<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1998.
Registration No. 33-37498
811-2954
----------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
--- ---
Post-Effective Amendment No. 8 x
--- ---
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 6 x
-- ---
-----------------------------------------------------
THE FIDELITY VARIABLE ANNUITY ACCOUNT
(Exact Name of Registrant)
PFL LIFE INSURANCE COMPANY
(Name of Depositor)
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Depositor's Telephone Number: (319) 297-8121
Frank A. Camp, Esquire
PFL Life Insurance Company
4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499
(Name and Address of Agent for Service)
Copy to:
Frederick R. Bellamy, Esquire
Sutherland, Asbill & Brennan L.L.P.
1275 Pennsylvania Avenue N.W.
Washington, D.C. 20004-2404
<PAGE>
Title of Securities Being Registered:
Fexible Premium Variable Annuity Policies
Title of Securities Being Registered:
Flexible Premium Variable Annuity Policies
------------------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485.
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X on May 1, 1998 pursuant to paragraph (b) of Rule 485.
- -----
60 days after filing pursuant to paragraph (a)(i) of Rule 485
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on pursuant to paragraph (a)(i) of Rule 485
- ----- -------------------
75 days after filing pursuant to paragraph (a)(ii)
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on pursuant to paragraph (a)(ii) of Rule 485
- ----- -----------
If appropriate, check the following box:
X This post-effective amendment designates a new effective
---
date for a previously filed post-effective amendment.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 495
Showing Location in Part A (Prospectus) and
Part B (Statement of Additional Information)
of Registration Statement of Information Required by Form N-4
-------------------------------------------------------------
<TABLE>
<CAPTION>
PART A
------
Item of Form N-4 Prospectus Caption
- ---------------- ------------------
<S> <C>
1. Cover Page.................... Cover Page
2. Definitions................... Definitions
3. Synopsis...................... Summary; Historical Performance
Data
4. Condensed Financial Information Financial Statements
5. General
(a) Depositor................. PFL Life Insurance Company
(b) Registrant................ The Variable Account
(c) Portfolio Company......... Variable Insurance
Products Fund and
Variable Insurance
Products Fund II
(d) Fund Prospectus........... Variable Insurance
Products Fund and
Variable Insurance
Products Fund II
(e) Voting Rights............. Voting Rights
6. Deductions and Expenses
(a) General................... Contract Charges
(b) Sales Load %.............. N/A
(c) Special Purchase Plan..... N/A
(d) Commissions............... Distribution of Contracts
(e) Expenses - Registrant..... N/A
(f) Fund Expenses............. Variable Insurance Products
Fund and Variable Insurance
Products Fund II
(g) Organizational Expenses... N/A
7. Policies
(a) Persons with Rights....... The Policy; Election of Annuity
Option; Determination of Annuity
Payments; Annuity Commencement
Date; Ownership of the Policy
Voting Rights
(b) (i) Allocation of Premium
Payments............ Allocation and Reallocation of Net
Purchase Payments
(ii) Transfers........... Allocation and Reallocation of Net
Purchase Payments
(iii) Exchanges........... Exchange Privilege
(c) Changes................... Addition, Deletion or
Substitution of Investments;
Election of Annuity Option;
Annuity Commencement Date;
Beneficiary; Ownership of the
Policy
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
(d) Inquiries................. Summary
8. Annuity Period................ Election of Annuity Options
9. Death Benefit................. Death Benefit
10. Purchase and Policy Values
(a) Purchases................. Purchase of the Contracts
(b) Valuation................. Value of Accumulation Units
(c) Daily Calculation......... Value of Accumulation Units
(d) Underwriter............... Distribution of Contracts
1 Redemptions
(a) By Owners................. Surrenders
By Annuitant.............. N/A
(b) Texas ORP................. N/A
(c) Check Delay............... Surrenders
(d) Lapse..................... N/A
(e) Free Look................. Right to Return Contract
12. Taxes.......................... Federal Tax Matters
13. Legal Proceedings.............. Legal Proceedings
14. Table of Contents for the
Statement of Statement of Additional
Additional Information Information
<CAPTION>
PART B
------
Item of Form N-4 Statement of Additional
- ---------------- Information Caption
-------------------
<S> <C>
15. Cover Page..................... Cover Page
16 Table of Contents.............. Table of Contents
17. General Information
and History.................... (Prospectus) PFL Life Insurance
Company
18. Services.......................
(a) Fees and Expenses
of Registrant............. N/A
(b) Management Policies....... N/A
(c) Custodian................. Custody of Assets
Independent
Auditors.................. Independent Auditors
(d) Assets of Registrant...... Custody of Assets
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
(e) Affiliated Person......... N/A
(f) Principal Underwriter..... Distribution of Contracts
19. Purchase of Securities
Being Offered.................. Distribution of Contracts
Offering Sales Load............ N/A
20. Underwriters................... Distribution of the Contracts;
(Prospectus) Distributor of the
Contracts
21. Calculation of Performance
Data........................... Calculation of Yields and Total
Returns; Other Performance Data
22. Annuity Payments............... (Prospectus) Election of Annuity Option;
(Prospectus) Determination of Annuity
Payments
23. Financial Statements........... Financial Statements
<CAPTION>
PART C -- OTHER INFORMATION
---------------------------
Item of Form N-4 Part C Caption
- ---------------- --------------
<S> <C>
24. Financial Statements
and Exhibits.................. Financial Statements and Exhibits
(a) Financial Statements..... Financial Statements
(b) Exhibits................. Exhibits
25. Directors and Officers of Directors and Officers of the
the Depositor Depositor
26. Persons Controlled By or Under Persons Controlled By or Under
Common Control with the Common Control with the
Depositor or Registrant....... Depositor or Registrant
27. Number of Policyowners........ Number of Policyowners
28. Indemnification............... Indemnification
29. Principal Underwriters........ Principal Underwriters
30. Location of Accounts..........
and Records................... Location of Accounts and Records
31. Management Services........... Management Services
32. Undertakings.................. Undertakings
Signature Page................ Signatures
</TABLE>
______________________________
5
<PAGE>
PROSPECTUS MAY 1, 1998
FIDELITY INCOME PLUS
THE FIDELITY VARIABLE ANNUITY ACCOUNT
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY
PFL LIFE INSURANCE COMPANY
ADMINISTRATIVE AND SERVICE OFFICE:
FINANCIAL MARKETS DIVISION - VARIABLE ANNUITY DEPT.
4333 EDGEWOOD ROAD, N.E.
CEDAR RAPIDS, IA 52499
The individual variable annuity contracts (the "Contracts") described in this
Prospectus are offered under the name "Fidelity Income Plus" by PFL Life In-
surance Company (the "Company") to individuals who desire to accumulate capi-
tal on a long-term tax-deferred basis for retirement or other long-term pur-
poses. The Contracts may only be purchased on a non-tax qualified basis. The
Contracts provide for monthly annuity payments on a variable or fixed basis,
commencing at a future date selected by the owner of the Contract. The Con-
tract may be purchased with a minimum initial Purchase Payment of $5,000.
After the deduction of applicable charges, payments made to purchase the Con-
tracts ("Purchase Payments") become assets of the Fidelity Variable Annuity
Account (the "Variable Account"), a segregated investment account of the Com-
pany. Net Purchase Payments may be allocated to one or more of thirteen sub-
accounts of the Variable Account (the "Subaccounts"). The assets of the
Subaccounts are currently invested in shares of the Variable Insurance Prod-
ucts Fund ("VIP"), the Variable Insurance Products Fund II ("VIP II"), and the
Variable Insurance Products Fund III ("VIP III") (the "Funds"). VIP currently
offers five Portfolios: VIP Money Market, VIP High Income, VIP Equity-Income,
VIP Growth, and VIP Overseas. VIP II currently offers five Portfolios: VIP II
Investment Grade Bond, VIP II Asset Manager, VIP II Asset Manager Growth, VIP
II Contrafund and VIP II Index 500. VIP III currently offers three Portfolios:
VIP III Balanced, VIP III Growth Opportunities and VIP III Growth & Income.
The value of each Contract prior to the date upon which the first annuity pay-
ment is to be made (the "Annuity Commencement Date") and the amount of Vari-
able Annuity Payments thereafter will depend upon the investment performance
of the assets of the Variable Account.
Following the date selected by the Contract Owner, Annuity Payments may com-
mence under one of the Annuity Options provided in the Contracts. Prior to the
Annuity Commencement Date, the Contracts are redeemable, in whole or in part,
at their then current value.
This Prospectus sets forth the information about the Variable Account that a
prospective investor should know before investing. Additional information
about the Variable Account has been filed with the Securities and Exchange
Commission in a Statement of Additional Information dated May 1, 1998, which
information is incorporated by reference, and is available without charge by
calling Fidelity Investments at 1-800-544-2442. The table of contents of the
Statement of Additional Information appears on page 30 of this Prospectus.
INC-1
<PAGE>
For further information please call Fidelity Investments.
For Sales Information call
Nationwide (toll-free): 800-544-2442
For Service and Account Information call
Nationwide (toll-free): 800-634-4672
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus For
the Variable Insurance Products Fund, the Variable Insurance Products Fund II,
and the Variable Insurance Products Fund III.
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK OR DEPOSITORY INSTITUTION, AND THE CONTRACT IS NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY. THE CONTRACT
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVEST-
ED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") OR ANY STATE SECURITIES COMMISSION NOR HAS THE SE-
CURITIES AND EXCHANGE COMMISSION OR STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
The date of this Prospectus is May 1, 1998
This Contract is not available in all States
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNEC-
TION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON.
DEFINITIONS
ACCUMULATION UNIT -- An accounting unit of measure used in calculating the
Contract Value.
ADMINISTRATIVE AND SERVICE OFFICE -- Financial Markets - Division Variable An-
nuity Dept., 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499-0001.
ANNUITANT -- The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
ANNUITY COMMENCEMENT DATE -- The date, which can only be the first day of a
calendar month, upon which Annuity Payments are to commence.
ANNUITY OPTION -- A method of receiving a stream of Annuity Payments.
ANNUITY PURCHASE VALUE -- An amount equal to the Contract Value for the Valua-
tion Period which ends immediately preceding the Annuity Commencement Date,
reduced by any applicable premium or similar taxes.
ANNUITY UNIT -- An accounting unit of measure used in the calculation of the
amount of the second and each additional Variable Annuity Payment.
BENEFICIARY -- The person who has the right to the death benefit set forth in
the Contract.
CODE -- The Internal Revenue Code of 1986, as amended.
INC-2
<PAGE>
COMPANY -- PFL Life Insurance Company.
CONTINGENT CONTRACT OWNER -- A person appointed by the Contract Owner to suc-
ceed to ownership of the Contract in the event of the death of the Contract
Owner before the Annuity Commencement Date.
CONTRACT -- One of the variable annuity contracts offered by this Prospectus.
CONTRACT OWNER -- The person who may exercise all rights and privileges under
the Contract. The Contract Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the Con-
tract Owner in the application or a Contingent Contract Owner; the Contract
Owner on and after the Annuity Commencement Date is the Annuitant; and the
Contract Owner after the death of the Annuitant is the Beneficiary.
CONTRACT VALUE -- The sum of the value of all Accumulation Units credited to a
Contract for any particular Valuation Period.
DATE OF ISSUE -- The date the Contract is issued, as shown on the Contract
Schedule Page.
DUE PROOF OF DEATH -- A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, or a written statement by the attending physician or any other proof
satisfactory to the Company will constitute Due Proof of Death.
ELIGIBLE FUNDS -- Mutual funds, shares of which currently may be purchased for
the Variable Account.
FMR -- Fidelity Management & Research Company, the investment advisor to the
Funds.
FIDELITY INSURANCE -- Fidelity Insurance Agency, Inc., through which the Con-
tracts are distributed.
FIDELITY BROKERAGE -- Fidelity Brokerage Services, Inc., which is the princi-
pal underwriter for the contracts, and through which the Contracts are dis-
tributed.
FIXED ANNUITY PAYMENTS -- Payments made pursuant to an Annuity Option which do
not fluctuate in amount.
FORMERLY ELIGIBLE FUNDS -- Mutual funds, shares of which were purchased for
the Variable Account prior to September 25, 1981.
NET INVESTMENT FACTOR -- An index applied to measure the investment perfor-
mance of a Subaccount from one Valuation Period to the next.
NET PURCHASE PAYMENT -- A Purchase Payment less any applicable charges, such
as the initial administrative charge and any premium taxes.
PURCHASE PAYMENT -- An amount paid to the Company by the Contract Owner or on
the Contract Owner's behalf as consideration for the benefits provided by the
Contract.
SUBACCOUNT -- A segregated account within the Variable Account which invests
in a portfolio of an Eligible Fund.
VALUATION PERIOD -- The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determination shall be made as of the close of trading on the New York
Stock Exchange on each day that the Exchange is open for trading.
VARIABLE ACCOUNT -- Fidelity Variable Annuity Account, a separate account es-
tablished by the Company and registered as a unit investment trust under the
Investment Company Act of 1940 to which Net Purchase Payments under the Con-
tracts are allocated.
VARIABLE ANNUITY -- An annuity with Variable Annuity Payments which vary as to
dollar amount in relation to the investment performance of specified
Subaccounts within the Variable Account.
VARIABLE ANNUITY PAYMENTS -- Payments made pursuant to an Annuity Option which
fluctuate based on the investment performance of selected Subaccounts.
INC-3
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE CONTRACT
Note: The following section contains brief questions and answers about the
Contract. Reference should be made to the body of this Prospectus for more de-
tailed information. "You" or "your" refers to the Contract Owner, "we," "us"
or "our" refers to the Company.
1. WHAT IS THE PURPOSE OF THE CONTRACT?
The Contract seeks to allow you to accumulate funds on a tax-deferred basis
and to receive Annuity Payments based on the investment experience of the as-
sets underlying the Contract. The Contract may only be purchased on a non-tax
qualified basis for use with retirement plans and other long-term investment
objectives. The Contract Owner can allocate Net Purchase Payments to one or
more Subaccounts of the Fidelity Variable Annuity Account (the "Variable Ac-
count"), each of which will invest in a corresponding portfolio of the Vari-
able Insurance Products Fund, the Variable Insurance Products Fund II and the
Variable Insurance Products Fund III ("VIP," "VIP II," "VIP III" or the
"Funds"). Because Variable Annuity Payments and Contract Values depend on the
investment experience of the selected Subaccounts, the Contract Owner bears
the entire investment risk under this Contract.
2. WHAT IS AN ANNUITY?
An annuity provides for a stream of Annuity Payments beginning on the Annuity
Commencement Date. The Contract Owner may select from a number of Annuity Op-
tions, including Annuity Payments for the life of an Annuitant (or an Annui-
tant and another person, the "Joint Annuitant") with or without a guaranteed
number of Annuity Payments. Annuity Payments which remain the same throughout
the payment period are referred to in this Prospectus as "Fixed Annuity Pay-
ments." Annuity Payments which vary in accordance with the investment experi-
ence of the Subaccount selected by the Contract Owner are referred to in this
Prospectus as "Variable Annuity Payments." (See "Annuity Options," p. 22.)
3. WHAT INVESTMENTS SUPPORT THE CONTRACTS?
Currently, Purchase Payments made under the Contracts will be invested
through the Variable Account exclusively in shares of the Funds, which are mu-
tual funds advised by Fidelity Management & Research Company ("FMR"). The
Funds currently have thirteen Portfolios that are available under the Con-
tracts. VIP currently offers five Portfolios: VIP Money Market, VIP High In-
come, VIP Equity-Income, VIP Growth, and VIP Overseas. VIP II currently offers
five Portfolios: VIP II Investment Grade Bond, VIP II Asset Manager, VIP II
Asset Manager Growth, VIP II Contrafund and VIP II Index 500. VIP III cur-
rently offers three Portfolios: VIP III Balanced, VIP III Growth Opportunities
and VIP III Growth & Income. Each of the thirteen Subaccounts of the Variable
Account invests in the corresponding Portfolio of the Funds. The assets of
each Portfolio are held separately from other Portfolios and each has distinct
investment objectives and policies (see "The Variable Insurance Products Fund,
the Variable Insurance Products Fund II, and the Variable Insurance Products
Fund III," p. 13) which are described in the accompanying Prospectuses for the
Funds.
4. HOW ARE PURCHASE PAYMENTS ALLOCATED?
Net Purchase Payments are allocated in accordance with the Contract Owner's
instructions. Any allocation of the initial Net Purchase Payment must be of at
least $1,000 to each Subaccount selected. Allocations of additional Net Pur-
chase Payments may be made in any manner, so long as any contribution to a
Subaccount is at least $500. Allocations of additional Net Purchase Payments
may be changed by sending written notice to the Administrative and Service Of-
fice or if you have
INC-4
<PAGE>
previously authorized it, by telephone. (See "Allocation and Reallocation of
Net Purchase Payments," p. 17.)
5. CAN I TRANSFER VALUES AMONG THE SUBACCOUNTS?
A Contract Owner may reallocate the Contract Value allocated to a particular
Subaccount to one or more other Subaccounts at any time either in writing or,
if you have previously authorized it, by telephone. (See "Allocation and Real-
location of Net Purchase Payments," p. 17.)
6. HOW CAN I GET TO MY MONEY IF I NEED IT?
All or part of the Contract Value under the Contract may be withdrawn before
the earlier of the Annuitant's death or the Annuity Commencement Date. The
amount of the cash withdrawal payment will be equal to the Contract Value at
the end of the Valuation Period during which the election becomes effective,
or the lesser amount requested. None of the amount surrendered will be subject
to a surrender charge. (See "Surrenders," p. 18.) Withdrawals may be taxable
and subject to a 10% penalty tax. (See "Surrenders," p. 18 and "Federal Tax
Matters," p. 24.)
7. WHAT ARE THE CHARGES AND DEDUCTIONS UNDER THE CONTRACT?
There is no sales charge under the Contract. We deduct a daily charge equal
to a percentage of the value of the net assets in the Variable Account for the
mortality risks assumed by us. The effective annual rate of this charge is
0.8%. (See "Charges for Mortality Risk," p. 20.) WE GUARANTEE THAT THIS CHARGE
WILL NOT BE INCREASED.
The Company also deducts an annual administrative charge from the Contract
Value of each Contract to cover the costs of administering the Contract. The
annual administrative charge currently is $35. (See "Administrative Charge,"
p. 19.) This charge could increase in the future.
Premium taxes are deducted from Purchase Payments or Contract Values depend-
ing upon when they are incurred by the Company. (See "Deductions for Taxes" p.
20.)
The Contract Values also reflect the charges, fees and expenses of the Fund.
(See "The Variable Insurance Products Fund, the Variable Insurance Products
Fund II and the Variable Insurance Products Fund III Expenses," p. 20.) See
also the Expense Data Summary on page 7.
8. WHAT ANNUITY INCOME OPTIONS ARE AVAILABLE UNDER THE CONTRACT?
The Contract Owner, or the person selected by the Contract Owner (the Annui-
tant), may receive Annuity Payments on a variable basis or a fixed basis. The
Contract Owner has flexibility in choosing the Annuity Commencement Date.
Four Annuity Options are included in the Contract: (1) life annuity; (2)
joint and survivor annuity; (3) life annuity with 120 or 240 monthly payments
guaranteed; and (4) cash or unit refund life annuity. All of these are offered
as either "Fixed Annuity Options" or "Variable Annuity Options."
Fixed Annuity Payments will always be for the same specified amount. However,
the amount of Variable Annuity Payments will increase or decrease according to
the investment experience of the particular Subaccount(s) selected. (See "An-
nuity Options," p. 22.)
9. WHAT HAPPENS IF THE ANNUITANT DIES BEFORE THE ANNUITY COMMENCEMENT DATE?
In the event that the Annuitant dies prior to the Annuity Commencement Date,
the Death Benefit is calculated and is payable, upon receipt of notice of
death, Due Proof of Death, and an election as to how the proceeds should be
paid, to the Beneficiary selected by the Contract Owner. The named Beneficiary
may be changed at any time before the Annuitant's death; the Annuitant named
in the Contract, however, may not be changed. The Death Benefit is not reduced
by the application of any
INC-5
<PAGE>
surrender charge. The Death Benefit may be paid as either a lump sum cash ben-
efit or under an Annuity Option (See "Death Benefit," p. 21.)
10. WHAT HAPPENS IF THE CONTRACT OWNER DIES BEFORE THE ANNUITY COMMENCEMENT
DATE?
