<PAGE> 1
As filed with the Securities and Exchange Commission on January 11, 1999
Registration Nos. 2-30771
811-01764
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 44*
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[X] Amendment No. 44*
AMERICAN FIDELITY SEPARATE ACCOUNT A
(FORMERLY AMERICAN FIDELITY VARIABLE ANNUITY FUND A)
(Exact Name of Registrant)
AMERICAN FIDELITY ASSURANCE COMPANY
(Name of Depositor)
2000 N. CLASSEN BOULEVARD, OKLAHOMA CITY, OKLAHOMA 73106
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, Including Area Code (405) 523-2000
Stephen P. Garrett Copies to:
Senior Vice President
Law and Government Affairs Connie S. Stamets, Esq.
American Fidelity Assurance Company McAfee & Taft
2000 N. Classen Boulevard A Professional Corporation
Oklahoma City, Oklahoma 73106 211 N. Robinson, 10th Floor
(Name and Address of Agent for Service) Oklahoma City, Oklahoma 73102
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)
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) 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: Group variable annuity contracts
*Amendment on Form N-4 to Registration Statement on Form N-3 in connection with
change in registration from management investment company to a unit investment
trust.
================================================================================
<PAGE> 2
AMERICAN FIDELITY SEPARATE ACCOUNT A
Cross Reference Sheet
Pursuant to Rule 495
<TABLE>
<CAPTION>
Item
No. Item Location in Prospectus
- ------- ---- ----------------------
<S> <C> <C>
PART A
1 Cover Page........................................... Cover Page
2 Definitions ......................................... Glossary of Terms
3 Synopsis ............................................ Summary
4 Condensed Financial Information...................... Condensed Financial Information
5 General Description of Registrant,
Depositor, and
Portfolio Companies................................ American Fidelity, Separate
Account A and Dual Strategy Fund
6 Deductions and Expenses.............................. Expenses
7 General Description of Variable Annuity
Contracts......................................... The Contract
8 Annuity Period ...................................... Annuity Provisions
9 Death Benefit ....................................... Death Benefit
10 Purchases and Contract Value ........................ Purchasing Accumulation Units
11 Redemptions ......................................... Withdrawals
12 Taxes ............................................... Federal Tax Matters
13 Legal Proceedings ................................... Legal Proceedings
14 Table of Contents of the Statement of
Additional Information .............................. Table of Contents of Statement of
Additional Information
PART B
15 Cover page........................................... Cover Page
16 Table of Contents.................................... Table of Contents
17 General Information and History ..................... General Information and History
18 Services............................................. Not Applicable
19 Purchase of Securities Being Offered................. Not Applicable
20 Underwriters......................................... Underwriter
21 Calculation of Performance Data...................... Performance Information
22 Annuity Payments..................................... Annuity Payments
23 Financial Statements................................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item as numbered in Part C of this Registration Statement.
<PAGE> 3
The Prospectus and Statement of Additional Information for American Fidelity
Separate Account A, included as part of Post-Effective Amendment No. 43 to the
Registrant's Registration Statement on Form N-4 (File No. 2-30771), filed with
the Securities and Exchange Commission on November 25, 1998 pursuant to Rule
485(a) under the Securities Act of 1933, are hereby incorporated by reference as
if set forth fully herein. The attached Statement of Assets and Liabilities of
the Registrant and the consolidated financial statements of American Fidelity
Assurance Company and the respective notes thereto will be added to the
Statement of Additional Information.
<PAGE> 4
AMERICAN FIDELITY SEPARATE ACCOUNT A
(formerly known as American Fidelity Variable
Annuity Fund A)
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 1, 1999 (unaudited)
<TABLE>
<S> <C>
Investments, at fair value:
American Fidelity Dual Strategy Fund shares (cost
$184,548,449)
$ 184,548,449
--------------
Total assets 184,548,449
Total liabilities 0
--------------
Net assets $ 184,548,449
==============
Accumulation units outstanding 7,584,331,949
==============
Net asset value per unit $ 24.3329
==============
</TABLE>
See accompanying notes to financial statements.
B-1
<PAGE> 5
AMERICAN FIDELITY SEPARATE ACCOUNT A
(formerly known as American Fidelity Variable
Annuity Fund A)
NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1999 (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL
American Fidelity Separate Account A (Account A) is a separate
account of American Fidelity Assurance Company (AFA). Account
A was formerly known as American Fidelity Variable Annuity
Fund A, and operated as an open-end diversified management
investment company from 1968 to 1998. Effective January 1,
1999, it was converted to a unit investment trust separate
account, and it transferred its investment portfolio to
American Fidelity Dual Strategy Fund (the Fund) in exchange
for shares of the Fund.
(B) INVESTMENTS
Account A's investment objectives are primarily long-term
growth of capital and secondarily the production of income.
Investments are made in the portfolio of the Fund and are
valued at the reported net asset values of such portfolio,
which values its investment securities at fair value.
Transactions are recorded on a trade date basis.
(C) INCOME TAXES
Account A is not taxed separately because the operations of
Account A 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. Account A
will not be taxed as a "Regulated Investment Company" under
Subchapter "M" of the Internal Revenue Code.
(D) 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.
B-2
<PAGE> 6
AMERICAN FIDELITY SEPARATE ACCOUNT A
(formerly known as American Fidelity Variable
Annuity Fund A)
NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1999 (unaudited)
If additional reserves are required, AFA reimburses Account A.
At January 1, 1999, there were no contract owners who had
elected the variable annuity method of payout. Accordingly,
Account A held no annuity reserves at January 1, 1999.
