Statement
It is proposed that this filing will become effective (check appropriate
box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on April 28, 1998 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.
Title of Securities Being Registered: Interests in variable annuity contracts
================================================================================
<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. To learn more about the Fund and the variable
annuity contracts offered by the Prospectus, you may obtain a copy of the
Statement of Additional Information dated April 28, 1998. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials on the
SEC's Internet Web site (http://www.sec.gov). The Statement of Additional
Information is incorporated by reference into this Prospectus. The table of
contents of the Statement of Additional Information appears at the end of this
Prospectus. For a free copy of the Statement of Additional Information, call
(800) 662-1106 or write to the Fund at P.O. Box 25523, Oklahoma City, Oklahoma
73125-0523.
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 or her account prior to commencement of annuity
payments, subject to restrictions under Federal income tax law. See "Federal Tax
Matters."
INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT TO RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. INTERESTS IN THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL INSTITUTION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
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 28, 1998
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................. 2
Fee Table................................................... 3
Participant Questions....................................... 3
Condensed Financial Information............................. 5
Financial Highlights...................................... 5
Financial Statements...................................... 5
Performance Results....................................... 5
General Description of the Fund and the Company............. 6
The Company............................................... 6
The Fund.................................................. 6
Investment Objectives and Policies of the Fund............ 6
Management of the Fund...................................... 7
Deductions and Expenses..................................... 8
General Description of Variable Annuity Contracts........... 9
Voting Rights............................................. 9
Amendments................................................ 9
Annuity Period.............................................. 10
Annuity Options........................................... 10
Death Benefit............................................... 11
Purchases and Contract Value................................ 11
How Do I Purchase Units?.................................. 11
How Are Accumulation Units Valued?........................ 11
Redemptions................................................. 12
Federal Tax Matters......................................... 13
General................................................... 13
Taxes Payable by Participants and Annuitants.............. 13
Section 403(b) Annuities for Employees of Certain
Tax-Exempt Organizations or Public Educational
Institutions........................................... 13
Section 401 Qualified Pension, Profit-Sharing or Annuity
Plans.................................................. 14
Individual Retirement Annuities (IRAs).................... 15
Legal Proceedings........................................... 16
Participant Inquiries....................................... 16
Contents of Statement of Additional Information............. 17
</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 do not 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
- ------ ------- ------- --------
<S> <C> <C> <C>
$69 $99 $131 $221
</TABLE>
This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown above.
Similarly, the 5% annual rate of return assumed in the example is not an
estimate or guarantee of future performance. Under Federal income tax laws, a
penalty tax may be assessed upon withdrawal of amounts accumulated under a
Contract prior to commencement of annuity payments.
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.
3
<PAGE> 7
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 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. Since 1997,
it has been the Company's policy to reallocate Fund assets equally between Kelly
and Todd Investment at the beginning of each year.
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 eight years ended December 31,
1997 by KPMG Peat Marwick LLP, independent auditors, and for the two 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,
----------------------------------------------------------------------------------------------------
1997 1996 1995(A) 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Investment income.......... $ 0.3284 $ 0.2817 $ 0.2163 $0.2105 $0.2113 $0.2267 $0.2329 $0.2507 $0.2077 $0.1750
Operating expenses......... 0.2576 0.1882 0.1364 0.1193 0.1180 0.1113 0.1000 0.0856 0.0829 0.0515
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Net investment income...... 0.0708 0.0935 0.0799 0.0912 0.0933 0.1154 0.1329 0.1651 0.1248 0.1235
CAPITAL CHANGES:
Net realized and unrealized
gains (losses) on
securities............... 4.0535 3.0468 3.0251 (0.7066) 0.5074 0.1266 1.8089 0.2452 1.2791 0.3859
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease) in
Accumulation Unit
value.................... 4.1243 3.1403 3.1050 (0.6154) 0.6007 0.2420 1.9418 0.4103 1.4039 0.5094
Accumulation Unit value,
beginning of period...... 15.3389 12.1986 9.0936 9.7090 9.1083 8.8663 6.9245 6.5142 5.1103 4.6009
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Accumulation Unit value,
end of period............ $19.4632 $15.3389 $12.1986 $9.0936 $9.7090 $9.1083 $8.8663 $6.9245 $6.5142 $5.1103
======== ======== ======== ======= ======= ======= ======= ======= ======= =======
RATIOS/OTHER DATA:
Ratio of expenses to
average net assets....... 1.4603% 1.3777% 1.2880% 1.2826% 1.2783% 1.2812% 1.2800% 1.2879% 1.2844% 1.2911%
Ratio of net investment
income to average net
assets................... 0.4042% 0.6850% 0.7542% 0.9797% 1.0110% 1.3289% 1.7004% 2.4849% 1.9328% 3.0992%
Portfolio of turnover
rate..................... 26.6% 36.9% 66.1% 43.5% 51.2% 31.7% 41.2% 41.1% 50.1% 34.0%
Number of Accumulation
Units outstanding, end of
period (000's)........... 7,044 6,443 5,997 5,616 5,114 4,644 4,268 4,041 3,806 3,840
</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. Performance calculations do not
reflect the deduction of any premium taxes.
The Fund's total return for the twelve months ended December 31, 1997 and
average annual total returns over the five and ten year periods ended December
31, 1997 were 19.85%, 15.08% and 14.86%, 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.
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
investment objectives and 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 obligations of
the United States Government for this purpose. The Fund has a policy of not
purchasing puts, calls or other options and 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.
6
<PAGE> 10
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 issuers. 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. Since 1997, it has been the Company's policy to reallocate
Fund assets equally between Kelly and Todd Investment at the beginning of each
year. Each Sub-Advisor determines what securities are acquired, held or disposed
of and, subject to any instructions from the Company as to the Fund's cash
requirements from time to time, the portion of Fund assets which will be held
uninvested. The Sub-Advisors are also authorized to exercise all voting rights
pertaining to the Fund assets they manage. The Sub-Advisors are authorized to
select brokers to effect securities transactions on behalf of the Fund. Neither
Sub-Advisor nor any of their respective affiliates may act as a broker with
respect to securities transactions for the Fund.
Kelly has provided the Company research and investment advice since 1985.
Beginning in the fourth quarter of 1995, Kelly's services relating to Fund
assets have been rendered pursuant to its sub-advisory agreement with the
Company, and its services relating to other assets managed by the Company have
been
7
<PAGE> 11
provided under a separate consulting agreement. Lawrence W. Kelly, the founder
of Kelly, has 31 years of experience in the investment advisory business and he
and his wife, Janice M. Kelly, are the majority 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,
1997, Kelly managed 50 client securities portfolios on a discretionary basis
with an aggregate market value of $396 million. It also managed or supervised 16
client securities portfolios on a non-discretionary basis with an aggregate
market value of $992 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 30 years of experience managing investments for
institutional clients. At December 31, 1997, Todd Investment managed over $2.7
billion for 50 clients, of which $1.2 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 28 years. The backup portfolio manager is Curtiss M. Scott, Jr.,
who has been with Todd since 1996, in the business for 19 years and is a
chartered financial analyst. Todd Investment has not acted as an investment
advisor to any registered investment company other than the Fund. It is located
at 101 South Fifth Street, Suite 3160, 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 1997 as a percentage of average net assets was
.046%. The deduction of 3/4% for the minimum death benefit is not applicable
after a Participant attains age 65. The sales charge is intended to recover all
distribution expenses associated with marketing Contracts. In the event the
sales charge is not adequate to recover all distribution expenses, the resulting
"shortfall" is borne by the Company. Any such shortfall amounts paid by the
Company may consist, among other things, of proceeds derived from mortality and
expense risk charges discussed below. The sales charge for lump sum or periodic
payments of $2,000 or greater may be less than 3%, depending on the actual
commission paid.
In addition to the 4% deduction, there is an additional administrative
charge against each premium deposit of $.50 and a one-time certificate issuance
fee of $15.00. These charges have been set at a level to recover no more than
the actual costs of administering Contracts. Such deductions will not be
increased until premium deposits on behalf of a Participant equal twice the
amount of premium deposits made during the first year of participation. Such
deductions may be increased on premium deposits in excess of such amount.
All the Fund's expenses are paid by the Company. The Company monitors the
actual costs it incurs on behalf of the Fund for sales and administrative
expenses compared with the amounts deducted for sales and administrative
expenses. If actual costs exceed the amount deducted, which has been the case
historically, no additional deductions are made.
The Company receives a daily fee of .0013698% (.50% on an annual basis) of
the current value of the Fund as an investment advisory and management fee. The
Company pays the Sub-Advisors' fees. Kelly receives an annual fee of .30% of
Fund assets under its management. 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.
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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 4% 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 or her 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 the
Participant, and to the vested portion of payments made by his or her employer,
if any. All other votes entitled to be cast during such period under such a
trust or plan may be cast by the Contract Owner in its sole discretion.
During the Annuity Period, each Annuitant may instruct the Contract Owner
with respect to all votes attributable to the amount of assets established in
the Fund to meet the annuity obligations related to such Annuitant. Each Annuity
Payment reduces the votes attributable to such assets. Proxy materials are sent
to each Contract Owner, Participant, beneficiary of a deceased Participant and
Annuitant.
Each Contract Owner must vote in accordance with instructions, and, in the
absence of instructions (other than those as to which no employee or Participant
is entitled to give instructions), must cast votes in the same proportion as the
votes for which instructions have been received.
AMENDMENTS
The Company may change the Contract at any time if required by state or
Federal laws. After a Contract has been in force for three years, the Company
may change any term of the Contract except that benefits already earned by
Participants cannot be decreased and guaranteed monthly life incomes cannot be
decreased. The Company will notify Contract Owners of any change at least 90
days before a change will take effect.
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ANNUITY PERIOD
Variable annuity payments, which are paid monthly, are determined on the
two-fold basis of (a) the mortality table stipulated in the Contract and (b) the
investment performance of the Fund. The amount of variable annuity payment is
not affected by adverse mortality experience or by the Company's expenses in
excess of contractual deductions. The amount of the monthly annuity payment
reflects investment income, gains and losses of the Fund both before and after
retirement. Accordingly, annuity payments will vary with the investment
experience of the Fund. The assumed investment rate of return upon which the
annuity payment calculation is based is 4.5%. Therefore, when the Fund
experiences returns in excess of 4.5%, monthly payments increase. When the
investment return is less than 4.5%, payments decrease.
Annuity commencement may begin at any time as elected by the Participant.
However, withdrawals not made in accordance with the Federal income tax laws
will be subject to penalties. See "Federal Tax Matters."
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. The
following annuity options are available:
Option 1 -- Life Variable Annuity:
A variable annuity payable monthly during the lifetime of and terminating
with the last monthly payment preceding the death of the Annuitant. This option
offers the maximum level of monthly payments, since there is no promise of a
minimum number of payments or provision for a death benefit for beneficiaries.
Option 2 -- Life Variable Annuity with 120, 180 or 240 Monthly Payments
Certain:
A variable annuity payable monthly during the lifetime of the Annuitant
with the provision that if, at the death of the Variable Annuitant, payments
have been made for less than 120, 180 or 240 months, as elected, variable
annuity payments will continue during the remainder of such period to the
beneficiary designated by the Participant. If the Annuitant's beneficiary dies
before the variable annuity payments cease, the present value of the current
dollar amount of the remaining certain payment will be paid to the estate of the
beneficiary based on an annual compound interest rate of 3 1/2%.
Option 3 -- Unit Refund Life Variable Annuity:
A variable annuity payable monthly during the lifetime of the Annuitant and
upon death an additional payment will be made of the value at the date of death
of the number of variable annuity units equal to the excess, if any, of (a) the
total amount applied under this option divided by the variable annuity unit
value on the date variable annuity installments commenced over (b) the variable
annuity units represented by each installment multiplied by the number of
installments paid prior to death.
Option 4 -- Joint and Last Survivor Variable Annuity:
A variable annuity providing a monthly benefit payable during the joint
lifetime of the Annuitant and a designated second person, and thereafter
two-thirds of such monthly benefit payable during the remaining lifetime of the
survivor. There is no predetermined number of annuity payments. This option may
not be elected if, as of the date the variable annuity is effected, the present
value of the payment to which the designated second person may become entitled
exceeds 49% of the present value of all payments provided for the Annuitant and
the designated second person; however, such limitations do not apply if the
designated second person is the spouse of the Annuitant.
Other Options:
A Participant has the further option to elect forms of fixed annuities
having essentially the same characteristics as Annuity Options 1 through 4
above.
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DEATH BENEFIT
In the event of the Participant's death prior to commencement of annuity
payments, death proceeds are payable to a named beneficiary in an amount equal
to the greater of (a) the value of the Participant's account as of the valuation
date coincident with or next following the date written notice of death is
received; or (b) if such death occurs prior to the Participant's 65th birthday,
100% of the total deposits made on behalf of the Participant, less any
redemptions. Payments normally are made within seven days of receipt of such
notice.
The Code requires that annuity contracts issued after January 18, 1985
restrict the length of time over which non-spouse beneficiaries may elect to
receive death benefit proceeds. Variable annuity contracts issued after this
date provide that non-spouse beneficiaries must either take a total distribution
within five years of the death of the Participant or, within one year of the
Participant's death, begin periodic payments for a period not to exceed the
expected lifetime of the beneficiary.
If the Participant dies during the annuity period, the Company will pay any
remaining guaranteed payments to (1) the Participant's beneficiary or (2) the
Participant's estate, if no beneficiary survives. Any payments made to a
beneficiary must be on a payment schedule at least as rapid as that made to the
Participant.
PURCHASES AND CONTRACT VALUE
HOW DO I PURCHASE UNITS?
Accumulation Units in the Fund are being continuously offered through the
Company's wholly owned subsidiary, American Fidelity Securities, Inc. ("AFS"),
2000 Classen Center, Oklahoma City, Oklahoma 73106. AFS has been the sole
underwriter of the Fund since 1972. AFS distributes the Contracts through
licensed life insurance representatives of the Company. Premium deposits are
credited on the basis of Accumulation Units. A request for purchase of
Accumulation Units received by the Fund before 3:00 p.m. Central Time will
receive same day pricing; otherwise, pricing on the next trading day following
receipt of a purchase request is used. The minimum initial premium deposit for
each Participant is $20, and the minimum amount of each subsequent deposit is
$10. A deduction is made from each premium deposit to reimburse the Company for
certain sales and other expenses.
The Underwriting Agreement between AFS and the Fund is subject to annual
renewal by the Board of Managers (including a majority of the Board of Managers
who are not interested persons as defined in the Investment Company Act of
1940), but may be terminated by the Board of Managers or by a majority in
interest of Contract Owners, without penalty, on not more than 60 days written
notice, and is automatically terminated upon assignment.
HOW ARE ACCUMULATION UNITS VALUED?
The Fund's Accumulation Unit value is computed once daily. Portfolio
securities are valued as of the close of regular trading of the New York Stock
Exchange, currently 4:00 p.m. Eastern Time, on each business day when the New
York Stock Exchange is open. The New York Stock Exchange is scheduled to be open
Monday through Friday throughout the year, except for certain Federal and other
holidays. The value of the Fund's securities and assets, except certain
short-term debt securities, is determined on the basis of their market values.
Short-term debt securities having remaining maturities of less than 1 year are
valued by the amortized cost method, which approximates market value. Equity
securities held by the Fund are valued at the last sales price on a national
securities exchange or the Nasdaq National Market or, lacking any sales, at the
last reported bid price. Over-the-counter securities not quoted in the Nasdaq
National Market are valued at the reported bid price. Investments for which
market quotations are not readily available, if any, are valued at their fair
value as determined in good faith by the Board of Managers. The value of an
Accumulation Unit is determined by dividing the value of the Fund's securities,
cash and other assets (including accrued but uncollected interest and
dividends), less all liabilities (including accrued expenses but excluding
capital and surplus) by the number of Accumulation Units outstanding.
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<PAGE> 15
The value of a Participant's individual account at any time prior to
commencement of annuity payments is determined by multiplying the total number
of Accumulation Units credited to his or her account by the current Accumulation
Unit value. Each Participant is advised semiannually of the number of
Accumulation Units credited to his or her account, the current Accumulation Unit
value, and the total value of the 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. The net investment factor is the net investment rate for the
period plus 1.0. See "Item 26 -- Annuity Payments" of the Statement of
Additional Information. 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 or her individual account. The redemption value of a
Participant's account is equal to the Accumulation Unit value under the account
next computed after the request for redemption is received by the Company. There
is no assurance that the redemption value of a Participant's account will equal
or exceed the aggregate amount of premium deposits at any time. There are no
administrative fees for withdrawals.
A partial redemption will result in a reduction of the Accumulation Units
in a Participant's account. The reduction in the number of Accumulation Units
will equal the amount redeemed divided by the applicable Accumulation Unit value
next computed after receipt of the redemption request. If a partial redemption
results in reduction of a Participant's accumulation account to less than
$1,000, the Company, at its option, may cancel all Accumulation Units and remit
the entire amount thereof to the Participant. After full redemption and
cancellation of a Participant's account, no further premium deposits may be made
on behalf of such Participant without the consent of the Company.
A Participant's request for redemption should be submitted in writing
directly to the Fund, 2000 Classen Center, Oklahoma City, Oklahoma 73106. A
redemption request requires the signature of each person in whose name the units
are registered, signed exactly as the name appears on the Company's register. In
certain instances, the Fund may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. ALL PROPER REDEMPTION
REQUESTS RECEIVED BEFORE 3:00 P.M. CENTRAL TIME WILL RECEIVE SAME-DAY PRICING.
Payment for units redeemed are made within three days after receipt of a
properly tendered request. Redemption rights may be suspended or payment
postponed at times when the New York Stock Exchange is closed (other than
customary weekend and holiday closings) or trading on the New York Stock
Exchange is restricted; when an emergency exists as a result of which disposal
by the Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund to determine the value of its net assets; or
for such other periods as the Securities and Exchange Commission may by order
permit for the protection of Participants. The Fund may delay the mailing of a
redemption check for recently purchased units until such time as the payment
check has cleared.
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The Fund is required by Federal income tax law to restrict certain
redemptions. In addition, certain adverse tax consequences may result from an
election by a Participant to redeem all or a part of his individual account. See
"Federal Tax Matters."
FEDERAL TAX MATTERS
GENERAL
The following description of Federal income tax consequences under the
Contracts is not exhaustive, and special rules may apply to situations not
discussed herein. For further information, consult a qualified tax adviser
before establishing any retirement program.
The Company files its income tax returns as a "life insurance company"
under the Internal Revenue Code of 1986 (the "Code"). The Fund is part of the
operations of the Company and is not taxed as a "regulated investment company."
To date, the assets of the Fund have not been subject to Federal income tax, nor
is it contemplated that the Fund will be so taxed.