If the Contract Owner is a different person than the Annuitant, in the event
that the Contract Owner dies prior to the Annuity Commencement Date, his en-
tire interest in the Contract will be distributed to the Contingent Contract
Owner if one is appointed, or to the estate of the Contract Owner. The Con-
tract Owner may appoint or change the Contingent Contract Owner at any time
prior to the Annuity Commencement Date. Regardless of whether the Contract
Owner is a different person than the Annuitant, upon the death of the Contract
Owner, the value of the Contract must be distributed pursuant to rules pre-
scribed by the Internal Revenue Code of 1986, as amended. Special rules apply
where the beneficiary of the Contract Owner's estate is the surviving spouse
of the deceased Contract Owner. (See "IRS Required Distributions," p. 21.)
11. CAN THE CONTRACT BE RETURNED AFTER IT IS DELIVERED?
The Contract contains a provision for a Right to Return the Contract, which
permits cancellation by returning the Contract to us, along with a written no-
tice of revocation, at our Administrative and Service Office within 10 days of
receipt of the Contract. In the event of cancellation, we will return all Pur-
chase Payments made under the Contract within ten days after we receive notice
of cancellation.
12. WHO DO I CALL IF I HAVE ANY QUESTIONS ABOUT MY CONTRACT?
Any question about procedures of your Contract will be answered by our Admin-
istrative and Service Office. For service and account information, call toll
free, 800-634-4672. For information and assistance regarding sales informa-
tion, please call, toll free, 800-544-2442.
INC-6
<PAGE>
FIDELITY VARIABLE ANNUITY ACCOUNT
The charges and deductions under the Contracts, including the Portfolios'
fees and expenses, are summarized in the following table.
FEE TABLE
<TABLE>
<CAPTION>
EXPENSE DATA
CONTRACT OWNER TRANSACTION EXPENSES
<S> <C>
Sales Load On Purchase Payments 0
Deferred Sales Load 0
Surrender Fees 0
Annual Contract Fee $35 Per Contract
Transfer Fee 0
</TABLE>
<TABLE>
<CAPTION>
VARIABLE ACCOUNT
(AS A PERCENTAGE OF CONTRACT VALUE)
<S> <C>
Mortality and Expense Risk Fees 0.80%
Account Fees and Expenses 0
TOTAL VARIABLE ACCOUNT
ANNUAL EXPENSES 0.80%
</TABLE>
VIP, VIP II, AND VIP III FUNDS ANNUAL EXPENSES --
(as a percentage of average net assets)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT OTHER RULE 12B-1 ANNUAL
FEES EXPENSES FEES EXPENSES
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
VIP Money Market 0.21% 0.10% -- 0.31%
VIP High Income (1) 0.59% 0.12% -- 0.71%
VIP Equity-Income (1) 0.50% 0.08% -- 0.58%
VIP Growth (1) 0.60% 0.09% -- 0.69%
VIP Overseas (1) 0.75% 0.17% -- 0.92%
VIP II Investment Grade Bond 0.44% 0.14% -- 0.58%
VIP II Asset Manager (1) 0.55% 0.10% -- 0.65%
VIP II Asset Manager Growth (1) 0.60% 0.17% -- 0.77%
VIP II Contrafund (1) 0.60% 0.11% -- 0.71%
VIP II Index 500 (2) 0.24% 0.04% -- 0.28%
VIP III Balanced (1) 0.45% 0.16% -- 0.61%
VIP III Growth Opportunities (1) 0.60% 0.14% -- 0.74%
VIP III Growth & Income 0.49% 0.21% -- 0.70%
</TABLE>
- -----------
(1) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into ar-
rangements with their custodian whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses presented in the table
would have been: 0.57% for VIP Equity-Income Portfolio, 0.67% for VIP
Growth Portfolio, 0.90% for VIP Overseas Portfolio, 0.64% for VIP II Asset
Manager Portfolio, 0.68% for VIP II Contrafund Portfolio, 0.76% for VIP II
Asset Manager Growth Portfolio, 0.73% for VIP III Growth Opportunities
Portfolio, 0.60% for VIP III Balanced Portfolio, and 0.71% for VIP High
Income Portfolio.
(2) FMR agreed to reimburse a portion of VIP II Index 500 Portfolio's expenses
during the period. Without this reimbursement, the fund's management fee,
other expenses and total expenses would have been 0.27%, 0.13% and 0.40%
respectively.
INC-7
<PAGE>
EXAMPLES
An Owner would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
VIP Money Market Subaccount $12 $36 $63 $139
VIP High Income Subaccount $16 $49 $84 $184
VIP Equity-Income Subaccount $14 $45 $77 $170
VIP Growth Subaccount $16 $48 $83 $182
VIP Overseas Subaccount $18 $55 $95 $207
VIP II Investment Grade Bond Subaccount $14 $45 $77 $170
VIP II Asset Manager Subaccount $15 $47 $81 $177
VIP II Asset Manager Growth Subaccount $16 $51 $87 $190
VIP II Contrafund Subaccount $16 $49 $84 $184
VIP II Index 500 Subaccount $11 $35 $61 $136
VIP III Balanced Subaccount $15 $46 $79 $173
VIP III Growth Opportunities Subaccount $16 $50 $86 $187
VIP III Growth & Income Subaccount $16 $48 $84 $183
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the ex-
penses of the VIP, VIP II and VIP III Funds. See "Contract Charges," p. 19 and
the VIP, VIP II, and VIP III prospectuses. In addition to the expenses listed
above, premium taxes may be applicable.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. The
figures and data for the VIP, VIP II, and VIP III Funds Annual Expenses are
for 1997 and have been provided by FMR, and while the Company does not dispute
these figures, the Company does not guarantee their accuracy. Examples for
formerly eligible Subaccounts may be found in Appendix A to this Prospectus.
In these examples, the $35 Annual Service Charge is reflected as a charge of
0.034% based on an average Policy Value of $104,407.
INC-8
<PAGE>
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units outstanding
for each Mutual Fund Subaccount from the date of inception are shown in the
following tables.
<TABLE>
<CAPTION>
VIP MONEY MARKET SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $2.413358 $2.525659 43,319,514.745
1996 2.307819 2.413358 51,936,943.182
1995 2.196945 2.307819 48,392,069.066
1994 2.124046 2.196945 65,884,206.476
1993 2.073920 2.124046 38,531,933.669
1992 2.011998 2.073920 46,920,555.357
1991 1.911406 2.011998 52,846,585.564
1990 1.783014 1.911406 61,584,581.853
1989 1.646165 1.783014 49,315,212.043
1988 1.545254 1.646165 46,119,586.661
</TABLE>
<TABLE>
<CAPTION>
VIP HIGH INCOME SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $3.285775 $3.835575 17,495,330.353
1996 2.904665 3.285775 18,704,131.149
1995 2.427652 2.904665 19,488,862.806
1994 2.485444 2.427652 17,337,052.330
1993 2.078934 2.485444 26,114,121.248
1992 1.703009 2.078934 20,668,821.606
1991 1.269032 1.703009 9,450,159.190
1990 1.310687 1.269032 6,894,970.437
1989 1.380187 1.310687 10,504,655.711
1988 1.244613 1.380187 12,374,735.048
</TABLE>
<TABLE>
<CAPTION>
VIP EQUITY-INCOME SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $3.346303 $4.252876 57,352,295.075
1996 2.951686 3.346303 68,119,423.617
1995 2.202346 2.951686 81,601,359.509
1994 2.073414 2.202346 74,571,142.757
1993 1.768091 2.073414 70,574,621.050
1992 1.523641 1.768091 49,654,509.443
1991 1.168338 1.523641 22,551,293.495
1990 1.390307 1.168338 15,320,204.431
1989 1.194265 1.390307 17,192,667.422
1988 0.978927 1.194265 12,203,910.523
</TABLE>
INC-9
<PAGE>
<TABLE>
<CAPTION>
VIP GROWTH SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $3.790532 $4.643463 30,726,907.924
1996 3.331228 3.790532 38,326,955.306
1995 2.480539 3.331228 43,498,210.261
1994 2.500812 2.480539 37,916,994.644
1993 2.111765 2.500812 37,369,691.127
1992 1.947218 2.111765 37,625,493.719
1991 1.348850 1.947218 24,177,587.154
1990 1.540465 1.348850 15,340,498.596
1989 1.181690 1.540465 9,534,230.020
1988 1.028662 1.181690 6,262,868.956
</TABLE>
<TABLE>
<CAPTION>
VIP OVERSEAS SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $1.962599 $2.172007 15,101,589.750
1996 1.747454 1.962599 18,498,493.052
1995 1.605980 1.747454 18,307,714.844
1994 1.591344 1.605980 35,747,520.597
1993 1.168866 1.591344 36,890,355.495
1992 1.319600 1.168866 4,705,928.756
1991 1.229709 1.319600 4,170,995.265
1990 1.261608 1.229709 4,324,803.282
1989 1.007020 1.261608 2,450,169.365
1988 0.938767 1.007020 1,829,968.620
</TABLE>
<TABLE>
<CAPTION>
VIP II INVESTMENT GRADE BOND SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $1.708442 $1.848460 10,859,598.713
1996 1.669036 1.708442 9,681,784.561
1995 1.571804 1.669036 10,019,780.574
1994 1.501802 1.433937 8,539,290.351
1993 1.364252 1.501802 11,685,281.879
1992 1.289396 1.364252 7,725,407.154
1991 1.115679 1.289396 8,683,076.207
1990 1.059709 1.115679 3,887,531.807
1989 (1) 1.000000 1.059709 1,710,458.331
</TABLE>
INC-10
<PAGE>
<TABLE>
<CAPTION>
VIP II ASSET MANAGER SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $2.073401 $2.481731 33,046,715.565
1996 1.823774 2.073401 37,212,616.412
1995 1.571804 1.823774 45,933,251.411
1994 1.687107 1.571804 76,955,562.944
1993 1.404870 1.687107 90,364,012.115
1992 1.265768 1.404870 27,180,037.717
1991 1.041041 1.265768 12,676,645.581
1990 (2) 1.000000 1.041041 989,833.209
</TABLE>
<TABLE>
<CAPTION>
VIP II ASSET MANAGER GROWTH SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $1.201587 $1.490886 11,443,467.081
1996 1.009935 1.201587 7,788,605.432
1995 (3) 1.000000 1.009935 2,178,270.748
</TABLE>
<TABLE>
<CAPTION>
VIP II CONTRAFUND SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $1.224976 $1.508640 33,372,392.534
1996 1.017954 1.224976 42,901,139.435
1995 (4) 1.000000 1.017954 20,570,759.262
</TABLE>
<TABLE>
<CAPTION>
VIP II INDEX 500 SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $1.336134 $1.758955 31,990,011.025
1996 1.096624 1.336134 23,088,441.156
1995 (3) 1.000000 1.096623 8,432,120.348
</TABLE>
<TABLE>
<CAPTION>
VIP III BALANCED SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 (5) $1.000000 $1.150095 1,126,357.174
</TABLE>
<TABLE>
<CAPTION>
VIP III GROWTH OPPORTUNITIES SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 (5) $1.000000 $1.232659 4,621,108.553
</TABLE>
<TABLE>
<CAPTION>
VIP III GROWTH & INCOME SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 (5) $1.000000 $1.241360 6,281,887.718
</TABLE>
(1) Period from June 5, 1989 through December 31, 1989.
(2) Period from May 29, 1990 through December 31, 1990.
(3) Period from September 5, 1995 through December 31, 1995
(4) Period from September 1, 1995 through December 31, 1995
(5) Period from May 1, 1997 through December 31, 1997.
INC-11
<PAGE>
FINANCIAL STATEMENTS
The financial statements of the Variable Account and the Company and the in-
dependent auditors' reports thereon are in the Statement of Additional Infor-
mation.
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company (the "Company") is a stock life insurance company
organized under the laws of the State of Iowa on April 19, 1961. The Company
offers a complete line of life insurance, annuities, and accident and health
insurance. It is currently authorized to sell variable annuities in the Dis-
trict of Columbia and Guam and in all states other than New York. The Company
is an indirect wholly-owned subsidiary of AEGON USA, Inc., 4333 Edgewood Road
N.E., Cedar Rapids, Iowa 52499, which is, in turn, an indirect wholly-owned
subsidiary of AEGON N.V., Mariahoeveplein 50, P.O. Box 202, 2501 CE The Hague,
The Netherlands, a holding company organized under the laws of The Nether-
lands.
THE FIDELITY VARIABLE ANNUITY ACCOUNT
The Fidelity Variable Annuity Account (the "Variable Account") was estab-
lished by an affiliate (Pacific Fidelity Life Insurance Company) under Cali-
fornia insurance law on August 24, 1979. On March 31, 1991, the Company ac-
quired the assets (and liabilities) of that affiliate, including the Variable
Account. As of December 31, 1997 the Company had assets of approximately $8.7
billion.
The Variable Account is registered with the Securities and Exchange Commis-
sion (the "Commission") as a unit investment trust pursuant to the provisions
of the Investment Company Act of 1940 and meets the definition of a separate
account under federal securities laws. Such registration does not involve su-
pervision of the management of the Variable Account or the Company by the Com-
mission.
Under Iowa insurance law, the income, gains or losses of the Variable Account
are credited to or charged against the assets of the Variable Account without
regard to the other income, gains or losses of the Company. Although the as-
sets maintained in the Variable Account will not be charged with any liabili-
ties arising out of any other business conducted by the Company, all obliga-
tions arising under the Contracts, including the promise to make annuity pay-
ments, are general corporate obligations of the Company.
Currently, the Company invests the assets of the Variable Account that sup-
port the Contracts in shares of one or more mutual funds (the "Eligible
Funds") that have been approved by the Company's Board of Directors. Shares of
the Eligible Funds will be purchased at net asset value. Currently, the only
Eligible Funds are the Variable Insurance Products Fund, the Variable Insur-
ance Products Fund II, and the Variable Insurance Products Fund III (the
"Funds"), but other mutual funds may be added or withdrawn as permitted by
law. The Variable Account currently offers thirteen sub-accounts that invest
exclusively in corresponding portfolios of the Funds: VIP currently offers
five Portfolios: VIP Money Market, VIP High Income, VIP Equity-Income, VIP
Growth, and VIP Overseas; VIP II currently offers five Portfolios: VIP II In-
vestment Grade Bond, VIP II Asset Manager, VIP II Asset Manager Growth, VIP II
Contrafund, and VIP II Index 500, and VIP III currently offers three Portfo-
lios: VIP III Balanced, VIP III Growth Opportunities and VIP III Growth & In-
come (the "Subaccounts"). Additional sub-accounts may be established at the
Company's discretion.
INC-12
<PAGE>
The Company does not guarantee the investment performance of the Variable Ac-
count. The Contract Value and the amount of Variable Annuity Payments depend
on the investment performance of the assets of the Funds. Because each Con-
tract Owner bears the full investment risk associated with the Variable Ac-
count, there can be no assurance concerning the amount of Variable Annuity
Payments under the Contract.
Prior to September 25, 1981, the assets of certain sub-accounts of the Vari-
able Account were invested in mutual funds (the "Formerly Eligible Funds")
other than the Funds. Contracts funded by these sub-accounts, which invest in
the Formerly Eligible Funds, are no longer offered, and no additional assets
of the Variable Account will be invested in shares of the Formerly Eligible
Funds. The following is a list of the Formerly Eligible Funds, which corre-
spond to these sub-accounts of the Variable Account: Fidelity Daily Income
Trust; Fidelity Cash Reserves; Fidelity Government Securities Fund, Ltd.; and
Fidelity Capital and Income Fund. Further information about the Formerly Eli-
gible Funds can be found in the Formerly Eligible Funds' individual fund pro-
spectuses. The remaining assets of the Variable Account are currently invested
exclusively in shares of the Funds.
THE VARIABLE INSURANCE PRODUCTS FUND,
VARIABLE INSURANCE PRODUCTS FUND II,
AND VARIABLE INSURANCE PRODUCTS FUND III
The available Subaccounts of the Variable Account invest exclusively in
shares of the Funds. The Funds are diversified, open-end management investment
companies organized as Massachusetts Business Trusts. The Variable Insurance
Product Fund was established on November 13, 1981, and was formerly known as
Fidelity Cash Reserves II. The Variable Insurance Products Fund II was estab-
lished on March 21, 1988. The Variable Insurance Products Fund III was estab-
lished on July 14, 1994, and prior to December 30, 1996 was known as the Fi-
delity Advisor Annuity Fund.
Certain information concerning the Funds is set forth below. More detailed
information may be found in the Funds' current prospectuses which accompany or
precede this Prospectus and the Funds' current Statements of Additional Infor-
mation. The following description is qualified in its entirety by reference to
each Fund's prospectus and Statement of Additional Information wherein more
detailed information may be found.
FMR provides investment advice and administrative services to the Funds pur-
suant to an agreement under which each Portfolio pays FMR a monthly fee. FMR
also provides investment advice and administrative services to the Formerly
Eligible Funds for a fee similar to the ones applicable to the Portfolios of
the Funds. The Variable Insurance Products Fund currently offers five Portfo-
lios: VIP Money Market Portfolio; VIP High Income Portfolio; VIP Equity-Income
Portfolio; VIP Growth Portfolio; and VIP Overseas Portfolio. The Variable In-
surance Products Fund II currently offers five portfolios that are available
under the Contracts: the VIP II Investment Grade Bond Portfolio (formerly
known as the Short-Term Portfolio), VIP II Asset Manager Portfolio, VIP II As-
set Manager Growth, VIP II Contrafund, and VIP II Index 500. The Variable In-
surance Products Fund III currently offers three Portfolios: VIP III Balanced,
VIP III Growth Opportunities and VIP III Growth & Income. The thirteen Portfo-
lios offered by the Funds provide a range of investment alternatives that vary
according to the different investment objectives described in the Funds' pro-
spectuses and summarized below. The assets of each Portfolio are separate from
the others, and each Portfolio has separate investment objectives and poli-
cies. As a result, each Portfolio operates as a separate
INC-13
<PAGE>
investment objectives and policies. As a result, each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has
no effect on the investment performance of any other Portfolio. Each of the
Portfolios may not be available for investment in every state.
VIP MONEY MARKET PORTFOLIO seeks to obtain as high a level of current income
as is consistent with preserving capital and liquidity. The Portfolio will in-
vest only in high-quality U.S. dollar dominated money market instruments of
domestic and foreign insurers. The Portfolio seeks to maintain a constant net
asset value of $1.00 per share although no assurances can be given that such
constant net asset value will be maintained. The Portfolio's shares are nei-
ther insured nor guaranteed by the U.S. Government.
VIP HIGH INCOME PORTFOLIO seeks to obtain a high level of current income by
investing primarily in high-yielding, lower rated, fixed-income securities. In
choosing these securities, growth of capital also will be considered. The
Portfolio may invest without limitation in lower-quality debt securities,
sometimes called "junk bonds" which carry greater risk than other debt securi-
ties. See the Funds' prospectus for a description of these risks.
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the Portfo-
lio will also consider the potential for capital appreciation. The Portfolio's
goal is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's Composite Index of 500 Stocks.
VIP GROWTH PORTFOLIO seeks to achieve capital appreciation through the pur-
chase of common stocks, although the Portfolio's investments are not re-
stricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
VIP OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. The Portfolio seeks to achieve its invest-
ment objective by investing at least 65% of the Portfolio's assets in securi-
ties of companies from at least three different countries outside of North
America. The Overseas Portfolio expects to invest most of its assets in secu-
rities of companies located in developed countries in these general areas: The
Americas (other than the United States), the Far East and Pacific Basin, Scan-
dinavia and Western Europe. Generally, the investment in securities of foreign
companies will involve greater risks than are present in domestic investments.
VIP II INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current in-
come as is consistent with the preservation of capital by investing in invest-
ment-grade fixed income securities. Its dollar weighted average maturity will
be ten years or less. The Portfolio will not invest in securities rated below
Baa by Moody's Investor's Service, Inc. or rated below BBB by Standard &
Poor's Corporation and unrated securities judged by FMR to be of equivalent
quality.
VIP II ASSET MANAGER PORTFOLIO seeks high total return with reduced risk over
the long term by allocating its assets among domestic and foreign stocks,
bonds and short-term fixed income instruments.
VIP II ASSET MANAGER: GROWTH PORTFOLIO seeks maximum total return over the
long term by allocating its assets among an aggressive mix of domestic and
foreign stocks, bonds and short-term fixed income instruments.
VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation by investing
in equity securities of companies considered undervalued or out-of-favor by
the Fund's advisor.
VIP II INDEX 500 PORTFOLIO seeks to provide investment results that corre-
spond to the total return (i.e. the combination of capital changes and income)
of common stocks publicly traded in
INC-14
<PAGE>
the United States. In seeking this objective, the portfolio attempts to dupli-
cate the composition and total return of the Standard & Poor's 500 Composite
Stock Price Index.
VIP III BALANCED PORTFOLIO seeks both income and growth of capital by invest-
ing in a broad selection of stocks, bonds, and convertible securities. When
FMR's outlook is neutral, it will invest approximately 60% of the fund's as-
sets in equity securities, and will always invest at least 25% of the fund's
assets in fixed-income securities.
VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks capital growth by investing in a
wide range of common stocks, convertible and foreign securities and bonds that
may offer long-term growth potential.
VIP III GROWTH & INCOME PORTFOLIO seeks high total return through a combina-
tion of current income and capital appreciation by investing mainly in equity
securities. The fund may also invest in equity securities that are not paying
current dividends, but offer potential for capital appreciation of future in-
come.
THERE IS NO ASSURANCE THAT ANY OF THE FUNDS' PORTFOLIOS WILL ACHIEVE ITS IN-
VESTMENT OBJECTIVE.
The Funds' prospectuses should be read carefully before any decision is made
concerning the allocation of Purchase Payments to a particular Portfolio. The
Funds are not limited to selling their shares to the Variable Account and are
permitted to accept investments from any separate account of an insurance com-
pany. Since the Portfolios of the Funds are available to registered separate
accounts offering variable annuity products of the Company, as well as vari-
able annuity and variable life products of other insurance companies, there is
a possibility that a material conflict may arise between the interests of the
Variable Account and one or more of the separate accounts of another partici-
pating insurance company. In the event of a material conflict, the affected
insurance companies agree to take any necessary steps, including removing
their separate accounts from the Funds, to resolve the matter. See the Funds'
prospectuses for further details.
The Company may from time to time receive revenue or fees from the Funds or
the advisor. The amount of the fees, if any, may be based on the amount of as-
sets that the Company or the Variable Account invests in the Portfolio.
PERFORMANCE
Performance information for the variable Subaccounts may appear in reports
and advertising to current and prospective Contract Owners. The performance
information is based on historical investment experience of the Subaccounts
and the Portfolios and does not indicate or represent future performance.
Total returns are based on the overall dollar or percentage change in value
of a hypothetical investment. Total return quotations reflect changes in Port-
folio share price, the automatic reinvestment by the separate account of all
distributions and the deduction of applicable administrative and mortality
charges.
An average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the per-
formance had been constant over the entire period. Because average annual to-
tal returns tend to smooth out variations in Subaccount's returns, you should
recognize that they are not the same as actual year-by-year results.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Subaccount
over a 7-day period. Effective yield is
INC-15
<PAGE>
calculated in a similar manner except that income earned is assumed to be re-
invested. This income is annualized and shown as a percentage. Yields do not
take into account capital gains or losses. The standard quotations of yield
reflect the administrative and mortality charges.
Additional information regarding yields and total returns calculated using
the standard formats briefly summarized above is contained in the Statement of
Additional Information, a copy of which may be obtained from the Company.
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
If the shares of the Funds or the Formerly Eligible Funds should no longer be
available for investment or, if in the judgment of the Company's management,
further investment in the Eligible Funds' shares should become inappropriate
in view of the purposes of the Contract, then the Company may substitute
shares of another fund for shares already purchased, or to be purchased in the
future, under the Contract. No substitution of securities in any sub-account
may take place except to the extent permitted by law. To the extent required
by the Investment Company Act of 1940, substitutions of shares attributable to
a Contract Owner's interest in a sub-account will not be made until the Con-
tract Owner has been notified of the change and prior approval of the Securi-
ties and Exchange Commission is obtained.
New sub-accounts may be established when, in the sole discretion of the Com-
pany, marketing, tax, investment or other conditions so warrant. Any new sub-
accounts will be made available to existing Contract Owners on a basis to be
determined by the Company. Each additional sub-account will purchase shares in
a Portfolio of the fund or in another mutual fund or investment vehicle. The
Company may also eliminate one or more sub-accounts if, in its sole discre-
tion, marketing, tax, investment or other conditions so warrant.
In the event of any such substitution or change, the Company may, by appro-
priate endorsement, make such changes in the Contracts as may be necessary or
appropriate to reflect such substitutions or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Contracts,
the Variable Account may be operated as a management company under the 1940
Act or any other form permitted by law, or it may be deregistered under such
Act in the event such registration is no longer required.
THE CONTRACTS
PURCHASE OF THE CONTRACTS
The Contracts may be purchased by mailing in a completed, signed application
to the Company, along with a check for the initial investment. Purchase Pay-
ments are payable at the Administrative and Service Office of the Company des-
ignated on the cover page. The initial Purchase Payment must be at least
$5,000. Additional Purchase Payments must be at least $500. Except for these
limitations, there are no restrictions on the amount or frequency of Purchase
Payments under a Contract.
If an application is complete upon receipt, the Contract Owner will receive a
Contract based on the price next determined after the application and initial
Purchase Payment are received. If an incomplete application is received, the
Company will notify the applicant by phone or mail to request the information
necessary to complete the application. Once the application is completed, the
Contract Owner will receive a Contract based on the price next determined af-
ter the application
INC-16
<PAGE>
was made complete. If, after five days, the application remains incomplete,
the Company will return the applicant's initial Purchase Payment unless it ob-
tains the applicant's permission to retain the initial Purchase Payment pend-
ing completion of the application.
A Contract shall automatically be continued in full force during the lifetime
of the Annuitant until the Annuity Commencement Date or until the Contract is
surrendered. Unless the Contract Owner has surrendered the Contract, Purchase
Payments may be made at any time during the life of the Annuitant and before
the Annuity Commencement Date.
ALLOCATION AND REALLOCATION OF NET PURCHASE PAYMENTS
Net Purchase Payments are allocated among the Subaccounts of the Variable Ac-
count that have been selected by the Contract Owner. The Purchase Payment,
less the administrative charge deducted upon payment, and less any deduction
for premium taxes, equals the Net Purchase Payment. Upon allocation to a
Subaccount, Net Purchase Payments are converted into Accumulation Units of the
Subaccount. The number of Accumulation Units to be credited is determined by
dividing the dollar amount allocated to each Subaccount by the value of a Ac-
cumulation Unit for that Subaccount as next determined after the Purchase Pay-
ment is received at the Administrative and Service Office, or in the case of
the initial Purchase Payment, when the Contract application is completed,
whichever is later.
Contract Owners (or their designated account executive) can make transfers
and/or change the allocation of additional premium payments by telephone if
the "Telephone Transfer/Reallocation Authorization" box in the application has
been checked or telephone transfers have been subsequently authorized in writ-
ing. The Company and/or the Administrative and Service Office will not be lia-
ble for following instructions communicated by telephone that it reasonably
believes to be genuine. However, the Company and/or the Administrative and
Service Office will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Company and/or the Administra-
tive and Service Office fails to do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone requests will be re-
corded on voice recorder equipment for the protection of the Contract Owner. A
Contract Owner, when making telephone requests may be required to provide
their social security number and/or other information for identification pur-
poses.
Telephone requests must be received at the Administrative and Service Office
no later than 3:00 p.m. Central time in order to assure same day pricing of
the transaction.
The telephone transaction privilege may be discontinued at any time as to
some or all Contracts and PFL may require written confirmation of a transac-
tion request.
When a reallocation is requested, the redemption of the requested amount from
out of the Subaccount and Portfolio in which the amount had been invested will
always be effected as of the end of the Valuation Period in which the request
is received at our Administrative and Service Office. That amount will gener-
ally be credited to the new Subaccount and Portfolio at the same time. Howev-
er, when (1) you are making a transfer to any Portfolio that accrues dividends
on a daily basis and (2) the equity portfolio from which the transfer is being
made is in an illiquid position due to substantial redemptions or transfers
that require it to sell portfolio securities in order to make funds available,
then the crediting of the amount transferred to the new Subaccount may be de-
layed until the Portfolio from which the transfer is being made obtains li-
quidity through the earlier of the Portfolio's receipt of proceeds from sales
of Portfolio securities, new contributions by contract Owners, or otherwise,
but no longer than seven days. During this period, the amount transferred will
be uninvested.
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There are currently thirteen Subaccounts, each corresponding to one of the
thirteen Portfolios of the Funds, each representing a different investment al-
ternative. (See "The Variable Insurance Products Fund, Variable Insurance
Products Fund II, and Variable Insurance Products Fund III" p. 13.) In allo-
cating the initial Purchase Payment among the Subaccounts, the Contract Owner
must allocate a minimum contribution of $1,000 to each Subaccount selected.
Additional Net Purchase Payments may be allocated among the Subaccounts in any
manner, so long as any contribution to a selected Subaccount is at least $500.
A Contract Owner may subsequently reallocate the value of a designated number
of Accumulation Units of a Subaccount then credited to a Contract, into an
equal value of Accumulation Units of one or more other Subaccounts. The real-
location shall be based on the relative value of the Accumulation Units of the
Subaccounts at the end of business on the day the request is received by the
Company.
On the Date of Issue of the Contract, the Contract Value equals the value of
the Net Purchase Payment. Thereafter, the Contract Value is determined by mul-
tiplying the number of Accumulation Units of each Subaccount credited to the
Contract by the current value of an Accumulation Unit for that Subaccount. The
number of Accumulation Units is increased by any Net Purchase Payments and de-
creased by the annual administrative charge, any premium taxes deducted and
any full or partial surrenders.
VALUE OF ACCUMULATION UNITS
The Accumulation Units of each Subaccount of the Variable Account are valued
separately. The value of Accumulation Units may change each Valuation Period
according to the investment performance of the shares purchased by each
Subaccount and the deduction of certain charges.
A Valuation Period is the period beginning at the close of trading on the New
York Stock Exchange on each Valuation Date and ends at the close of trading on
the next succeeding Valuation Date. A Valuation Date is each day that the New
York Stock Exchange is open for business.
The value of an Accumulation Unit in a Subaccount for any Valuation Period
equals the value of the Accumulation Unit as of the immediately preceding Val-
uation Period, multiplied by the Net Investment Factor for that Subaccount for
the Valuation Period for which the Accumulation Unit value is being calculat-
ed. The Net Investment Factor is a number representing the change in the value
of Subaccount assets on successive Valuation Dates due to investment income,
realized or unrealized capital gains or losses, deductions for taxes, if any,
and deductions for the Mortality Risk Charge.
SURRENDERS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Contract Owner may elect to surrender all or any portion of
the Contract Value in exchange for a cash withdrawal payment from the Company.
Any such election shall be in writing in such form as the Company may require
and shall specify the amount of the cash withdrawal payment. At the Contract
Owner's request, the Company will provide a form to request a surrender and to
notify the Company of the Contract Owner's election whether to have federal
income taxes withheld. Such an election will be effective on the date that it
is received by the Company at its Administrative and Service Office.
The amount of the cash withdrawal payment will be equal to the Contract Value
at the end of the Valuation Period during which the election becomes effec-
tive, or the lesser amount requested. The cash withdrawal payment will result
in the liquidation of Accumulation Units with an aggregated
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value equal to the dollar amount of the cash withdrawal payment. Unless in-
structed to the contrary, the Company will liquidate Accumulation Units of all
Subaccounts within the Variable Account in the same proportion that the cash
withdrawal payment bears to the Contract Value.
Any cash withdrawal payment will be paid within seven (7) days from the date
the surrender request becomes effective, except as the Company may be permit-
ted to defer such payment in accordance with the Investment Company Act of
1940. (See "Suspension of Payment," p. 27.) Payments under the Contract of any
amounts derived from Purchase Payments made by check, may be delayed until
such time as the check has cleared your bank. If at the time that the Contract
Owner makes a partial or full surrender request, he or she has not provided
the Company with a written election not to have federal income taxes withheld,
the Company must by law withhold such taxes from the taxable portion of any
full or partial surrender and remit that amount to the federal government.
Moreover, the Internal Revenue Code provides that a 10% penalty tax may be im-
posed on certain early surrenders. (See "Federal Tax Matters," p. 24.)
RIGHT TO RETURN THE CONTRACT
The Contract Owner may cancel the Contract within ten (10) days after it is
delivered to the Contract Owner by delivering or mailing the Contract and a
written notice of revocation to the Company at its Administrative and Service
Office. In the event of cancellation, the Company will return all Purchase
Payments made under the Contract within seven (7) days after it receives writ-
ten notice of cancellation and the returned Contract.
CONTRACT CHARGES
No deduction for sales charges is made from Purchase Payments or upon surren-
der. As more fully described below, charges under the contracts are assessed
(1) against the initial Purchase Payments and annually thereafter from the
Contract Value for administrative expenses, and (2) against the assets of the
Variable Account for the assumption of mortality risk. Premium taxes, if any,
are deducted from the Purchase Payment or the Contract Value at the time they
are incurred by the Company and the Company reserves the right to make deduc-
tions from the Variable Account for income tax liabilities resulting from the
operation of the Variable Account.
Costs of distributing the Contracts will be paid from the Company's general
assets. These assets may include proceeds from the mortality charge described
below. The Company incurs certain costs, including the obligation to pay cer-
tain insurance commissions in connection with the distribution of the Con-
tracts.
ADMINISTRATIVE CHARGE
The Company performs the administrative services for the Contracts and the
Variable Account. These services include issuance of the Contracts, mainte-
nance of records concerning the Contracts, and valuation services. An adminis-
trative charge to cover these expenses is deducted from the initial Purchase
Payment and annually thereafter from the Contract Value. The current annual
administrative charge is $35.00.
When the Contract Owner makes the initial investment in the Contract, a pro
rata portion of the annual charge for the current year will be deducted from
the Purchase Payments. Annually thereafter, on the last day of each year, the
annual charge for the next calendar year will be deducted. No part of the an-
nual charge will be refunded upon termination of a Contract. In the states of
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Pennsylvania and South Carolina the annual charge will never exceed $35.00 for
Contracts issued in connection with the delivery of this Prospectus.
PRIOR TO THE ANNUITY COMMENCEMENT DATE, THE ADMINISTRATIVE CHARGE IS NOT
GUARANTEED AND, SUBJECT TO LIMITS IMPOSED BY STATE LAW, MAY CHANGE OVER THE
YEARS THE CONTRACT IS IN FORCE.
CHARGES FOR MORTALITY RISK
The mortality risk assumed by the Company arises from the contractual obliga-
tion to continue to make annuity payments to each Annuitant regardless of how
long the Annuitant lives and regardless of how long all Annuitants as a group
live. Although Variable Annuity Payments made to Annuitants will vary in ac-
cordance with the investment performance of the Funds (or the Formerly Eligi-
ble Funds), they will not be affected by the mortality experience of persons
receiving such payments or of the general population. This assures each Annui-
tant that neither the longevity of fellow Annuitants nor an improvement in
life expectancy generally will have an adverse effect on the Variable Annuity
Payments received under the Contracts. The Company assumes this mortality risk
by virtue of annuity payment rates incorporated in the Contract. These rates
cannot be changed. (See "Statement of Additional Information--Annuity Payment
Rates," p. 6.)
For assuming this mortality risk, the Company deducts from the daily net as-
set value of the Variable Account an amount, computed on a daily basis, which
is equal to an effective annual rate of 0.8%. If this amount is insufficient
to cover the actual costs, the loss will be borne by the Company; conversely,
if the amount deducted proves more than sufficient, the excess will be a
profit to the Company. To the extent that this charge results in a profit to
the Company, such profit will be available for use by the Company for, among
other things, the payment of distribution, sales and other expenses. The level
of this charge is guaranteed and will not change. A mortality risk charge is
assessed during the annuity phase for all options including those that do not
carry a life contingency.
DEDUCTIONS FOR TAXES
Any premium taxes or other similar taxes (herein collectively referred to as
"premium taxes") levied by any governmental entity as a result of the exist-
ence of the Contracts will be deducted from Contract Values when incurred.
Premium taxes are generally levied at the Annuity Commencement Date. As of the
date of this prospectus, the current range of state premium taxes is from 0.0%
to 3.5%.
The Company does not expect to incur any federal income tax liability attrib-
utable to investment income or capital gains retained as part of the reserve
under the Contracts. Based on these expectations, no charge is being made cur-
rently to the Variable Account for corporate federal income taxes which may be
attributable to Variable Account. However, if the tax laws change such that
there is tax liability, the Company may review from time to time the need to
make a charge for any taxes attributable to the income of the Variable Ac-
count.
Under present laws, the Company does not incur state or local taxes (other
than premium taxes), and therefore, does not charge for these taxes. If there
is a change in state or local tax laws, charges for such taxes, if any, at-
tributable to the Variable Account may be made.
THE VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II AND
VARIABLE INSURANCE PRODUCTS FUND III EXPENSES
The value of the assets in the Variable Account will reflect the value of the
Funds' (or the Formerly Eligible Fund) shares and, therefore, the fees and ex-
penses paid by the Funds (or the
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Formerly Eligible Fund). A complete description of the expenses and deductions
from the portfolios are found in the individual Fund prospectuses.
BENEFITS UNDER THE CONTRACT
DEATH BENEFIT
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company, upon receipt of Due Proof of Death of the Annuitant, will
pay a death benefit to the Beneficiary designated by the Contract Owner. If
the death of the Annuitant occurs on or after the Annuity Commencement Date,
no death benefit will be payable under the Contract except as may be provided
under the Annuity Option elected.
The death benefit payable in the event of the death of the Annuitant prior to
the Annuity Commencement Date is equal to the Contract Value. The Accumulation
Unit values used in determining the amount of death benefit will be the values
for the next subsequent Valuation Period following the date all of the items
listed below have been received by the Company: written notice of death of the
Annuitant; Due Proof of Death of the Annuitant; and an election to pay the
proceeds as a single cash payment or under an Annuity Option.
If no election as to how the proceeds should be paid was made by the Contract
Owner prior to the Annuitant's death, the Beneficiary may elect one of the An-
nuity Options or a lump sum cash payment within 90 days after the Company re-
ceives notification of death. To comply with federal tax law, however, the
Beneficiary must choose an Annuity Option within 60 days after the lump sum
first became payable in order to receive favorable tax treatment.
IRS REQUIRED DISTRIBUTIONS
For Contracts issued on or after January 19, 1985, federal tax law requires
that if the Contract Owner or any Joint Contract Owner dies before the Annuity
Commencement Date, the entire value of the Contract must generally be distrib-
uted within five (5) years of the date of death of the Contract Owner or the
Joint Contract Owner. Special rules may apply to spouses of the deceased own-
er. See the Statement of Additional Information for a detailed description of
these rules.
ANNUITY PAYMENTS
ANNUITY COMMENCEMENT DATE
Unless the Annuity Commencement Date is changed, Annuity Payments under a
Contract will begin on the Annuity Commencement Date which is selected by the
Contract Owner at the time the Contract is applied for. The Annuity Commence-
ment Date may be changed from time to time by the Contract Owner by written
notice to the Company, provided that notice of each change is received by the
Company at its Administrative and Service Office at least thirty (30) days
prior to the then current Annuity Commencement Date. Except as otherwise per-
mitted by the Company, a new Annuity Commencement Date must be a date which
is: (1) at least thirty (30) days after the date notice of the change is re-
ceived by the Company; (2) the first day of a month; and (3) not later than
the first day of the first month following the Annuitant's 75th birthday. Cur-
rently, the Company permits the new Annuity Commencement Date to begin as late
as the first day of the first month following the Annuitant's 85th birthday.
The Annuity Commencement Date may also be changed by the Beneficiary's elec-
tion of the Annuity Option after the Annuitant's death.
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<PAGE>
ELECTION OF ANNUITY OPTIONS
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Contract Owner may elect any one of the Annuity Options described in
this Prospectus. The Contract Owner may also change any election, but written
notice of any election or change of election must be received by the Company
at its Administrative and Service Office at least thirty (30) days prior to
the Annuity Commencement Date. If no election is in effect on the thirtieth
day prior to the Annuity Commencement Date, Annuity Option 3 for a life annu-
ity with 120 monthly payments guaranteed will be deemed to have been elected
on a variable basis. At such time as one of the Annuity Options under the Con-
tract may become operative, a supplementary agreement will be issued by the
Company setting forth the terms of the option elected.