(E) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of increase and decrease in net
assets from operations during the period. Actual results could
differ from those estimates.
(2) VARIABLE ANNUITY CONTRACTS
During the accumulation period, contract owners may partially or
totally withdraw from Account A 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.
(3) YEAR 2000 RISKS
Like other separate accounts, financial and business organizations and
individuals around the world, the Account A could be adversely affected
if the computer systems used by AFA and Account A's other service
providers do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Problem." AFA has had a formal project team
(including 22 information systems professionals) working to correct the
problem since 1996. In the briefest terms, the correction is to change
all date-related fields in AFA's computer systems to four digits
instead of two digits. At the same time, all relationships with systems
outside AFA must be checked for the same change and all must be tested
to determine that relationships continue to be compatible. Those
systems tested in December 31, 1997 and went through year-
B-3
<PAGE> 7
AMERICAN FIDELITY SEPARATE ACCOUNT A
(formerly known as American Fidelity Variable
Annuity Fund A)
NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1999 (unaudited)
end processing without incident. The final test of all systems will be
run in 1999. Even though management of AFA is expending considerable
resources in a concerted effort to meet this technology-related threat,
there is no guarantee that there will be no adverse impact on Account A
of some sort as January 1, 2000 passes.
B-4
<PAGE> 8
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
KPMG LLP
B-5
<PAGE> 9
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-6
<PAGE> 10
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-7
<PAGE> 11
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-8
<PAGE> 12
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-9
<PAGE> 13
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-10
<PAGE> 14
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-11
<PAGE> 15
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-12
<PAGE> 16
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-13
<PAGE> 17
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-14
<PAGE> 18
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-15
<PAGE> 19
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-16
<PAGE> 20
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-17
<PAGE> 21
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-18
<PAGE> 22
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-19
<PAGE> 23
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-20
<PAGE> 24
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-21
<PAGE> 25
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-22
<PAGE> 26
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-23
<PAGE> 27
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-24
<PAGE> 28
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-25
<PAGE> 29
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-26
<PAGE> 30
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-27
<PAGE> 31
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-28
<PAGE> 32
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>
See accompanying independent auditors' report.
B-29
<PAGE> 33
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-30
<PAGE> 34
PART C
OTHER INFORMATION
ITEM 24 -- FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements are included in Part B of this
registration statement:
AMERICAN FIDELITY SEPARATE ACCOUNT A
Statement of Assets and Liabilities as of January 1, 1999 (unaudited)
Notes to Statement of Assets and Liabilities (unaudited)
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 for the Years Ended
December 31, 1997, 1996 and 1995
Schedule IV _ Reinsurance for the Years Ended December 31, 1997, 1996
and 1995
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
1.1 - Resolution adopted by the Board of Directors of American Fidelity on
May 7, 1968, authorizing establishment of the Registrant. Incorporated
herein by reference to Exhibit 1.1 to Post-Effective Amendment No. 43
to Registrant's registration statement on Form N-4 filed on November
25, 1998 (No. 2-30771).
1.2 - Resolution adopted by the Board of Directors of American Fidelity on
April 6, 1998, authorizing reorganization of the Registrant as a unit
investment trust. Incorporated herein by reference to Exhibit 1.2 to
Post-Effective Amendment No. 43 to Registrant's registration statement
on Form N-4 filed on November 25, 1998 (No. 2-30771).
1.3 - Resolution adopted by the Board of Managers of the Registrant on March
19, 1998, authorizing reorganization of the Registrant as a unit
investment trust. Incorporated herein by reference to Exhibit 1.3 to
Post-Effective Amendment No. 43 to Registrant's registration statement
on Form N-4 filed on November 25, 1998 (No. 2-30771).
</TABLE>
2 - Not applicable.
C-1
<PAGE> 35
<TABLE>
<S> <C>
3 - Underwriting Contract between the Registrant and American Fidelity
Securities, Inc. dated December 20, 1972. Incorporated herein by
reference to Exhibit 3 to Post-Effective Amendment No. 43 to
Registrant's registration statement on Form N-4 filed on November 25,
1998 (No. 2- 30771).
4.1 - Form of Variable Annuity Master Contract. Incorporated herein by
reference to Exhibit 4.1 to Post-Effective Amendment No. 43 to
Registrant's registration statement on Form N-4 filed on November 25,
1998 (No. 2-30771).
4.2 - Form of Variable Annuity Contract Certificate. Incorporated herein by
reference to Exhibit 4.2 to Post-Effective Amendment No. 43 to
Registrant's registration statement on Form N-4 filed on November 25,
1998 (No. 2-30771).
5 - Forms of Variable Annuity Application. Incorporated herein by reference
to Exhibit 5 to Post- Effective Amendment No. 43 to Registrant's
registration statement on Form N-4 filed on November 25, 1998 (No.
2-30771).
6.1 - Articles of Incorporation of American Fidelity and all amendments
through November 4, 1987. Incorporated herein by reference to Exhibit
6.1 to Post-Effective Amendment No. 43 to Registrant's registration
statement on Form N-4 filed on November 25, 1998 (No. 2-30771).
6.2 - Amended and Restated Bylaws of American Fidelity dated November 24,
1997. Incorporated herein by reference to Exhibit 8.2 to Post-Effective
Amendment No. 42 to Registrant's registration statement on Form N-3
filed on April 24, 1998 (No. 2-30771).
7 - Not applicable.
8* - Fund Participation Agreement dated December 22, 1998 between Registrant
and American Fidelity.
9 - Opinion and Consent of Counsel. Incorporated herein by reference to
Exhibit 9 to Post-Effective Amendment No. 43 to Registrant's
registration statement on Form N-4 filed on November 25, 1998 (No.