TAXES PAYABLE BY PARTICIPANTS AND ANNUITANTS
The Contracts offered by this Prospectus are used with retirement programs
which receive favorable tax deferred treatment under Federal income tax law.
Increases in the value of a Participant's account are not subject to income tax
until annuity payments commence, at which time the amount of each payment is
considered as ordinary income.
Annuity payments or other amounts received under all Contracts generally
are subject to some form of Federal income tax withholding. The withholding
requirement will vary among recipients depending on the type of program, the tax
status of the individual and the type of payments from which taxes are withheld.
Additionally, annuity payments or other amounts received under all Contracts may
be subject to state income tax withholding requirements.
SECTION 403(B) ANNUITIES FOR EMPLOYEES OF CERTAIN
TAX-EXEMPT ORGANIZATIONS OR PUBLIC EDUCATIONAL INSTITUTIONS
Premium Deposits. Under Section 403(b) of the Code, payments made by
tax-exempt organizations meeting the requirements of Section 501(c)(3) of the
Code and public educational institutions to purchase annuity Contracts for their
employees are excludable from the gross income of employees to the extent that
the aggregate premium deposits do not exceed the limitations prescribed by
Section 402(g), Section 403(b)(2) and Section 415 of the Code. This gross income
exclusion applies to employer contributions and voluntary salary reduction
contributions.
An individual's voluntary salary reduction contributions under Section
403(b) are generally limited to the lesser of $9,500 or 20% of includible
salary. Additional catch-up contributions are permitted under certain
circumstances. Combined employer and salary reduction contributions are
generally limited to approximately 20% of includible salary. In addition,
employer contributions must comply with various nondiscrimination rules; these
rules may have the effect of further limiting the rate of employer contributions
for highly compensated employees.
Taxation of Distributions. Distributions of voluntary salary reduction
amounts are restricted. The restrictions apply to amounts accumulated after
December 31, 1988 (including voluntary contributions after that date and
earnings on prior and current voluntary contributions). These restrictions
require that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3) death,
(4) disability, or (5) hardship (hardship distributions will be limited to the
amount of salary reduction contributions exclusive of earnings thereon).
Other distributions from a Section 403(b) annuity Contract are taxed as
ordinary income to the recipient in accordance with Section 72 of the Code.
Distributions received before the recipient attains age 59 1/2
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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 or her death, distributions must continue at least as rapidly as under
the method in effect at the date of death. However, amounts accumulated under an
account through December 31, 1986 are not subject to these minimum distribution
requirements. A penalty tax of 50% will be imposed on the amount by which the
minimum required distribution in any year exceeds the amount actually
distributed in that year.
Tax-Free Transfers and Rollovers. The Internal Revenue Service has ruled
(Revenue Ruling 90-24) that total or partial amounts may be transferred tax free
between Section 403(b) annuity contracts and/or Section 403(b)(7) custodial
accounts under certain circumstances. In addition, Section 403(b)(8) of the Code
permits tax-free rollovers from Section 403(b) programs to IRAs or other Section
403(b) programs under certain circumstances. Such a rollover must be completed
within 60 days of receipt of the distribution. The portion of any distribution
which is eligible to be rolled over to an IRA or another Section 403(b) program
is subject to 20% Federal income tax withholding unless the Participant elects a
direct rollover of such distribution to an IRA or other Section 403(b) program.
SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS
Premium Deposits. Premium deposits made by an employer (or a self-employed
individual) under a pension, profit-sharing or annuity plan qualified under
Section 401(a) or Section 403(a) of the Code are excluded from the gross income
of the employee for Federal income tax purposes. Payments made by an employee
generally are made on an after-tax basis unless they are made on a pre-tax basis
by reason of Sections 401(k) or 414(h) of the Code.
Taxation of Distributions. Distributions from Contracts purchased under
qualified plans are taxable as ordinary income, except to the extent allocable
to an employee's after-tax contributions (which constitute "investment in the
Contract"). However, if an employee or the beneficiary receives a lump sum
distribution, as defined in the Code, from an exempt employees' trust, the
taxable portion of the distribution may be subject to special tax treatment. For
most individuals receiving lump sum distributions after attainment of age
59 1/2, the rate of tax may be determined under a special 5-year income
averaging provision. Those who attained age 50 by January 1, 1986 may instead
elect to use a 10-year income averaging provision based on the income tax rates
in effect for 1986. In addition, individuals who attained age 50 by January 1,
1986 may elect capital gains treatment (at a 20% rate) for the taxable portion
of a lump sum distribution attributable to years of service before 1974; such
capital gains treatment has otherwise been repealed. Taxable distributions
received from an account under a qualified plan prior to attainment of age
59 1/2 are subject to the same 10% penalty tax (and the same exceptions) as
described with respect to Section 403(b) annuity Contracts.
Required Distributions. The minimum distribution requirements for qualified
plans are generally the same as described with respect to Section 403(b) annuity
Contracts, except that no amounts are exempted from the minimum distribution
requirements.
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Tax-Free Rollovers. The taxable portion of certain distributions from a
plan qualified under Sections 401 or 403(a) may be transferred in a tax-free
rollover to an individual retirement account or annuity or to another such plan.
Such a rollover must be completed within 60 days of receipt of the qualifying
distribution. The portion of any distribution which is eligible to be rolled
over to an IRA or another Section 401(a) or 403(a) plan is subject to 20%
Federal income tax withholding unless the Participant elects direct rollover of
such distribution to an IRA or other Section 401(a) or 403(a) plan.
INDIVIDUAL RETIREMENT ANNUITIES (IRAS)
Regular IRAs
Premium Deposits. Federal tax laws limit the extent to which individuals
may make tax-deductible contributions for regular IRA Contracts. Deductible
contributions equal to the lesser of $2,000 or 100% of compensation are
permitted only for an individual who (i) is (and whose spouse is not) an active
participant in another retirement plan; (ii) is an active participant in another
retirement plan, but is unmarried and has adjusted gross income in 1998 of
$30,000 or less; (iii) is an active participant in another retirement plan, but
is married and has adjusted gross income in 1998 of $50,000 or less; or (iv) is
not an active participant in another retirement plan, but his or her spouse is
an active participant in another retirement plan and has adjusted gross income
of $150,000 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. An individual who is an active participant in
another retirement plan and whose adjusted gross income exceeds the cut-off
point ($30,000 if unmarried and $50,000 if married) by less than $10,000 is
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. In addition, early withdrawals for the purchase of a
home by a first-time home buyer (subject to a $10,000 lifetime limit) or to pay
qualified higher education expenses are not subject to 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.
Roth IRAs
Premium Deposits. The Taxpayer Relief Act of 1997 created the "Roth IRA"
which permits individuals to make nondeductible contributions and, if specific
requirements are met, receive distributions that are tax free. The Roth IRA is
an individual retirement account and is treated in the same manner as a regular
IRA with certain exceptions. An individual can make an annual nondeductible
contribution to a Roth IRA up to the lesser of $2,000 or 100% of the
individual's annual compensation minus the aggregate amount of contributions for
the tax year to all other IRAs maintained for the benefit of that individual.
Unlike a regular
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IRA, active participation in an employer's qualified plan does not reduce the
amount that an individual can contribute to a Roth IRA. The contribution that
can be made to a Roth IRA is phased out for individuals with adjusted gross
income of between $95,000 and $110,000, and for joint filers with combined
adjusted gross income of between $150,000 and $160,000.
Taxation of Distributions. Distributions from a Roth IRA are not includible
in income if the contribution to which the distribution relates is a "qualified
distribution." A "qualified distribution" is a distribution which is made on or
after the recipient becomes age 59 1/2, on account of death or disability or for
a qualified first-time home buyer expense. A distribution is not considered to
be a "qualified distribution" if it is made within the five-year period
beginning with the first tax year for which the individual made a contribution
to a Roth IRA. A distribution is also not a "qualified distribution" for
payments properly allocable to a "qualified rollover contribution" from a
regular IRA if it is made within the five-year period beginning with the first
tax year in which the rollover contribution was made. Nonqualifying
distributions from a Roth IRA are includible in income to the extent of earnings
on contributions. Distributions that are attributable to contributions to a Roth
IRA are received tax free, since these contributions were nondeductible.
Required Distributions. Roth IRAs are not subject to the minimum
distribution rules before death.
Tax-Free Rollovers. A tax-free rollover may be made to a Roth IRA from (a)
another Roth IRA or (b) a regular IRA that meets the requirements for the
exclusion of a rollover under Code Section 408(d)(3) if the taxpayer has
adjusted gross income of not more than $100,000 and, if married, does not file a
separate return.
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 not exceed $7,000
indexed for inflation. Employees of tax-exempt organizations are not eligible
for this type of SEP. Additionally, only certain small employers who have SEPs
that permitted 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 regular IRA distributions.
Required Distributions. SEP distributions are subject to the same minimum
required distribution rules applicable to regular 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.
16
<PAGE> 20
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>
17
<PAGE> 21
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 28, 1998. 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 28, 1998
B-1
<PAGE> 22
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
BY PAGE TO
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information and History............................. B-2 6
Investment Objectives and Policies.......................... B-2 6
Management.................................................. B-4 7
Investment Advisory and Other Services...................... B-5 7
Brokerage Allocation........................................ B-6 7
Purchase and Pricing of Securities Being Offered............ B-7 11
Underwriters................................................ B-7 11
Calculation of Performance Data............................. B-8 5
Annuity Payments............................................ B-8 10
Financial Statements........................................ B-10 N/A
</TABLE>
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
B-2
<PAGE> 23
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;
(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 issuers 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 issuers. 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 fundamental
investment policies of the Fund, which may not be changed without the
approval of Contract Owners representing a majority vote of shares of
the Fund.
B-3
<PAGE> 24
(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 1995, 1996 and 1997
was 66.1%, 36.9% and 26.6%, respectively.
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, 64 Manager and Chairman of Director (1982 to present),
2000 Classen Center the Board (1)(2)(3) President and Chief
Oklahoma City, OK 73106 Operating Officer (1992 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
Daniel D. Adams, Jr., 55 Manager and Vice President and Investment
2000 Classen Center Secretary(1)(2) Officer of the Company and
Oklahoma City, OK 73106 American Fidelity
Corporation
Jean G. Gumerson, 75 Manager President and Chief Executive
711 Stanton L. Young Blvd., Officer, Presbyterian Health
Suite 604 Foundation
Oklahoma City, OK 73104
Edward C. Joullian, III, 68 Manager(2)(3) Chairman of the Board of
2000 Classen Center, 800 East Directors and Chief
Oklahoma City, OK 73106 Executive Officer, Mustang
Fuel Corporation; Director
of the Company and American
Fidelity Corporation;
Director, Fleming Companies,
Inc.; Director, The LTV
Corporation
</TABLE>
B-4
<PAGE> 25
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE WITH REGISTRANT DURING PAST 5 YEARS
--------------------- ---------------- -----------------------
<S> <C> <C>
Gregory M. Love, 36 Manager President and Chief Operating
10601 N. Pennsylvania Avenue Officer (1995 to present),
Oklahoma City, OK 73120 Vice 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., 80 Manager Private practice in pediatric
5222 North Portland dentistry; Professor
Oklahoma City, OK 73112 Emeritus, University of
Oklahoma, College of
Dentistry
G. Rainey Williams, Jr., 37 Manager President, Pinnacle Asset
6301 N. Western Management, Inc. (1996 to
Suite 200 present); Managing Partner,
Oklahoma City, OK 73118 Marco Capital Group (1988-
1996); Director, Mustang
Fuel Corporation
</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.
(c) 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 1997, such fees totaled $1,500.
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 Cameron Associates, Inc., 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: William M. Cameron and Messrs.
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 $200,800 in 1995, $353,000 in
1996 and $416,700 in 1997. 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
B-5
<PAGE> 26
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, 1996 and 1997, the
Company paid Kelly $27,150, $131,000 and $182,050, respectively, and
Todd Investment $34,700, $165,300 and $234,600, respectively.
Lawrence W. Kelly and his wife, Janice M. Kelly, are the majority
shareholders of Kelly, each holding 48.8% 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) 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. Kelly provided investment research
and specific investment recommendations to the Company and the Fund for
an annual fee of $50,000. The Company paid all of Kelly's fees under the
consulting agreement, of which $20,100 in 1995 was allocated to services
rendered to the Fund.
(f) The Fund's distribution expenses are paid by the Company. The Fund has
no distribution plan as described in Rule 12b-1(b) of the Investment
Company Act of 1940.
(g) All of the assets of the Fund are held under a custodial safekeeping
agreement by Bank of Oklahoma, N.A., 6307 Waterford Boulevard, Oklahoma
City, Oklahoma 73118. Bank of Oklahoma maintains securities in
safekeeping on its premises, or in a recognized clearing corporation, or
in the Federal Reserve book-entry system, in the Fund's or Custodian's
name, or in the name of the clearing corporation, or in the nominee name
of any of the foregoing.
The consolidated financial statements of the Company and its
subsidiaries as of December 31, 1997 and 1996 and for the three years
ended December 31, 1997 and the financial statements of the Fund as of
December 31, 1997 and 1996 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 March
18, 1997 to appoint KPMG Peat Marwick LLP as the Fund's independent
certified public accountants for 1997 and this decision was ratified by
the Contract Owners at their annual meeting on June 6, 1997.
ITEM 22 -- BROKERAGE ALLOCATION
For the years 1995, 1996 and 1997, the Fund paid brokerage commissions of
$137,100, $87,100 and $90,500. The higher commissions in 1995 were largely
because of 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 1995, .09% in 1996 and .07% in 1997.
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.
B-6
<PAGE> 27
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 1997, Todd Investment internally allocated brokerage
transactions to certain brokers based on the furnishing of such services.
Research services provided by brokers may be used by Todd Investment in advising
all of its clients and not all such services may be used by the clients which
paid the commissions. Conversely, however, a client of Todd Investment may
benefit from research services provided by brokers whose commissions are paid by
other clients. As a result, 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.
B-7
<PAGE> 28
(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 1995, 1996 and 1997 were $256,000, $312,800
and $449,200, 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, 1997
and average annual total returns for the five and ten year periods
ended December 31, 1997 were 19.85%, 15.08% and 14.86%, respectively.
The average total return (T) is computed by equating the value at the
end of the period (ERV) with a hypothetical initial investment of
$1,000 (P) over a period of years (n) according to the following
formula as required by the Securities and Exchange Commission:
P(1 + T)(n) = ERV.
To calculate total return, an initial investment is multiplied by 96%
(which gives effect to the 3.00% sales charge, 0.25% administrative fee
and 0.75% minimum death benefit expense). The product is then reduced by
the $0.50 per payment expense and the one-time contract fee of $15.00. The
resulting amount is divided by the Accumulation Unit value as of the first
day of the period in order to determine the initial number of Accumulation
Units purchased. The number of Accumulation Units purchased is multiplied
by the Accumulation Unit value as of the end of the period in order to
determine the ending value. The difference between the ending value and
the initial investment divided by the initial investment converted to a
percentage equals total return. Total return may be calculated for the
one, five and ten year periods and for other time periods. The Fund's
total return for the one, five and ten year time periods ended December
31, 1997 was 19.85%, 101.83% and 299.56%, 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, 1997 was $1,270, $9,850
and $27,008, 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
B-8
<PAGE> 29
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.
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 Number of Variable Variable Annuity Unit Value
Second and Subsequent = Annuity Units X for Period in Which
Annuity Payments Per Payment Payment is Due
</TABLE>
ILLUSTRATION USING HYPOTHETICAL EXAMPLE
The determination of the Variable Annuity Unit value and the annuity
payment may be illustrated by the following hypothetical example. Assume a
Participant at the date of retirement has credited to his individual account
30,000 Accumulation Units, and that the value of an Accumulation Unit on the
fourteenth calendar day immediately preceding the date the first annuity payment
is due was $1.15, producing a total value of his individual account of $34,500.
Assume also that the Participant elects an option for which the table in the
Variable Annuity Contract indicates the first monthly payment is $6.57 per
$1,000 of value applied. The Participant's first monthly payment would thus be
$34,500 divided by $1,000 and multiplied by $6.57, or $226.67.
Assume that the Variable Annuity Unit value for the valuation date on which
the first payment was due was $1.10. When this is divided into the first monthly
payment, the number of Variable Annuity Units represented by that payment is
determined to be 206.064. The value of this same number of Variable Annuity
Units will be paid in each subsequent month.
Assume further that the Variable Annuity Unit value is $1.107 for the
fourteenth calendar day prior to a subsequent valuation date. The current
monthly payment is then determined by multiplying the fixed number of Variable
Annuity Units by the current Variable Annuity Unit value or 206.064 times
$1.107, which produces a current monthly payment of $228.11.
B-9
<PAGE> 30
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, 1997 and 1996
Statements of Operations for the Years Ended December 31, 1997 and 1996
Statements of Changes in Net Assets for the Years Ended December 31, 1997
and 1996
Schedule of Portfolio Investments as of December 31, 1997
Financial Highlights for the Five Years Ended December 31, 1997
Notes to Financial Statements
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Schedule III -- Business Segment Information
Schedule IV -- Reinsurance
B-10
<PAGE> 31
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, 1997 and
1996, 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, 1997, and the Schedule of Portfolio
Investments as of December 31, 1997. 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, 1997 and 1996, by correspondence with the custodian and brokers. 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, 1997 and 1996, 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, 1997, in conformity with generally accepted accounting
principles.
Oklahoma City, Oklahoma
January 16, 1998
B-11
<PAGE> 32
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Investments, at market value (cost $85,275,367 and
$66,094,445 in 1997 and 1996, respectively)............... $136,542,104 $98,234,687
Cash........................................................ 327,520 469,711
Accrued interest and dividends.............................. 220,927 191,430
------------ -----------
Total assets...................................... 137,090,551 98,895,828
LIABILITIES
Payable to broker........................................... -- 66,429
------------ -----------
Total liabilities................................. -- 66,429
------------ -----------
Net assets.................................................. $137,090,551 $98,829,399
============ ===========
Accumulation units outstanding.............................. 7,043,575 6,443,056
============ ===========
Net asset value per unit.................................... $ 19.4632 $ 15.3389
============ ===========
</TABLE>
See accompanying notes to financial statements.
B-12
<PAGE> 33
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Investment income:
Income:
Dividends.............................................. $ 1,954,633 1,538,540
Interest............................................... 271,265 201,294
----------- ----------
2,225,898 1,739,834
----------- ----------
Expenses:
Mortality and expense guaranty fees (note 3)........... 1,148,308 809,048
Investment management fees (note 3).................... 598,077 353,001
----------- ----------
1,746,385 1,162,049
----------- ----------
Net investment income............................. 479,513 577,785
----------- ----------
Realized gains on investments:
Proceeds from sales....................................... 31,160,087 31,697,825
Cost of securities sold................................... 23,009,137 27,483,951
----------- ----------
Net realized gains................................ 8,150,950 4,213,874
----------- ----------
Unrealized appreciation on investments:
End of year............................................... 51,266,737 32,140,242
Beginning of year......................................... 32,140,242 17,459,492
----------- ----------
Increase in unrealized appreciation............... 19,126,495 14,680,750
----------- ----------
Net increase in net assets resulting from
operations..................................... $27,756,958 19,472,409
=========== ==========
</TABLE>
See accompanying notes to financial statements.