During the lifetime of the Annuitant, the Contract Owner may elect that all
or any part of the Death Benefit be applied under any one of the Annuity Op-
tions listed in the Contract or in any other manner agreeable to the Company.
If no election as to the Annuity Option has been selected by the Contract
Owner at the time of death of the Annuitant, such an election may be made by
the Beneficiary.
ANNUITY OPTIONS
Annuity payments may be made under any one of the Annuity Options described
below or in any other manner agreeable to the Company. Annuity payments will
be made on either a fixed basis or a variable basis as selected by the Con-
tract Owner (or the Beneficiary, after the Annuitant's death). The effect of
choosing a Fixed Annuity Option is that the amount of each payment will be set
on the Annuity Commencement Date and will not change. If a Fixed Annuity Op-
tion is selected, the Contract Value will be transferred to the general ac-
count of the Company, and the annuity payments will be fixed in amount and du-
ration by the fixed annuity provisions selected and the age and sex of the An-
nuitant. For further information, contact the Company at its Administrative
and Service Office.
The Contract provides four Annuity Options which are described below; howev-
er, the Contract Owner may not select more than one. All of these are offered
as either "Fixed Annuity Options" or "Variable Annuity Options." Under Annuity
Options 1 and 2, it would be possible for only one annuity payment to be made
if the Annuitant(s) were to die before the due date of the second annuity pay-
ment, only two annuity payments if the Annuitant(s) were to die before the due
date of the third annuity payment, and so forth. Therefore, under Annuity Op-
tions 1 and 2 the Contract Value may not be returned.
ANNUITY OPTION 1 -- LIFE ANNUITY: This option provides monthly payments dur-
ing the lifetime of the Annuitant ceasing with the last payment due prior to
the death of the Annuitant. This option offers the highest level of monthly
payments because no further payments are payable after the death of the Annui-
tant and there is no provision for a death benefit payable to a Beneficiary.
ANNUITY OPTION 2 -- JOINT AND SURVIVOR ANNUITY: This option provides monthly
payments during the joint lifetime of the Annuitant and designated second per-
son and during the lifetime of the survivor. As in the case of Annuity Option
1, there is no guaranteed number of payments and there is no provision for a
death benefit payable to a Beneficiary under this option.
ANNUITY OPTION 3 -- LIFE ANNUITY WITH 120 OR 240 MONTHLY PAYMENTS GUARANTEED:
This option provides monthly payments during the lifetime of the Annuitant and
in any event for one hundred twenty (120) or two hundred forty (240) months
certain as elected. In the event of the death of the Annuitant under this op-
tion, the Contract provides that any guaranteed monthly
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<PAGE>
payments will be paid to the Beneficiary during the remaining months of the
term selected, provided that the Beneficiary may, at any time, elect to re-
ceive the discounted value of the remaining payments, if any, in one sum. The
discounted value for Fixed or Variable Annuity Payments will be based on in-
terest compounded annually at the applicable assumed interest rate used in de-
termining the first annuity payment. (See "Determination of Annuity Payments,"
p. 23.) Upon the death of a Beneficiary receiving annuity benefits under this
option, the present value of the guaranteed number of payments remaining after
the Company receives notice of the death of the Beneficiary, computed at the
applicable assumed interest rate shall be paid in a lump sum to the estate of
the Beneficiary. Such present value is computed as of the Valuation Period
during which notice of the death of the Beneficiary is received by the Company
at its Administrative and Service Office.
ANNUITY OPTION 4 -- CASH OR UNIT REFUND LIFE ANNUITY: This option provides
monthly payments during the lifetime of the Annuitant terminating with the
last payment due prior to the death of the Annuitant. An additional payment
will be made to the Beneficiary which for a Variable Annuity will equal the
Annuity Unit value as of the date that notice of death of the Annuitant in
writing is received by the Company at its Administrative and Service Office,
multiplied by the excess, if any, of (a) over (b) where (a) is the Contract
Value applied at the Annuity Commencement Date under this option, divided by
the Annuity Unit Value as of the Annuity Commencement Date, and (b) is the
product of the number of Annuity Units represented by each Variable Annuity
Payment paid to the Annuitant and the number of Variable Annuity Payments
made. For Fixed Annuity Payments, the Annuity Unit Value shall be $1. There-
fore, (a) is the Contract Value as of the Annuity Commencement Date, while (b)
is the sum of all Fixed Annuity Payments made.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Contract's Annuity Purchase Value will
be applied to provide for Annuity Payments under the selected annuity option
as specified. The Annuity Purchase Value will be equal to the Contract Value
for the Valuation Period which ends immediately preceding the Annuity Com-
mencement Date, reduced by an applicable premium or similar taxes.
Fixed Annuity Payments are determined by the Annuity Payment rates based on
the current assumed rate of interest as determined by the Company at the Annu-
ity Commencement Date. The assumed interest rate may be changed upon the
Company's discretion; however, the minimum guaranteed interest rate is 3.5%.
If, at the time the annuity payments begin, the Contract Owner has not pro-
vided the Company with a written election not to have federal income taxes
withheld, the Company must by law withhold such taxes from the taxable portion
of such annuity payments and remit that amount to the federal government.
The dollar amount of the first Variable Annuity Payment will be determined in
accordance with the annuity payment rates based on the assumed interest rate
selected by the Annuitant. Under the Contract, the Annuitant has some flexi-
bility in choosing the assumed rate of interest to be used in connection with
the Variable Annuity Payments. The Annuitant may choose among interest rates
offered by the Company at the Annuity Commencement Date. Currently, the Com-
pany offers assumed interest rates of 3.5% and 7.5%.
If the Annuitant chooses a higher assumed interest rate, as compared to
choosing the lowest rate offered, Variable Annuity Payments would start at a
higher level but would increase more slowly and decrease more rapidly. There-
fore, election of a higher assumed rate of interest would result in a higher
first monthly Variable Annuity Payment, but would increase the possibility of
reduced
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<PAGE>
future payments during the periods when net investment performance of the
Subaccount did not exceed the higher assumed rate of interest.
All Variable Annuity Payments other than the first are calculated using Annu-
ity Units which are credited to the Contract. The number of Annuity Units to
be credited in respect of a particular Subaccount is determined by dividing
that portion of the first Variable Annuity Payment attributable to that
Subaccount by the Annuity Unit value of that Subaccount for the Valuation Pe-
riod which ends immediately preceding the Annuity Commencement Date. The num-
ber of Annuity Units of each particular Subaccount credited to the Contract
then remains fixed. The dollar amount of each Variable Annuity Payment after
the first may increase, decrease or remain constant, and is equal to the sum
of the amounts determined by multiplying the number of Annuity Units of each
particular Subaccount credited to the Contract by the Annuity Unit value for
the particular Subaccount for the Valuation Period which ends immediately pre-
ceding the due date of each additional payment. Furthermore, after the Annuity
Commencement Date, the Contract Owner may reallocate all or part of the values
held in one Subaccount to one or more other Subaccounts. (See Statement of Ad-
ditional Information "--Reallocation of Contract Values after the Annuity Com-
mencement Date", p. 3.)
ADJUSTMENT OF ANNUITY PAYMENTS
If the Contract Value on the Annuity Commencement Date is less than $5,000,
the Company may pay such value in one sum in lieu of the payments otherwise
provided for. If the Contract Value is not less than $5,000, but the payments
provided for would be or become less than $50, the Company may change, at its
discretion, the frequency of payments to such intervals as will result in pay-
ments of at least $50.
FEDERAL TAX MATTERS
INTRODUCTION
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE.
The Contracts are designed for use by individuals in retirement plans which
will not be qualified plans under the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"). The ultimate effect of federal income taxes
on the Contract Value, on Variable Annuity Payments and on the economic bene-
fit to the Contract Owner, Annuitant or Beneficiary depends on the tax status
of both the Company and the individual concerned. The discussion contained
herein is general in nature and is not intended as tax advice. Each person
concerned should consult a competent tax adviser. No attempt is made to con-
sider any applicable state or other tax laws. The discussion contained herein
reflects the Company's understanding of current federal income tax laws appli-
cable to the Company and to variable annuity contracts used in connection with
retirement plans which are not qualified plans under the Code. Moreover, the
discussion herein is limited to a consideration of the taxation of variable
annuity contracts funded by investments in shares of the Funds. The discussion
contained herein does not attempt to discuss the tax treatment applicable to
variable annuity contracts funded by investments in shares of the Formerly El-
igible Funds which is different from the treatment discussed herein. No repre-
sentation is made regarding the likelihood of continuation of current federal
income tax laws or the current interpretations by the Internal Revenue Serv-
ice. THE COMPANY DOES NOT MAKE ANY GUARANTEE REGARDING ANY TAX STATUS, FEDER-
AL, STATE OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CON-
TRACTS.
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<PAGE>
TAXATION OF ANNUITIES IN GENERAL
THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS AN ANNU-
ITY CONTRACT FOR FEDERAL INCOME TAX PURPOSES. THE STATEMENT OF ADDITIONAL IN-
FORMATION DISCUSSES SUCH QUALIFICATIONS.
An annuity Contract Owner generally is not taxed on increases in the value of
a Contract until distribution occurs, either in the form of a cash payment re-
ceived by withdrawing all or part of the cash value or as annuity payments un-
der the annuity option elected. For this purpose, the assignment or pledge of,
or the agreement to assign or pledge, any portion of the value of a Contract
will be treated as a distribution. The taxed portion of a distribution (in the
form of a lump sum payment or an annuity) is taxed as ordinary income. Howev-
er, for purchase payments made after February 28, 1986, an owner of a Contract
who is not a natural person (subject to limited exceptions) generally will be
taxed on any increase in the Contract's Contract value during the taxable
year, even if no distribution occurs. There are, however, exceptions to this
rule which you may wish to discuss with your tax counsel. The following dis-
cussion applies to Contracts owned by natural persons.
Except as provided below, in the case of a partial withdrawal under a Con-
tract, amounts received are first treated as taxable income to the extent that
the Contract Value of the Contract immediately before the withdrawal exceeds
the "investment in the contract" at that time. Any additional amount withdrawn
is not taxable. However, in the case of a withdrawal under a Contract issued
before August 14, 1982, and allocable to an "investment in the contract" made
before that date, amounts received are treated as taxable income only to the
extent that they exceed the "investment in the contract." Upon a full surren-
der of the Contract, amounts received in excess of the "investment in the con-
tract" will be treated as taxable income. The "investment in the contract"
generally equals the portion, if any, of any Purchase Payment paid by or on
behalf of an individual under a Contract which is not excluded from the indi-
vidual's gross income.
Although the tax consequences may vary depending on the form of annuity se-
lected under the Contract, the recipient of an Annuity Payment under a Con-
tract generally is taxed on the portion of such payment that exceeds the "in-
vestment in the contract." For Variable Annuity Payments, the taxable portion
is determined by a formula that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic pay-
ments. For Fixed Annuity Payments, in general, there is no tax on the amount
of each payment which represents the same ratio that the "investment in the
contract" bears to the total expected value of the Annuity Payment for the
term of the payment; however, the remainder of each Annuity Payment is tax-
able. For individuals whose Annuity Commencement Date is after December 31,
1986, any distribution received subsequent to the investment in the Contract
being recovered will be fully taxable.
There may be imposed a penalty tax on distributions equal to ten percent
(10%) of the amount treated as taxable income. The penalty tax is not imposed
in certain circumstances, which generally include: (1) distributions received
on or after owner's age 59 1/2, death of the owner, or disability of the own-
er; (2) distributions received in substantially equal installments as a life
annuity (subject to special "recapture" rules if the series of payments is
subsequently modified), and (3) distributions allocable to the "investment in
the contract" and attributable earnings thereon before August 14, 1982.
Amounts may be distributed from a Contract because of the death of an Annui-
tant or Contract Owner. Generally, such amounts are includable in the income
of the recipient as follows: (i) if
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<PAGE>
distributed in a lump sum, they are taxed in the same manner as a full with-
drawal, as described above, or (ii) if distributed under an annuity option,
they are taxed in the same manner as annuity payments, as described above. For
these purposes, the investment in the Contract is not affected by the Owner's
or Annuitant's death. That is, the investment in the Contract remains the
amount of any Purchase Payments paid which were not excluded from gross in-
come.
The Company will withhold and remit to the U.S. Government a part of the tax-
able portion of each distribution made under a Contract unless the Contract
Owner or Annuitant notifies the Company at or before the time of the distribu-
tion that he or she chooses not to have any amounts withheld.
All non-qualified, deferred annuity contracts issued by the same company (or
an affiliated company) to the same owner during any calendar year shall be
treated as one annuity contract, and "aggregated" for purposes of determining
the amount includable in gross income. In addition, the Treasury Department
has specific authority to issue regulations that prevent the avoidance of sec-
tion 72(e) through the serial purchase of annuity contracts or otherwise. Con-
gress has also indicated that the Treasury Department may have authority to
treat the combination purchase of an immediate annuity contract and separate
deferred annuity contracts as a single annuity contract under its general au-
thority to prescribe rules as may be necessary to enforce the income tax laws.
A transfer of ownership of a Contract, the designation of an Annuitant, Payee
or other Beneficiary who is not also an Owner, the selection of certain Annu-
ity Dates, or the exchange of a Contract may result in certain tax conse-
quences that are not discussed herein. Anyone contemplating any such designa-
tion, transfer, assignment, selection, or exchange should contact a competent
tax adviser with respect to the potential tax effects of such a transaction.
The foregoing comments about the federal income tax consequences under Con-
tracts issued by the Company are not exhaustive, and special rules apply in
other situations not discussed in this Prospectus. The discussion herein also
reflects the Company's understanding of current law. No assurance can be given
that the present deferred tax treatment of variable annuity contracts will re-
main unaffected by future actions of Congress. Accordingly, a prospective pur-
chaser should consult a qualified tax adviser.
PROPOSED TAX LEGISLATION
Although the likelihood of legislative change in uncertain, there is always
the possibility that the tax treatment of the Policies could change by legis-
lation or other means. For instance, the President's 1999 Budget Proposal rec-
ommended legislation that, if enacted, would adversely modify the federal tax-
ation of the Policies. It is also possible that any change could be retroac-
tive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect
on the Policy.
GENERAL PROVISIONS
OWNERSHIP OF THE CONTRACT
The Contract shall belong to the Contract Owner upon issuance of the Contract
after completion of an application and delivery of the initial Purchase Pay-
ment. Prior to the Annuity Commencement Date, the Contract Owner shall be the
person so designated in the application. A Contract Owner may appoint another
person (the "Contingent Contract Owner") to succeed to ownership of the Con-
tract in the event of the death of the Contract Owner prior to the Annuity
Commencement Date. The Contract Owner may appoint or change the Contingent
Contract Owner or Beneficiary at any
INC-26
<PAGE>
time prior to the Annuity Commencement Date. All Contract rights and privi-
leges may be exercised by the Contract Owner without the consent of the Bene-
ficiary or any other person. Such rights and privileges may be exercised only
during the lifetime of the Annuitant and prior to the Annuity Commencement
Date, except as otherwise provided in the Contract. The Annuitant becomes the
Contract Owner on and after the Annuity Commencement Date. The Beneficiary be-
comes the Contract Owner on the death of the Annuitant.
ASSIGNMENT
During the lifetime of the Annuitant, the Contract Owner may assign any
rights or benefits provided by the Contract. An assignment will not be binding
on the Company until a copy has been filed at its Administrative and Service
Office. The rights and benefits of the Contract Owner and Beneficiary are sub-
ject to the rights of the assignee. The Beneficiary may not assign any payment
under the Contract before the payment becomes due.
BENEFICIARY
The Beneficiary designation contained in the application will remain in ef-
fect until changed. The interest of any Beneficiary is subject to the particu-
lar Beneficiary surviving the Annuitant. The Contract Owner may change or re-
voke the designation of a Beneficiary at any time while the Annuitant is liv-
ing by filing with the Company a written beneficiary designation or revocation
in such form as the Company may require. The change or revocation will not be
effective and binding upon the Company until it is received by the company at
its Administrative and Service Office. The Annuitant named in the Contract,
however, may not be changed.
AMENDMENTS
The Company reserves the right to amend the Contracts to meet the require-
ments of the Investment Company Act of 1940 or other applicable federal or
state laws or regulations. No contract may be modified by the Company without
the consent of the Contract Owner except as may be required by applicable law.
SUSPENSION OF PAYMENT
The Company reserves the right to suspend or postpone the date of any payment
of death benefits or cash withdrawals (1) for any period during which the New
York Stock Exchange is closed (other than customary week-end and holiday
closings) or during which trading on the New York Stock Exchange is restricted
as determined by the Securities and Exchange Commission; (2) for any period
during which an emergency exists as a result of which disposal of securities
held in any separate account is not reasonably practicable, or it is not rea-
sonably practicable to fairly determine the value of such assets; or (3) for
such other periods as the Securities and Exchange Commission may by order per-
mit for the protection of security holders or as may be permitted under the
Investment Company Act of 1940.
NON-PARTICIPATING
The Contracts are non-participating. No dividends are payable and the Con-
tracts will not share in the profits or surplus earnings of the Company.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant or Designated Annuitant has been misstat-
ed, the Company will change the annuity benefit payable to that which the Pur-
chase Payments would have purchased for
INC-27
<PAGE>
the correct age or sex. The dollar amount of any underpayment made by the Com-
pany shall be paid in full with the next payment due such person or the Bene-
ficiary. The dollar amount of any overpayment made by the Company due to any
misstatement shall be deducted from payments subsequently accruing to such
person or the Beneficiary. The age of the Annuitant or Designated Annuitant
may be established at any time by the submission of proof satisfactory to the
Company.
DISTRIBUTION OF CONTRACTS
The Contracts will be sold by licensed insurance agents in those states where
the Contracts may be lawfully sold. Such agents will be registered representa-
tives of broker-dealers registered under the Securities Exchange Act of 1934
which are members of the National Association of Securities Dealers, Inc. The
Contracts will be distributed through Fidelity Brokerage Services, Inc. ("Fi-
delity Brokerage") and Fidelity Insurance Agency, Inc. ("Fidelity Insurance"),
which are affiliated with FMR. Fidelity Brokerage, the principal underwriter
of the Contracts, is a member of the National Association of Securities Deal-
ers, Inc. Fidelity Distributors Corporation ("Fidelity Distributors"), an af-
filiate of FMR, was incorporated under the laws of Massachusetts on July 18,
1960, is also the distributor of funds in the Fidelity Family of Funds and
other funds advised by FMR and funds advised by other companies. The principal
business address of Fidelity Brokerage, Fidelity Insurance and Fidelity Dis-
tributors is 82 Devonshire Street, Boston, Massachusetts 02109.
The Company has agreed to pay insurance commissions to Fidelity Insurance for
its services as an insurance general agent in distributing the Contracts which
will equal 0.55% on an annual basis of the daily net asset value of the Vari-
able Account. Fidelity Insurance may appoint subagents to whom it will pay a
portion of its commissions.
VOTING RIGHTS AND REPORTS
In accordance with its view of present applicable law, the Company will vote
the Funds' shares and the Formerly Eligible Fund shares held in the Variable
Account at regular and special meetings of shareholders of the Funds and the
Formerly Eligible Funds in accordance with instructions received from persons
having a voting interest in the Variable Account. However, if the Investment
Company Act of 1940 or any regulation thereunder should be amended or if the
present interpretation thereof should change, and as a result the Company de-
termines that it is permitted to vote such shares in its own right, it may
elect to do so.
Prior to the Annuity Commencement Date, the Contract Owner exercises the vot-
ing rights under the Contract. After the Annuity Commencement Date, the person
having the voting interest shall be the person then entitled to receive Vari-
able Annuity Payments. Prior to the Annuity Commencement Date, the number of
votes which a person has the right to cast will be determined by applying such
person's percentage interest in a Subaccount to the total number of votes at-
tributable to the Subaccount. After the Annuity Commencement Date, the number
of votes attributable to a Contract is determined by applying the percentage
interest reflected by the reserve for such Contract by the total number of
votes attributable to the Subaccount. After the Annuity Commencement Date the
votes attributable to a Contract decrease as such percentage interest de-
creases. Voting instructions will be solicited by written communications prior
to the date of the meeting at which votes are to be cast.