2-30771).
10* - Independent Auditors' Consent.
11 - Not applicable.
12 - Not applicable.
13* - Schedule for computation of performance quotations.
14 - Not applicable.
</TABLE>
C-2
<PAGE> 36
<TABLE>
<S> <C>
15 - American Fidelity organization chart. Incorporated herein by reference
to Exhibit 15 to Post- Effective Amendment No. 43 to Registrant's
registration statement on Form N-4 filed on November 25, 1998 (No.
2-30771).
16 - Power of Attorney. Incorporated herein by reference to Exhibit 16 to
Post-Effective Amendment No. 43 to Registrant's registration statement
on Form N-4 filed on November 25, 1998 (No. 2- 30771).
</TABLE>
- -----------------
* Filed herewith.
ITEM 25 -- DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with American Fidelity
------------------ ----------------------
<S> <C>
Lynda L. Cameron Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William M. Cameron Chairman and Chief
2000 N. Classen Boulevard Executive Officer, Director
Oklahoma City, OK 73106
David R. Carpenter Senior Vice President, Treasurer
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William E. Durrett Senior Chairman, Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
Stephen P. Garrett Senior Vice President, Secretary
2000 N. Classen Boulevard
Oklahoma City, OK 73106
William A. Hagstrom Director
800 Research Parkway
Oklahoma City, OK 73104
Edward C. Joullian, III Director
2000 N. Classen Boulevard
Oklahoma City, OK 73106
Kenneth D. Klehm Senior Vice President
2000 N. Classen Boulevard
Oklahoma City, OK 73106
</TABLE>
C-3
<PAGE> 37
<TABLE>
<S> <C>
Alfred L. Litchenburg Senior Vice President
2000 N. Classen
Boulevard Oklahoma City, OK 73106
David R. Lopez Director
800 N. Harvey, Room 300
Oklahoma City, OK 73102
Paula Marshall-Chapman Director
2745 East 11th Street
Tulsa, OK 74104
John W. Rex President, Chief Operating Officer,
2000 N. Classen Boulevard Director
Tulsa, OK 74104
Galen P. Robbins, M.D. Director
3433 N.W. 56th
Oklahoma City, OK 73112
John D. Smith Director
3400 Peach Tree Road, Suite 831
Atlanta, GA 30326
</TABLE>
ITEM 26 -- PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
American Fidelity's organization chart is included as Exhibit 15. The
subsidiaries of American Fidelity reflected in the organization chart are
included in the consolidated financial statements of American Fidelity in
accordance with generally accepted accounting principles.
ITEM 27 -- NUMBER OF CONTRACT OWNERS
As of November 9, 1998, there were 2,013 Contract Owners of qualified
contracts offered by the Registrant.
ITEM 28 -- INDEMNIFICATION
The Bylaws of American Fidelity (Article VIII, Section 3) generally
provide that American Fidelity shall indemnify its directors, officers,
employees and agents, as well as any person serving at the request of American
Fidelity as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against liabilities
incurred in acting in any such capacity if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interest of
American Fidelity and, with respect to any criminal action, if they had no
reasonable cause to believe their conduct was unlawful. Indemnification of these
persons is also provided for derivative actions. See American Fidelity's Bylaws
filed as Exhibit 6.2 to this registration statement.
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
C-4
<PAGE> 38
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.
ITEM 29 -- PRINCIPAL UNDERWRITERS
(a) American Fidelity Securities, Inc. is the sole underwriter for the
Registrant, American Fidelity Separate Account B and American Fidelity Dual
Strategy Fund, Inc.
(b) Director and officer information for American Fidelity Securities,
Inc. is as follows:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ---------------------
<S> <C>
David R. Carpenter Director, Chairman, President, Chief Executive
P. O. Box 25523 Officer, Treasurer, Chief Financial Officer and
Oklahoma City, OK 73125 Registered Limited Principal
Marvin R. Ewy Director, Vice President, Secretary, Chief
P. O. Box 25523 Compliance Officer and Registered
Oklahoma City, OK 73125 Limited Principal
Nancy K. Steeber Director, Vice President, Operations Officer and
P. O. Box 25523 Registered Limited Principal
Oklahoma City, OK 73125
</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 Registrant. It received no other
compensation from or on behalf of the Registrant during the year.
ITEM 30 -- LOCATION OF ACCOUNTS AND RECORDS
The name and address of the person who maintains physical possession of
the accounts, books and other documents of the Registrant required by Section
31(a) of the Investment Company Act of 1940 are:
David R. Carpenter
Senior Vice President and Treasurer
American Fidelity Assurance Company
2000 N. Classen Boulevard
Oklahoma City, Oklahoma 73106
C-5
<PAGE> 39
ITEM 31 -- MANAGEMENT SERVICES
Not applicable.
ITEM 32 -- UNDERTAKINGS
The Registrant hereby undertakes to:
(a) 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;
(b) 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
(c) deliver any Statement of Additional Information and any
financial statements required to be made available under this
Form promptly upon written or oral request.
American Fidelity 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 American Fidelity.
C-6
<PAGE> 40
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this Registration Statement to be signed on its
behalf, in the city of Oklahoma City and State of Oklahoma on this 8th day of
January, 1999.