B-13
<PAGE> 34
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Increase in net assets from operations:
Net investment income..................................... $ 479,513 577,785
Net realized gains on investments......................... 8,150,950 4,213,874
Increase in unrealized appreciation on investments........ 19,126,495 14,680,750
------------ ----------
Net increase in net assets resulting from
operations...................................... 27,756,958 19,472,409
------------ ----------
Changes from principal transactions:
Net purchase payments received (note 3)................... 21,031,010 15,914,163
Withdrawal of funds....................................... (10,526,816) (9,709,707)
------------ ----------
Increase in net assets derived from principal
transactions.................................... 10,504,194 6,204,456
------------ ----------
Increase in net assets............................ 38,261,152 25,676,865
Net assets:
Beginning of year......................................... 98,829,399 73,152,534
------------ ----------
End of year............................................... $137,090,551 98,829,399
============ ==========
Accumulation units:
Outstanding, beginning of year............................ 6,443,056 5,996,795
Increase for payments received......................... 1,190,147 1,159,575
Decrease for withdrawal of funds....................... (589,628) (713,314)
------------ ----------
Outstanding, end of year.................................. 7,043,575 6,443,056
============ ==========
</TABLE>
See accompanying notes to financial statements.
B-14
<PAGE> 35
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
<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....................... 84,400 $ 3,776,900
Pfizer, Inc...................................... 43,800 3,265,816
Johnson & Johnson................................ 44,000 2,898,500
Novartis AG-ADR**................................ 23,000 1,863,000
Proctor & Gamble Company......................... 22,600 1,803,751
Merck & Company, Inc............................. 11,700 1,243,125
American Home Products Corporation............... 16,000 1,224,000
Abbott Laboratories.............................. 16,800 1,101,442
Eli Lilly and Company............................ 12,800 891,200
DuPont........................................... 14,400 864,893
------------
18,932,627 13.81%
------------
Business Services:
Interpublic Group of Companies................... 66,450 3,310,007
Cisco Systems, Inc.*............................. 59,250 3,303,188
Automatic Data Processing........................ 34,000 2,086,750
Computer Associates.............................. 25,800 1,364,175
Reuters Holdings PLC ADR**....................... 13,000 861,250
Microsoft Corporation*........................... 5,500 710,875
------------
11,636,245 8.49%
------------
Depository Institutions:
Citicorp......................................... 16,500 2,086,210
MBNA............................................. 67,500 1,843,560
BankAmerica Corporation.......................... 20,000 1,460,000
CoreStates Financial Corporation................. 18,200 1,457,128
Nationsbank Corporation.......................... 19,400 1,179,753
J.P. Morgan & Company............................ 10,000 1,128,750
Wachovia Corporation............................. 13,500 1,095,188
Regions Financial Corporation.................... 17,600 742,491
------------
10,993,080 8.02%
------------
Insurance Carriers:
American International Group..................... 39,150 4,257,562
AFLAC, Inc....................................... 59,775 3,055,997
Allstate Corporation............................. 21,000 1,908,375
------------
9,221,934 6.73%
------------
</TABLE>
B-15
<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>
Petroleum and Coal Products:
Royal Dutch Petroleum............................ 61,200 $ 3,316,244
Texaco, Inc...................................... 55,200 3,001,500
Exxon Corporation................................ 36,000 2,202,732
------------
8,520,476 6.22%
------------
Electronic and Other Electric Equipment:
General Electric Company......................... 72,500 5,319,687
Intel Corporation................................ 41,600 2,922,400
------------
8,242,087 6.01%
------------
Food and Kindred Products:
The Coca-Cola Company............................ 49,200 3,277,950
Sara Lee Corporation............................. 44,000 2,477,728
Ralston Purina................................... 23,900 2,221,194
------------
7,976,872 5.82%
------------
Holding and Other Investment Offices:
Wells Fargo & Company............................ 7,100 2,410,003
First Industrial Realty Trust.................... 28,000 1,011,500
Mack-Cali Realty Corporation..................... 20,400 836,400
Meditrust........................................ 18,744 686,499
Felcor Suite Hotels, Inc......................... 17,300 614,150
Federal Realty Investment Trust.................. 22,300 574,225
------------
6,132,777 4.47%
------------
Industrial Machinery and Equipment:
Hewlett-Packard Company.......................... 36,600 2,287,500
International Business Machines Corporation...... 14,000 1,463,868
Baker Hughes, Inc................................ 32,200 1,404,725
United Technologies.............................. 10,000 728,120
------------
5,884,213 4.29%
------------
Communications:
Bell Atlantic Corporation........................ 16,896 1,537,536
SBC Communications, Inc.......................... 18,800 1,377,100
Ameritech........................................ 16,700 1,344,350
Bellsouth Corporation............................ 15,000 844,680
------------
5,103,666 3.72%
------------
Electric, Gas and Sanitary Services:
GTE.............................................. 34,800 1,818,300
Teco Energy, Inc................................. 37,500 1,054,688
Duke Energy Company.............................. 16,000 886,000
Texas Utilities.................................. 19,500 810,459
------------
4,569,447 3.33%
------------
</TABLE>
B-16
<PAGE> 37
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
SCHEDULE OF PORTFOLIO INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARKET VALUE
--------------------------
SHARES OR PERCENTAGE
PRINCIPAL OF NET
AMOUNT AMOUNT ASSETS
---------- ------------ ----------
<S> <C> <C> <C>
Oil & Gas Extraction:
Diamond Offshore*................................ 47,400 $ 2,281,125
Schlumbereger, LTD............................... 26,000 2,093,000
------------
4,374,125 3.19%
------------
Food Stores:
Safeway, Inc.*................................... 68,600 4,338,950
------------
4,338,950 3.16%
------------
Personal Services:
Loewen Group, Inc.**............................. 71,000 1,832,652
H & R Block...................................... 34,300 1,537,052
------------
3,369,704 2.46%
------------
Railroad Transportation:
Burlington Northern/Santa Fe..................... 31,000 2,881,047
------------
2,881,047 2.10%
------------
Miscellaneous Retail:
Costco, Inc. *................................... 57,700 2,574,862
------------
2,574,862 1.88%
------------
Transportation Equipment:
Allied Signal, Inc............................... 30,000 1,168,110
Chrysler Corporation............................. 24,000 844,488
------------
2,012,598 1.47%
------------
Non-Depository Institutions:
Federal National Mortgage Association............ 34,400 1,962,933
------------
1,962,933 1.43%
------------
Motion Pictures:
Disney (Walt) Company............................ 19,200 1,901,990
------------
1,901,990 1.39%
------------
Radio, TV and Computer Stores:
Circuit City Stores.............................. 53,000 1,884,786
------------
1,884,786 1.37%
------------
Miscellaneous Manufacturing Industries:
Tiffany & Company................................ 47,200 1,702,126
------------
1,702,126 1.24%
------------
Hotels and Other Lodging Places:
Mirage Resorts, Inc. *........................... 61,800 1,405,950
------------
1,405,950 1.03%
------------
Fabricated Metal Products:
The Gillette Company............................. 13,800 1,386,031
------------
1,386,031 1.01%
------------
</TABLE>
B-17
<PAGE> 38
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>
Primary Metal Industries:
Englehard Corporation............................ 58,000 $ 1,007,750
------------
1,007,750 0.73%
------------
Health Services:
Phycor, Inc...................................... 19,000 513,000
MedPartners, Inc.*............................... 21,000 469,875
------------
982,875 0.72%
------------
Eating and Drinking Places:
McDonald's Corporation........................... 16,000 764,000
------------
764,000 0.56%
------------
General Merchandise:
Wal-Mart Corporation............................. 16,200 638,879
------------
638,879 0.47%
------------
Building Materials and Gardening Supplies:
Home Depot, Inc.................................. 10,500 618,188
------------
618,188 0.45%
------------
Paper & Allied Products:
Kimberly Clark Corporation....................... 3,300 162,730
------------
162,730 0.12%
------------ ------
Total common stocks (cost $79,916,211)...... 131,182,948 95.69%
------------ ------
Short-term investments:
Associates Corporation of North America Master Note
Fltg (5.57% at December 31, 1997)................ $4,395,744 4,395,744
U.S. Treasury Bill (5.2% maturing December 10,
1998)............................................ $ 500,000 475,083
U.S. Treasury Bill (5.2% maturing June 11, 1998).... $ 500,000 488,329
------------
Total short-term investments................ 5,359,156 3.91%
------------ ------
Total investments (cost $85,275,367)........ 136,542,104 99.60%
Other assets and liabilities, net........... 548,447 0.40%
------------ ------
Total net assets............................ $137,090,551 100.00%
============ ======
</TABLE>
- ---------------
* Presently not producing dividend income
** Foreign investments
See accompanying notes to financial statements.
B-18
<PAGE> 39
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
--------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Investment income and expenses:
Investment income.............. $ .3284 $ .2817 $ .2163 $ .2105 $ .2113
Operating expenses............. .2576 .1882 .1364 .1193 .1180
---------- ---------- ---------- ---------- ----------
Net investment
income............... .0708 .0935 .0799 .0912 .0933
Capital changes:
Net realized and unrealized
gains (losses) from
securities.................. 4.0535 3.0468 3.0251 (.7066) .5074
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
accumulation unit value..... 4.1243 3.1403 3.1050 (.6154) .6007
Accumulation unit value,
beginning of period......... 15.3389 12.1986 9.0936 9.7090 9.1083
---------- ---------- ---------- ---------- ----------
Accumulation unit
value,
end of period........ $ 19.4632 $ 15.3389 $ 12.1986 $ 9.0936 $ 9.7090
========== ========== ========== ========== ==========
Number of accumulation units
outstanding, end of period..... 7,043,575 6,443,056 5,996,795 5,615,645 5,113,999
========== ========== ========== ========== ==========
Ratios:
Ratio of expenses to average
net assets.................. 1.4603% 1.3777% 1.2880% 1.2826% 1.2783%
Ratio of net investment income
to average net assets....... .4042% .6850% .7542% .9797% 1.0110%
Portfolio turnover rate........ 26.6% 36.9% 66.1% 43.5% 51.2%
Average commission rate paid... $ .0619 $ .0636 $ .0551
</TABLE>
See accompanying notes to financial statements.
B-19
<PAGE> 40
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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. 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, and
include all investments with maturities less than one year.
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.
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.
B-20
<PAGE> 41
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) INVESTMENTS
The aggregate dollar amount of investment purchases (exclusive of
short-term investments) was $39,825,220 and $34,924,178 for the years ended
December 31, 1997 and 1996, respectively. At December 31, 1997, net unrealized
appreciation on investments of $51,266,737, was composed of gross appreciation
of $52,797,920 and gross depreciation of $1,531,183.
(3) VARIABLE ANNUITY CONTRACTS
Net purchase payments received represent gross payments less deductions of
$803,592 and $578,837 for the years ended December 31, 1997 and 1996,
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). 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.
(4) ANNUITY RESERVES
Annuity reserves are computed for currently payable contracts according to
the Progressive Annuity Mortality Table. The assumed interest rate is 3.5
percent unless the annuitant elects otherwise, in which case the rate may vary
from zero to 5 percent, as regulated by the laws of the respective states.
Charges to annuity reserves for mortality and expense risks experience are
reimbursed to AFA if the reserves required are less than originally estimated.
If additional reserves are required, AFA reimburses the Fund. At December 31,
1997 and 1996, there were no contract owners who had elected the variable
annuity method of payout. Accordingly, the Fund held no annuity reserves at
December 31, 1997 and 1996.
(5) SUBSEQUENT EVENT
In 1998, AFA and the Fund intend to implement a reorganization plan whereby
the Fund will become a unit investment trust and exchange its assets solely for
shares of a new management investment company formed by AFA. The reorganization
is subject to approval by contract owners of the Fund and to regulatory
approvals.
B-21
<PAGE> 42
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,
1997 and 1996, 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, 1997. 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, 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.
March 16, 1998
B-22
<PAGE> 43
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Investments:
Fixed maturities held-to-maturity, at amortized cost (fair
value $241,863 and $251,034 in 1997 and 1996,
respectively).......................................... $ 234,799 $ 251,944
Fixed maturities available-for-sale, at fair value
(amortized cost of $622,712 and $551,856 in 1997 and
1996, respectively).................................... 642,577 559,121
Equity securities, at fair value:
Common stocks (cost $11,023 and $9,692 in 1997 and
1996, respectively)................................... 11,736 12,046
Mortgage loans on real estate, net........................ 135,122 130,508
Investment real estate, at cost (less accumulated
depreciation of $1,350 and $7,047 in 1997 and 1996,
respectively).......................................... 9,070 18,954
Policy loans.............................................. 8,668 8,359
Short-term and other investments.......................... 20,770 12,763
---------- ----------
1,062,742 993,695
---------- ----------
Cash........................................................ 8,427 15,962
Accrued investment income................................... 14,357 14,248
Accounts receivable:
Uncollected premiums...................................... 20,571 21,665
Reinsurance receivable.................................... 57,503 36,794
Other..................................................... 15,248 12,341
---------- ----------
93,322 70,800
---------- ----------
Deferred policy acquisition costs........................... 177,737 162,497
Other assets................................................ 5,761 6,954
Separate account assets..................................... 137,090 98,896
---------- ----------
Total assets...................................... $1,499,436 $1,363,052
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities:
Reserves for future policy benefits:
Life and annuity....................................... $ 105,663 $ 102,820
Accident and health.................................... 140,530 121,097
Unearned premiums......................................... 2,686 2,376
Benefits payable.......................................... 35,347 33,178
Funds held under deposit administration contracts......... 580,499 556,665
Other policy liabilities.................................. 92,144 85,068
---------- ----------
956,869 901,204
---------- ----------
Other liabilities:
Net deferred income tax liability......................... 59,198 48,278
General expenses, taxes, licenses and fees payable and
other liabilities...................................... 36,099 34,125
---------- ----------
95,297 82,403
---------- ----------
Notes payable............................................... 50,719 19,839
Separate account liabilities................................ 137,090 98,896
---------- ----------
Total liabilities................................. 1,239,975 1,102,342
---------- ----------
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................................ 23,244 19,916
Net unrealized holding gain on investments
available-for-sale, net of deferred tax expense of
$7,207 and $3,367 in 1997 and 1996, respectively....... 13,371 6,252
Retained earnings......................................... 220,346 232,042
---------- ----------
Total stockholder's equity........................ 259,461 260,710
Commitments and contingencies (notes 9, 10, 11, 13 and 14)
---------- ----------
Total liabilities and stockholder's equity........ $1,499,436 $1,363,052
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
B-23
<PAGE> 44
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums:
Life and annuity...................................... $ 25,282 $ 24,187 $ 24,514
Accident and health................................... 181,944 166,057 156,960
-------- -------- --------
207,226 190,244 181,474
Net investment income.................................... 69,175 67,502 65,326
Other.................................................... 13,190 11,250 12,190
-------- -------- --------
Total revenues................................... 289,591 268,996 258,990
-------- -------- --------
Benefits:
Benefits paid or provided:
Life and annuity...................................... 18,045 18,539 18,849
Accident and health................................... 105,594 93,858 74,219
Interest credited to funded contracts.................... 30,207 28,386 27,635
Increase in reserves for future policy benefits:
Life and annuity (net of increase (decrease) in
reinsurance reserves ceded of $55, $(3), and $53 in
1997, 1996, and 1995, respectively)................. 2,788 4,336 4,619
Accident and health (net of increase (decrease) in
reinsurance reserves ceded of $9,838, $6,704, and
$(250), in 1997, 1996, and 1995, respectively)...... 10,250 13,259 15,535
-------- -------- --------
166,884 158,378 140,857
-------- -------- --------
Expenses:
Selling costs............................................ 56,835 47,105 48,784
Other operating, administrative and general expenses..... 43,241 44,942 42,586
Taxes, other than federal income taxes, and licenses and
fees.................................................. 7,251 6,535 6,250
Increase in deferred policy acquisition costs............ (15,240) (10,082) (11,902)
-------- -------- --------
92,087 88,500 85,718
-------- -------- --------
Total benefits and expenses........................... 258,971 246,878 226,575
-------- -------- --------
Income before income taxes............................ 30,620 22,118 32,415
Income taxes:
Current.................................................. 2,680 4,421 10,443
Deferred................................................. 5,802 4,650 554
-------- -------- --------
8,482 9,071 10,997
-------- -------- --------
Net income............................................ $ 22,138 $ 13,047 $ 21,418
======== ======== ========
Basic net income per share................................. $ 88.55 $ 52.19 $ 85.67
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
B-24
<PAGE> 45
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(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, 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
Net income........................................ -- -- -- 22,138
Increase in unrealized holding gain, net of
deferred taxes.................................. -- -- 7,119 --
Capital contributed by parent..................... -- 3,328 -- --
Dividends......................................... -- -- -- (33,834)
------ ------ ------ -------
Balance at December 31, 1997...................... $2,500 23,244 13,371 220,346
====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
B-25
<PAGE> 46
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 22,138 $ 13,047 $ 21,418
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for depreciation on investment real
estate............................................. 653 935 876
Accretion of discount on investments................. (546) (469) (605)
Realized gains on investments........................ (1,823) (1,793) (2,423)
Increase in deferred policy acquisition costs........ (15,240) (10,082) (11,902)
Increase in accrued investment income................ (218) (478) (1,819)
(Increase) decrease in accounts receivable........... (23,254) (15,006) 847
Increase in policy liabilities....................... 56,043 36,130 66,489
Increase in general expenses, taxes, licenses and
fees payable and other liabilities................. 2,656 4,257 256
Deferred income taxes................................ 5,802 4,650 554
Other................................................ 949 840 471
--------- --------- ---------
Total adjustments............................... 25,022 18,984 52,744
--------- --------- ---------
Net cash provided by operating activities....... 47,160 32,031 74,162
--------- --------- ---------
Cash flows from investing activities:
Sale, maturity or repayment of investments:
Fixed maturities held-to-maturity.................... 20,940 26,867 73,984
Fixed maturities available-for-sale.................. 133,727 166,678 36,640
Equity securities.................................... 11,673 5,708 5,635
Mortgage loans on real estate........................ 20,200 15,736 12,426
Real estate.......................................... 9,221 9,101 7,677
Net (increase) decrease in short-term and other
investments.......................................... (11,013) (3,416) 3,283
Purchase of investments:
Fixed maturities held-to-maturity.................... (4,349) (45,961) (60,439)
Fixed maturities available-for-sale.................. (211,464) (171,753) (164,417)
Equity securities.................................... (19,489) (4,580) (4,249)
Mortgage loans on real estate........................ (24,793) (24,671) (14,328)
Real estate.......................................... (1,403) (907) (2,820)
Policy loans, net.................................... (309) (194) (305)
Cash received from sale of AFI to AFC, net of cash
transferred.......................................... -- -- 21,005
--------- --------- ---------
Net cash used in investing activities........... (77,059) (27,392) (85,908)
--------- --------- ---------
Cash flows from financing activities:
Dividends paid to parent................................ (14,156) (4,200) --
Capital contribution from parent........................ 3,328 -- 4,085
Proceeds from notes payable............................. 109,775 9,075 7,095
Repayment of notes payable.............................. (76,583) (8,278) (5,849)
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................... 22,364 (3,403) 5,331
--------- --------- ---------
Net (decrease) increase in cash........................... (7,535) 1,236 (6,415)
Cash at beginning of year................................. 15,962 14,726 21,141
--------- --------- ---------
Cash at end of year....................................... $ 8,427 $ 15,962 $ 14,726
========= ========= =========
</TABLE>
B-26
<PAGE> 47
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on notes payable............................ $ 2,076 $ 1,340 $ 1,478
========= ========= =========
Federal income taxes................................. $ 4,800 $ 7,100 $ 12,500
========= ========= =========
Supplemental disclosure of noncash investing activities:
Change in unrealized holding gain on investments
available-for-sale, net of deferred tax expense
(benefit) of $3,840, $(6,289), and $15,554, in 1997,
1996, and 1995, respectively......................... $ 7,119 $ (9,776) $ 15,079
========= ========= =========
Investments transferred to available-for-sale........... $ -- $ -- $ 300,850
========= ========= =========
Supplemental disclosure of noncash financing activities:
Capital contribution from parent through forgiveness of
deferred tax liability............................... $ -- $ 2,198 $ --
========= ========= =========
Amounts transferred to Parent through dividend of common
stock of affiliated companies:
Fixed maturities..................................... $ 8,567 $ -- $ --
========= ========= =========
Real estate, net..................................... $ 2,632 $ -- $ --
========= ========= =========
Short-term and other investments..................... $ 3,006 $ -- $ --
========= ========= =========
Accounts receivable.................................. $ 732 $ -- $ --
========= ========= =========
Accrued investment income............................ $ 109 $ -- $ --
========= ========= =========
Other assets......................................... $ 241 $ -- $ --
========= ========= =========
Policy liabilities................................... $ 378 $ -- $ --
========= ========= =========
Notes payable........................................ $ 2,312 $ -- $ --
========= ========= =========
Deferred tax liability............................... $ 683 $ -- $ --
========= ========= =========
Other liabilities.................................... $ 682 $ -- $ --
========= ========= =========
Amounts transferred to Parent through dividend of common
stock of non-affiliated companies:
Common stock......................................... $ 6,485 $ -- $ --
========= ========= =========
Deferred tax liability assumed by the Company........ $ (1,961) $ -- $ --
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-27
<PAGE> 48
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(1) SIGNIFICANT ACCOUNTING POLICIES
Business
American Fidelity Assurance Company (AFA or the Company) and subsidiaries
provide a variety of financial services. AFA is a wholly owned subsidiary of
American Fidelity Corporation (AFC), a Nevada insurance holding company. 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. 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 with
approximately 34% of direct premiums written in Oklahoma, Texas, and Georgia.