Shares of the Funds and Formerly Eligible Funds held in a Subaccount as to
which no timely instructions are received or as to which Contract Owners do
not have an interest will be voted by
INC-28
<PAGE>
the Company in proportion to the voting instructions which are received with
respect to all Contracts participating in that Subaccount. Voting instructions
to abstain on any item to be voted upon will be applied on a pro rata basis to
reduce the votes eligible to be cast. Each person having a voting interest in
a Subaccount will receive proxy material, reports and other material relating
to the Funds and the Formerly Eligible Funds. In addition, every person having
voting rights will receive such reports or prospectuses concerning the Vari-
able Accounts as may be required by the Investment Company Act of 1940 and the
Securities Act of 1933. The Company will also send such statements reflecting
transactions involving the Contract as may be required by applicable laws,
rules and regulations.
YEAR 2000 MATTERS
In October, 1996, the Company adopted and presently has in place a Year 2000
Assessment and Planning Project (the "Plan") to review and analyze existing
hardware and software systems, as well as voice and data communications sys-
tems, to determine if they are Year 2000 compatible. The Plan provides for a
management process which ensures that when a particular system, or software
application, is determined to be "non-compliant" the proper steps are in place
to either remedy the "non-compliance" or cease using the particular system or
software. The Plan also provides that the Chief Information Officer report to
the Board of Directors as to the status of the efforts under the Plan on a
regular and routine basis. The Company has engaged the services of a third-
party provider that is specialized in Year 2000 issues to work on the project.
The Plan has four specific objectives (1) develop an inventory of all appli-
cations; (2) evaluate all applications in the inventory to determine the most
prudent manner to move them to Year 2000 compliance, if required; (3) estimate
budgets, resources and schedules for the migration of the "affected" applica-
tions to Year 2000 compliance; and (4) define testing and deployment require-
ments to successfully manage validation and re-deployment of any changed code.
It is anticipated that all compliance issues will be resolved by December
1998.
As of the date of this Prospectus, the Company has identified and made avail-
able what it believes are the appropriate resources of hardware, people, and
dollars, including the engagement of outside third parties, to ensure that the
Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that the sys-
tems or equipment addresses Year 2000 data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived response plan, including
testing procedures, there is no certainty that any company will achieve com-
plete success. Further, notwithstanding its efforts or results, the Company's
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond its knowledge
or control.
LEGAL PROCEEDINGS
No material legal proceedings are pending against the Variable Account, the
Company, its subsidiaries or Fidelity Brokerage.
INC-29
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PFL Life Insurance Company................................................ 3
The Contracts............................................................. 3
Reallocation of Contract Values After the Annuity Commencement Date...... 3
Accumulation Units....................................................... 3
Illustration of Accumulation Unit Value Calculations..................... 4
Reinvestment of Fund Distributions....................................... 4
Contract Charges.......................................................... 5
Administrative Charge.................................................... 5
Charges for Mortality Risk............................................... 5
Benefits Under the Contract............................................... 5
Death Benefit............................................................ 5
IRS Required Distribution................................................ 6
Annuity Payments.......................................................... 6
Annuity Unit Value....................................................... 6
Annuity Payment Rates.................................................... 6
Illustration of Calculations for Annuity Unit Value and Variable Annuity
Payments............................................................... 6
Performance.............................................................. 7
Total Return............................................................. 8
Yields................................................................... 9
Federal Tax Matters....................................................... 9
Tax Treatment of the Company............................................. 9
Diversification Requirements............................................. 10
Owner Control............................................................ 10
Distribution Requirements................................................ 10
Distribution of the Contracts............................................. 11
Custody of Assets......................................................... 11
State Regulation.......................................................... 11
Records and Reports....................................................... 12
Independent Auditors...................................................... 12
Other Information......................................................... 12
Financial Statements...................................................... 12
</TABLE>
INC-30
<PAGE>
APPENDIX A
FORMERLY ELIGIBLE SUB-ACCOUNTS -- THESE SUB-ACCOUNTS ARE NO LONGER AVAILABLE
FOR INVESTMENT
<TABLE>
<CAPTION>
FIDELITY DAILY INCOME TRUST SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $3.252838 $3.424415 86,061.186
1996 3.094122 3.252838 114,662.042
1995 2.921185 3.094122 131,063.459
1994 2.812357 2.921185 190,668.116
1993 2.736044 2.812357 158,275.684
1992 2.641072 2.736044 243,997.001
1991 2.495176 2.641072 268,694.048
1990 2.313482 2.495176 339,345.456
1989 2.120570 2.313482 323,342.240
1988 1.977108 2.120570 351,832.648
</TABLE>
<TABLE>
<CAPTION>
FIDELITY CASH RESERVES SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $3.268738 $3.443500 23,137.187
1996 3.108117 3.268738 23,164.006
1995 2.934039 3.108117 23,192.241
1994 2.822897 2.934039 27,720.506
1993 2.742508 2.822897 29,444.337
1992 2.643311 2.742508 47,677.285
1991 2.493319 2.643311 60,818.839
1990 2.312283 2.493319 88,660.193
1989 2.122897 2.312283 102,882.970
1988 1.979215 2.122897 108,627.416
</TABLE>
<TABLE>
<CAPTION>
FIDELITY GOVERNMENT SECURITIES FUND, LTD. SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1996 4.618027 $ N/A 0.000
1995 3.911039 4.618027 8,068.949
1994 4.009576 3.911039 8,076.564
1993 3.676253 4.009576 8,085.472
1992 3.404732 3.676253 8,094.201
1991 2.934545 3.404732 8,103.722
1990 2.678442 2.934545 8,114.001
1989 2.376907 2.678442 8,125.927
1988 2.236112 2.376907 8,138.994
</TABLE>
INC-31
<PAGE>
<TABLE>
<CAPTION>
FIDELITY CAPITAL AND INCOME FUND SUBACCOUNT
----------------------------------------------------------------------
Accumulation Unit Value Accumulation Unit Value Number of Accumulation
at Beginning of Year at End of Year Units at End of Year
<S> <C> <C> <C>
1997 $7.515932 $8.623329 15,980.956
1996 6.744302 7.515932 21,049.298
1995 5.777672 6.744302 25,993.308
1994 6.060768 5.777672 35,622.255
1993 4.850494 6.060768 43,008.701
1992 3.785099 4.850494 70,510.002
1991 2.912437 3.785099 94,291.263
1990 3.029998 2.912437 112,223.477
1989 3.130904 3.029998 140,750.477
1988 2.782925 3.130904 175,640.223
</TABLE>
INC-32
<PAGE>
<TABLE>
<S> <C>
TABLE OF CONTENTS PAGE
DEFINITIONS............................................................... 2
QUESTIONS AND ANSWERS ABOUT THE CONTRACT.................................. 4
EXPENSE DATA FEE TABLE.................................................... 7
CONDENSED FINANCIAL INFORMATION........................................... 9
FINANCIAL STATEMENTS...................................................... 12
PFL LIFE INSURANCE COMPANY................................................ 12
THE FIDELITY VARIABLE ANNUITY ACCOUNT..................................... 12
THE VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II
AND VARIABLE INSURANCE PRODUCTS FUND III................................. 13
Performance.............................................................. 15
Additions, Deletions or Substitutions of Investments..................... 16
THE CONTRACTS............................................................. 16
Purchase of the Contracts................................................ 16
Allocation and Reallocation of Net Purchase Payments..................... 17
Value of Accumulation Units.............................................. 18
Surrenders............................................................... 18
Right to Return the Contract............................................. 19
CONTRACT CHARGES.......................................................... 19
Administrative Charge.................................................... 19
Charges for Mortality Risk............................................... 20
Deductions for Taxes..................................................... 20
The Variable Insurance Products Fund, Variable Insurance Products Fund II
and Variable Insurance Products Fund III Expenses....................... 20
BENEFITS UNDER THE CONTRACT............................................... 21
Death Benefit............................................................ 21
IRS Required Distributions............................................... 21
ANNUITY PAYMENTS.......................................................... 21
Annuity Commencement Date................................................ 21
Election of Annuity Options.............................................. 22
Annuity Options.......................................................... 22
Determination of Annuity Payments........................................ 23
Adjustment of Annuity Payments........................................... 24
FEDERAL TAX MATTERS....................................................... 24
Introduction............................................................. 24
Taxation of Annuities in General......................................... 25
Proposed Tax Legislation................................................. 26
GENERAL PROVISIONS........................................................ 26
Ownership of the Contract................................................ 26
Assignment............................................................... 27
Beneficiary.............................................................. 27
Amendments............................................................... 27
Suspension of Payment.................................................... 27
Non-Participating........................................................ 27
Misstatement of Age or Sex............................................... 27
DISTRIBUTION OF CONTRACTS................................................. 28
VOTING RIGHTS AND REPORTS................................................. 28
YEAR 2000 MATTERS......................................................... 29
LEGAL PROCEEDINGS......................................................... 29
STATEMENT OF ADDITIONAL INFORMATION....................................... 30
APPENDIX A................................................................ 31
</TABLE>
FIDELITY
INCOME
PLUS
PROSPECTUS
MAY 1, 1998
INC-33
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FIDELITY INCOME PLUS
THE FIDELITY VARIABLE ANNUITY ACCOUNT
STATEMENT OF ADDITIONAL INFORMATION FOR THE
INDIVIDUAL VARIABLE ANNUITY CONTRACT
Offered by
PFL LIFE INSURANCE COMPANY
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
This Statement of Additional Information supplements the information found
in the current Prospectus for the Individual Variable Annuity Contracts
("Contract") offered by PFL Life Insurance Company. You may obtain a copy of
the Prospectus dated May 1, 1998, without charge by calling Fidelity
Investments; for Sales information call toll free 800-544-2442; for Service
and Account information call toll free 800-634-4672. Terms used in the current
Prospectus for the Contract are incorporated in this Statement.
Dated May 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS
PAGE PAGE
---- ----------
<S> <C> <C>
PFL Life Insurance Company..................................... 3 12
The Contracts.................................................. 3 16
Reallocation of Contract Values After the Annuity Commence-
ment Date................................................... 3
Accumulation Units........................................... 3 18
Illustration of Accumulation Unit Value Calculations......... 4
Reinvestment of Fund Distributions........................... 4
Contract Charges............................................... 5 19
Administrative Charge........................................ 5 19
Charges for Mortality Risk................................... 5 20
Benefits Under the Contract.................................... 5 21
Death Benefit................................................ 5 21
IRS Required Distribution.................................... 6 21
Annuity Payments............................................... 6 21
Annuity Unit Value........................................... 6
Annuity Payment Rates........................................ 6
Illustration of Calculations for Annuity Unit Value and
Variable Annuity Payments................................... 6
Performance.................................................. 7
Total Return................................................. 8
Yields....................................................... 9
Federal Tax Matters............................................ 9 24
Tax Treatment of the Company................................. 9
Diversification Requirements................................. 10
Owner Control................................................ 10
Distribution Requirements.................................... 10
Distribution of the Contracts.................................. 11
Custody of Assets.............................................. 11
State Regulation............................................... 11
Records and Reports............................................ 12
Independent Auditors........................................... 12
Other Information.............................................. 12
Financial Statements........................................... 12
</TABLE>
2
<PAGE>
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("Company") is a stock life insurance company
incorporated under the laws of the State of Iowa on April 19, 1961 under the
name "NN Investors Life Insurance Company, Inc." On January 1, 1991, the name
was changed from NN Investors Life Insurance Company, Inc. to PFL Life
Insurance Company. All of its products, including life insurance, annuities,
and accident and health insurance, have been approved by the various states
where offered.
All of the stock of the Company is indirectly owned by AEGON USA, Inc., an
insurance holding company, which is a wholly-owned indirect subsidiary of
AEGON, N.V., a holding company organized under the laws of The Netherlands and
engaged, through subsidiaries and associated companies, mainly in the
insurance and financial services industries.
THE CONTRACTS
REALLOCATION OF CONTRACT VALUES AFTER THE ANNUITY COMMENCEMENT DATE
After the Annuity Commencement Date, the Contract Owner may reallocate the
value of a designated number of Annuity Units of a Sub-account, then credited
to a Contract, into an equal value of Annuity Units of one or more other Sub-
accounts. The reallocation shall be based on the relative value of the Annuity
Units of the Sub-accounts at the end of the Valuation Date on the next payment
date. The request must be in writing to our Administrative and Service Office.
There is no charge assessed in connection with such reallocation. The Company
reserves the right to limit the number of times a reallocation of Contract
Value may be made in any given calendar year.
ACCUMULATION UNITS
Upon allocation to the selected Sub-account, Net Purchase Payments are
converted into Accumulation Units of the Sub-account. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to each Sub-account by the value of an Accumulation Unit for that
Sub-account as next determined after the Purchase Payment is received at the
Administrative and Service Office or, in the case of the initial Purchase
Payment, when the Contract application is completed, whichever is later. The
value of an Accumulation Unit was arbitrarily established at $1 at the
inception of each Sub-account. Thereafter, the value of Accumulation Unit is
determined as of the close of trading on each day the New York Stock Exchange
is open for business.
An index (the "Net Investment Factor") which measures the investment
performance of a Sub-account during a Valuation Period is used to determine
the value of an Accumulation Unit for the next subsequent Valuation Period.
The Net Investment Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Contract Owner bears this
investment risk. The Net Investment Performance of a Sub-account and deduction
of certain charges affect the Accumulation Unit Value.
The Net Investment Factor for any Sub-account for any Valuation Period is
determined by dividing (a) by (b) and subtracting (c) from the result. For
purposes of this calculation:
(a) is the net result of:
(1) the net asset value per share of the shares held in the Sub-
account determined at the end of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Sub-account if the ex-
dividend date occurs during the current Valuation Period, plus or minus
(3) a per share credit or charge for any taxes determined by the
Company to have resulted from the investment operations of the Sub-
account and for which it has created a reserve;
3
<PAGE>
(b) is the net asset value per share of the shares held in the Sub-
account determined as of the end of the immediately preceding Valuation
Period.
(c) is the charge for mortality risk during the Valuation Period equal on
an annual basis to 0.8% of the daily net asset value of the Sub-account.
ILLUSTRATION OF ACCUMULATION UNIT VALUE CALCULATIONS
FORMULA AND ILLUSTRATION FOR DETERMINING THE NET INVESTMENT FACTOR
Net Investment Factor = A + B - C - E
---------
D
Where: A = The Net Asset Value of an Underlying Fund share as of the end of
the current Valuation Period.
Assume...................................... = $11.57
B = The per share amount of any dividend or capital gains distribution
since the end of the immediately preceding Valuation Period.
Assume........................................... = 0
C = The per share charge or credit for any taxes reserved for at the
end of the current Valuation Period.
Assume........................................... = 0
D = The Net Asset Value of an Underlying Fund share at the end of the
immediately preceding Valuation Period.
Assume...................................... = $11.40
E = The daily deduction for mortality risk, which totals 0.8% on an
annual basis.
On a daily basis........................ = 0.00002183
Then, the Net Investment Factor = 11.57 + 0 - 0 - 0.00002183 = 1.01489045
-------------
11.40
FORMULA AND ILLUSTRATION FOR DETERMINING ACCUMULATION UNIT VALUE
Accumulation Unit Value = A X B
Where: A = The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume........................................ = $1.347125
B = The Net Investment Factor for the current Valuation Period.
Assume....................................... = 1.01489045
Then, the Accumulation Unit Value = $1.347125 X 1.01489045 = $1.367184
REINVESTMENT OF FUND DISTRIBUTIONS
The Funds and the Formerly Eligible Funds have as a policy the current
distribution of income and capital gains. However, under the Contracts, there
is an automatic reinvestment of such distributions in the Funds.
4
<PAGE>
CONTRACT CHARGES
ADMINISTRATIVE CHARGE
The Company performs the administrative services for the Contracts. These
services include issuance of the Contracts, maintenance of records concerning
the Contracts, and certain valuation services.
CHARGES FOR MORTALITY RISK
A mortality risk charge equal to an annual charge of 0.8% of the daily net
asset value of the Variable Account is deducted daily.
BENEFITS UNDER THE CONTRACT
DEATH BENEFIT
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Contract Owner may elect to have the Contract Value applied under
any one of the Annuity Options. If no election of a method of settlement of
the death benefit by the Contract Owner is in effect on the date of death of
the Annuitant, the Beneficiary may elect (a) to receive the death benefit in
the form of a cash payment; or (b) to have the Contract Value applied under
one of the Annuity Options subject to the distribution after death rules
described below in the case of Contracts issued after January 18, 1985; or (c)
continue the Contract as the new Contract Owner/Annuitant if the contract was
issued after January 18, 1985, and the Beneficiary was the surviving spouse of
the Annuitant at the time of death. If settlement of the death benefit under
an Annuity Option is elected, the Annuity Commencement Date shall be the date
specified in the election but no later than ninety (90) days after receipt by
the Company of notification of the death of the Annuitant. Either election
described above may be made by filing with the Company a written election in
such form as the Company may require. Any election of a method of settlement
of the death benefit by the Contract Owner will become effective on the date
it is received by the Company at its Administrative and Service Office. Any
election of a method of settlement of the death benefit by the Beneficiary
will become effective on the later of: (a) the date the election is received
by the Company at its Administrative and Service Office: and (b) the date
notification of death and due proof of the death of the Annuitant is received
by the Company. If an election by the Beneficiary is not received by the
Company within ninety (90) days following the date notification of the death
of the Annuitant is received by the Company at its Administrative and Service
Office, the Beneficiary will be deemed to have elected a cash payment as of
the last day of the ninety (90) day period.
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven (7) days of the date the election is deemed to become
effective. If the death benefit is to be paid to the Contract Owner or the
Contract Owner's estate, payment will be made within seven (7) days of the
date Due Proof of Death is received by the Company. Payment will be made in
accordance with any applicable laws and regulations governing payment of death
benefits. Notwithstanding the foregoing, the Company may be permitted to defer
such payment in accordance with the Investment Company Act of 1940.
The taxable portion of a lump sum payment of the death benefit is subject to
tax at ordinary income rates. If the Beneficiary elects to receive the death
benefit under an Annuity Option within sixty (60) days after the death benefit
becomes payable in a lump sum, the Beneficiary will recognize such ordinary
income as payments are received. However, if the election is not made within
sixty (60) days after the lump sum first became payable, the entire death
benefit will be subject to tax in the current tax year, irrespective of
whether the death benefit is actually received as a lump sum or as a series of
payments under an Annuity Option elected.
5
<PAGE>
IRS REQUIRED DISTRIBUTION
If the Contract Owner or any Joint Contract Owner of the Contract dies
before the entire interest in the Contract is distributed, the value of the
Contract must be distributed to the designated beneficiary as described in
this section so that the Contracts qualify as annuities under the Internal
Revenue Code.
For Contracts issued after January 18, 1985, if the death occurs on or after
the Annuity Commencement Date, the remaining portion of such interest will be
distributed at least as rapidly as under the method of distribution being used
as of the date of death. If the death occurs before the Annuity Commencement
Date, the Contract Value generally must be paid out to the beneficiary within
five years after the death. However, if an Annuity Option is elected by the
beneficiary, the Contract Value may be distributed as an annuity over the
lifetime of the beneficiary, as long as the distribution does not extend
beyond the life expectancy of the beneficiary and the distribution begins
within one year after the Contract Owner's (or Joint Contract Owner's) death.
If any portion of the Contract Owner's interest is payable to (or for the
benefit of) the surviving spouse of the Contract Owner, the Contract may be
continued with the surviving spouse as the new Contract Owner. For Contracts
issued before January 19, 1985, the Contract Value will be paid out in
accordance with the Annuity Option elected by the beneficiary.
ANNUITY PAYMENTS
ANNUITY UNIT VALUE
The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Sub-account
exceeds the assumed interest rate, which is selected by the Annuitant upon the
Annuity Commencement Date. Conversely, Annuity Unit Values fall if the net
investment performance of the Sub-account is less than the assumed rate.
The Annuity Unit Value of each Sub-account is arbitrarily established at
$1.00 for the first Valuation Period of the particular Sub-account. The
Annuity Unit Value for the particular Sub-account for any Valuation Period is
determined by multiplying the Annuity Unit Value for the particular Sub-
account for the immediately preceding Valuation Period by the Net Investment
Factor for the particular Sub-account for the current Valuation Period, and
then multiplying that product by a factor to neutralize the assumed interest
rate used to establish the annuity payment rate found in the Contract.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in the Prospectus. The rates show, for each $1,000 applied, the
dollar amount of the first monthly Variable Annuity Payment when this payment
is based on the minimum guaranteed interest rate of 3.5% per year. The dollar
amount of subsequent Variable Annuity Payments will depend upon changes in
applicable Annuity Unit Values.