AMERICAN FIDELITY SEPARATE ACCOUNT A
(Registrant)
By: American Fidelity Assurance Company
(Depositor)
By /s/ John W. Rex
---------------------------------------
John W. Rex, President
AMERICAN FIDELITY ASSURANCE COMPANY
(Depositor)
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 January 8, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ William M. Cameron* Chairman, Chief Executive Officer and
- ----------------------------------- Director (Principal Executive Officer)
William M. Cameron
/s/ William E. Durrett* Senior Chairman and Director
- -----------------------------------
William E. Durrett
/s/ Lynda L. Cameron* Director
- -----------------------------------
Lynda L. Cameron
/s/ John W. Rex Director, President and Chief Operating
- ----------------------------------- Officer
John W. Rex
/s/ Edward C. Joullian, III* Director
- -----------------------------------
Edward C. Joullian, III
/s/ Galen P. Robbins, M.D.* Director
- -----------------------------------
Galen P. Robbins, M.D.
/s/ John D. Smith* Director
- -----------------------------------
John D. Smith
/s/ William A. Hagstrom* Director
- -----------------------------------
William A. Hagstron
/s/ David R. Lopez* Director
- -----------------------------------
David R. Lopez
/s/ Paula Marshall-Chapman* Director
- -----------------------------------
Paula Marshall-Chapman
/s/ David R. Carpenter* Senior Vice President, Controller and
- ----------------------------------- Treasurer (Principal Financial and
David R. Carpenter Accounting Officer)
*By /s/ John W. Rex
-------------------------------
John W. Rex, Attorney in-Fact
</TABLE>
C-7
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of the 22nd day of December, 1998,
between AMERICAN FIDELITY DUAL STRATEGY FUND, INC., an open-end management
investment company organized as a Maryland corporation (the "Fund"), and
AMERICAN FIDELITY ASSURANCE COMPANY, a life insurance company organized and
domiciled under the laws of the State of Oklahoma (the "Company"), on its
own behalf and on behalf of each segregated asset account of the Company
which may be set forth on Schedule A as attached hereto, as amended from
time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Fund has filed a registration statement with the
Securities and Exchange Commission to register itself as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and to register the offer and sale of its shares
under the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Fund desires to act as an investment vehicle for
separate accounts established for variable annuity contracts to be offered
by insurance companies that have entered into participation agreements with
the Fund (the "Participating Insurance Companies"); and
WHEREAS, American Fidelity Securities, Inc. (the "Underwriter")
is registered as a broker-dealer with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), is a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") and acts as principal
underwriter of the shares of the Fund; and
WHEREAS, the Company is duly registered as an investment adviser
under the Investment Advisers Act of 1940, as amended, and any applicable
state securities law, and acts as the Fund's investment adviser; and
WHEREAS, the Company has registered or will register under the
1933 Act certain variable annuity contracts funded or to be funded through
one or more of the Accounts (the "Contracts"); and
WHEREAS, the Company has registered or will register each Account
as a unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Fund (the
"Shares") on behalf of the Accounts to fund the Contracts, and the Fund
intends to sell such Shares to the relevant Accounts at such Shares' net
asset value.
NOW, THEREFORE, in consideration of their mutual promises, the
parties agree as follows:
ARTICLE 1
SALE OF THE FUND SHARES
1.1 Subject to Section 1.3 of this Agreement, the Fund shall
cause the Underwriter to make Shares available to the Accounts at such
Shares' most recent net asset value provided to the Company prior to
receipt of such purchase order by the Fund (or the Underwriter as its
agent), in accordance with the operational procedures mutually agreed to by
the Underwriter and the Company from time to time and the provisions of the
then-current prospectus of the Fund. Shares of the Fund shall be ordered
in such quantities and at such times as determined by the Company to be
necessary to meet the requirements of the Contracts. The Directors of the
Fund (the "Directors") may refuse to sell Shares of the Fund to any person
(including the Company and the Accounts), or suspend or terminate the
offering of Shares if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the
Directors acting in good faith and in light of their fiduciary duties under
federal and any applicable state laws, necessary in the best interests of
the shareholders of the Fund.
1.2 Subject to Section 1.3 of this Agreement, the Fund will
redeem any full or fractional Shares when requested by the Company on
behalf of an Account at such Shares' most recent net asset value provided
to the Company prior to receipt by the Fund (or the Underwriter as its
agent) of the request for redemption, as established in accordance with the
operational procedures mutually agreed to by the Underwriter and the
Company from time to time and the provisions of the then-current prospectus
of the Fund. The Fund shall make payment for such Shares in the manner
established from time to time by the Fund, but in no event shall payment be
delayed for a greater period than is permitted by the 1940 Act (including
any rule or order of the SEC thereunder).
1.3 The Fund shall accept purchase and redemption orders
resulting from investment in and payments under the Contracts on each
Business Day, provided that such orders are received prior to 9:00 a.m. on
such Business Day and reflect instructions received by the Company from
Contract holders in good order prior to the time the net asset value of the
Fund is priced in accordance with its prospectus (the "valuation time") on
the prior Business Day. Any purchase or redemption order for Shares
received, on any Business Day, after the valuation time on such Business
Day shall be deemed received prior to 9:00 a.m. on the next succeeding
Business Day. "Business Day" shall mean any day on which the Company is
open for business and on which the Fund calculates its net asset value
pursuant to the rules of the SEC. Purchase and redemption orders shall be
provided by the Company to the Underwriter as agent for the Fund in such
written or electronic form (including facsimile) as may be mutually
acceptable to the Company and the Underwriter. The Underwriter may reject
purchase and redemption orders that are not in proper form. In the event
that the Company and the Underwriter agree to use a form of written or
electronic communication which is not capable of recording the time, date
and recipient of any communication and confirming good transmission, the
Company agrees that it shall be responsible (i) for confirming with the
Underwriter that any communication sent by the Company was in fact received
by the Underwriter in proper form, and (ii) for the effect of any delay in
the Underwriter's receipt of such communication in proper form. The Fund
and its agents shall be entitled to rely, and shall be fully protected from
all liability in acting, upon the instructions of the persons named in the
list of authorized individuals attached hereto as Schedule B, or any
subsequent list of authorized individuals provided to the Fund or its
agents by the Company in such form, without being required to determine the
authenticity of the authorization or the authority of the persons named
therein.