AFA is represented by approximately 235 salaried managers and agents, and over
3,500 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 whose premiums are 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. These premiums
are also funded by employees through payroll deductions. 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 taken measures to reduce its involvement with major medical
products in order to concentrate on its more profitable lines of business.
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.
B-28
<PAGE> 49
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in its investments.
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.
B-29
<PAGE> 50
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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
the Company's experience. Deferred policy acquisition costs are subject to
recoverability testing at time of policy issue and at the end of each accounting
period, and are written off if determined to be unrecoverable.
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 the Company'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.
B-30
<PAGE> 51
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
Basic Net Income Per Share
Basic net income per share is based on the weighted average number of
shares outstanding. During the years ended December 31, 1997, 1996, and 1995,
the weighted average number of shares was 250,000. There are no dilutive
securities outstanding.
Reclassifications
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
(2) STATUTORY FINANCIAL INFORMATION
The Company is required to file statutory financial statements with state
insurance regulatory authorities. Accounting principles used to prepare these
statutory financial statements differ from financial statements prepared on the
basis of generally accepted accounting principles. The Company reported
statutory net income for the years ended December 31, 1997 (unaudited), 1996,
and 1995, of approximately $16,276,000, $13,227,000, and $30,510,000,
respectively. The Company reported statutory capital and surplus at December 31,
1997 (unaudited) and 1996, of approximately $119,523,000 and $146,033,000,
respectively.
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.
B-31
<PAGE> 52
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and 1996, the statutory TAC of the Company
significantly exceeds the level requiring corrective action. At December 31,
1996, the statutory TAC of SGLI significantly exceeded the level requiring
corrective action.
(3) INVESTMENTS
Investment income for the years ended December 31 is summarized below (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Interest on fixed maturities.......................... $ 61,556 58,271 53,931
Dividends on equity securities........................ 25 44 139
Interest on mortgage loans............................ 12,091 11,747 11,543
Investment real estate income......................... 2,285 3,295 4,055
Interest on policy loans.............................. 1,411 1,281 1,200
Interest on short-term investments.................... 244 120 571
Net realized gains on investments..................... 1,823 1,793 2,423
Other................................................. 787 1,186 1,071
-------- ------- ------
80,222 77,737 74,933
Less investment expenses.............................. (11,047) (10,235) (9,607)
-------- ------- ------
Net investment income................................. $ 69,175 67,502 65,326
======== ======= ======
</TABLE>
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>
1997 1996 1995
--------------------- --------------------- ---------------------
REALIZED UNREALIZED REALIZED UNREALIZED REALIZED UNREALIZED
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities
held-to-maturity............. $ 173 -- (1,127) -- 581 --
Fixed maturities available-
for-sale..................... 449 12,600 573 (19,051) 271 31,529
Equity securities.............. -- (1,641) 27 2,986 611 (896)
Real estate.................... 1,219 -- 2,398 -- 1,436 --
Mortgage loans................. (15) -- (68) -- (196) --
Other.......................... (3) -- (10) -- (280) --
------ ------- ------ ------- ------ -------
$1,823 10,959 1,793 (16,065) 2,423 30,633
====== ======= ====== ======= ====== =======
</TABLE>
Included in the above realized gains (losses) is the increase (decrease) in
the allowance for possible losses on mortgage loans of $16,000, $(790,000), and
$235,000 in 1997, 1996, and 1995, respectively, and the increase in the
allowance for losses on investment real estate of $117,000 in 1996. In addition,
the Company
B-32
<PAGE> 53
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
realized net gains (losses) of approximately $1,000, and $(11,000) during 1996,
and 1995, 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, 1997
--------------------------------------------------
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.............................. $ 9,001 659 -- 9,660
Corporate securities.................... 131,251 4,826 (354) 135,723
Mortgage-backed securities.............. 94,547 2,037 (104) 96,480
-------- ----- ------ -------
Totals........................ $234,799 7,522 (458) 241,863
======== ===== ====== =======
</TABLE>
<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 obligations
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-33
<PAGE> 54
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity at December 31 are shown below (in thousands) by
contractual maturity. Expected maturities will differ from contractual
maturities because the issuers of such securities may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1997
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due after one year through five years....................... $ 11,635 11,878
Due after five years through ten years...................... 45,957 47,624
Due after ten years......................................... 82,660 85,881
-------- -------
140,252 145,383
Mortgage-backed securities.................................. 94,547 96,480
-------- -------
$234,799 241,863
======== =======
</TABLE>
Proceeds from sales of investments in fixed maturities held-to-maturity
during 1997, 1996, and 1995 were approximately $9,006,000, $7,948,000, and
$33,685,000, respectively. Gross gains of approximately $173,000, $33,000, and
$1,022,000, respectively, were realized on those sales. In 1996 and 1995, gross
losses of approximately $1,161,000 and $430,000, respectively, were realized on
those sales. In 1997, 1996, and 1995, 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 1997, 1996, and 1995.
Available-for-Sale
The gross unrealized holding gains on equity securities available-for-sale
were $779,000 and $2,369,000 in 1997 and 1996, respectively. Gross unrealized
holding losses on equity securities available-for-sale were $66,000 and $15,000
in 1997 and 1996, respectively.
B-34
<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, 1997
--------------------------------------------------
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.............................. $ 89,182 2,249 (65) 91,366
Corporate securities.................... 382,599 14,128 (195) 396,532
Mortgage-backed securities.............. 150,931 3,909 (161) 154,679
-------- ------ ---- -------
Totals........................ $622,712 20,286 (421) 642,577
======== ====== ==== =======
</TABLE>
<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>
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>
1997
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 22,964 23,140
Due after one year through five years....................... 157,919 162,717
Due after five years through ten years...................... 202,614 209,128
Due after ten years......................................... 88,284 92,913
-------- -------
471,781 487,898
Mortgage-backed securities.................................. 150,931 154,679
-------- -------
$622,712 642,577
======== =======
</TABLE>
Proceeds from sales of investments in fixed maturities available-for-sale
were approximately $100,220,000, $136,577,000, and $31,944,000 in 1997, 1996,
and 1995, respectively. Gross gains of approximately $1,152,000, $1,257,000, and
$359,000 and gross losses of approximately $703,000, $684,000, and $88,000 were
realized on those sales in 1997, 1996, and 1995, respectively.
At December 31, 1997 and 1996, investments with carrying values of
approximately $2,497,000 and $5,282,000, respectively, were on deposit with
state insurance departments as required by statute.
B-35
<PAGE> 56
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>
1997 1996
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash........................................... $ 8,427 8,427 15,962 15,962
Short-term and other investments............... 20,770 20,770 12,763 12,763
Accounts receivable............................ 35,819 35,819 34,006 34,006
Accrued investment income...................... 14,357 14,357 14,248 14,248
Reinsurance receivables on paid and unpaid
benefits.................................... 57,503 57,503 36,794 36,794
Policy loans................................... 8,668 8,668 8,359 8,359
Fixed maturities held-to-maturity.............. 234,799 241,863 251,944 251,034
Fixed maturities available-for-sale............ 642,577 642,577 559,121 559,121
Equity securities.............................. 11,736 11,736 12,046 12,046
Mortgage loans................................. 135,122 145,763 130,508 137,978
Financial liabilities:
Certain policy liabilities..................... 639,272 620,976 613,151 596,386
Other liabilities.............................. 36,099 36,099 34,125 34,125
Notes payable.................................. 50,719 51,247 19,839 19,758
</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 6.95% and 6.60% as of December
31, 1997 and 1996, 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.
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.
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 8.70% and
B-36
<PAGE> 57
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8.92% for December 31, 1997 and 1996, respectively. The fair value of mortgage
loans was calculated by discounting scheduled cash flows to maturity using
estimated market discount rates of 7.29% and 7.71% for December 31, 1997 and
1996, 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, 1997 DECEMBER 31, 1996
---------------------- ----------------------
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............................ $580,499 562,961 556,665 540,105
Annuities.............................. 58,773 58,015 56,486 56,281
</TABLE>
Notes Payable
The fair value of the Company's notes payable is estimated by discounting
the scheduled cash flows of each instrument through the scheduled maturity. The
discount rates used are similar to those used for the valuation of the Company's
commercial mortgage loan portfolio, except for the Company's notes payable to
the Federal Home Loan Bank of Topeka, which are valued using discount rates at
or near the carried rates because the notes have relatively short lives or carry
the option of conversion to an adjustable rate.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument, nor do they reflect income taxes on differences between
fair value and tax basis of the assets. Because no established exchange exists
for a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
B-37
<PAGE> 58
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs principally represent field sales
compensation, direct response costs, underwriting and issue costs, and related
expenses. Information relating to the increase 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, 1997:
Deferred costs................................. $ 8,600 $ 28,734 $ 37,334
Amortization................................... (5,581) (16,513) (22,094)
------- -------- --------
Net increase................................... $ 3,019 $ 12,221 $ 15,240
======= ======== ========
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
======= ======== ========
</TABLE>
(6) RESERVES FOR FUTURE POLICY BENEFITS
Reserves for life and annuity future policy benefits as of December 31 are
principally based on the interest assumptions set forth below (in thousands):
<TABLE>
<CAPTION>
INTEREST
1997 1996 ASSUMPTIONS
-------- -------- ---------------
<S> <C> <C> <C>
Life and annuity reserves:
Issued prior to 1970....................... $ 3,308 $ 3,305 4.75%
Issued 1970 through 1980................... 28,796 28,792 6.75% to 5.25%
Issued after 1982 (indeterminate premium
products)............................... 559 530 10.00% to 8.50%
Issued through 1987 (SGLI acquisition)..... 1,360 1,423 11.00%
Issued 1981 -- 1994 (all other)............ 28,018 27,357 8.50% to 7.00%
Issued after 1994 (all other).............. 2,892 1,701 7.00%
Life contingent annuities.................. 30,894 30,151 Various*
Group term life waiver of premium disabled
lives................................... 5,311 5,105 6.00%
All other life reserves.................... 4,525 4,456 Various
-------- --------
$105,663 $102,820
======== ========
</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).
B-38
<PAGE> 59
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 provision for benefits pertaining to prior years did not change
significantly in 1997. 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 and cancer products.
(8) NOTES PAYABLE
Notes payable as of December 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
5.91% line of credit, due in 1998, interest due monthly..... $ 3,500 $ 3,500
5.97% line of credit, due in 1998, interest due monthly..... 5,000 5,000
5.54% line of credit, due in 1998, interest due monthly..... 3,500 --
5.56% line of credit, due in 1998, interest due monthly..... 5,000 --
5.66% line of credit, due in 1999, interest due monthly..... 3,000 --
5.62% line of credit, due in 1999, interest due monthly..... 10,000 --
6.84% line of credit, due in 2000, interest due monthly..... 4,000 4,000
5.81% line of credit, due in 2002, interest due monthly..... 10,000 --
5.78% line of credit, due in 2002, interest due monthly..... 3,000 --
8.4% mortgage loan, due in monthly installments of $22,000
(including interest) to 2027.............................. 2,881 2,902
Other....................................................... 838 2,054
Various notes payable, paid in 1997......................... -- 2,383
------- -------
$50,719 $19,839
======= =======
</TABLE>
The promissory notes are guaranteed by AFC. The mortgage loan is secured by
a mortgage on other investment real estate. The mortgage loan is also secured by
an assignment of the leases on investment real estate.
AFA has a $50,000,000 line of credit with the Federal Home Loan Bank of
Topeka. The line of credit is secured by investment securities pledged as
collateral by AFA with a carrying value of approximately $61,954,000 at December
31, 1997. The collateral required for this line of credit at December 31, 1997,
was $57,500,000. The pledged securities are held in the Company's name in a
custodial account at Bank of Oklahoma to secure current and future borrowings.
To participate in this available credit, AFA has purchased 114,916 shares of
Federal Home Loan Bank of Topeka common stock with a total carrying value of
approximately $11,491,600 at December 31, 1997.
The Company has unused lines of credit of $3,000,000 at December 31, 1997.
Interest expense for the years ended December 31, 1997, 1996, and 1995,
totaled approximately $2,076,000, $1,319,000, and $1,482,000, respectively.
B-39
<PAGE> 60
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities (excluding interest) of the above indebtedness at
December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................... $17,070
1999............................................... 13,078
2000............................................... 4,084
2001............................................... 92
2002............................................... 13,100
Thereafter......................................... 3,295
-------
$50,719
=======
</TABLE>
(9) INCOME TAXES
Total income tax expense in the accompanying consolidated statements of
income differs from the federal statutory rate of 35% of income before income
taxes principally due to the recapture of certain tax reserve benefits on
reinsurance recaptured by the ceding company in 1997, loss on the disposition of
a subsidiary in 1997, payments made to AFC in 1997 treated as management fees
for tax purposes, and the correction of prior year estimates of deferred taxes
in 1997 and 1996.
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>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Investment real estate.................................... $ -- $ 311
Other investments......................................... 522 428
Life and health reserves.................................. 12,783 12,956
Other liabilities......................................... -- 1,433
-------- --------
Total gross deferred tax assets................... 13,305 15,128
-------- --------
Deferred tax liabilities:
Fixed maturities.......................................... (7,602) (3,010)
Equity securities......................................... (250) (824)
Deferred policy acquisition costs......................... (57,151) (51,937)
Investment real estate.................................... (39) --
Other assets.............................................. (6,863) (7,635)
Other liabilities......................................... (598) --
-------- --------
Total gross deferred tax liabilities.............. (72,503) (63,406)
-------- --------
Net deferred tax liability........................ $(59,198) $(48,278)
======== ========
</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, 1997 and 1996, other accounts receivable
includes income taxes receivable from AFC and other members of the consolidated
group of approximately $6,550,000 and $4,988,000, respectively.
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
B-40
<PAGE> 61
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 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, 1997 and 1996, reinsurance receivables with a carrying value of
approximately $18,183,000 and $11,688,000, respectively were associated with two
reinsurers.
During 1997, the Company entered into litigation with one of its
reinsurance carriers. The litigation is still in process. Management and legal
counsel do not expect the anticipated result to have a material financial impact
on the Company.
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, 1997 and 1996, the face amounts of life insurance in force that are
reinsured amounted to approximately $307,000,000 (approximately 4.6% of total
life insurance in force) and approximately $403,000,000 (approximately 6.3% 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 $50,000 for
individual cancer coverage to $250,000 for major medical coverage.
The effects of reinsurance agreements on earned and written premiums, prior
to deductions for benefits and commission allowances, were approximately
$(92,731,000), $(83,947,000), and $(76,143,000) for life and accident and health
reinsurance ceded, and $416,000, $2,897,000, and $2,750,000 for life and
accident and health reinsurance assumed, for the years ended December 31, 1997,
1996 and 1995, respectively.
Reinsurance agreements reduced benefits paid for life and accident and
health policies by approximately $72,522,000, $61,730,000, and $52,318,000 for
the years ended December 31, 1997, 1996, and 1995, respectively.
Since 1990, the Company has been involved in a reinsurance agreement with
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.
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 policyholders to reject an assumption.
B-41
<PAGE> 62
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, AFA and SGLI entered into an assumption agreement whereby SGLI
assumed a small block of life business and a block of stop-loss medical business
from AFA.