The Annuity Payment Rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date.
The Contract also contains a table for determining the adjusted age of the
Annuitant.
ILLUSTRATION OF CALCULATIONS FOR ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENTS
FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE
Annuity Unit Value = A X B X C
Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume........................................ = $1.097696
6
<PAGE>
B = Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
Assume......................................... = 1.005200
C = A factor to neutralize the assumed interest rate of 3.5% built
into the Annuity Tables used.
Daily factor equals............................ = 0.999906
Then, the Annuity Unit Value is: $1.097696 X 1.005200 X 0.999906 = $1.103300
FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF
FIRST MONTHLY VARIABLE ANNUITY PAYMENT
First Monthly Variable Annuity Payment = A X B
$1,000
Where: A = The Annuity Purchase Value as of the Annuity Commencement Date.
Assume....................................... = $15,000.00
B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according to
the tables contained in the Contract.
Assume............................................ = $6.10
Then, the first Monthly Variable Annuity Payment = $15,000 X $6.10 = $91.50
-------
$1,000
FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY
UNITS REPRESENTED BY EACH MONTHLY VARIABLE ANNUITY PAYMENT
Number of Annuity Units = A
---
B
Where: A = The dollar amount of the first monthly Variable Annuity Payment.
Assume........................................... = $91.50
B = The Annuity Unit Value for the Valuation Date on which the first
monthly payment is due.
Assume........................................ = $1.103300
Then, the number of Annuity Units = $91.50 = 82.933019
---------
$1.103300
PERFORMANCE
Performance information for any Sub-account may be compared, in reports and
advertising to: (1) the Standard & Poor's Composite Index of 500 Stocks ("S &
P 500"), Dow Jones Industrial Average ("DJIA"), Donoghue's Money Market
Institutional Averages; (2) other variable annuity separate accounts or other
investment products tracked by Lipper Analytical Services, Morningstar, or the
Variable Annuity Research and Data Service, widely used independent research
firms which rank mutual funds and other investment companies by overall
performance, investment objectives, and assets; and (3) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in a Contract. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for annuity charges and
investment management costs.
7
<PAGE>
Performance information may be quoted numerically or in a table, graph, or
similar illustration. Reports and advertising may also contain other
information including (i) the ranking of any Sub-account derived from rankings
of variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by rating services, companies, publications or
other persons who rank separate accounts or other investment products on
overall performance or other criteria, and (ii) the effect of tax deferred
compounding on a Sub-account's investment returns, or returns in general,
which may be illustrated by graphs, charts, or otherwise, and which may
include a comparison, at various points in time, of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis.
The table below provides performance results for each Sub-account through
12/31/97. The performance information is based on the historical investment
experience of the Sub-accounts and of the Portfolios. It does not indicate or
represent future performance.
TOTAL RETURN
Total returns quoted in advertising reflect all aspects of a Sub-account's
return, including the automatic reinvestment by the separate account of all
distributions and any change in the Sub-account's value over the period.
Average annual returns are calculated by determining the growth or decline in
value of a hypothetical historical investment in the Sub-account over a stated
period, and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant over the period. For example, a cumulative return of 100%
over ten years would produce an average annual return of 7.18%, which is the
steady rate that would equal 100% growth on a compounded basis in ten years.
While average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the Sub-account's performance is
not constant over time, but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of a Sub-account.
Table 1 shows the average annual total return on a hypothetical investment
in the Sub-accounts for the last year, three years, five years, and from the
date that the Portfolios began operations, assuming that the Contract was
surrendered December 31, 1997. For any Portfolio in existence ten years or
more, figures are shown for a ten year period rather than for the life of the
Portfolio. The average annual total returns shown in Table 1 are computed by
finding the average annual compounded rates of return over the periods shown
that would equate the initial amount invested to the withdrawal value, in
accordance with the following formula: P(1+T) = ERV where P is a hypothetical
investment payment of $1,000, T is the average annual total return, n is the
number of years, and ERV is the withdrawal value at the end of the periods
shown. The returns reflect the mortality charge (.80% on an annual basis) and
the administrative charge.
8
<PAGE>
Table 1: Average Annual Total Return for Period Ending on 12/31/97
<TABLE>
<CAPTION>
SUB-ACCOUNT
1 YEAR 3 YEAR 5 YEAR LIFE INCEPTION DATE
------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
VIP MONEY MARKET* 4.62% 4.71% 3.97% 4.96%** 03/31/82
VIP HIGH INCOME 16.70% 16.43% 12.98% 11.83%** 09/11/85
VIP EQUITY INCOME 27.06% 24.49% 19.14% 15.73%** 10/08/86
VIP GROWTH 22.47% 23.20% 17.02% 16.18%** 10/08/86
VIP OVERSEAS 10.64% 10.55% 13.15% 8.67%** 01/27/87
VIP II INVESTMENT GRADE BOND 8.16% 8.79% 6.21% 7.36% 06/05/89
VIP II ASSET MANAGER 19.66% 16.40% 12.00% 12.64% 05/29/90
VIP II INDEX 500 31.61% N/A N/A 27.52% 09/01/95
VIP II ASSET MANAGER GROWTH 24.04% N/A N/A 18.75% 09/05/95
VIP II CONTRAFUND 23.12% N/A N/A 19.35% 09/01/95
VIP III BALANCED N/A N/A N/A 14.98%*** 05/01/97
VIP III GROWTH OPPORTUNITIES N/A N/A N/A 23.24%*** 05/01/97
VIP III GROWTH & INCOME N/A N/A N/A 24.11%*** 05/01/97
</TABLE>
* There can be no assurance that the VIP Money Market portfolio will maintain
a stable $1.00 share price. None of the portfolios are insured or guaranteed
by the U.S. Government.
** Figure is for 10 years.
*** Represents the total return (not annualized) for the period May 1, 1997,
to December 31, 1997.
Total returns are historical and include change in unit price and the
automatic reinvestment of dividends and capital gains. Principal, investment
returns (except VIP Money Market Portfolio) and yields will fluctuate and
there is no guarantee you will receive back your original principal. Average
Annual Total Returns and Yield include all insurance contract charges: 0.8%
annuity mortality risk charge and $35 annual administrative charge.
In these examples, the $35 Annual Service Charge is reflected as a charge of
0.034% based on an average Policy Value of $104,407.
YIELDS
Yields quoted in advertising for the VIP Money Market Sub-account reflect
the change in value of a hypothetical investment in the Sub-account over a
stated period of time, not taking into account capital gains or losses. Yields
are annualized and stated as a percentage. Current yield for the VIP Money
Market Sub-account reflects the income generated by a Sub-account over a 7-day
period. Current yield is calculated by determining the net change, (exclusive
of capital changes and income other than investment income), in the value of a
hypothetical account having one Accumulation Unit at the beginning of the
period adjusting for the administrative charge, and dividing the difference by
the value of the account at the beginning of the base period to obtain the
base period return, and multiplying the base period return by (365/7). The
resulting yield figure is carried to the nearest hundredth of a percent.
Effective yield for the VIP Money Market Sub-account is calculated in a
similar manner to current yield except that investment income is assumed to be
reinvested throughout the year at the 7-day rate. Effective yield is obtained
by taking the base period returns as computed above, and then compounding the
base period return by adding 1, raising the sum to a power equal to (365/7)
and subtracting one from the result, according the formula Effective
Yield = [(Base Period Return + 1)] - 1. Since the reinvestment of income is
assumed in the calculation of effective yield, it will generally be higher
than current yield. For the 7-day period ending on 12/31/97 the VIP Money
Market Sub-account had a current yield of 4.75% and an effective yield of
4.86%.
FEDERAL TAX MATTERS
TAX TREATMENT OF THE COMPANY
The Company is taxed as a life insurance company under Subchapter L of the
Code. Since the Variable Account is not an entity separate from the Company
and its operations form a part of the Company, it will not
9
<PAGE>
be taxed separately as a "regulated investment company" under Subchapter M of
the Code. Investment income and realized net capital gains on the assets of
the Variable Account are reinvested and are taken into account in determining
Contract Values. As a result, such investment income and realized net capital
gains are automatically retained as part of the reserves under the Contract.
Under existing federal income tax law, the Company believes that Variable
Account investment income and realized net capital gains should not be taxed,
to the extent that such income and gains are retained as part of the reserves
under the Contracts.
DIVERSIFICATION REQUIREMENTS
Section 817(h) of the Code provides in substance that Section 72 of the Code
will not apply and the Company will not be treated as the owner of the assets
of the Company's segregated account unless the investments made by the
segregated account are "adequately diversified" in accordance with regulations
prescribed by the Treasury. If the segregated account is not "adequately
diversified," any increase in the value of a variable annuity contract will be
taxed to the contract owner currently.
The Variable Account, through the Funds, intends to comply with the
diversification requirements under Section 817(h) as prescribed by the
Treasury. Although the Company does not control the Funds, it believes that
FMR, as the manager of the investments of each of the Funds' Portfolios, will
comply with the diversification rules set forth in the Regulations.
Accordingly, the Company believes that it will be treated as the owner of the
segregated account assets invested in shares of the Funds and the Contracts
issued by the Company will be taxed as annuities under Section 72 of the Code.
OWNER CONTROL
In certain circumstances, owners of variable annuity contracts may be
considered the owners for Federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includable in the
variable annuity contractowner's gross income. The IRS has stated in published
ruling that a variable contractowner will be considered the owner of separate
account assets if the contractowner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets.
The Treasury Department has also announced, in connection with the issuance of
regulations concerning investment diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor, rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way
of regulations or rulings on the "extent to which policyholders may direct
their investments to particular subaccounts without being treated as owners of
the underlying assets."
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the Service in rulings in which it
was determined that contractowners were not owners of separate account assets.
For example, the Contract Owner has the choice of one or more Subaccounts in
which to allocate premiums and Contract values, and may be able to transfer
among Subaccounts more frequently than in such rulings, or if a Subaccount is
too narrow in its investment strategy (e.g., a fund that invests only in gold
or stock of gold mining companies), or if Contract Owners have too many
subaccount options to select. These differences could result in the Contract
Owner being treated as the owner of the assets of the Variable Account. In
addition, PFL does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. PFL therefore reserves the right to modify the Contract as necessary to
attempt to prevent the Contract Owner from being considered the owner of a pro
rata share of assets of Variable Account.
DISTRIBUTION REQUIREMENTS
The Code also requires that Nonqualified Contracts contain specific
provisions for distribution of Contract proceeds upon the death of any Owner.
In order to be treated as an annuity contract for federal income tax
10
<PAGE>
purposes, the Code requires that such Contracts provide that if any Owner dies
on or after the Annuity Commencement Date and before the entire interest in
the Contract has been distributed, the remaining portion must be distributed
at least as rapidly as under the method in effect on such Owner's death. If
any Owner dies before the Annuity Commencement Date, the entire interest in
the Contract must generally be distributed within 5 years after such Owner's
date of death or be used to purchase an immediate annuity under which payments
will begin within one year of such Owner's death and will be made for the life
of the Beneficiary or for a period not extending beyond the life expectancy of
the Beneficiary. However, if upon such Owner's death occurs prior to the
Annuity Commencement Date, such Owner's surviving spouse is named the
beneficiary, then the Contract may be continued with the surviving spouse as
the new Owner receiving the one-time adjustment to the Contract Value. If any
Owner is not a natural person, then for purposes of these distribution
requirements, the primary Annuitant shall be treated as the Owner and any
death or change of such primary Annuitant shall be treated as the death of the
Owner. The Nonqualified Contract contains provisions intended to comply with
these requirements of the Code. No regulations interpreting these requirements
of the Code have yet been issued and thus no assurance can be given that the
provisions contained in the Contracts satisfy all such Code requirements.
DISTRIBUTION OF THE CONTRACTS
The Contracts are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the
Contracts is continuous and the Company does not anticipate discontinuing the
offering of the Contracts. However, the Company reserves the right to
discontinue the offering of the Contracts.
The Contracts will be distributed through Fidelity Brokerage Services, Inc.,
the principal underwriter of the Contracts, and Fidelity Insurance Agency,
Inc., which are affiliated with FMR. During 1997, the amount paid to Fidelity
Insurance Agency, Inc. for its services as a general insurance agency was
$4,476,712. Amounts paid for these services in 1996, 1995 and 1994 were
$4,136,279, $3,398,244 and $3,511,300, respectively.
CUSTODY OF ASSETS
The assets of each of the Sub-accounts are held by the Company. The assets
of the Variable Account and each of the Sub-accounts thereunder are kept
physically segregated and held separate and apart from the general account
assets of the Company. The Company maintains records of all purchases and
redemptions of shares of the Fund held by each of the Sub-accounts. Additional
protection for the assets of the Variable Account is afforded by the Company's
fidelity bond presently in the amount of $5 million covering the acts of
officers and employees of the Company.
STATE REGULATION
The Company is subject to the laws of Iowa governing insurance companies and
to regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of the Company for the preceding year and its financial condition as
of the end of such year. Regulation by the Division of Insurance includes
periodic examination to determine the Company's contract liabilities and
reserves so that the Division of Insurance may certify the items are correct.
The Company's books and accounts are subject to review by the Division of
Insurance at all times and a full examination of its operations is conducted
periodically by the National Association of Insurance Commissioners. In
addition, the Company is subject to regulation under the insurance laws of
other jurisdictions in which it may operate.
11
<PAGE>
RECORDS AND REPORTS
All records and accounts relating to the Variable Account will be maintained
by the Company. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, the Company will mail to all Contract
Owners at their last known address of record, at least semi-annually, reports
containing such information as may be required under that Act or by any other
applicable law or regulation. The Company will also mail to Contract Owners
confirmation of each financial transaction and semi-annual Account Statements
reflecting the Contract Value of a particular Contract.
INDEPENDENT AUDITORS
The financial statements of PFL Life Insurance Company at December 31, 1997
and 1996, and for each of three years in the period ended December 31, 1997,
and the financial statements of The Fidelity Variable Annuity Account at
December 31, 1997 and for each of the two years in the period then ended,
included in this Statement of Additional Information have been audited by
Ernst & Young LLP, Independent Auditors, 801 Grand Avenue, Suite 3400, Des
Moines, Iowa, 50309-2764.
OTHER INFORMATION
A Registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of
the information set forth in the Registration amendments and exhibits thereto
has been included in this Statement of Additional Information. Statements
contained in this Statement of Additional Information concerning the content
of the Contracts and other legal instruments are intended to be summaries. For
a complete statement of the terms of the documents, reference should be made
to the instruments filed with the Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of the interest of Contract Owners in the Variable Account will
be affected solely by the investment results of the selected Sub-account(s).
The financial statements of the Company as contained herein should be
considered only as bearing upon the Company's ability to meet its obligations
to Contract Owners under the Contracts, and they should not be considered as
bearing on the investment performance of the Sub-accounts.
12
<PAGE>
FINANCIAL STATEMENTS - STATUTORY BASIS
PFL LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
PFL Life Insurance Company
Financial Statements - Statutory Basis
Years ended December 31, 1997, 1996 and 1995
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................. 1
Audited Financial Statements
Balance Sheets - Statutory Basis................................ 3
Statements of Operations - Statutory Basis...................... 5
Statements of Changes in Capital and Surplus - Statutory Basis.. 6
Statements of Cash Flows - Statutory Basis...................... 7
Notes to Financial Statements - Statutory Basis................. 9
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1997 and 1996, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles. The
variances between such practices and generally accepted accounting principles
also are described in Note 1. The effects on the financial statements of these
variances are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of PFL Life Insurance Company at December 31, 1997 and 1996, or the results of
its operations or its cash flows for each of the three years in the period ended
December 31, 1997.
1
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PFL Life Insurance Company
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with accounting practices prescribed or permitted by the Insurance
Division, Department of Commerce, of the State of Iowa. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic statutory-basis financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 27, 1998
2
<PAGE>
PFL Life Insurance Company
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 23,939 $ 50,737
Bonds 4,913,144 4,773,433
Stocks:
Preferred 2,750 3,097
Common (cost: 1997 - $33,058; 1996 - $23,212) 42,345 32,038
Affiliated entities (cost: 1997 - $10,798; 1996 -
$14,893) 8,031 6,934
Mortgage loans on real estate 935,207 911,705
Real estate, at cost less accumulated depreciation
($8,655 in 1997; $11,338 in 1996):
Home office properties 8,283 10,372
Properties acquired in satisfaction of debt 11,814 12,260
Investment properties 36,416 35,922
Policy loans 57,136 54,214
Other invested assets 29,864 16,343
--------------------------------
Total cash and invested assets 6,068,929 5,907,055
Premiums deferred and uncollected 16,101 16,345
Accrued investment income 69,662 70,401
Short-term notes receivable from affiliate -- 53,900
Federal income taxes recoverable -- 4,018
Transfers from separate accounts 60,193 38,528
Other assets 37,624 31,215
Separate account assets 2,517,365 1,844,515
--------------------------------
Total admitted assets $8,769,874 $7,965,977
================================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 884,018 $ 736,100
Annuity 4,204,125 4,408,419
Accident and health 169,328 139,269
Policy and contract claim reserves:
Life 8,635 7,369
Accident and health 57,713 66,988
Other policyholders' funds 143,831 126,672
Remittances and items not allocated 153,745 64,064
Asset valuation reserve 69,825 54,851
Interest maintenance reserve 30,287 23,745
Federal income taxes payable 1,889 --
Short-term notes payable to affiliates 16,400 --
Other liabilities 75,070 70,663
Payable to affiliates 13,240 4,975
Separate account liabilities 2,512,406 1,844,515
--------------------------------
Total liabilities 8,340,512 7,547,630
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized,
266 issued and outstanding 2,660 2,660
Paid-in surplus 154,282 154,129
Unassigned surplus 272,420 261,558
--------------------------------
Total capital and surplus 429,362 418,347
--------------------------------
Total liabilities and capital and surplus $8,769,874 $7,965,977
================================
</TABLE>
See accompanying notes.
4
<PAGE>
PFL Life Insurance Company
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life $ 202,435 $ 204,872 $ 114,704
Annuity 657,695 725,966 921,452
Accident and health 207,982 227,862 232,738
Net investment income 446,424 428,337 392,685
Amortization of interest maintenance reserve 3,645 2,434 4,341
Commissions and expense allowances on reinsurance
ceded 49,859 73,931 77,071
--------------------------------------------------------
1,568,040 1,663,402 1,742,991
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 146,583 147,024 146,346
Surrender benefits 658,071 512,810 498,626
Other benefits 126,495 101,288 88,607
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 149,575 140,126 50,071
Annuity (203,139) 188,002 528,330
Accident and health 30,059 26,790 17,694
Other 16,998 19,969 16,017
--------------------------------------------------------
924,642 1,136,009 1,345,691
Insurance expenses:
Commissions 157,300 177,466 200,706
General insurance expenses 57,571 57,282 57,623
Taxes, licenses and fees 8,715 13,889 15,700
Net transfers to separate accounts 297,480 171,785 42,981
Other expenses 119 526 760
--------------------------------------------------------
521,185 420,948 317,770
--------------------------------------------------------
1,445,827 1,556,957 1,663,461
--------------------------------------------------------
Gain from operations before federal income taxes and
net realized capital gains (losses) on investments 122,213 106,445 79,530
Federal income tax expense 43,381 41,177 33,335
--------------------------------------------------------
Gain from operations before net realized capital
gains (losses) on investments 78,832 65,268 46,195
Net realized capital gains (losses) on investments
(net of related federal income taxes and amounts
transferred to interest maintenance reserve) 7,159 (3,503) (18,096)
--------------------------------------------------------
Net income $ 85,991 $ 61,765 $ 28,099
========================================================
</TABLE>
See accompanying notes.