1.4 Purchase orders that are transmitted to the Fund in
accordance with Section 1.3 of this Agreement shall be paid for no later
than 12:00 noon on the same Business Day that the Fund receives notice of
the order. Payments shall be made in federal funds transmitted by wire
and/or a credit for any Shares purchased the same day as a redemption. In
the event that the Company shall fail to pay in a timely manner for any
purchase order validly received by the Underwriter on behalf of the Fund
pursuant to Section 1.3 of this Agreement (whether or not such failure is
the fault of the Company), the Company shall hold the Fund harmless from
any losses reasonably sustained by the Fund as the result of acting in
reliance on such purchase order.
1.5 Issuance and transfer of the Fund's Shares will be by book
entry only. Stock certificates will not be issued to the Company or to any
Account. Shares ordered from the Fund will be recorded in the appropriate
title for each Account.
1.6 The Fund shall furnish prompt notice to the Company of any
income, dividends or capital gain distribution payable on Shares. The
Company hereby elects to receive all such income, dividends and capital
gain distributions as are payable on Shares in additional Shares of the
Fund. The Fund shall notify the Company of the number of Shares so issued
as payment of such dividends and distributions.
1.7 The Fund shall make the net asset value per share for the
Fund available to the Company on a daily basis as soon as reasonably
practical after such net asset value per share is calculated and shall use
its best efforts to make such net asset value per share available by 6:30
p.m., New York time.
1.8 The Company agrees that it will not take any action to
operate any Account as a management investment company under the 1940 Act
without the Fund's and the Underwriter's prior written consent.
1.9 The Fund agrees that its Shares will be sold only to
Participating Insurance Companies and their separate accounts. No Shares
will be sold directly to the general public. The Company agrees that Fund
Shares will be used only for the purposes of funding the Contracts and
Accounts listed in Schedule A, as such schedule may be amended from time to
time.
1.10 The Fund agrees that all Participating Insurance Companies
shall have the obligations and responsibilities regarding pass-through
voting and conflicts of interest corresponding to those contained in
Section 2.9 and Article 4 of this Agreement.
ARTICLE 2
OBLIGATION OF THE PARTIES
2.1 The Fund shall prepare and be responsible for filing with
the SEC and any state securities regulators requiring such filing, all
shareholder reports, notices, proxy materials (or similar materials such as
voting instruction solicitation materials), prospectuses and statements of
additional information of the Fund. Except as the Company and the Fund
have otherwise agreed, the Company shall bear the costs of registration and
qualification of the Fund's Shares, preparation and filing of the documents
listed in this Section 2.1 and all taxes to which an issuer is subject on
the issuance and transfer of its shares.
2.2 At least annually, the Fund or its designee shall provide
the Company, at the Company's expense, with as many copies of the current
prospectus for the Shares as the Company may reasonably request for
distribution to existing Contract owners whose Contracts are funded by such
Shares. The Fund or its designee shall provide the Company, at the
Company's expense, with as many copies of the current prospectus for the
Shares as the Company may reasonably request for distribution to
prospective purchasers of Contracts. If requested by the Company in lieu
thereof, the Fund or its designee shall provide such documentation
(including a "camera ready" copy of the new prospectus as set in type) and
other assistance as is reasonably necessary in order for the parties hereto
once each year (or more frequently if the prospectus for the Shares is
supplemented or amended) to have the prospectus for the Contracts and the
prospectus for the Shares printed together in one document; the expenses of
such printing to be borne by the Company. In the event that the Company
requests that the Fund or its designee provide the Fund's prospectus in a
"camera ready" format, the Fund shall be responsible solely for providing
the prospectus in the format in which it is accustomed to formatting
prospectuses, and the Company shall bear the expense of adjusting or
changing the format to conform with any of its prospectuses.
2.3 The prospectus for the Shares shall state that the statement
of additional information for the Shares is available from the Fund or its
designee. The Fund or its designee, at the Company's expense, shall print
and provide such statement of additional information to the Company (or a
master of such statement suitable for duplication by the Company) for
distribution to any owner of a Contract funded by the Shares. The Fund or
its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to any prospective purchaser
who requests such statement.
2.4 The Fund or its designee shall provide the Company, at the
Company's expense, copies, if and to the extent applicable to the Shares,
of the Fund's proxy materials, reports to shareholders and other
communications to shareholders in such quantity as the Company shall
reasonably require for distribution to Contract owners.
2.5 The Company shall furnish, or cause to be furnished, to the
Fund or its designee, a copy of each prospectus for the Contracts or
statement of additional information for the Contracts in which the Fund or
its investment adviser is named prior to the filing of such document with
the SEC. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser is named, at least
five Business Days prior to its use. No such prospectus, statement of
additional information or material shall be used if the Fund or its
designee reasonably objects to such use within five Business Days after
receipt of such material.
2.6 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund
or its investment adviser in connection with the sale of the Contracts
other than information or representations contained in and accurately
derived from the registration statement or prospectus for the Fund Shares
(as such registration statement and prospectus may be amended or
supplemented from time to time), reports of the Fund, Fund-sponsored proxy
statement, or in sales literature or other promotional material approved by
the Fund or its designee, except with the written permission of the Fund or
its designee.