(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>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits........................................... $14,455 11,248
Nonvested benefits........................................ 1,850 1,420
------- -------
Total accumulated benefit obligation.............. $16,305 $12,668
======= =======
Projected benefit obligation for service rendered to date... 19,466 14,679
Plan assets, at fair value.................................. 21,839 16,864
------- -------
Plan assets in excess of projected benefit obligation....... 2,373 2,185
Unrecognized transition amount.............................. (298) (443)
Unrecognized prior service cost due to plan amendment....... 449 521
Unrecognized net loss....................................... 205 370
------- -------
Prepaid pension cost included in other assets............... $ 2,729 2,633
======= =======
</TABLE>
In determining the projected benefit obligation, the weighted average
assumed discount rate used was 7.0% and 7.5% in 1997 and 1996, respectively. The
rate of increase in future salary levels was 5.0% in 1997 and 1996. The expected
long-term rate of return on assets used in determining net periodic pension cost
was 9.5% in 1997 and 1996. Plan assets are invested in fixed maturities, equity
securities, short-term investments and in an unallocated deposit administration
contract with the Company.
Net periodic pension cost for the years ended December 31 included the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service costs -- benefits earned during period........ $ 1,284 $ 1,237 $ 1,025
Interest cost......................................... 1,193 1,054 919
Return on plan assets................................. (4,065) (3,711) (2,455)
Net amortization and deferral......................... 2,332 2,421 1,366
------- ------- -------
Net periodic pension cost............................. $ 744 $ 1,001 $ 855
======= ======= =======
</TABLE>
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 $881,000, $822,000, and $831,000 to this plan during the years
ended December 31, 1997, 1996, and 1995, respectively.
(12) DISCONTINUED OPERATIONS
Effective January 1, 1995, AFA sold its subsidiary American Fidelity
Insurance Company (AFI), a property and casualty insurance company, to AFC for
approximately $28,717,000. In connection with this
B-42
<PAGE> 63
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sale, AFC contributed capital of approximately $4,085,000 to AFA as reflected in
the accompanying consolidated statement of stockholder's equity.
(13) COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 1997, 1996, and 1995, was
approximately $6,163,000, $5,674,000, and $5,133,000, 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, 1997, under
noncancellable long-term leases for office space are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................ $2,863
1999................................................ 1,756
2000................................................ 798
2001................................................ 370
2002................................................ 308
Thereafter.......................................... 331
</TABLE>
The Company has pledged approximately $31,423,000 of its treasury notes as
collateral on lines of credit held by affiliated companies.
The Company has outstanding mortgage loan commitments of approximately
$8,165,000 and $13,182,000 at December 31, 1997 and 1996, 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 1998
through 2003. The properties leased are included in the consolidated balance
sheets as investment real estate with the related debt included in notes
payable. Rental income on these properties is included in the consolidated
statements of income as net investment income.
Investments in real estate held for lease can be summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Land and buildings.......................................... $3,325 4,857
Less accumulated depreciation............................... 685 1,567
------ -----
Net investment.................................... 2,640 3,290
Less indebtedness........................................... 839 884
------ -----
Investment net of indebtedness.............................. $1,801 2,406
====== =====
</TABLE>
B-43
<PAGE> 64
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rentals on noncancellable operating leases can be summarized
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1998................................................... $ 392
1999................................................... 253
2000................................................... 181
2001................................................... 133
2002................................................... 117
Thereafter............................................. 31
------
Total future minimum rentals................................ $1,107
======
</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, 1997, 1996, and 1995, rentals paid under these leases were
approximately $3,577,000, $2,966,000, and $2,955,000, respectively.
During the year ended December 31, 1997, the Company paid investment
advisory fees to a partnership that owns a controlling interest in AFC totaling
approximately $3,232,000.
During the years ended December 31, 1997, 1996, and 1995, the Company and
its subsidiaries paid management fees and investment advisory fees to AFC
totaling approximately $2,848,000, $16,536,000, and $17,885,000, respectively.
The Company and its subsidiaries lease office space from a subsidiary of
AFC. The rent payments associated with the lease will be approximately
$2,100,000 per year for the next 15 years.
During 1997, the Company paid a dividend of approximately $33,834,000 to
AFC. This dividend was in the form of cash payments of approximately $8,800,000,
common stock in affiliated companies (including SGLI) of approximately
$16,588,000 (including deferred tax liabilities assumed by AFC of $683,000), and
common stock in non-affiliated companies of approximately $8,446,000 (including
a deferred tax liability retained by the Company of $1,961,000). This
transaction was approved by the Oklahoma Insurance Department.
Short-term and other investments at December 31, 1997 includes a note
receivable from AFC of approximately $3,328,000, maturing in 1998.
During 1997, the Company entered into a three-year software lease agreement
with AFC. Lease expense related to this agreement was approximately $569,000 and
is included in selling costs and other operating, administrative and general
expenses.
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 and 1995, the Company recorded
investment income on the notes from AFC of approximately $481,000, and $699,000,
respectively.
AFC and several of its subsidiaries rented office space in the home office
building from the Company until the home office building was sold in 1997.
During the years ended December 31, 1997, 1996, and 1995, the Company received
rental income from AFC and several of its subsidiaries of approximately
$299,000, $1,280,000, and $1,281,000, respectively.
B-44
<PAGE> 65
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-45
<PAGE> 66
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III -- BUSINESS SEGMENT INFORMATION
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
The Company's reportable segments are its strategic business units. The
components of operations for the years ended December 31, 1997, 1996, and 1995
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
TOTAL REVENUES:
American Fidelity Education Services Division........ $ 152,021 $ 142,493 $ 129,628
Association Group Division........................... 105,784 99,979 96,140
Brokerage Division................................... 32,290 24,558 31,898
Non insurance operations............................. (504) 1,966 1,324
---------- ---------- ----------
$ 289,591 $ 268,996 $ 258,990
========== ========== ==========
PRETAX EARNINGS:
American Fidelity Education Services Division........ 24,621 14,275 16,034
Association Group Division........................... 10,683 9,349 5,751
Brokerage Division................................... (2,344) (1,903) 10,113
Non insurance operations............................. (2,340) 397 517
---------- ---------- ----------
$ 30,620 $ 22,118 $ 32,415
========== ========== ==========
TOTAL ASSETS:
American Fidelity Education Services Division........ 1,029,976 922,671 885,216
Association Group Division........................... 192,507 197,225 181,426
Brokerage Division................................... 274,818 239,986 231,774
Non insurance operations............................. 2,135 3,170 1,891
---------- ---------- ----------
$1,499,436 $1,363,052 $1,300,307
========== ========== ==========
</TABLE>
B-46
<PAGE> 67
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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, 1997
Life insurance in force............ $6,872,047 306,917 10 6,565,140 --%
========== ======= ======= =========
Premiums:
Life insurance................ 26,756 1,474 -- 25,282 --%
Accident and health
insurance................... 272,785 91,257 416 181,944 --%
---------- ------- ------- ---------
Total premiums........... $ 299,541 92,731 416 207,226 --%
========== ======= ======= =========
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 0.00%
---------- ------- ------- ---------
Total premiums........... $ 271,294 83,947 2,897 190,244 1.52%
========== ======= ======= =========
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 --%
---------- ------- ------- ---------
Total premiums........... $ 254,867 76,143 2,750 181,474 1.52%
========== ======= ======= =========
</TABLE>
See accompanying independent auditors' report.
B-47
<PAGE> 68
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, 1997 and 1996
Statements of Operations for the Years Ended December 31, 1997 and 1996
Statements of Changes in Net Assets for the Years Ended December 31, 1997
and 1996
Schedule of Portfolio Investments as of December 31, 1997
Financial Highlights for the Five Years Ended December 31, 1997
Notes to Financial Statements
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
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 April 30, 1997,
between the Registrant and Bank of Oklahoma, N.A.
</TABLE>
C-1
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C> <C>
4.1 -- Management and Investment Advisory Contract between the
Registrant and the Company dated May 1, 1973, as amended
by Amendment dated September 1, 1995. Incorporated by
reference to Exhibit 4.1 to Post-Effective Amendment No.
33 to Form N-3 filed March 1, 1993 and Exhibit 4.1.1 to
Post-Effective Amendment No. 37 to Form N-3 filed
September 20, 1995.
4.2 -- Investment Sub-Advisory Agreement between the Company and
Lawrence W. Kelly & Associates, Inc. dated June 26, 1995.
Incorporated by reference to Exhibit 4.3 to
Post-Effective Amendment No. 37 to Form N-3 filed
September 20, 1995.
4.3 -- Investment Sub-Advisory Agreement between the Company and
Todd Investment Advisors, Inc. dated June 26, 1995.
Incorporated by reference to Exhibit 4.4 to
Post-Effective Amendment No. 37 to Form N-3 filed
September 20, 1995.
5 -- Underwriting Contract between the Registrant and American
Fidelity Securities, Inc., dated December 20, 1972.
Incorporated by reference to Exhibit 5 to Post-Effective
Amendment No. 33 to Form N-3 filed March 1, 1993.
6 -- Form of Variable Annuity Contract and Amendment Rider
(Investment Management Charge). Incorporated by reference
to Exhibit 6 to Post-Effective Amendment No. 27 to Form
N-3 filed April 30, 1987 and Exhibit 6.1 to Post-
Effective Amendment No. 38 to Form N-3 filed April 26,
1996.
7 -- Form of Variable Annuity Application. Incorporated by
reference to Exhibit 7 to Post-Effective Amendment No. 27
to Form N-3 filed April 30, 1987.
8.1 -- Articles of Incorporation of the Company and all
amendments through November 4, 1987. Incorporated by
reference to Exhibit 8.1 to Post-Effective Amendment No.
33 to Form N-3 filed March 1, 1993.
8.2 -- Amended and Restated Bylaws of the Company dated November
24, 1997.
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.
27 -- Financial Data Schedule.
</TABLE>
C-2
<PAGE> 70
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 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 Senior Chairman of the Board, None
2000 Classen Center Director
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
William A. Hagstrom Director None
800 Research Parkway
Oklahoma City, OK 73104
David R. Lopez Director None
800 N. Harvey, Room 300
Oklahoma City, OK 73102
</TABLE>
C-3
<PAGE> 71
ITEM 30 -- PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT
** CAMERON ENTERPRISES, A LIMITED PARTNERSHIP (CELP) - OK
73-1267299
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CELP Ltd. Agency, Inc.
100% - OK
73-1369092
North American
Ins. Agency, Inc.
(NAIA)
91.5% - OK
73-0687265
Shade Works, LLC Agar Ins. Agency, Inc. North American Ins. N.A.I.A. of North American Insurance
33.33% - OK 95.4% - OK Agency of Colorado, Inc. Louisiana, Inc. Agency of New Mexico, Inc.
73-1475654 73-0675989 100% - CO 100% - LA 100% - NM
84-0599059 72-0761691 85-0441542
North American Ins. North American Ltd. N.A.I.A. Ins.
Agency of Tulsa, Inc. Agency, Inc. Agency, Inc.
100% - OK 100% - OK 100% - OK
73-0778755 73-1356772 73-1527682
National Ins. Marketers
Agency, Inc.
100% - OK
73-1437538
American Fidelity Corp.
(AFC)
92.47% - NV
73-0966202
Market Place Realty American Mortgage *Security General Life Concourse C, Inc. American Fidelity
Corp. (MPRC) & Investment Co. Ins. Co. (SGL) 100% - OK Property Co. (AFPC)
100% - OK (AMICO) 100% - OK 73-1505641 100% - OK
73-1160212 98.7% - OK 73-0741925 73-1290496
73-1232134 NAIC #68691
Home Rentals, Inc.
Holliday Mortgage Corp. 100% - OK
100% - OK 73-1364226
73-1284635
Cimarron Investment Shade Works, LLC
Co., Inc. 16.67% - OK
100% - KS 73-1475634
48-0759023
*American Fidelity
Assurance CO. (AFA)
100% - OK
73-0714500
NAIC #60410
AF Apartments, Inc. American Fidelity American Fidelity Ltd.
100% - OK Securities, Inc. Agency, Inc. (AFLA)
73-1512985 (AFS) 100% - OK
100% - OK 73-1352430
73-0783902
American Fidelity General
Agency, Inc. (AFGA)
100% - OK
73-1352431
Balliet's, Inc. Apple Creek
75% - OK Apartments, Inc.
73-0761950 100% - OK
73-1408485
American Fidelity
International Holdings, Inc.
100% - OK
73-1421879
American Fidelity American Fidelity
Offshore Investments., LTD Care, LLC
Bermuda - 100% 33% - OK
NAIC #20400 73-1424864
Reg. #EC20754
***American Fidelity
(Cypress) Limited - Cypress ***American Fidelity ***Covenant Mari El Development
99% (China), Ltd. Underwriters Corporation Limited
Bermuda (93%) (Bermuda) Ltd. Republic of Cyprus,
***Soyuznik 33.33% Reg. #7035
Insurance Co. (AFOI) - 51.3%
Russian
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> 72
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 April 9, 1998 there were 2,043 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> 73
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.
5. William A. Hagstrom, a director of the Company, is President and
Chairman of the Board of UroCor, Inc., 800 Research Parkway, Oklahoma
City, Oklahoma 73104.
6. David R. Lopez, a director of the Company, is President of the Oklahoma
Division of Southwestern Bell Telephone Company, 800 N. Harvey, Room
300, Oklahoma City, Oklahoma 73102.
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 majority shareholders and
directors of Lawrence W. Kelly & Associates, Inc. The officers of Kelly and the
positions they have held since January 1, 1996 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)
Catherin M. Oaks........................ Vice President-Operations and Compliance
(1997-present); Registered Sales
Assistant, Morgan Stanley Dean Witter
(1996-1997); Branch Administrative
Assistant, Dean Witter (1994-1996)
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
C-6
<PAGE> 74
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,
1996 or earlier:
<TABLE>
<CAPTION>
NAME POSITIONS
---- ---------
<S> <C>
Bosworth M. Todd........................ Chairman; Director, First Capital Bank of
Kentucky, Louisville, KY (1996-
present); Director of SAMC
Robert P. Bordogna...................... President and Chief Executive Officer;
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
C. Kevin Blair.......................... Vice President, Business Development
(1997-present); Vice President, PNC
Bank, Kentucky, Louisville, KY
(1992-1997)
</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. It is also the sole underwriter for the Company's American Fidelity
Separate Account B.
C-7
<PAGE> 75
(b) Director and officer information for American Fidelity Securities, Inc.
is as follows:
<TABLE>
<CAPTION>
POSITIONS AND
NAME AND PRINCIPAL POSITIONS AND OFFICES OFFICES WITH
BUSINESS ADDRESS WITH UNDERWRITER FUND
------------------ --------------------- -------------
<S> <C> <C>
David R. Carpenter Director, Chairman of the Board, None
P.O. Box 25523 President, Treasurer, Chief
Oklahoma City, OK 73125 Financial Officer and Registered
Limited Principal
Marvin R. Ewy Director, Vice President, Secretary, None
P.O. Box 25523 Chief Operations Officer and
Oklahoma City, OK 73125 Registered Limited Principal
Nancy K. Steeber Director, Vice President, Operations None
P.O. Box 25523 Officer and Registered Limited
Oklahoma City, OK 73125 Principal
</TABLE>
(c) The net underwriting discounts and commissions received by American
Fidelity Securities, Inc. in 1997 were $449,200, representing the 3% sales fee
deducted from premium deposits to the Fund. It received no other compensation
from or on behalf of the Fund during the year.
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:
American Fidelity Assurance Company
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> 76
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940 the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of the Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Oklahoma City,
and State of Oklahoma on this 23rd day of April, 1998.
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 23,
1998.
/s/ JOHN W. REX
------------------------------------
John W. Rex, Chairman of the Board
/s/ DANIEL D. ADAMS, JR.
------------------------------------
Daniel D. Adams, Jr., Manager
and Secretary
/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> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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 April 30, 1997,
between the Registrant and Bank of Oklahoma, N.A.
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 -- Amended and Restated Bylaws of the Company dated November
24, 1997.
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.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3
AMERICAN FIDELITY VARIABLE ANNUITY FUND A
CORPORATE CUSTODIAL AGREEMENT
--------------------------------------------------------
ARTICLE I
CREATION OF CUSTODIAL RELATIONSHIP
1.01 AMERICAN FIDELITY VARIABLE ANNUITY FUND A (hereinafter referred
to as "Principal"), wishes to provide for the safekeeping of certain assets of
Principal, including certified securities and uncertified securities as defined
in paragraphs (a) and (b) of subsection (1) of 12A O.S. Section 8-102 and by
federal laws and regulations (hereinafter collectively referred to as
"Securities"), cash and short-term liquid investments, and other assets
(hereinafter referred to as the "Account"). Principal hereby appoints BANK OF
OKLAHOMA, N.A., custodian (hereinafter referred to as "Custodian") of the
Account.
ARTICLE II
AUTHORIZED PERSONS OF PRINCIPAL
2.01 Principal shall, from time to time, authorize and terminate the
authority of individuals empowered to act on behalf of Principal with respect
to the Account by appropriate resolutions of Principal's Board of Directors or
by other forms of authorization acceptable to Custodian. Principal shall
designate such individuals as "Authorized Employees" or "Authorized
Signatories" for the purposes specified herein. Principal hereby warrants that
all persons so designated shall have authority to act for Principal as further
provided in this Agreement. Attached hereto as Exhibit "A" and Exhibit "B" of
this Agreement are individuals currently designated as Authorized Employees and
Authorized Signatories, respectively.
2.02 Principal may, from time to time, authorize and terminate the
authority of advisors or sub-advisors empowered to act on behalf of Principal
with respect to buy and sell decisions from and to the Account by appropriate
resolutions of Principal's Board of Directors or by other forms of
authorization acceptable to Custodian. Principal shall designate such advisors
or subadvisors as "Authorized Advisors" for the purposes specified herein.
Principal hereby warrants that all persons so designated shall have
1
<PAGE> 2
authority to act for Principal in buy and sell decisions, subject to
limitations provided in Paragraph 7.03 of this Agreement. Attached hereof as
Exhibit "C" of this Agreement are entities currently designated as Authorized
Advisors.
ARTICLE III
SAFEKEEPING OF SECURITIES
3.01 Custodian shall in all instances maintain the Securities in
accordance with governing law, including, but not limited to, the Oklahoma
Insurance Code, as amended from time to time. Custodian, in its discretion,
shall maintain Securities in safe-keeping on Custodian's premises, or in a
recognized clearing corporation, or in the Federal Reserve book-entry system
subject to the following provisions:
A. Certified Securities held by the Custodian shall be held
either separate from the Securities of the Custodian and of
all of its other customers or in a fungible bulk of Securities
as part of a Filing of Securities by Issue (FOSBI)
arrangement;
B. Securities held in a fungible bulk by the Custodian and
Securities in a clearing corporation or in the Federal Reserve
book-entry system shall be separately identified on the
Custodian's official records as being owned by the Principal.