5
<PAGE>
PFL Life Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
TOTAL CAPITAL
COMMON STOCK PAID-IN UNASSIGNED AND SURPLUS
SURPLUS SURPLUS
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $2,660 $114,129 $211,552 $328,341
Capital contribution - 40,000 - 40,000
Net income for 1995 - - 28,099 28,099
Net unrealized capital losses - - (7,574) (7,574)
Decrease in non-admitted assets - - 50 50
Increase in asset valuation reserve - - (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a division - - 35 35
Cancellation of reinsurance agreement - - 585 585
Amendment of reinsurance agreement - - 419 419
Transfer of subsidiary investment to
stockholder - - (3,250) (3,250)
Change in reserve valuation methodology - - (501) (501)
Increase in liability for reinsurance in
unauthorized companies - - (2,730) (2,730)
---------------------------------------------------------------------
Balance at December 31, 1995 2,660 154,129 220,739 377,528
Net income for 1996 - - 61,765 61,765
Net unrealized capital gains - - 2,351 2,351
Increase in non-admitted assets - - (148) (148)
Increase in asset valuation reserve - - (10,930) (10,930)
Dividend to stockholder - - (20,000) (20,000)
Prior period adjustment - - 5,025 5,025
Surplus effect of sale of a division - - (384) (384)
Surplus effect of ceding commission
associated with the sale of a division - - 29 29
Amendment of reinsurance agreement - - 421 421
Decrease in liability for reinsurance in
unauthorized companies - - 2,690 2,690
---------------------------------------------------------------------
Balance at December 31, 1996 2,660 154,129 261,558 418,347
Capital contribution - 153 - 153
Net income for 1997 - - 85,991 85,991
Net unrealized capital gains - - 3,592 3,592
Increase in non-admitted assets - - (481) (481)
Increase in asset valuation reserve - - (14,974) (14,974)
Dividend to stockholder - - (62,000) (62,000)
Surplus effect of sale of a division - - (161) (161)
Surplus effect of ceding commissions
associated with the sale of a division - - 5 5
Surplus effect of amendment of reinsurance - - 389 389
agreement
Surplus effect of reinsurance agreement - - 402 402
Increase in liability for reinsurance in
unauthorized companies - - (1,901) (1,901)
---------------------------------------------------------------------
Balance at December 31, 1997 $2,660 $154,282 $272,420 $429,362
=====================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Premiums and other considerations, net of reinsurance $ 1,119,936 $ 1,240,748 $ 1,353,407
Net investment income 452,091 431,456 398,051
Life and accident and health claims (154,383) (147,556) (140,798)
Surrender benefits and other fund withdrawals (658,071) (512,810) (498,626)
Other benefits to policyholders (126,462) (101,254) (88,519)
Commissions, other expenses and other taxes (225,042) (248,321) (278,241)
Net transfers to separate accounts (319,146) (210,312) (42,981)
Federal income taxes, excluding tax on capital gains (47,909) (35,551) (32,905)
Cash paid in conjunction with an amendment of a
reinsurance agreement (4,826) (5,812)
Repayment of intercompany notes and receivables, net - - (48,070)
Cash received in connection with a reinsurance
agreement 1,477 - -
Other, net 89,693 (41,677) 62,345
--------------------------------------------------------------
Net cash provided by operating activities 127,358 368,911 683,663
INVESTING ACTIVITIES
Proceeds from investment sold, matured or repaid:
Bonds and preferred stocks 3,284,095 2,112,831 1,757,229
Common stocks 34,004 27,214 20,338
Mortgage loans on real estate 138,162 74,351 36,550
Real estate 6,897 18,077 23,203
Cash received from ceding commissions associated
with the sale of a division 8 45 55
Other 57,683 22,568 8,258
--------------------------------------------------------------
3,520,849 2,255,086 1,845,633
Cost of investments acquired:
Bonds and preferred stocks (3,411,442) (2,270,105) (2,294,195)
Common stocks (37,339) (29,799) (23,284)
Mortgage loans on real estate (159,577) (324,381) (192,292)
Real estate (2,013) (222) (10,188)
Policy loans (2,922) (1,539) (877)
Cash paid in association with the sale of a division - (539) -
Cash paid in conjunction with sales of a division (591) (123) -
Other (15,674) (6,404) (2,670)
--------------------------------------------------------------
(3,629,558) (2,633,112) (2,523,506)
--------------------------------------------------------------
Net cash used in investing activities (108,709) (378,026) (677,873)
</TABLE>
7
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows - Statutory Basis (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance of short-term intercompany notes payable $ 16,400 $ - $ 40,000
Capital contribution 153 - -
Dividends to stockholder (62,000) (20,000) -
-----------------------------------------------------------
Net cash provided by (used in) financing activities (45,447) (20,000) 40,000
-----------------------------------------------------------
Increase (decrease) in cash and short-term
investments (26,798) (29,115) 45,790
Cash and short-term investments at beginning of year 50,737 79,852 34,062
-----------------------------------------------------------
Cash and short-term investments at end of year $ 23,939 $ 50,737 $ 79,852
===========================================================
</TABLE>
See accompanying notes.
8
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PFL Life Insurance Company ("the Company") is a stock life insurance company and
is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands.
In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through mergers.
In addition, the Company has canceled or entered into several coinsurance and
reinsurance agreements with affiliates and non-affiliates. The following is a
description of those transactions:
. During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association, an
independent insurance agency, will be written by the insurance subsidiaries
of UICI and will not be shared with the Company and its affiliates through
coinsurance arrangements. As a result of the sale, during 1996 the Company
transferred $123 in assets, substantially all of which was cash, and $70 of
liabilities. The difference between the assets and liabilities of $(53) plus
a tax credit of $19 was charged directly to unassigned surplus. During 1997,
the Company transferred $591 in assets, substantially all of which was cash
and $343 of liabilities. The difference between the assets and liabilities
of $(248) net of a tax credit of $87 was charged directly to unassigned
surplus.
. Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference between
the assets and liabilities, net of a tax effect of $302 was credited
directly to unassigned surplus.
9
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2-1/2% each year
(primarily group health business). As a result, the Company transferred
$4,303 in assets and liabilities of $4,467 during 1995. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets and
liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus. During 1997, the Company transferred $5,045 in assets,
including $4,826 of cash and short-term investments, and liabilities of
$5,164. The difference between the assets and liabilities of $119 plus a tax
credit of $270 was credited directly to unassigned surplus.
. During 1993, the Company sold the Oakbrook Division (primarily group health
business). The initial transfer of risk occurred through an indemnity
reinsurance agreement. The policies will then be assumed by the reinsurer by
novation as state regulatory and policyholder approvals are received. During
1996, the Company paid $539 in association with this sale; the payment, net
of a tax credit of $189, were charged directly to unassigned surplus. In
addition, the Company will receive from the third party administrator a
ceding commission of one percent of the premiums collected between January
1, 1994 and December 31, 1996. As a result of the sale, in 1995, the Company
received $55 for ceding commissions; the commissions net of the related tax
effect of $20 was credited directly to unassigned surplus. During 1996, the
Company received $45 for ceding commissions; the commissions net of the
related tax effect of $(16) was charged directly to unassigned surplus. In
1997, the Company received $8 for ceding commissions; the commissions net of
the related tax effect of $3 was credited directly to unassigned surplus.
. During 1997, the Company entered into a reinsurance agreement with a non-
affiliate. As a result of the agreement, the Company received $1,480 of
assets, including $1,477 of cash and short-term securities, and $861 of
liabilities. The difference between the assets and liabilities of $619, net
of a tax effect of $217 was credited directly to unassigned surplus.
NATURE OF BUSINESS
The Company sells individual non-participating whole life, endowment and term
contracts, as well as a broad line of single fixed and flexible premium annuity
products. In addition, the Company offers group life, universal life, and
individual and specialty health coverages. The Company is licensed in 49 states
and the District of Columbia. Sales of the Company's products are primarily
through the Company's agents and financial institutions.
10
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant of
these differences are as follows: (a) bonds are generally reported at amortized
cost rather than segregating the portfolio into held-to-maturity (reported at
amortized cost), available-for-sale (reported at fair value), and trading
(reported at fair value) classifications; (b) acquisition costs of acquiring new
business are charged to current operations as incurred rather than deferred and
amortized over the life of the policies; (c) policy reserves on traditional life
products are based on statutory mortality rates and interest which may differ
from reserves based on reasonable assumptions of expected mortality, interest,
and withdrawals which include a provision for possible unfavorable deviation
from such assumptions; (d) policy reserves on certain investment products use
discounting methodologies based on statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) potential declines in the estimated realizable value
of investments are provided for through the establishment of a formula-
determined statutory investment reserve (reported as a liability) changes to
which are charged directly to surplus, rather than through recognition in the
statement of operations for declines in value, when such declines are judged to
be other than temporary; (i) certain assets designated as "non-admitted assets"
have been charged to surplus rather than being reported as assets; (j) revenues
for universal life and investment products consist of premiums received rather
than policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed; (k)
pension expense is recorded as amounts are paid;
11
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) adjustments to federal income taxes of prior years are charged or credited
directly to unassigned surplus, rather than reported as a component of expense
in the statement of operations; (m) gains or losses on dispositions of business
are charged or credited directly to unassigned surplus rather than being
reported in the statement of operations; and (n) a liability is established for
"unauthorized reinsurers" and changes in this liability are charged or credited
directly to unassigned surplus. The effects of these variances have not been
determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1998,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased to
be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in preferred
stocks not in good standing are reported at the lower of cost or market. Common
stocks of affiliated and unaffiliated companies, which includes shares of mutual
funds (money market and other), are carried at market. Real estate is reported
at cost less allowances for depreciation. Depreciation is computed principally
by the straight-line method. Policy loans are reported at unpaid principal.
Other invested assets consist principally of investments in various joint
ventures and are recorded at equity in underlying net assets. Other "admitted
assets" are valued, principally at cost, as required or permitted by Iowa
Insurance Laws.
12
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for potential
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or on real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1997, 1996 and 1995, the
Company excluded investment income due and accrued of $177, $1,541 and $2,272,
respectively, with respect to such practices.
The Company uses interest rate swaps and caps as part of its overall interest
rate risk management strategy for certain life insurance and annuity products.
The Company entered into several interest rate swap contracts to modify the
interest rate characteristics of the underlying liabilities. The net interest
effect of such swap transactions is reported as an adjustment of interest income
from the hedged items as incurred.
The Company has entered into interest-rate cap agreements to hedge the exposure
of changing interest rates. The cash flows from the interest rate caps will help
offset losses that might occur from changes in interest rates. The cost of such
agreements is included in interest expense ratably during the life of the
agreement. Income received as a result of the cap agreement will be recognized
in investment income as earned. Unamortized cost of the agreements is included
in other assets.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
statutorily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum required
by law.
13
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.00 to 6.00 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with and without life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 2.50 to 11.25 percent and mortality rates, where appropriate, from a
variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. These estimates are subject to the effects of
trends in claim severity and frequency. The estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate accounts are valued at market.
Income and gains and losses with respect to the assets in the separate accounts
accrue to the benefit of the policyholders and, accordingly, the operations of
the separate accounts are not included in the accompanying financial statements.
The separate accounts do not have any minimum guarantees and the investment
risks associated with market value changes are borne entirely by the
policyholders. The Company received variable contract premiums of $281,095,
$227,864 and $133,386 in 1997, 1996 and 1995, respectively. All variable account
contracts are subject to discretionary withdrawal by the policyholder at the
market value of the underlying assets less the current surrender charge.
14
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No. 119,
Disclosures about Derivative Financial Instruments and Fair Value of Financial
Instruments, requires additional disclosure about derivatives. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement of
Financial Accounting Standards No. 107 and No. 119 exclude certain financial
instruments and all nonfinancial instruments from their disclosure requirements
and allow companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal their carrying value.
15
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
Interest rate cap and interest rate swaps: Estimated fair value of the
interest rate cap is based upon the latest quoted market price.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------ ------------------------------
CARRYING Carrying
VALUE FAIR VALUE Value FAIR VALUE
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $4,913,144 $5,046,527 $4,773,433 $4,867,770
Preferred stocks 2,750 8,029 3,097 7,133
Common stocks 42,345 42,345 32,038 32,038
Affiliated common stock 8,031 8,031 6,934 6,934
Mortgage loans on real estate 935,207 983,720 911,705 922,010
Policy loans 57,136 57,136 54,214 54,214
Cash and short-term
investments 23,939 23,939 50,737 50,737
Interest rate cap 5,618 1,513 6,797 6,975
Interest rate swaps - 2,546 - -
Separate account assets 2,517,365 2,517,365 1,844,515 1,844,515
LIABILITIES
Investment contract liabilities 4,345,181 4,283,461 4,532,568 4,398,630
Separate account liabilities 2,452,205 2,452,205 1,803,057 1,803,057
</TABLE>
16
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 188,241 $ 2,562 $ (21) $ 190,782
State, municipal and other government 61,532 2,584 (1,774) 62,342
Public utilities 121,582 5,384 (2,952) 124,014
Industrial and miscellaneous 1,955,587 85,233 (7,752) 2,033,068
Mortgage-backed securities 2,586,202 55,382 (5,263) 2,636,321
-----------------------------------------------------------------
4,913,144 151,145 (17,762) 5,046,527
Preferred stocks 2,750 5,279 - 8,029
-----------------------------------------------------------------
$4,915,894 $156,424 $(17,762) $5,054,556
=================================================================
DECEMBER 31, 1996
Bonds:
United States Government and agencies $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other government 59,644 1,906 177 61,373
Public utilities 147,918 5,616 1,020 152,514
Industrial and miscellaneous 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities 2,470,740 43,896 15,610 2,499,026
-----------------------------------------------------------------
4,773,433 119,429 25,092 4,867,770
Preferred stocks 3,097 4,036 - 7,133
-----------------------------------------------------------------
$4,776,530 $123,465 $ 25,092 $4,874,903
=================================================================
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
----------------------------
<S> <C> <C>
Due in one year or less $ 132,834 $ 133,608
Due after one year through five years 1,036,862 1,066,474
Due after five years through ten years 886,542 915,229
Due after ten years 270,704 294,895
----------------------------
2,326,942 2,410,206
Mortgage and other asset-backed securities 2,586,202 2,636,321
----------------------------
$4,913,144 $5,046,527
============================
</TABLE>
17
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Interest on bonds and notes $373,496 $364,356 $342,182
Dividends on equity investments 1,460 1,436 1,822
Interest on mortgage loans 80,266 69,418 52,702
Rental income on real estate 7,501 9,526 10,443
Interest on policy loans 3,400 3,273 3,112
Other investment income 613 1,799 1,803
--------------------------------------
Gross investment income 466,736 449,808 412,064
Investment expenses 20,312 21,471 19,379
--------------------------------------
Net investment income $446,424 $428,337 $392,685
======================================
</TABLE>
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Proceeds $3,284,095 $2,112,831 $1,757,229
==============================================
Gross realized gains $ 30,094 $ 19,876 $ 19,721
Gross realized losses (17,265) (19,634) (34,399)
----------------------------------------------
Net realized gains (losses) $ 12,829 $ 242 $ (14,678)
==============================================
</TABLE>
At December 31, 1997, investments with an aggregate carrying value of $5,944,376
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required by
statute.
18
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Debt securities $ 12,829 $ 242 $(14,678)
Short-term investments (19) (197) 24
Equity securities 6,972 1,798 504
Mortgage loans on real estate 2,252 (5,530) (1,053)
Real estate 4,252 1,210 (1,908)
Other invested assets 1,632 12 (970)
---------------------------------------
27,918 (2,465) (18,081)
Tax effect (10,572) (1,235) 7,878
Transfer to interest maintenance reserve (10,187) 197 (7,891)
---------------------------------------
Net realized gains (losses) $ 7,159 $(3,503) $(18,096)
=======================================
<CAPTION>
CHANGE IN UNREALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Debt securities $40,289 $(115,867) $355,560
Equity securities 5,653 2,929 (16,379)
----------------------------------------
Change in unrealized appreciation
(depreciation) $45,942 $(112,938) $339,181
=======================================
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Unrealized gains $10,356 $ 9,590 $ 6,833
Unrealized losses (3,836) (8,723) (8,895)
---------------------------------------
Net unrealized gains (losses) $ 6,520 $ 867 $(2,062)
=======================================
19
</TABLE>
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1997, the Company issued mortgage loans with interest rates ranging from
7.32% to 8.62%. The maximum percentage of any one mortgage loan to the value of
the underlying real estate at origination was 80%. Mortgage loans with a
carrying value of $237 were non-income producing for the previous twelve months.
Accrued interest of $79 related to these mortgage loans was excluded from
investment income. The Company requires all mortgaged properties to carry fire
insurance equal to the value of the underlying property.
During 1996 and 1995, mortgage loans of $13,163 and $1,644, respectively, were
foreclosed and transferred to real estate. No mortgage loans were foreclosed
during 1997. At December 31, 1997 and 1996, the Company held a mortgage loan
loss reserve in the asset valuation reserve of $11,985 and $5,432, respectively.
The mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- -------------------------------------- --------------------------------------
DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
--------------- ---------------
<S> <C> <C> <C> <C> <C>
South Atlantic 29% 26% Retail 35% 37%
Pacific 15 13 Office 31 34
E. North Central 12 15 Apartment 14 14
Mountain 10 10 Other 14 12
W. South Central 9 12 Industrial 6 3
E. South Central 8 9
Middle Atlantic 7 6
W. North Central 6 6
New England 4 3
</TABLE>
At December 31, 1997, the Company had the following investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
- -------------------------------------------------- ----------------------
<S> <C>
Bonds:
Structured Asset Securities Corporation $66,650
Countrywide Mortgage Backed Securities, Inc. 94,918
</TABLE>
20
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of its
investment portfolio attributable to changes in general interest rate levels and
to manage duration mismatch of assets and liabilities. Those instruments include
interest rate exchange agreements (swaps and caps), options, and commitments to
extend credit and all involve elements of credit and market risks in excess of
the amounts recognized in the accompanying financial statements at a given point
in time. The contract or notional amounts of those instruments reflect the
extent of involvement in the various types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance by
a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
At December 31, 1997 and 1996, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
1997 1996
-----------------------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed pay floating $100,000 $ -
Receive floating (uncapped) - pay floating (capped) 67,229 -
Interest rate cap agreements 500,000 500,000
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty.
21
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and ceded
amounts:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Direct premiums $1,312,446 $1,457,450 $1,591,531
Reinsurance assumed 2,038 1,796 2,356
Reinsurance ceded (246,372) (300,546) (324,993)
--------------------------------------------------
Net premiums earned $1,068,112 $1,158,700 $1,268,894
==================================================
</TABLE>
The Company received reinsurance recoveries in the amount of $183,638, $168,155
and $167,287 during 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996, estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $60,437 and $63,226, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1997 and 1996 of $2,434,130 and
$2,737,441, respectively.
At December 31, 1997, amounts recoverable from unauthorized reinsurers of
$73,080 (1996 $73,434) and reserve credits for reinsurance ceded of $78,838
(1996 $55,035) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of trust
agreements totaling $117,686 at December 31, 1997 that can be drawn on for
amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.
22
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES (CONTINUED)
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%) $42,775 $37,256 $27,835
Tax reserve adjustment 2,004 2,211 2,405
Excess tax depreciation (392) (384) (365)
Deferred acquisition costs tax basis 4,308 5,583 4,581
Prior year over accrual (1,016) (499) (306)
Dividend received deduction (941) (454) (56)
Charitable contribution (848) - -
Other items net (2,509) (2,536) (759)
-------------------------------------------
Federal income tax expense $43,381 $41,177 $33,335
===========================================
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($20,387 at December 31, 1997). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings would
be reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual. This
included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related interest
of $1,686, net of a tax effect of $590. An examination is underway for years
1988 through 1995.
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided
that a dividend distribution, which is determined annually based on mortality
and persistency experience of the participating policies, is authorized by the
Company. Participating insurance constituted approximately .9% and 1.0% of
ordinary life insurance in force at December 31, 1997 and 1996, respectively.