2.7 The Fund shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Contracts (as such registration statement
and prospectus may by amended or supplemented from time to time), or in
materials approved by the Company for distribution including sales
literature or other promotional materials, except with the written
permission of the Company.
2.8 The Company shall amend the registration statement of the
Contracts under the 1933 Act and registration statement for each Account
under the 1940 Act from time to time as required in order to effect the
continuous offering of the Contracts or as may otherwise be required by
applicable law. The Company shall register and qualify the Contracts for
sale to the extent required by applicable securities laws and insurance
laws of the various states.
2.9 Solely with respect to Contracts and Accounts that are
subject to the 1940 Act, so long as, and to the extent that, the SEC
interprets the 1940 Act to require pass-through voting privileges: (a) the
Company will provide pass-through voting privileges to owners of Contracts,
through the Accounts, in Shares of the Fund; (b) the Fund shall require all
Participating Insurance Companies to calculate voting privileges in the
same manner and the Company shall be responsible for assuring that the
Accounts calculate voting privileges in the manner established by the Fund;
(c) with respect to each Account, the Company will vote Shares of the Fund
held by the Account and for which no timely voting instructions from
Contract owners are received, as well as Shares held by the Account that
are owned by the Company for its general account, in the same proportion as
the Company votes Shares held by the Account for which timely voting
instructions are received from Contract owners; and (d) the Company and its
agents will in no way recommend or oppose or interfere with the
solicitation of proxies for Fund Shares held by Contract owners without the
prior written consent of the Fund, which consent may be withheld in the
Fund's sole discretion.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance
company duly organized and in good standing under the laws of the State of
Oklahoma and has established each Account as a segregated asset account
under such law.
3.2 The Company represents and warrants that it has registered
or, prior to any issuance or sale of the Contracts, will register each
Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the Contracts.
3.3 The Company represents and warrants that the issuance of the
Contracts will be registered under the 1933 Act prior to any issuance or
sale of the Contracts; the Contracts will be issued and sold in compliance
in all material respects with all applicable federal and state laws; and
the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements.
3.4 The Company represents and warrants that the Contracts are
currently and at the time of issuance will be treated as annuity contracts
under applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company shall make every effort to maintain such
treatment and shall notify the Fund and the Underwriter immediately upon
having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
3.5 The Fund represents and warrants that it is duly organized
and validly existing under the laws of the State of Maryland.
3.6 The Fund represents and warrants that the sale of the Fund
Shares offered and sold pursuant to this Agreement will be registered under
the 1933 Act and that the Fund is registered under the 1940 Act. The Fund
shall use its best efforts to amend its registration statement under the
1933 Act and the 1940 Act from time to time as required in order to effect
the continuous offering of its shares. The Company shall advise the Fund
of any state requirements to register Shares for sale in such states. If
the Fund determines registration is appropriate, the Fund shall use its
best efforts to register and qualify its Shares for sale in accordance with
the laws of such jurisdictions reasonably requested by the Company.
3.7 The Fund represents and warrants that its investments will
comply with the diversification requirements set forth in section 817(h) of
the Code and the rules and regulations thereunder.
ARTICLE 4
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Fund's Shares may be made
available for investment to other Participating Insurance Companies. In
such event, the Directors will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the contract
owners of all Participating Insurance Companies. An irreconcilable
material conflict may arise for a variety of reasons, including: (a) an
action by any state insurance regulatory authority; (b) a change in
applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or
securities decision in any relevant proceeding; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of the Fund are being managed; (e) a difference in voting
instructions given by variable annuity contract; or (f) a decision by an
insurer to disregard the voting instructions of contract owners. The
Directors shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or
existing conflicts of which it is aware to the Directors. The Company will
assist the Directors in carrying out their responsibilities by providing
the Directors with all information reasonably necessary for the Directors
to consider any issues raised including, but not limited to, information as
to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Directors, or a
majority of the Fund's Directors who are not affiliated with the Company or
the Underwriter (the "Disinterested Directors"), that a material
irreconcilable conflict exists that affects the interests of Contract
owners, the Company shall, in cooperation with other Participating
Insurance Companies whose contract owners are also affected, at its expense
and to the extent reasonably practicable (as determined by the Directors)
take whatever steps are necessary to remedy or eliminate the irreconcilable
material conflict, which steps could include: (a) withdrawing the assets
allocable to some or all of the Accounts from the Fund and reinvesting such
assets in a different investment medium, or submitting the question of
whether or not such segregation should be implemented to a vote of all
affected Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners or variable contract
owners of one or more Participating Insurance Companies) that votes in
favor of such segregation, or offering to the affected Contract owners the
option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and
that decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Fund's election, to withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s); provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of
the Disinterested Directors. Any such withdrawal and termination must take
place within 30 days after the Fund gives written notice that this
provision is being implemented. Until the end of such 30 day-period, the
Fund shall continue to accept and implement orders by the Company for the
purchase and redemption of Shares of the Fund.
4.5 If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company
will withdraw the affected Account's (or Accounts') investment in the Fund
and terminate this Agreement with respect to such Account(s) within 30 days
after the Fund informs the Company in writing that it has determined that
such decision has created an irreconcilable material conflict; provided,
however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as
determined by a majority of the Disinterested Directors. Until the end of
such 30-day period, the Fund shall continue to accept and implement orders
by the Company for the purchase and redemption of Shares of the Fund.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement,
a majority of the Disinterested Directors shall determine whether any
proposed action adequately remedies any irreconcilable material conflict,
but in no event will the Company be required to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote of
a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Directors
determine that any proposed action does not adequately remedy any
irreconcilable material conflict, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the
Directors inform the Company in writing of the foregoing determination;
provided, however, that such withdrawal and termination shall be limited to
the extent required by any such material irreconcilable conflict as
determined by a majority of the Disinterested Directors.