Said records shall identify which Securities are held by the
Custodian or by its agent and which Securities are in a
clearing corporation or in the Federal Reserve book-entry
system. If the Securities are in a clearing corporation or in
the Federal Reserve book-entry system, said records shall also
identify where the Securities are and, if in a clearing
corporation, the name of the clearing corporation and, if
through an agent, the name of the agent;
C. All Securities that are registered shall be registered in the
name of the Principal or in the name of a nominee of the
Principal or in the name of the Custodian or its nominee or,
if in a clearing corporation, in the name of the clearing
corporation or its nominee.
2
<PAGE> 3
ARTICLE IV
ACCOUNT CASH AND SHORT-TERM INVESTMENTS
4.01 Custodian shall establish for Principal separate income and
Principal cash accounts which shall be invested in such short-term investment
media (such as money market funds, Custodian's deposit accounts, master notes,
registered mutual funds and the like) as agreed to from time to time by
Principal and Custodian. In the event that cash available in such cash
accounts is insufficient to enable Custodian to execute any instruction made by
Principal under this Agreement, Custodian in its sole discretion may treat the
instruction as null and void without any liability for doing so; provided,
however, that Custodian shall promptly orally notify Principal of such
insufficiency and shall confirm such notification by writing mailed within five
(5) business days.
ARTICLE V
SAFEKEEPING OF OTHER ASSETS
5.01 Custodian shall maintain assets of the Account other than
Securities, cash and short-term investments in safekeeping on Custodian's
premises subject to such additional agreements as Principal and Custodian shall
make from time to time.
ARTICLE VI
ACCESS TO ACCOUNT BY PRINCIPAL
AND PERSONS AUTHORIZED BY PRINCIPAL
6.01 Custodian shall permit access, during Custodian's regular
business hours, to assets of the Account held on Custodian's premises and to
Custodian's official records regarding the Account, by persons authorized by
Principal as further provided herein. Access shall be granted only to persons
authorized in writing by two (2) Authorized Signatories of Principal. Access
shall be granted only to two (2) or more persons so authorized, who shall be
accompanied by an employee of Custodian during the period of access.
3
<PAGE> 4
ARTICLE VII
DEPOSITS AND WITHDRAWALS
7.01 WRITTEN INSTRUCTION OF PRINCIPAL. Principal may, from time to
time, instruct Custodian to effect deposits of assets to the Account and
withdrawals of assets from the Account (including transfers to third persons),
by written instructions signed by at least two (2) Authorized Signatories.
Such instructions, at the minimum, shall state (a) the date of the deposit or
withdrawal; (b) the description or amount of the assets to be deposited or
withdrawn; and (c) the identity of the person to whom the assets are to be
transferred, or from whom they are to be received, as the case may be. Such
instructions shall be presented in duplicate to the Custodian, who shall note
thereon the time of receipt and shall mail one (1) copy to Principal within
two (2) business days, to serve as a confirmation of receipt of such
instructions. Custodian shall preserve the other copy (in the original or by
microfilm) for not less than five (5) years.
7.02 ORAL INSTRUCTION OF PRINCIPAL. Principal may, from time to
time, instruct Custodian to effect a deposit of assets to the Account, or a
withdrawal of assets from the Account for transfer (including purchase, sale,
or exchange transactions) solely to or for Principal's account at a federally
insured depository institution or a recognized securities broker, upon oral
instructions of any Authorized Employee. Principal shall confirm such deposit
or withdrawal by written confirmation mailed to Custodian within two (2)
business days of the withdrawal. Custodian shall preserve a copy of such
confirmation (in the original or by microfilm) for not less than five (5)
years.
7.03 INSTRUCTIONS FROM AUTHORIZED ADVISOR. Custodian shall be
authorized to act in response to instructions given by any Authorized Advisor
as to buy/sell decisions regarding the Account, provided that, in connection
with any buy/sell transaction, Custodian shall release cash from the Account
only upon receipt of purchased securities, and shall release securities only
upon receipt of funds in payment.
7.04 NON-DISCRETIONARY DEPOSITS AND WITHDRAWALS. Custodian is
authorized, as provided further herein, to effect deposits of assets to the
Account, and withdrawals of assets from the Account (including transfers to
third persons) which are of a routine or ministerial nature not requiring the
exercise of discretion, as further described herein. Custodian shall notify
Principal of any such deposit or withdrawal by written notification or account
statement.
A. INCOME, INTEREST, DIVIDENDS, ETC. Custodian shall deposit to
the Account any assets (such as stock dividends) received as
income, interest, dividends, distributions and the like,
respecting assets held
4
<PAGE> 5
in the Account. Custodian shall promptly notify principal of
any such amounts due but not paid and on or before the "Ex"
date of stocks. In addition, Custodian or its agent shall
timely file all the necessary forms with the appropriate
foreign governments, or agencies thereof, in order to minimize
the taxes or withholding taxes on dividend, interest or other
income from Principal's investment in foreign issues of stock
or bonds held by Custodian or agent thereof. Custodian or its
agent shall also timely file the necessary forms with the
appropriate foreign governments, or agencies thereof in order
to obtain all dividend withholding tax rebates allowable under
the current tax treaties with the United States, or in the
absence of a tax treaty, the minimum permitted by the laws of
the respective foreign government of the issuer.
B. EXPENSES. Custodian shall charge the Account for all expenses
incurred in carrying out Principal's instructions (including,
but not limited to, brokerage commissions, wire charges,
postage, etc.) and for Custodian's fees.
C. MATURITY, CALLS, MANDATORY REDEMPTIONS AND EXCHANGES, ETC.
Custodian is authorized to surrender assets upon maturity and
in other situations where such transfer is mandatory. Should
any Securities held in any central depository or in bulk by
Custodian be called for partial redemption by the issuer,
Custodian is authorized in its sole discretion to allot (or
consent to the allotment of) the called portion to the
respective holders in any manner deemed by the Custodian to be
fair and equitable. Custodian shall deposit the proceeds of
any such transaction to the Account.
D. FRACTIONAL SHARES. Custodian is authorized to sell any
fractional shares received as a result of a stock split or
stock dividend affecting Securities. Custodian shall deposit
the proceeds of any such transaction to the Account.
7.05 CUSTODIAN'S CONFIRMATION OF DEPOSITS AND WITHDRAWALS.
Custodian shall send written confirmation to Principal of all deposits of
assets to the Account and all withdrawals of assets from the Account (including
purchase, sale or exchange transactions) within two (2) business days of each
respective deposit or withdrawal.
7.06 WITHDRAWALS REQUIRING INSURANCE COMMISSIONER APPROVAL.
Securities used to meet the deposit requirements set forth in the Oklahoma
Insurance Code (36 O.S. Section 101 et seq.) (the "Code") shall, to the extent
required by the Code, be under the
5
<PAGE> 6
control of the Insurance Commissioner of the State of Oklahoma or his
authorized representative (hereinafter collectively referred to as the
"Commissioner"), and shall not be withdrawn by the Principal without the
approval of the Commissioner.
ARTICLE VIII
CUSTODIAN'S DUTIES
8.01 Custodian's duties with respect to the Account are intended to
be ministerial only, and Custodian may rely upon, and shall not be liable for
the propriety, prudence, or correctness of, any instruction made by Principal
in accordance with this Agreement. Custodian further agrees that it shall have
no ownership interest in the Account or any assets or Securities or funds which
comprise the Account, or earnings received by it from any Securities or assets
held in the Account, nor does the Custodian have any right of offset or other
means of exercising any ownership interest over the Account and Securities,
except and only in its capacity as Custodian and a Bailee for the benefit of
the Principal. Custodian shall forward to Principal or Authorized Advisor if
applicable all prospectuses, proxies, official reports, notices and other
materials concerning discretionary management of assets which are received by
Custodian as holder of such assets. Custodian shall not vote proxies, act on
tender offers, or perform other discretionary acts not specifically authorized
by this Agreement without specific instructions from Principal or Authorized
Advisor. Custodian shall be entitled to request instructions from Principal
concerning any matter involving the Account, and Principal agrees to promptly
respond to any such request.
ARTICLE IX
RECORD KEEPING
9.01 Custodian agrees to cooperate with Principal in maintaining
records and supplying reports to Principal, as reasonably needed by Principal
in order to meet Principal's accounting, reporting and regulatory obligations,
including the following obligations:
A. The Custodian and its agents shall be required to send to the
Principal:
(1) On the first business day of each month a report of
all the transactions in the Account
6
<PAGE> 7
during the preceding month and the listing of all
assets held in the Account at the end of the
preceding month.
(2) all reports which they receive from a clearing
corporation or the Federal Reserve book-entry system
on their respective systems of internal accounting
control; and
(3) any reports prepared by outside auditors on the
Custodian's or its agents' internal accounting
control of Securities that the Principal may
reasonably request.
B. The Custodian shall maintain records sufficient to determine
and verify information relating to Securities that may be
reported in the Principal's annual statement and supporting
schedules and information required in any audit of the
financial statements of the Principal.
C. The Custodian shall provide, upon written request from any of
the Authorized Signatories of the Principal, the appropriate
affidavits, substantially in the form provided in Exhibits
"D", "E" and "F", attached hereto, and made a part hereof,
with respect to the Securities.
ARTICLE X
LIABILITY FOR SAFEKEEPING
10.01 Custodian shall be responsible only for assets actually
received by it hereunder. Custodian shall indemnify Principal for any loss of
Securities occasioned by the negligence or dishonesty of the Custodian's
officers and employees, or burglary, robbery, holdup, theft or mysterious
disappearance, including any loss by damage or destruction. Custodian shall
not be liable in any manner for loss occasioned by failure of Principal or its
officers or employees to comply with this Agreement, by negligence or
dishonesty of Principal or its officers or employees. Custodian will not be
liable for any failure to take any action required to be taken under the
Agreement in the event and to the extent that the taking of such action is
prevented or delayed by war (whether declared or not and including existing
wars), revolution, insurrection, riot, civil
7
<PAGE> 8
commotion, or act of God, accident, fire, explosion, stoppage of labor, strikes
or other differences with employees, laws, regulations, orders or other acts of
any governmental authority or any other cause whatever beyond its reasonable
control. In the event that there is a loss of Securities, Custodian shall
promptly replace the Securities or the value thereof, and the value of any loss
of rights or privileges resulting from said loss of Securities. In the event
that Custodian obtains entry in a clearing corporation or in the Federal
Reserve book-entry system through an agent, Custodian shall agree with such
agent that the agent shall be subject to the same liability for loss of
Securities as Custodian. Custodian's responsibility for any asset shall be
terminated upon compliance with Principal's instructions regarding withdrawal,
in compliance with procedures established under this Agreement.
ARTICLE XI
MISCELLANEOUS
11.01 WARRANTY. Principal warrants that it has authority to enter
into this Agreement and that it has title to and authority to deliver any
property which will be delivered to Custodian, and that all instructions
provided to Custodian hereunder will be within Principal's authority.
11.02 FEES. Custodian's charges for services provided hereunder
shall be such reasonable compensation as is mutually agreed upon from time to
time by Principal and Custodian.
11.03 GOVERNING LAW - TERMINATION. This Agreement shall be governed
by the laws of the State of Oklahoma and may be terminated by either party upon
sixty (60) days written notice. Custodian's fees shall be prorated to the
termination date.
11.04 SEVERABILITY. In the event that any provision of this
Agreement is held invalid or unenforceable, the remaining provisions shall be
construed to be valid and enforceable nonetheless.
11.05 CAPTIONS. Captions employed in this Agreement are for ease of
reference only and shall not be employed in determining the meaning of any
provision.
11.06 NOTICE. Except where otherwise more specifically provided
herein, notice shall be made in writing by delivery or mail as follows:
8
<PAGE> 9
If to Principal:
American Fidelity Variable Annuity Fund A
Attention: Investment Department
2000 Classen Center
P.O. Box 25523
Oklahoma City, Oklahoma 73125
If to Custodian:
Attention: Ellen D. Fleming
Bank of Oklahoma, N.A.
6307 Waterford Boulevard, Suite 100
Oklahoma City, Oklahoma 73118
IN WITNESS WHEREOF, the parties hereby cause their names to be signed
herein and their seals to be affixed and duly attested by their duly authorized
officers, this 30th day of April, 1997.
"PRINCIPAL"
AMERICAN FIDELITY VARIABLE ANNUITY
FUND A
ATTEST: By: American Fidelity
Assurance Company
STEPHEN P. GARRETT By: JOHN W. REX
- ----------------------------- ----------------------------------
Stephen P. Garrett, Secretary John W. Rex, President
"CUSTODIAN"
ATTEST: BANK OF OKLAHOMA, N.A.
TERRY [NOT READABLE] By: ELLEN D. FLEMING
- ---------------------------- ----------------------------------
Assistant Cashier Ellen D. Fleming, Senior Vice
President & Senior Trust Officer
9
<PAGE> 10
EXHIBIT "A"
AUTHORIZED EMPLOYEES
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
Daniel D. Adams, Jr. Vice President
Judy A. Clancy Vice President
Mark A. Hayton Assistant Vice President
Debbie Ray Investment Administrator
Tracy Bain Investment Administration Asst.
Jan Loman Senior Executive Assistant
</TABLE>
10
<PAGE> 11
EXHIBIT "B"
AUTHORIZED SIGNATORIES
<TABLE>
<CAPTION>
NAME SIGNATURE
---- ---------
<S> <C>
Daniel D. Adams, Jr.
----------------------------
Jo Ann Anderson
----------------------------
William M. Cameron
----------------------------
David R. Carpenter
----------------------------
William E. Durrett
----------------------------
Lucy K. Fritts
----------------------------
Stephen P. Garrett
----------------------------
Kenneth D. Klehm
----------------------------
John W. Rex
----------------------------
M. Kathryn Self
----------------------------
</TABLE>
11
<PAGE> 12
EXHIBIT "C"
AUTHORIZED ADVISORS
Lawrence Kelly & Associates
200 S. LosRobles Suite 510
Pasadena CA 91101
(818) 449-9500
Todd Investment Advisors
3160 National City Tower
Louisville KY 40202
(502) 585-3121
12
<PAGE> 13
EXHIBIT "D"
FORM A
CUSTODIAN AFFIDAVIT
-----------------------
STATE OF OKLAHOMA )
) SS.
COUNTY OF OKLAHOMA )
________________________________, being duly sworn deposes and says
that he is _________________________________ of BANK OF OKLAHOMA, N.A.,, a
banking corporation organized under and pursuant to the laws of the
_________________________ with the principal place of business at
___________________________ (hereinafter called the "Bank").
That his duties involve supervision of activities of the Bank as
custodian and records relating thereto.
That the Bank is custodian for certain securities of AMERICAN FIDELITY
VARIABLE ANNUITY FUND A, having a place of business at Oklahoma City, Oklahoma
(hereinafter called the "Insurance Company"), pursuant to an agreement between
the Bank and the Insurance Company.
That the schedule attached hereto is a true and complete statement of
securities (other than those caused to be deposited with The Depository Trust
Company or like entity or a Federal Reserve Bank under the Federal Reserve
book- entry procedure) which were in the custody of the Bank for the account of
the Insurance Company as of the close of business on ________________________;
that, unless otherwise indicated on the schedule, the next maturing and all
subsequent coupons were then either attached to coupon bonds or in the process
of collection; and that, unless otherwise shown on the schedule, all such
securities were in bearer form or in registered form in the name of the
Insurance Company or its nominee or of the Bank or its nominee, or were in the
process of being registered in such form.
13
<PAGE> 14
That the Bank as custodian has the responsibility for the safekeeping
of such securities as that responsibility is specifically set forth in the
agreement between the Bank as custodian and the Insurance Company; and
That, to the best of his knowledge and belief, unless otherwise shown
on the schedule, said securities were the property of said Insurance Company
and were free of all liens, claims or encumbrances whatsoever.
BANK OF OKLAHOMA, N.A.
By:
--------------------------------
Subscribed and sworn to before me this ____ day of ______________, 19___.
-----------------------------------
Notary Public
My Commission Expires:
- -----------------------
(SEAL)
14
<PAGE> 15
EXHIBIT "E"
FORM B
CUSTODIAN AFFIDAVIT
-----------------------
STATE OF OKLAHOMA )
) SS.
COUNTY OF OKLAHOMA )
________________________________, being duly sworn deposes and says
that he is _________________________________ of BANK OF OKLAHOMA, N.A., a
banking corporation organized under and pursuant to the laws of the
_________________________ with the principal place of business at
___________________________ (hereinafter called the "Bank").
That his duties involve supervision of activities of the Bank as
custodian and records relating thereto.
That the Bank is custodian for certain securities of AMERICAN FIDELITY
VARIABLE ANNUITY FUND A, having a place of business at (hereinafter called the
"Insurance Company"), pursuant to an agreement between the Bank and the
Insurance Company.
That the Bank has caused certain of such securities to be deposited
with _________________________________ and that the schedule attached hereto
is a true and complete statement of the securities of the Insurance Company of
which the Bank was custodian as of the close of business on
________________________, 19____, and which were so deposited on such date.
That the Bank as custodian has the responsibility for the safekeeping
of such securities both in the possession of the Bank or deposited with
______________________________ as is specifically set forth in the agreement
between the Bank as custodian and the Insurance Company; and
15
<PAGE> 16
That, to the best of his knowledge and belief, unless otherwise shown
on the schedule, said securities were the property of said Insurance Company
and were free of all liens, claims or encumbrances whatsoever.
BANK OF OKLAHOMA, N.A.
By:
--------------------------------
Subscribed and sworn to before me this ____ day of ______________, 19___.
-----------------------------------
Notary Public
My Commission Expires:
- -----------------------
(SEAL)
16
<PAGE> 17
EXHIBIT "F"
FORM C
CUSTODIAN AFFIDAVIT
-----------------------
STATE OF OKLAHOMA )
) SS.
COUNTY OF OKLAHOMA )
________________________________, being duly sworn deposes and says
that he is _________________________________ of BANK OF OKLAHOMA, N.A. , a
banking corporation organized under and pursuant to the laws of the
_________________________ with the principal place of business at
___________________________ (hereinafter called the "Bank").
That his duties involve supervision of activities of the Bank as
custodian and records relating thereto.
That the Bank is custodian for certain securities of AMERICAN FIDELITY
VARIABLE ANNUITY FUND A, having a place of business at
_______________________________ (hereinafter called the "Insurance Company"),
pursuant to an agreement between the Bank and the Insurance Company.
That it has caused certain securities to be credited to its book-entry
account with the Federal Reserve Bank of ___________________________ under the
Federal Reserve book-entry procedure; and that the schedule attached hereto is
a true and complete statement of the securities of the Insurance Company of
which the Bank was custodian as of the close of business on
_______________________, 19___, which were in a "General" book-entry account
maintained in the name of the Bank on the books and records of the Federal
Reserve Bank of ________________________ at such date;
That the Bank has the responsibility for the safekeeping of such
securities both in the possession of the Bank or said "General" book-entry
account as is specifically set forth in the agreement between the Bank and the
Insurance Company; and
17
<PAGE> 18
That, to the best of his knowledge and belief, unless otherwise shown
on the schedule, said securities were the property of said Insurance Company
and were free of all liens, claims or encumbrances whatsoever.
BANK OF OKLAHOMA, N.A.
By:
--------------------------------
Subscribed and sworn to before me this ____ day of ______________, 19___.
-----------------------------------
Notary Public
My Commission Expires:
- -----------------------
(SEAL)
18
<PAGE> 1
EXHIBIT 8.2
AMENDED AND RESTATED BY-LAWS
OF
AMERICAN FIDELITY ASSURANCE COMPANY
ARTICLE I
OFFICES
SECTION 1.01 The principal office of the Corporation shall be in Oklahoma
City, County of Oklahoma, State of Oklahoma.
SECTION 1.02 The Corporation may also have offices at such other places both
within and without the State of Oklahoma as the Board of Directors may from time
to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01 All meetings of the stockholders for the election of directors
shall be held in the City of Oklahoma City, State of Oklahoma, or at such other
place within or without the State of Oklahoma as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting or a
duly executed waiver of notice thereof. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Oklahoma, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
SECTION 2.02 Annual meetings of stockholders shall be held on such days and
at such times as may be fixed by the Board of Directors at which they shall
elect by a plurality vote of the votes cast at such election a Board of
Directors, and transact such other business as may properly be brought before
the meeting.
SECTION 2.03 Unless otherwise provided by statute, written notice of the
annual meeting stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote at such meeting of not less than ten (10) nor
more than sixty (60) days before the date of the meeting.
SECTION 2.04 The officer or agent who has charge of the stock ledger or
transfer books of the Corporation shall prepare and make, at least ten (10) days
before every
<PAGE> 2
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The original stock ledger or transfer books shall be prima facie
evidence as to who are the stockholders entitled to examine such list or to vote
at any such meeting of stockholders.
SECTION 2.05 Special meetings of the stockholder, for any purpose or purposes,
unless otherwise prescribed by statute or by the Articles of Incorporation, may
be called by the Chairman of the Board or the President or shall be called by
the President or Secretary at the request in writing of a majority of the whole
Board of Directors, or at the request in writing of stockholders owning
twenty-five (25%) of the capital stock of the Corporation issued and outstanding
and entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
SECTION 2.06 Unless otherwise provided by statute, written notice of a special
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given not less than ten (10)
nor more than sixty (60) days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
SECTION 2.07 Business transacted at any special meeting of the stockholders
shall be limited to the purposes in the notice.
SECTION 2.08 The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Articles of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting originally notified
and called. If the adjournment is for more than thirty (30) days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
2
<PAGE> 3
SECTION 2.09 When a quorum is present at any meeting, the vote of the holders
of a majority of the stock entitled to vote present in person or represented by
proxy at the meeting shall decide any questions brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Articles of Incorporation, a different vote is required in which case such
express provision shall govern and control the decision of such question.
SECTION 2.10 Unless otherwise provided in the Articles of Incorporation or in
any certificate of powers, designations, preferences and rights pursuant to
which any shares of the capital stock of the Corporation are issued, each
shareholder shall at every meeting of the shareholders, be entitled to one vote
for each share of the capital stock having voting power held by such
shareholder.
SECTION 2.11 A stockholder may vote in person or may be represented and vote
by a proxy or proxies appointed by an instrument in writing. In the event that
any such instrument in writing shall designate two or more persons to act as
proxies, a majority of such persons present at the meeting, or, if only one
shall be present, then that one shall have and may exercise all of the powers
conferred by such written instrument upon all of the persons so designated
unless the instrument shall otherwise provide. No such proxy shall be valid
after the expiration of three (3) years from the date of its execution, unless
coupled with an interest, or unless the person executing it specifies therein
the length of time for which it is to continue in force. Subject to the above,
any proxy duly executed and not revoked shall continue in full force and effect
until an instrument revoking it or a duly executed proxy bearing a later date is
filed with the Secretary of the Corporation. Each proxy shall be revocable
unless expressly provided therein to be irrevocable.
SECTION 2.12 Written notice of the time, place and purpose of all special
meetings shall be delivered personally to each director or sent by mail or by
other form of written communication, charges prepaid, addressed to him at his
address as shown in the records of the Corporation or, if it is not so shown on
such records or is not readily ascertainable, at the place where meetings of the
directors are regularly held. In case such notice is mailed or telegraphed, it
shall be deposited in the United States Mail or delivered to the telegraph
company in the place in which the principal office of the Corporation is located
at least five (5) days prior to the time of the holding of the meeting. In case
such notice is delivered as above provided, it shall be so delivered at least
twenty-four (24) hours prior to the time of the holding of the meeting. Such
mailing, telegraphing or delivery as above provided shall be due, legal and
personal notice to such director.
SECTION 2.13 Any action required to be taken at any annual or special meeting
of stockholders of the Corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum
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number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
SECTION 2.14 Voting at any meeting of stockholders may be oral or by ballot
at the discretion of the President, except if vote by written ballot is demanded
by a majority of the stockholders present at such meeting.
ARTICLE III
DIRECTORS
SECTION 3.01 The number of directors which shall constitute the whole Board
of Directors shall be not less than three (5) nor more than fifteen (15). Within
the limits specified, the number of directors shall be determined by resolution
of the Board of Directors or by the stockholders at the annual meeting or at a
special meeting called for that purpose. The directors shall be elected at the
annual meeting of the stockholders or a special meeting of stockholders held for
that purpose, except as provided in Section 3.02 of this Article, and each
director elected shall hold office until his successor is elected and qualified.
Directors need not be residents of the State of Oklahoma or stockholders.
SECTION 3.02 Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, and the directors so
chosen shall hold office until the next annual election and until their
successors are duly elected and shall qualify, unless sooner displaced. If there
are no directors in office, then an election of directors shall be held in the
manner provided by statute.
SECTION 3.03 The business and affairs of the Corporation shall be managed by
its Board of Directors which may exercise all such powers of the Corporation and
do all such lawful acts and things as are not by statute or by the Articles of
Incorporation or by these By-laws directed or required to be exercised or done
by the stockholders.
SECTION 3.04 Any director of the Corporation or the entire Board of Directors
may be removed or discharged with or without cause by the affirmative vote
therefore or written consent thereto by a majority of the issued and outstanding
stock entitled to vote in the election of directors.
SECTION 3.05 Any director may resign at any time by mailing or delivering or
by transmitting by telegram or cable written notice of his resignation to the
Chairman of the Board, President, or to the Secretary of the Corporation; and
any such resignation shall
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take effect at the time specified therein or, if no time is specified therein,
then such resignation shall take effect immediately upon the receipt thereof
ARTICLE IV
MEETINGS OF DIRECTORS
SECTION 4.01 The Board of Directors may hold meetings, both regular and
special, either within or without the State of Oklahoma.
SECTION 4.02 An annual meeting of the Board of Directors for the purpose of
election of officers of the company and the transaction of any other business
coming before such meeting shall be held each year. If a quorum of the whole
Board shall not be present, then such regular annual meeting may be held at such
time as shall be fixed by the consent, in writing, of all the Directors. Other
meetings of the Board may be held without notice at such time as shall be
determined by the Board.
SECTION 4.03 Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors.
SECTION 4.04 Special meetings of the Board of Directors may be called by the
Chairman of the Board or the President on twenty-four (24) hours' notice
delivered personally to each director, or three (3) days' notice by mail or by
telegram; special meetings shall be called by the President or Secretary in like
manner and on like notice on the written request of two directors. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors need be specified in the notice or written waiver of
notice of such meeting.
Section 4.05 At all meetings of the Board of Directors, a majority of the
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which a quorum is
present shall be the act of the Board of Directors. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present. At such adjourned
meeting at which a quorum shall be present, any business may be transacted which
might have been transacted at the meeting as originally notified and called.
SECTION 4.06 Any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board of Directors or committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee.
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SECTION 4.07 Members of the Board of Directors, or of any committee thereof,
may participate in a meeting of such Board by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
ARTICLE V
EXECUTIVE COMMITTEE
SECTION 5.01 At the annual meeting, at a regular meeting or at any special
meeting of the Board of Directors, the Board may, if it deems necessary, acting
by resolution adopted by a majority of the whole Board, elect, from their own
members, an Executive Committee composed of three or more voting members.
SECTION 5.02 The Executive Committee shall have all of the powers of the
directors in the interim between meetings of the Board, except the power to
declare dividends and to adopt, amend or repeal the By-laws and where action of
the Board of Directors is required by law. It shall keep regular minutes of its
proceedings which shall be reported to the directors at their next meeting.
SECTION 5.03 The Executive Committee shall meet at such times as may be fixed
by the Committee or on the call of the President or the Chairman of the Board.
Notice of the time and place of the meeting shall be given to each member of the
Committee in the manner provided for the giving of notice to members of the
Board of Directors of the time and place of special meetings of the Board of
Directors.
SECTION 5.04 A majority of the members of the Executive Committee shall
constitute a quorum for the transaction of business. The act of the majority of
the members of the Executive Committee present at a meeting at which a quorum is
present shall be the act of the Executive Committee. At all meetings of the
Executive Committee, each member present shall have one (1) vote which shall be
cast by him in person.
SECTION 5.05 Any actions taken or approved at any meeting of the Executive
Committee, however called and noticed or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice, if a quorum be
present and if, either before or after the meeting, each of the members not
present signs a written waiver of notice or a consent to holding such meeting or
an approval of the minutes thereof.
SECTION 5.06 The entire Executive Committee or any individual member thereof
may be removed from the Committee with or without cause by a vote of a majority
of the whole Board of Directors.
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SECTION 5.07 The Board of Directors shall fill all vacancies in the Executive
Committee which may occur from time to time.
SECTION 5.08 Any action which might be taken at a meeting of the Executive
Committee may be taken without a meeting if all of the members consent thereto
in writing and the writing or writings are filed with the minutes of proceedings
of the Committee.
SECTION 5.09 Members of the Executive Committee may participate in a meeting
of such committee by means of conference telephone or similar communication
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this section shall
constitute presence in person at such meeting.
ARTICLE VI
COMMITTEE OF DIRECTORS
SECTION 6.01 The Board of Directors may, by resolution passed by a majority
of the whole Board, designate one or more committees, in addition to the
Executive Committee provided for in Article V hereof, each committee to consist
of two or more of the directors of the Corporation, which, to the extent
provided in the resolution, shall have and may exercise the powers of the Board
of Directors in the management of the business and affairs of the Corporation,
except where action of the Board of Directors is required by law, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
SECTION 6.02 Each committee shall comply with the same procedural rules set
forth in Sections 5.03, 5.08, and 5.09 inclusive, of Article V that are
applicable to the Executive Committee.
ARTICLE VII
NOTICES
SECTION 7.01 Notices to directors, officers and stockholders shall be in
writing and delivered personally or mailed to the directors, officers or
stockholders at their addresses appearing on the books of the Corporation.
Notice by mail with postage thereon prepaid, shall be deemed to be given at the
time when it is deposited in the
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United States mail. Notice to directors may also be given by telegram or cable
and shall be deemed delivered when same shall be deposited at a telegraph office
or cable office for transmission and all appropriate fees therefor have been
paid.
SECTION 7.02 Whenever any notice is required to be given under the provisions
of the General Corporation Law of Oklahoma, the Articles of Incorporation or
these By-laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice
ARTICLE VIII
OFFICERS
SECTION 8.01 The officers of the corporation shall be a President, a Secretary
and a Treasurer. The Corporation may also have, at the discretion of the Board
of Directors, a Senior Chairman of the Board, a Chairman of the Board, a Vice
Chairman of the Board, one or more Executive Vice Presidents, one or more Senior
Vice Presidents, one or more Vice Presidents, one or more Assistant Secretaries,
one or more Assistant Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 8.03. One person may hold two or more
offices; provided, however, that no person shall at the same time hold the
offices of President and Secretary or more than one of the offices of President,
Executive Vice President and Vice President
APPOINTMENT
SECTION 8.02 The officers of the Corporation, except such officers as may be
appointed in accordance with the provisions of Section 8.03 or Section 8.05 of
this Article, shall be chosen annually by the Board of Directors, and each shall
hold his office until he shall resign or shall be removed or otherwise
disqualified to serve, or his successor shall be elected and qualified.
SUBORDINATE OFFICERS
SECTION 8.03 The Board of Directors may appoint, and may empower the Chairman
of the Board or the President to appoint, such other officers as the business of
the Corporation may require, each of whom shall hold office for such period,
have
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such titles and such authority and perform such duties as are provided in the
By-laws or as the Board of Directors may from time to time determine.
REMOVAL AND RESIGNATION
SECTION 8.04 Any officer may be removed, either with or without cause, by the
Board of Directors, at any regular or special meeting thereof, or, except in
case of an officer chosen by the Board of Directors, by any officer upon whom
such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the Board of
Directors, or to the President, or to the Secretary of the Corporation. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
VACANCIES
SECTION 8.05 A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
the By-laws for regular appointments to such office.
CHAIRMAN EMERITUS
SECTION 8.06 The Chairman Emeritus of the Board, if any, shall be elected by
and shall have such powers and duties which may be assigned to him from time to
time by the Board of Directors.
SENIOR CHAIRMAN OF THE BOARD
SECTION 8.07 The Senior Chairman of the Board, shall, if present, in the
absence of the Chairman of the Board, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by the
By-laws.
CHAIRMAN OF THE BOARD
SECTION 8.08 The Chairman of the Board, shall, if present, preside at all
meetings of the Board of Directors. He shall be the Chief Executive Officer of
the Corporation and exercise and perform such other powers and duties as may be
from time to time assigned to him by the Board of Directors or prescribed by the
By-laws.
VICE CHAIRMAN OF THE BOARD
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SECTION 8.09 The Vice Chairman of the Board, if any, shall, if present, in the
absence of the Chairman, or the Senior Chairman, preside at all meetings of the
Board of Directors and exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors or prescribed by
the By-laws.
PRESIDENT
SECTION 8.10 Subject to such powers and duties, if any, as may be assigned by
the Board of Directors to the Chairman Emeritus of the Board, to the Senior
Chairman of the Board, to the Chairman of the Board, and to the Vice Chairman of
the Board, the President shall, subject to the control of the Board of
Directors, have general supervision, direction and control of the business and
officers of the Corporation, including:
(a) he shall preside at all meetings of the shareholders;
(b) in the absence of the Chairman of the Board, or the Senior
Chairman of the Board, or the Vice Chairman of the Board, at
all meetings of the Board of Directors.
(c) He shall sign or countersign, as may be necessary, all such
bills, notes, checks, contracts and other instruments as may
pertain to the ordinary course of the Corporation's business
and shall, with the Secretary, sign the minutes of all
shareholders' and directors' meetings over which he may have
presided.
(d) He shall execute bonds, mortgages, and other contracts
requiring a seal under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and
executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation.
(e) At the annual meeting of the shareholders, he shall submit a
completed report of the operations of the Corporation's
affairs as existing at the close of each year and shall report
to the Board of Directors from time to time all such matters
coming to his attention and relating to the interest of the
Corporation as should be brought to the attention of the
Board.
(f) He shall be a member of the Board of Directors and all
standing committees, including the Executive Committee, if
any; and he shall have such usual powers and duties of
supervision and management as may pertain to the office of the
President and shall have such other powers and duties as may
be prescribed by the Board of Directors or the By-laws.
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SECTION 8.11 The Chairman of the Board and the President shall have the
power, subject to the Board of Directors, to appoint, as many Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents or any other subordinate
officers, in their discretion, as they may determine. Such officers shall have
the power to sign or countersign, as may be necessary, all such checks, notes,
contracts and other instruments as may pertain to the ordinary course of the
Corporation's business, including bonds, mortgages, and other contracts
requiring a seal under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other agent of the Corporation.
SECRETARY
SECTION 8.12 The Secretary shall keep or cause to be kept, at the principal
office of the corporation or such other place as the Board of Directors may
order, a book of minutes of all meetings of directors and shareholders, with the
time and place of holding, whether regular or special, and, if special, how
authorized, the notice thereof given, the names of those present at directors'
meetings, the number of shares present or represented at shareholders' meetings,
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office of the
corporation or at the office of the corporation's transfer agent, a share
ledger, or a duplicate share ledger, showing the names of the shareholders and
their addresses, the number and classes of shares held by each, the number and
date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of the
shareholders and of the Board of Directors required by the By-laws or by law to
be given, and he shall keep the seal of the corporation in safe custody. He
shall also sign, with the President or Vice President, all contracts, deeds,
licenses and other instruments when so ordered. He shall make such reports to
the Board of Directors as they may request and shall also prepare such reports
and statements as are required by the laws of the State of Oklahoma and shall
perform such other duties as may be prescribed by the Board of Directors or by
the By-laws.
The Secretary shall allow any shareholder, on application, during normal
business hours, to inspect the share ledger in accordance with applicable law.
He shall attend to such correspondence and perform such other duties as may be
incidental to his office or as may be properly assigned to him by the Board of
Directors.
The Assistant Secretary or Secretaries, if any, shall perform the duties of the
Secretary in the case of his absence or disability and such other duties as may
be specified by the Board of Directors.
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TREASURER
SECTION 8.13 The Treasurer shall keep and maintain, or cause to be kept and
maintained, adequate and correct amounts of the properties and business
transactions of the corporation, including account of its assets, liabilities,
receipts, disbursements, gains, losses, capital, surplus and shares. The books
of account shall at all reasonable times be open to inspection by any director.
The Treasurer shall deposit all moneys and other valuables in the name and to
the credit of the corporation with such depositories as may be designated by the
Board of Directors. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, shall render to the President and directors,
whenever they request it, an account of all of his transactions as Treasurer and
of the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed by the Board of Directors or
the By-laws.
The Assistant Treasurer or Treasurers, if any, shall perform the duties of the
Treasurer in the event of his absence or disability and such other duties as the
Board of Directors may determine.
DELEGATION OF DUTIES
SECTION 8.14 In case of the absence or disability of any officer of the
corporation or for any other reason that the Board of Directors may deem
sufficient, the Board of Directors may, by a vote of a majority of the whole
Board, delegate, for the time being, the powers or duties, or any of them, of
such officer to any other officer or to any director.