ARTICLE 5
INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to
indemnify and hold harmless the Fund and each of its Directors, officers,
employees and agents and each person, if any, who controls the Fund within
the meaning of Section 15 of the 1933 Act (collectively the "Indemnified
Parties" for purposes of this Article 5) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of the Company) or expenses (including the reasonable costs
of investigating or defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in connection therewith)
(collectively, "Losses"), to which such Indemnified Parties may become
subject under any statute or regulation, or common law or otherwise,
insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in the
Contracts themselves or in sales literature generated or approved
by the Company on behalf of the Contracts or Accounts (or any
amendment or supplement to any of the foregoing) (collectively,
"Company Documents" for the purposes of this Article 5), or arise
out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided
that this indemnity shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or
omission was made in reliance upon and was accurately derived
from written information furnished to the Company by or on behalf
of the Fund for use in Company Documents or otherwise for use in
connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statements or
representations (other than statements or representations
contained in and accurately derived from Fund Documents (as
defined in Section 5.2(a) below) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Fund
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived from
written information furnished to the Fund by or on behalf of the
Company; or
(d) arise out of or result from any failure by the Company
to provide the services or furnish the materials required under
the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company.
5.2 Indemnification by the Fund. The Fund agrees to indemnify
and hold harmless the Company and each of its directors, officers,
employees and agents and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Article 5) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement
with the written consent of the Fund) or expenses (including the reasonable
costs of investigating or defending any alleged loss, claim, damage,
liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or at common
law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statement of any material fact contained in the
registration statement or prospectus for the Fund (or any
amendment or supplement thereto) or in sales literature approved
by the Fund (but solely with respect to statements regarding the
Fund), (collectively, "Fund Documents" for the purposes of this
Article 5), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this indemnity shall not apply as to
any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Fund
by or on behalf of the Company for use in Fund Documents or
otherwise for use in connection with the sale of the Contracts or
Shares; or
(b) arise out of or result from statement or representations
(other than statements or representations contained in and
accurately derived from Company Documents) or wrongful conduct of
the Fund or persons under its control, with respect to the sale
or acquisition of the Contracts or Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of
the Fund; or
(d) arise out of or result from any failure by the Fund to
provide the services or furnish the materials required under the
terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Fund.
5.3 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with
respect to any Losses incurred or assessed against any Indemnified Party to
the extent such Losses arise out of or result from such Indemnified Party's
willful misfeasance, bad faith or negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with
respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the party against whom
indemnification is sought in writing within five business days after the
summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by
such Indemnified Party (or after such Indemnified Party shall have received
notice of service upon or other notification to any designated agent), but
failure to notify the party against whom indemnification is sought of any
such claim shall not relieve that party from any liability that it may have
to the Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified
Parties, the indemnifying party shall be entitled to participate, at its
own expense, in the defense of such action. The indemnifying party also
shall be entitled to assume the defense thereof, with counsel reasonably
satisfactory to the party named in the action. After notice from the
indemnifying party to the Indemnified Party of an election to assume such
defense, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the indemnifying party will not be
liable to the Indemnified Party under this Agreement for any legal or other
expenses subsequently incurred by such Indemnified Party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE 6
TERMINATION
6.1 This Agreement may be terminated by either party for any
reason by six (6) months' advance written notice to the other party, and
may be terminated by the Fund pursuant to Sections 6.2 through 6.4 below
upon written notice to the Company.
6.2 This Agreement may be terminated at the option of the Fund
upon any finding or ruling against the Company by a court or the NASD, the
SEC, the insurance department of any state, or any other regulatory body
regarding the Company's duties under this Agreement or related to the sale
of the Contracts, the operation of the Account, the administration of the
Contracts or the purchase of the Shares, or any settlement of any
proceedings or undertaking to any regulatory body that would, in the Fund's
reasonable judgment, materially impair the Company's ability to meet and
perform the Company's obligations and duties hereunder.
6.3 This Agreement may be terminated at the option of the Fund
if the Contracts cease to qualify as annuity contracts under the Code, or
if the Fund reasonably believes that the Contracts may fail to so qualify.
6.4 This Agreement may be terminated by the Fund, at its option,
if the Fund shall reasonably determine, in its sole judgment exercised in
good faith, that either (1) the Company shall have suffered a material
adverse change in its business or financial condition or (2) the Company
shall have been the subject of material adverse publicity that is likely to
have a material adverse impact upon the business and operations of either
the Fund or the Underwriter.
6.5 This Agreement may be terminated at the option of the
Company if (A) the Internal Revenue Service determines that the Fund fails
to qualify as a "Regulated Investment Company" under the Code or fails to
comply with the diversification requirements of Section 817(h) of the Code,
or (B) the Company shall reasonably determine, in its sole judgment
exercised in good faith, that either (1) the Fund or the Underwriter shall
have been the subject of material adverse publicity which is likely to have
a material adverse impact upon the business and operations of the Company,
or (2) the Fund breaches any obligation under this Agreement in a material
respect and such breach shall continue unremedied for thirty (30) days
after receipt of notice from the Company of such breach.
6.6 Notwithstanding any termination of this Agreement pursuant
to this Article 6, the Fund and the Underwriter may, at the option of the
Fund, continue to make available additional Fund Shares for so long after
the termination of this Agreement as the Fund desires pursuant to the terms
and conditions of this Agreement as provided in Section 6.7 below, for all
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if the Fund or Underwriter so elects to make additional Shares
available, the owners of the Existing Contracts or the Company, whichever
shall have legal authority to do so, shall be permitted to reallocate
investments in the Fund, redeem investments in the Fund and/or invest in
the Fund upon the making of additional purchase payments under the Existing
Contracts.