ARTICLE IX
CERTIFICATES OF STOCK
SECTION 9.01 The Corporation shall deliver certificates representing all
shares to which stockholders are entitled; and such certificates shall be signed
by the President or a Vice President, and the Secretary or an Assistant
Secretary of the Corporation, and may be sealed with the seal of the Corporation
or a facsimile thereof. No certificate shall be issued for any share until the
consideration therefor has been fully paid. Each certificate representing shares
shall state upon the face thereof that the Corporation is organized under the
laws of the State of Oklahoma, the name of the person to whom issued, the number
and class and the designation of the series, if any, which said certificate
represents, and the par value of each share represented by such certificate or a
statement that the shares are without par value. If the Corporation is
authorized to issue shares of more than one class, every certificate shall set
forth upon the face or back of such certificate a full or summary statement of
all designations, preferences, limitations and relative rights of the shares of
each class authorized to be issued.
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SECTION 9.02 The signatures of the President or Vice President and the
Secretary or Assistant Secretary up on a certificate may be facsimiles, if the
certificate is countersigned by a transfer agent and/or registered by a
registrar, other than the Corporation itself or an employee of the Corporation.
In case any officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer at the date of the issuance.
LOST CERTIFICATES
SECTION 9.03 The Board of Directors may direct a new certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificates of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
SECTION 9.04 Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence or succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books;
provided that the Corporation shall not be obligated to effect any such
transfers in violation of any transfer restrictions related to such certificate.
FIXING RECORD DATE
SECTION 9.05 In order that the Corporation may determine the stockholders
entitled to notice or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a day not more than sixty
(60) nor less than ten (10) days prior to the date of such meeting, nor more
than sixty (60) days nor less than ten (10) days prior to any action, unless
otherwise provided by statute, as the record date for the determination of
stockholders of the Corporation. A determination of stockholders of record
entitled to
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notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
SECTION 9.06 The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Oklahoma.
FRACTIONAL SHARES
SECTION 9.07 Anything in these By-laws to the contrary notwithstanding, the
corporation shall not execute and deliver a stock certificate for or including a
fraction of a share of capital stock
ARTICLE X
EXECUTION OF POLICIES, INSTRUMENTS AND CONTRACTS
POLICIES
SECTION 10.01 All policies of insurance shall be signed by the President or a
Vice President and by the Secretary or an Assistant Secretary whose signatures
may be engraved, printed, or stamped thereon..
FUNDS OF THE COMPANY AND CHECKS
SECTION 10.02 Funds of the company shall be deposited only in the corporate
name of the company and in such financial institutions as the Chairman of the
Board or the President shall designate. Checks or demands for money and notes of
the corporation shall be signed by such officer or officers or agent or agents
as the Chairman of the Board or the President may from time to time designate.
FACSIMILE SIGNATURES
SECTION 10.03 The Executive Committee may authorize the use of a check signing
machine or any other mechanical device to imprint on checks and drafts of the
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company the facsimile signature of the President, the Vice President and the
Secretary, or such officers as it may designate. Such authority, when given,
together with such limitations and restrictions as the Executive Committee may
impose thereon, shall be recorded in the minutes of the Executive Committee and
may be revoked at any time by the Executive Committee or by the President or the
Chairman of the Board
INSTRUMENTS AND CONTRACTS
SECTION 10.04 Any officer of the Corporation shall have the power to execute in
the name of the company any contract, agreement, certificate, conveyance,
receipt, release or any other instrument whatsoever in writing required or
permitted by law to be executed by the company or which it is necessary for it
to execute in the transaction of its business or in the management of its
affairs. Whenever the affixing of the company seal to any instrument is
necessary, the instrument shall be attested by the Secretary or an Assistant
Secretary with the seal of the company affixed. No authority granted shall be
construed to supersede or contravene the control of the Directors over the
affairs of the company; provided, however, that any person, firm or corporation
may and shall be entitled to accept and act upon any document or instrument
signed, countersigned, endorsed or executed by the officers of the company
pursuant to the provision of these By-laws unless prior to the receipt of such
document or instrument, such person, firm or corporation has been furnished with
a certified copy of a resolution of the Board of Directors or the Executive
Committee prescribing a different signature, counter-signature, endorsement or
execution.
ARTICLE XI
INDEMNIFICATION
SECTION 11.01(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of or with the consent of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), amounts paid in settlement (whether with
or without court approval), judgments, fines actually and reasonably incurred by
him in connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendre or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not
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opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(b) The Corporation shall indemnify every person who is or was a party
or is or was threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of or with the consent of the Corporation as a director, officer,
employee or agent or in any other capacity of or in another corporation, or a
partnership, joint venture, trust or other enterprise, or by reason of any
action alleged to have been taken or not taken by him while acting in such
capacity, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such threatened,
pending or completed action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation. The termination of any such threatened or actual action or suit by
a settlement or by an adverse judgment or order shall not of itself, creat a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation. Nevertheless, there shall be no indemnification with respect to
expenses incurred in connection with any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the Corporation unless, and only to the extent that
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as such court shall deem proper.
(c) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in Subsections (a) and (b) hereof, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with such defense.
(d) Any indemnification under Subsections (a) and (b) hereof (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific cases upon a determination that indemnification is proper in the
circumstances because the person claiming indemnification has met the applicable
standard of conduct set forth in such subsections. Such determination shall be
made by the Board of Directors by a majority vote of a quorum consisting of
disinterested directors, or, if such quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or by the stockholders.
(e) The amount of any expenses incurred by a person in defending any
threatened or actual action, suit or proceeding referred to in subsection (a)
hereof or any threatened or actual action or suit referred to in subsection (b)
hereof may be advanced to or for the benefit of such person by the Corporation
prior to the final
16
<PAGE> 17
disposition thereof as authorized by the Board of Directors in the specific case
upon the receipt of any undertaking by or on behalf of such person to repay such
amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation.
(f) The indemnification provided by this Article Xl shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
(g) The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article XI.
ARTICLE XII
GENERAL PROVISIONS
DIVIDENDS
SECTION 12.01 Subject to any provision of the Articles of Incorporation,
dividends on the outstanding capital stock of the Corporation (to the extent
permitted by any applicable law, rule or regulation) may be declared by the
Board of Directors. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the Articles of Incorporation
FISCAL YEAR
SECTION 12.02 The fiscal year of the Corporation shall be fixed by resolution
of the Board of Directors.
SEAL
SECTION 12.03 The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Oklahoma." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
17
<PAGE> 18
AMENDMENT TO THE BY-LAWS
SECTION 12.04 These By-laws may be amended at any meeting of the Board of
Directors or at any meeting of the Shareholders by a majority vote.
The undersigned hereby certifies that he is the duly elected and acting
Secretary of the Corporation and that the foregoing are the By-laws of the
Corporation, originally adopted by the Board of Directors of the Corporation on
the 30th day of November, 1960, which By-laws include all amendments
subsequently adopted by the Board of Directors, consisting of 18 pages and are
the Amended and Restated By-laws of the Corporation as of the 24th day of
November, 1997.
/s/ STEPHEN P. GARRETT
-------------------------------
Stephen P. Garrett, Secretary
18
<PAGE> 1
EXHIBIT 12
[MCAFEE & TAFT LETTERHEAD]
April 23, 1998
American Fidelity Variable
Annuity Fund A
2000 Classen Center
Oklahoma City, Oklahoma 73106
Re: Post-Effective Amendment No. 42
to Form N-3 Registration
Statement (No. 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. 42 to the Registration Statement on Form N-3 (No.
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,
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, 1997 and 1996,
and for the years then ended, including the financial highlights for each of
the years in the five-year period ended December 31, 1997. 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, 1997
and 1996, and for each of the years in the three-year period ended December 31,
1997, 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 28, 1998
<PAGE> 1
EXHIBIT 16
SCHEDULE OF COMPUTATIONS FOR EACH PERFORMANCE QUOTATION PROVIDED IN THE
REGISTRATION STATEMENT
<TABLE>
<CAPTION>
ONE YEAR FIVE YEAR TEN YEAR
(1) TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN
------------ ------------ ------------
<S> <C> <C> <C>
(A) INITIAL INVESTMENT $1,000.00 $1,000.00 $1,000.00
multiplied by x x x
0.96 0.96 0.96 0.96
less $15.00 - - -
less $.50 $15.00 $15.00 $15.00
equals - - -
NET INITIAL INVESTMENT $0.50 $0.50 $0.50
= = =
$ 944.50 $ 944.50 $ 944.50
(B) NET INITIAL INVESTMENT $ 944.50 $ 944.50 $ 944.50
divided by / / /
ACCUMULATION UNIT VALUE ON PURCHASE DATE $ 15.3389 $ 9.1083 $ 4.6009
equals = = =
NUMBER OF ACCUMULATION UNITS PURCHASED 61.58 103.70 205.29
(C) ACCUMULATION UNIT VALUE AT THE END OF TIME PERIOD $ 19.4632 $ 19.4632 $ 19.4632
multiplied by x x x
NUMBER OF ACCUMULATION UNITS PURCHASED 61.58 103.7 205.29
equals = = =
ENDING VALUE $1,198.54 $2,018.33 $3,995.60
(D) ENDING VALUE $1,198.54 $2,018.33 $3,995.60
minus - - -
INITIAL INVESTMENT $1,000.00 $1,000.00 $1,000.00
equals = = =
TOTAL DOLLAR RETURN $198.54 $1,018.33 $2,995.60
(E) TOTAL DOLLAR RETURN $198.54 $1,018.33 $2,995.60
divided by / / /
INITIAL INVESTMENT $1,000.00 $1,000.00 $1,000.00
multiplied by 100 x x x
equals 100 100 100
TOTAL RETURN FOR THE PERIOD EXPRESSED AS A PERCENTAGE = = =
19.85% 101.83% 299.56%
</TABLE>
<PAGE> 2
(2) AVERAGE ANNUAL TOTAL RETURN
Average annual total return quotations for the one, five and ten year
periods ending December 31, 1997 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) = $1,198.54 $1,000 (1 + T)(5) = $2,018.33 $1,000 (1 + T)(10) = $3,995.60
T = 19.85% T = 15.08% T = 14.86%
</TABLE>
<PAGE> 3
(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:
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>
(i - n) (M) (V) (M/V)
AMOUNT TO
INVEST AFTER
DATE OF SALES CHARGES ACCUMULATION ACCUMULATION
PURCHASE & OTHER FEES UNIT VALUE UNITS PURCHASED
-------- ------------- ------------ ---------------
<S> <C> <C> <C>
01-Jan-97 80.50 15.3389 5.2481
01-Feb-97 95.50 16.1929 5.8976
01-Mar-97 95.50 16.0772 5.9401
01-Apr-97 95.50 15.5631 6.1363
01-May-97 95.50 16.2137 5.8901
01-Jun-97 95.50 17.2290 5.5430
01-Jul-97 95.50 17.9709 5.3141
01-Aug-97 95.50 19.1318 4.9917
01-Sep-97 95.50 18.2176 5.2422
01-Oct-97 95.50 19.2098 4.9714
01-Nov-97 95.50 18.5803 5.1399
01-Dec-97 95.50 19.3674 4.9310
--------
TOTAL UNITS PURCHASED: 65.2455
x
ACCUMULATION UNIT VALUE (12/31/97): $19.4632
=
ENDING VALUE (12/31/97): $ 1,270
========
</TABLE>
<PAGE> 4
ENDING VALUE OF INVESTING $100 PER MONTH FOR 5 YEARS.
<TABLE>
<CAPTION>
(i - n) (M) (V) (M/V)
AMOUNT TO
INVEST AFTER
DATE OF SALES CHARGES ACCUMULATION ACCUMULATION
PURCHASE & OTHER FEES UNIT VALUE UNITS PURCHASED
-------- ------------ ---------- ---------------
<S> <C> <C> <C>
01-Jan-93 80.50 9.1081 8.8383
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
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
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
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
01-Jan-97 95.50 15.3389 6.2260
01-Feb-97 95.50 16.1929 5.8976
01-Mar-97 95.50 16.0772 5.9401
01-Apr-97 95.50 15.5631 6.1363
01-May-97 95.50 16.2137 5.8901
01-Jun-97 95.50 17.2290 5.5430
01-Jul-97 95.50 17.9709 5.3141
01-Aug-97 95.50 19.1318 4.9917
01-Sep-97 95.50 18.2176 5.2422
01-Oct-97 95.50 19.2098 4.9714
01-Nov-97 95.50 18.5803 5.1399
01-Dec-97 95.50 19.3674 4.9310
---------
TOTAL UNITS PURCHASED: 506.0707
x
ACCUMULATION UNIT VALUE (12/31/97): $ 19.4632
=
ENDING VALUE (12/31/97): $ 9,850
=========
</TABLE>
<PAGE> 6
ENDING VALUE OF INVESTING $100 PER MONTH FOR 10 YEARS.
<TABLE>
<CAPTION>
(i - n) (M) (V) (M/V)
AMOUNT TO
INVEST AFTER
DATE OF SALES CHARGES ACCUMULATION ACCUMULATION
PURCHASE & OTHER FEES UNIT VALUE UNITS PURCHASED
-------- ------------ ---------- ---------------
<S> <C> <C> <C>
01-Jan-88 80.50 4.6011 17.4958
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
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
</TABLE>
<PAGE> 7
<TABLE>
<S> <C> <C> <C>
01-Aug-91 95.50 7.9530 12.0080
01-Sep-91 95.50 8.1348 11.7397
01-Oct-91 95.50 8.0678 11.8372
01-Nov-91 95.50 8.2038 11.6409
01-Dec-91 95.50 8.0001 11.9374
01-Jan-92 95.50 8.8663 10.7711
01-Feb-92 95.50 8.6582 11.0300
01-Mar-92 95.50 8.6614 11.0259
01-Apr-92 95.50 8.5176 11.2121
01-May-92 95.50 8.5481 11.1721
01-Jun-92 95.50 8.6905 10.9890
01-Jul-92 95.50 8.5233 11.2046
01-Aug-92 95.50 8.7179 10.9545
01-Sep-92 95.50 8.6883 10.9918
01-Oct-92 95.50 8.6729 11.0113
01-Nov-92 95.50 8.7472 10.9178
01-Dec-92 95.50 8.9620 10.6561
01-Jan-93 95.50 9.1081 10.4852
01-Feb-93 95.50 9.2553 10.3184
01-Mar-93 95.50 9.0701 10.5291
01-Apr-93 95.50 9.2795 10.2915
01-May-93 95.50 8.9096 10.7188
01-Jun-93 95.50 9.1733 10.4106
01-Jul-93 95.50 9.0810 10.5165
01-Aug-93 95.50 9.1075 10.4859
01-Sep-93 95.50 9.4526 10.1030
01-Oct-93 95.50 9.4595 10.0957
01-Nov-93 95.50 9.6088 9.9388
01-Dec-93 95.50 9.3918 10.1684
01-Jan-94 95.50 9.7488 9.7961
01-Feb-94 95.50 9.9856 9.5638
01-Mar-94 95.50 9.3822 10.1788
01-Apr-94 95.50 9.0780 10.5199
01-May-94 95.50 9.1072 10.4862
01-Jun-94 95.50 9.3466 10.2176
01-Jul-94 95.50 9.0101 10.5992
01-Aug-94 95.50 9.4414 10.1150
01-Sep-94 95.50 9.6275 9.9195
01-Oct-94 95.50 9.3450 10.2194
01-Nov-94 95.50 9.4603 10.0948
01-Dec-94 95.50 9.0420 10.5618
01-Jan-95 95.50 9.0288 10.5773
01-Feb-95 95.50 9.1534 10.4333
01-Mar-95 95.50 9.4018 10.1576
01-Apr-95 95.50 9.7214 9.8237
01-May-95 95.50 9.9893 9.5602
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
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C> <C>
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
01-Jan-97 95.50 15.3389 6.2260
01-Feb-97 95.50 16.1929 5.8976
01-Mar-97 95.50 16.0772 5.9401
01-Apr-97 95.50 15.5631 6.1363
01-May-97 95.50 16.2137 5.8901
01-Jun-97 95.50 17.2290 5.5430
01-Jul-97 95.50 17.9709 5.3141
01-Aug-97 95.50 19.1318 4.9917
01-Sep-97 95.50 18.2176 5.2422
01-Oct-97 95.50 19.2098 4.9714
01-Nov-97 95.50 18.5803 5.1399
01-Dec-97 95.50 19.3674 4.9310
-----------
TOTAL UNITS PURCHASED: 1,387.6536
x
ACCUMULATION UNIT VALUE (12/31/97): $ 19.4632
=
ENDING VALUE (12/31/97): $ 27,008
===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<INVESTMENTS-AT-COST> 85,599,940 66,564,156
<INVESTMENTS-AT-VALUE> 136,869,624 98,704,398
<RECEIVABLES> 220,927 191,430
<ASSETS-OTHER> 0 0
<OTHER-ITEMS-ASSETS> 0 0
<TOTAL-ASSETS> 137,090,551 98,895,828
<PAYABLE-FOR-SECURITIES> 0 66,429
<SENIOR-LONG-TERM-DEBT> 0 0
<OTHER-ITEMS-LIABILITIES> 0 0
<TOTAL-LIABILITIES> 0 66,429
<SENIOR-EQUITY> 0 0
<PAID-IN-CAPITAL-COMMON> 0 0
<SHARES-COMMON-STOCK> 7,043,575 6,443,056
<SHARES-COMMON-PRIOR> 6,443,056 5,996,795
<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> 137,090,551 98,829,399
<DIVIDEND-INCOME> 1,954,633 1,538,540
<INTEREST-INCOME> 271,265 201,294
<OTHER-INCOME> 0 0
<EXPENSES-NET> 1,746,385 1,162,049
<NET-INVESTMENT-INCOME> 479,513 577,785
<REALIZED-GAINS-CURRENT> 8,150,950 4,213,874
<APPREC-INCREASE-CURRENT> 19,126,495 14,680,750
<NET-CHANGE-FROM-OPS> 27,756,958 19,472,409
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> 0 0
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 1,190,147 1,159,575
<NUMBER-OF-SHARES-REDEEMED> 589,628 713,314
<SHARES-REINVESTED> 0 0
<NET-CHANGE-IN-ASSETS> 38,261,152 25,676,865
<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> 1,746,385 1,162,049
<AVERAGE-NET-ASSETS> 118,621,112 84,347,737
<PER-SHARE-NAV-BEGIN> 15.34 12.20
<PER-SHARE-NII> 0.07 0.09
<PER-SHARE-GAIN-APPREC> 4.05 3.05
<PER-SHARE-DIVIDEND> 0.00 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00 0.00
<RETURNS-OF-CAPITAL> 0.00 0.00
<PER-SHARE-NAV-END> 19.46 15.34
<EXPENSE-RATIO> 1.46 1.38
<AVG-DEBT-OUTSTANDING> 0 0
<AVG-DEBT-PER-SHARE> 0 0
</TABLE>