6.7 In the event of a termination of this Agreement pursuant to
this Article 6, the Fund and the Underwriter shall promptly notify the
Company whether the Underwriter and the Fund will continue to make Shares
available after such termination; if the Underwriter and the Fund will
continue to make Shares so available, the provisions of this Agreement
shall remain in effect except for Section 6.1 hereof and thereafter either
the Fund or the Company may terminate the Agreement, as so continued
pursuant to this Section 6.7, upon prior written notice to the other party,
such notice to be for a period that is reasonable under the circumstances
but, if given by the Fund, need not be greater than six months.
6.8 The provisions of Article 5 shall survive the termination of
this Agreement, and the provisions of Article 4 and Sections 2.4 and 2.9
shall survive the termination of this Agreement so long as Shares of the
Fund are held on behalf of Contract owners in accordance with Section 6.6.
ARTICLE 7
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund:
American Fidelity Dual Strategy Fund, Inc.
2000 Classen Center
Oklahoma City, Oklahoma 73106
Attention:
Daniel D. Adams, Secretary
If to the Company:
American Fidelity Assurance Company
2000 Classen Boulevard, 5 North
Oklahoma City, Oklahoma 73106-6092
Attention: Derrick P. Owens, Annuity Product Manager
Strategic Development Division
ARTICLE 8
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience
of reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the
same instrument.
8.3 If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
the Agreement shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Oklahoma,
shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and
the rules, regulations and rulings thereunder, including such exemptions
from those statutes, rules and regulations as the SEC may grant and the
terms hereof shall be interpreted and construed in accordance therewith.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Fund arising, directly or indirectly, under this
Agreement, of any and every nature whatsoever, shall be satisfied solely
out of the assets of the Fund and that no Director, officer, agent, or
holder of shares of beneficial interest of the Fund shall be personally
liable for any such liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC,
the NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. Each party shall use its best efforts to provide the
other party with reasonable notice of any governmental investigation or
inquiry relating to this Agreement or the transactions contemplated hereby
of which it has knowledge.
8.7 The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights,
remedies and obligations, at law or in equity, which the parties hereto are
entitled to under state and federal laws.
8.8 The parties to this Agreement acknowledge and agree that
this Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations
hereunder may be assigned by either party without the prior written
approval of the other party.
8.10 No provisions of this Agreement may be amended or modified
in any manner except by a written agreement properly authorized and
executed by both parties.
8.11 No failure or delay by a party in exercising any right or
remedy under this Agreement will operate as a waiver thereof and no single
or partial exercise of rights shall preclude a further or subsequent
exercise. The rights and remedies provided in this Agreement are
cumulative and not exclusive of any rights or remedies provided by law.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and
year first above written.
AMERICAN FIDELITY ASSURANCE COMPANY
By: JOHN W. REX
Name: John W. Rex
Title: President
AMERICAN FIDELITY DUAL STRATEGY FUND, INC.
By: JOHN W. REX
Name: John W. Rex
Title: Chairman of the Board and President
<PAGE>
SCHEDULE A
Segregated Accounts of American Fidelity Assurance Company Participating in
American Fidelity Dual Strategy Fund, Inc.
Name of Separate Account Effective Date of Participation
American Fidelity January 1, 1999
Separate Account A
<PAGE>
SCHEDULE B
Persons Authorized to Act on Behalf of American Fidelity Assurance Company
The Fund, the Underwriter and their respective agents are
authorized to rely on instructions from the following individuals on behalf
of American Fidelity Assurance Company on its own behalf and on behalf of
each Account:
Name Signature
<PAGE> 1
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
The Board Directors
American Fidelity Assurance Company:
We consent to the use of our reports included herein and the reference to our
name under the heading "Independent Accountants" in the Statement of Additional
Information.
KPMG LLP
Oklahoma City, Oklahoma
January 8, 1999
<TABLE>
Schedule of Computations for Each Performance Quotation Provided
in the Registration Statement
<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 $17.8642 $9.0570 $4.9974
equals = = =
NUMBER OF ACCUMULATION UNITS
PURCHASED 52.87 104.28 189.00
(C) ACCUMULATION UNIT VALUE AT
THE END OF TIME PERIOD $22.6941 $22.6941 $22.6941
multiplied by x x x
NUMBER OF ACCUMULATION UNITS
PURCHASED 52.87 104.28 189.00
equals = = =
ENDING VALUE $1,199.84 $2,366.54 $4,289.18
(D) ENDING VALUE $1,199.84 $2,366.54 $4,289.18
minus - - -
INITIAL INVESTMENT $1,000.00 $1,000.00 $1,000.00
equals = = =
TOTAL DOLLAR RETURN $199.84 $1,366.54 $3,289.18
(E) TOTAL DOLLAR RETURN $199.84 $1,366.54 $3,289.18
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 19.98% 136.65% 328.92%
</TABLE>
(2) AVERAGE ANNUAL TOTAL RETURN
Average annual total return quotations for the one, five and ten
year periods ending 30-Jun-98 are computed using the formula below:
P (1+T)**n = ERV
Where: P = a hypothectical initial investment of $1,000
T = average annual total return
** = to the power of
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 = $1,199.84 $1,000(1+T)**5 = $2,366.54 $1,000(1+T)**10 = $4,289.18
T = 19.98% T = 18.80% T = 15.67%
</TABLE>