23
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on a
variety of the Company's products that are not subject to significant mortality
or morbidity risk; however, there may be certain restrictions placed upon the
amount of funds that can be withdrawn without penalty. The amount of reserves on
these products, by withdrawal characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------- --------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 8,912 0% $ 20,800 0%
Subject to discretionary withdrawal at
book value less surrender charge 755,300 8 794,881 9
Subject to discretionary withdrawal at
market value 2,454,845 27 1,803,057 20
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 5,821,049 63 6,284,876 69
Not subject to discretionary withdrawal
provision 203,522 2 174,416 2
------------------------------- --------------------------------
9,243,628 100% 9,078,030 100%
Less reinsurance ceded 2,372,495 2,677,432
------------------ ------------------
Total policy reserves on annuities and
deposit fund liabilities $6,871,134 $6,400,598
================== ==================
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
Transfers as reported in the summary of operations of the
separate accounts statement:
<S> <C> <C> <C>
Transfers to separate accounts $281,095 $227,864 $133,386
Transfers from separate accounts 9,819 75,172 104,219
---------------------------------------------------
Net transfers to separate accounts 271,276 152,692 29,167
Reconciling adjustments charges for investment
manage-ment, administration fees and contract guarantees 26,204 19,093 13,814
---------------------------------------------------
Transfers as reported in the summary of operations of the
life, accident and health annual statement $297,480 $171,785 $ 42,981
===================================================
</TABLE>
24
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1997 and 1996, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Life and annuity:
Ordinary direct first year business $ 2,316 $1,698 $ 618
Ordinary direct renewal business 22,724 6,834 15,890
Group life direct business 1,523 646 877
Reinsurance ceded (1,464) (81) (1,383)
----------------------------------------
25,099 9,097 16,002
Accident and health:
Direct 148 - 148
Reinsurance ceded (49) - (49)
----------------------------------------
Total accident and health 99 - 99
----------------------------------------
$25,198 $9,097 $16,101
========================================
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business $ 2,657 $1,865 $ 792
Ordinary direct renewal business 23,307 7,180 16,127
Group life direct business 1,788 1,195 593
Reinsurance ceded (1,706) (438) (1,268)
----------------------------------------
26,046 9,802 16,244
Accident and health:
Direct 104 - 104
Reinsurance ceded (3) - (3)
-----------------------------------------
Total accident and health 101 - 101
----------------------------------------
$26,147 $9,802 $16,345
========================================
</TABLE>
At December 31, 1997 and 1996, the Company had insurance in force aggregating
$69,271 and $69,251, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Division, Department of Commerce, of the State of Iowa. The Company
established policy reserves of $1,128 and $1,252 to cover these deficiencies at
December 31, 1997 and 1996, respectively.
25
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in reserving
methodologies over five years. A direct charge to surplus of $501 was made for
the year ended December 31, 1995, related to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $62,000 and $20,000 in 1997 and
1996, respectively. No dividends were paid in 1995.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
No. 87 expense as a percent of salaries. The benefits are based on years of
service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $422, $1,056 and $942 for the
years ended December 31, 1997, 1996 and 1995, respectively. The plan is subject
to the reporting and disclosure requirements of the Employee Retirement and
Income Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Expense
related to this plan was $226, $297 and $465 for the years ended December 31,
1997, 1996 and 1995, respectively.
26
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also sponsors
an employee stock option plan for individuals employed at least three years and
a stock purchase plan for its producers, with the participating affiliated
companies establishing their own eligibility criteria, producer contribution
limits and company matching formula. These plans have been accrued or funded as
deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $62, $184
and $164 for the years ended December 31, 1997, 1996 and 1995, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997, 1996
and 1995, the Company paid $18,705, $17,028 and $14,214, respectively, for these
services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the thirty-
day commercial paper rate of 5.6% at December 31, 1997. During 1997, 1996 and
1995, the Company paid net interest of $1,188, $174 and $71, respectively, to
affiliates.
During 1997 and 1995, the Company received capital contributions of $153 and
$40,000, respectively, in cash from its parent.
At December 31, 1997, the Company has a $16,400 short-term note payable to an
affiliate. Interest on this note accrues at 5.6%.
27
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable. No
gain was recognized on this sale. This note matured during 1996.
During the year ended December 31, 1995, the Company restructured demand notes
and accrued interest of $13,250 and $745, respectively, related to an affiliate.
The Company received 9,750 shares of preferred stock from the affiliate for
satisfaction of debt. The Company realized a loss of $8,695 related to this
transaction. At December 31, 1996 and 1995, the preferred stock related to this
affiliate was deemed to have no value and an unrealized loss of $4,555 was
recognized in 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages, in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on the
most recent information available from the National Organization of Life and
Health Insurance Guaranty Associations. The Company has established a reserve of
$17,700 and $21,774 and an offsetting premium tax benefit of $7,984 and $8,752
at December 31, 1997 and 1996, respectively, for its estimated share of future
guaranty fund assessments related to several major insurer insolvencies. The
guaranty fund expense (benefit) was $(975), $2,617 and $5,859 for December 31,
1997, 1996 and 1995, respectively.
28
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning Project
(the "Project") to review and analyze its information technology and systems to
determine if they are Year 2000 compatible. The Company has begun to convert or
modify, where necessary, critical data processing systems. It is contemplated
that the plan will be substantially completed by early 1999. The Company does
not expect this project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the project, the
Company has undertaken communications with its significant customers, suppliers
and other third parties to determine their Year 2000 compatibility and
readiness. Management believes that the issues associated with the Year 2000
will be resolved with no material financial impact on the Company.
Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including testing
procedures, there is no certainty that any company will achieve complete
success. Notwithstanding the efforts or results of the Company, its ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond its knowledge or control.
29
<PAGE>
PFL Life Insurance Company
Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1997
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and authorities $1,325,817 $1,355,098 $1,325,817
States, municipalities and political
subdivisions 136,058 139,110 136,058
Foreign governments 51,407 51,154 51,407
Public utilities 124,013 124,013 121,582
All other corporate bonds 3,275,849 3,377,152 3,278,280
Redeemable preferred stock 2,750 8,029 2,750
----------------------------------------------------
Total fixed maturities 4,915,894 5,054,556 4,915,894
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance 7,593 9,046 9,046
Industrial, miscellaneous and all other 36,263 41,330 41,330
----------------------------------------------------
Total equity securities 43,856 50,376 50,376
Mortgage loans on real estate 935,207 935,207
Real estate 44,699 44,699
Real estate acquired in satisfaction of
debt 11,814 11,814
Policy loans 57,136 57,136
Other long-term investments 29,864 29,864
Cash and short-term investments 23,939 23,939
-------------- ----------------
Total investments $6,062,409 $6,068,929
============== ================
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
30
<PAGE>
PFL Life Insurance Company
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
--------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Individual life $ 882,003 $ - $ 8,550
Individual health 62,033 9,207 12,821
Group life and health 88,211 11,892 44,977
Annuity 4,204,125 - -
--------------------------------------------------
$5,236,372 $21,099 $66,348
==================================================
YEAR ENDED DECEMBER 31, 1996
Individual life $ 734,350 $ - $ 7,240
Individual health 39,219 8,680 13,631
Group life and health 78,418 14,702 53,486
Annuity 4,408,419 - -
--------------------------------------------------
$5,260,406 $23,382 $74,357
==================================================
YEAR ENDED DECEMBER 31, 1995
Individual life $ 594,274 $ - $ 6,066
Individual health 24,225 7,768 11,863
Group life and health 67,994 16,662 58,813
Annuity 4,220,274 -
--------------------------------------------------
$4,906,767 $ 24,430 $76,742
==================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND SETTLEMENT OPERATING PREMIUMS
REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 200,175 $ 75,914 $ 211,921 $ 36,185 -
63,548 5,934 37,706 29,216 $ 63,383
146,694 11,888 103,581 91,568 143,580
657,695 352,688 571,434 364,216 -
- ----------------------------------------------------------------------
$ 1,068,112 $446,424 $ 924,642 $521,185
======================================================================
$ 202,082 $ 66,538 $ 197,526 $ 38,067 -
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 -
- ----------------------------------------------------------------------
$ 1,158,700 $428,337 $1,136,009 $420,948
======================================================================
$ 111,918 $ 49,929 $ 97,065 $ 37,933 -
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 -
- ----------------------------------------------------------------------
$ 1,268,894 $392,685 $1,345,691 $317,770
======================================================================
</TABLE>
* Allocations of net investment income and other operating expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.
32
<PAGE>
PFL Life Insurance Company
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER
31, 1997
Life insurance in force $5,025,027 $420,519 $ 35,486 $4,639,994 .8%
=========================================================================
Premiums:
Individual life $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health 73,593 10,045 - 63,548 -
Group life and health 339,269 192,575 - 146,694 -
Annuity 697,893 40,198 - 657,695 -
-------------------------------------------------------------------------
$1,312,446 $ 246,372 $ 2,038 $1,068,112 .2%
=========================================================================
YEAR ENDED DECEMBER
31, 1996
Life insurance in force $4,863,416 $477,112 $30,685 $4,416,989 .7%
=========================================================================
Premiums:
Individual life $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health 68,699 12,828 - 55,871 -
Group life and health 390,296 215,515 - 174,781 -
Annuity 794,311 68,345 - 725,966 -
-------------------------------------------------------------------------
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
=========================================================================
YEAR ENDED DECEMBER
31, 1995
Life insurance in force $4,594,434 $468,811 $22,936 $4,148,559 .6%
=========================================================================
Premiums:
Individual life $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health 60,309 12,617 - 47,692 -
Group life and health 408,097 220,265 - 187,832 -
Annuity 1,009,191 88,270 531 921,452 .05%
-------------------------------------------------------------------------
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
=========================================================================
</TABLE>
33
<PAGE>
The Fidelity Variable Annuity Account
Report of Independent Auditors
The Board of Directors and Contract Owners of
The Fidelity Variable Annuity Account,
PFL Life Insurance Company:
We have audited the accompanying balance sheet of The Fidelity Variable
Annuity Account as of December 31, 1997, and the related statements of
operations for the year then ended and changes in contract owners'
equity for each of the two years in the period then ended. These
financial statements are the responsibility of the Variable Account's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of mutual fund shares
owned as of December 31, 1997, by correspondence with the mutual funds'
transfer agent. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Fidelity
Variable Annuity Account at December 31, 1997, and the results of its
operations for the year then ended and changes in its contract owners'
equity for each of the two years in the period then ended in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
March 27, 1998
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
Money High Equity
Market Income Income Growth Overseas
Total Subaccount Subaccount Subaccount Subaccount Subaccount
----- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets
Cash $ 861 840 - - 2 2
Investments in mutual funds,
at current market value (Note 2):
Variable Insurance Products Fund:
Money Market Portfolio 109,409,482 109,409,482 - - - -
High Income Portfolio 67,104,665 - 67,104,665 - - -
Equity Income Portfolio 243,912,224 - - 243,912,224 - -
Growth Portfolio 142,679,258 - - - 142,679,258 -
Overseas Portfolio 32,800,757 - - - - 32,800,757
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 20,073,532 - - - - -
Asset Manager Portfolio 82,013,045 - - - - -
Asset Manager Growth Portfolio 17,060,915 - - - - -
Contrafund Portfolio 50,346,970 - - - - -
Index 500 Portfolio 56,268,995 - - - - -
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 5,696,251 - - - - -
Growth & Income Portfolio 7,798,083 - - - - -
Balanced Portfolio 1,295,417 - - - - -
Fidelity Daily Income Trust 294,972 - - - - -
Fidelity Capital and Income Fund 137,875 - - - - -
Fidelity Cash Reserves 79,765 - - - - -
------------ ----------- ---------- ----------- ----------- ----------
Total investments in mutual funds 836,972,206 109,409,482 67,104,665 243,912,224 142,679,258 32,800,757
------------ ----------- ---------- ----------- ----------- ----------
Total Assets $836,973,067 109,410,322 67,104,665 243,912,224 142,679,260 32,800,759
============ =========== ========== =========== =========== ==========
Liabilities and Contract Owners' Equity
Liabilities:
Contract terminations payable $ 518 - 13 25 - -
------------ ----------- ---------- ----------- ------------ ----------
Total Liabilities 518 - 13 25 - -
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3) 836,972,549 109,410,322 67,104,652 243,912,199 142,679,260 32,800,759
------------ ----------- ---------- ----------- ----------- ----------
$836,973,067 109,410,322 67,104,665 243,912,224 142,679,260 32,800,759
============ =========== ========== =========== =========== ==========
<CAPTION>
Asset
Investment Asset Manager Growth
Grade Bond Manager Growth Contrafund Index 500 Opportunities
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash 2 13 - - - -
Investments in mutual funds,
at current market value (Note 2):
Variable Insurance Products Fund:
Money Market Portfolio - - - - - -
High Income Portfolio - - - - - -
Equity Income Portfolio - - - - - -
Growth Portfolio - - - - - -
Overseas Portfolio - - - - - -
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 20,073,532 - - - - -
Asset Manager Portfolio - 82,013,045 - - - -
Asset Manager Growth Portfolio - - 17,060,915 - - -
Contrafund Portfolio - - - 50,346,970 - -
Index 500 Portfolio - - - - 56,268,995 -
Variable Insurance Products Fund III:
Growth Opportunities Portfolio - - - - - 5,696,251
Growth & Income Portfolio - - - - -
Balanced Portfolio - - - - - -
Fidelity Daily Income Trust - - - - - -
Fidelity Capital and Income Fund - - - - - -
Fidelity Cash Reserves - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Total investments in mutual funds 20,073,532 82,013,045 17,060,915 50,346,970 56,268,995 5,696,251
---------- ---------- ---------- ---------- ---------- ----------
Total Assets 20,073,534 82,013,058 17,060,915 50,346,970 56,268,995 5,696,251
========== ========== ========== ========== ========== ==========
Liabilities and Contract Owners' Equity
Liabilities:
Contract terminations payable - - 10 44 5 -
---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities - - 10 44 5 -
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3) 20,073,534 82,013,058 17,060,905 50,346,926 56,268,990 5,696,251
---------- ---------- ---------- ---------- ---------- ----------
20,073,534 82,013,058 17,060,915 50,346,970 56,268,995 5,696,251
========== ========== ========== ========== ========== ==========
<CAPTION>
Fidelity Fidelity
Daily Capital and Fidelity
Growth & Income Income Cash
Income Balanced Trust Fund Reserves
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets
Cash 1 1 - - -
Investments in mutual funds,
at current market value (Note 2):
Variable Insurance Products Fund:
Money Market Portfolio - - - - -
High Income Portfolio - - - - -
Equity Income Portfolio - - - - -
Growth Portfolio - - - - -
Overseas Portfolio - - - - -
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio - - - - -
Asset Manager Portfolio - - - - -
Asset Manager Growth Portfolio - - - - -
Contrafund Portfolio - - - - -
Index 500 Portfolio - - - - -
Variable Insurance Products Fund III:
Growth Opportunities Portfolio - - - - -
Growth & Income Portfolio 7,798,083 - - - -
Balanced Portfolio - 1,295,417 - - -
Fidelity Daily Income Trust - - 294,972 - -
Fidelity Capital and Income Fund - - - 137,875 -
Fidelity Cash Reserves - - - - 79,765
---------- ---------- ---------- ---------- ----------
Total investments in mutual funds 7,798,083 1,295,417 294,972 137,875 79,765
---------- ---------- ---------- ---------- ----------
Total Assets 7,798,084 1,295,418 294,972 137,875 79,765
========== ========== ========== ========== ==========
Liabilities and Contract Owners' Equity
Liabilities:
Contract terminations payable - - 263 66 92
---------- ---------- ---------- ---------- ----------
Total Liabilities - - 263 66 92
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3) 7,798,084 1,295,418 294,709 137,809 79,673
---------- ---------- ---------- ---------- ----------
7,798,084 1,295,418 294,972 137,875 79,765
========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
Page 1
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
Statement of Operations
Year Ended December 31, 1997, Except as Noted
<TABLE>
<CAPTION>
Money High Equity
Market Income Income Growth
Total Subaccount Subaccount Subaccount Subaccount
----- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss)
Income:
Dividends $55,389,728 6,368,532 5,032,373 22,357,878 5,312,363
Expenses (Note 4):
Administrative fee 271,495 39,597 18,865 81,679 48,805
Mortality and expense risk charge 6,511,581 952,144 497,507 1,881,931 1,169,214
------------ ------------ ------------ ----------- ------------
Net Investment income (loss) $48,606,652 5,376,791 4,516,001 20,394,268 4,094,344
Net Realized & Unrealized Capital Gain
From Investments
Net realized capital gain (loss) from sales of
investments:
Proceeds from sales 909,707,852 282,028,442 109,277,373 76,684,279 120,769,794
Cost of investments sold 835,736,265 282,028,442 103,140,443 53,797,817 104,813,040
------------ ------------ ------------ ----------- ------------
Net realized capital gain (loss) from sales of
investments 73,971,587 - 6,136,930 22,886,462 15,956,754
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period 66,967,006 - 2,580,686 39,562,042 7,486,534
End of the period 90,346,635 - 1,351,233 52,342,315 17,137,120
------------ ------------ ------------ ----------- ------------
Net change in unrealized appreciation/depreciation
of investments 23,379,629 - (1,229,453) 12,780,273 9,650,586
------------ ------------ ------------ ----------- ------------
Net realized and unrealized capital gain
from investments 97,351,216 - 4,907,477 35,666,735 25,607,340
------------ ------------ ------------ ----------- ------------
Increase From Operations $145,957,868 5,376,791 9,423,478 56,061,003 29,701,684
============ ============ ============ =========== ============
<CAPTION>
Asset
Investment Asset Manager
Overseas Grade Bond Manager Growth Contrafund
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss)
Income:
Dividends 3,125,344 893,883 9,368,191 16,207 1,546,310
Expenses (Note 4):
Administrative fee 10,888 4,731 32,379 4,150 12,729
Mortality and expense risk charge 317,285 130,712 643,711 109,260 408,744
------------ ------------ ------------ ----------- ------------
Net Investment income (loss) 2,797,171 758,440 8,692,101 (97,203) 1,124,837
Net Realized & Unrealized Capital Gain
From Investments
Net realized capital gain (loss) from sales of
investments:
Proceeds from sales 99,659,637 9,205,345 24,952,146 19,722,181 54,914,191
Cost of investments sold 94,749,656 9,234,687 22,617,678 17,332,667 45,541,492
------------ ------------ ------------ ----------- ------------
Net realized capital gain (loss) from sales of
investments 4,909,981 (29,342) 2,334,468 2,389,514 9,372,699
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period 2,110,872 233,733 9,001,676 47,668 4,493,639
End of the period (616,949) 793,238 12,360,535 607,443 3,752,020
------------ ------------ ------------ ----------- ------------
Net change in unrealized appreciation/depreciation
of investments (2,727,821) 559,505 3,358,859 559,775 (741,619)
------------ ------------ ------------ ----------- ------------
Net realized and unrealized capital gain
from investments 2,182,160 530,163 5,693,327 2,949,289 8,631,080
------------ ------------ ------------ ----------- ------------
Increase From Operations 4,979,331 1,288,603 14,385,428 2,852,086 9,755,917
============ ============ ============ =========== ============
<CAPTION>
Fidelity
Daily
Growth Growth & Income
Index 500 Opportunities Income Balanced Trust
Subaccount Subaccount (1) Subaccount (1) Subaccount (1) Subaccount
---------- -------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss)
Income: - 189,770 - 15,659
Dividends 1,147,905
Expenses (Note 4):
Administration fee 13,666 1,553 1,653 372 266
Mortality and expense risk charge 355,642 20,431 21,061 3,939 -
---------- --------- ---------- --------- ------
Net Investment income (loss) 778,597 (21,984) 167,056 (4,311) 15,393
Net Realized & Unrealized Capital Gain
From Investments
Net realized capital gain (loss) from sales of
investments:
Proceeds from sales 87,943,806 9,957,725 12,110,805 2,344,128 94,063
Cost of investments sold 78,703,409 9,589,706 11,765,693 2,286,353 94,063
---------- --------- ---------- --------- ------
Net realized capital gain (loss) from sales of
investments 9,240,397 368,019 345,112 57,775 -
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period 1,454,500 - - - -
End of the period 2,390,084 157,875 50,738 16,023 -
---------- --------- ---------- --------- ------
Net change in unrealized appreciation/depreciation
of investments 935,584 157,875 50,738 16,023 -
---------- --------- ---------- --------- ------
Net realized and unrealized capital gain
from investments 10,175,981 525,894 395,850 73,798 -
---------- --------- ---------- --------- ------
Increase From Operations 10,954,578 503,910 562,906 69,487 15,393
========== ========= ========== ========= ======
<CAPTION>
Fidelity
Capital and Fidelity
Income Cash
Fund Reserves
Subaccount Subaccount
---------- ----------
<S> <C> <C>
Net Investment Income (Loss)
Income: 11,284 4,029
Dividends
Expenses (Note 4):
Administration fee 70 92
Mortality and expense risk charge - -
---------- ----------
Net Investment income (loss) 11,214 3,937
Net Realized & Unrealized Capital Gain
From Investments
Net realized capital gain (loss) from sales of
investments:
Proceeds from sales 43,845 92
Cost of investments sold 41,027 92
---------- ----------
Net realized capital gain (loss) from sales of
investments 2,818 -
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period (4,344) -
End of the period 4,960 -
---------- ----------
Net change in unrealized appreciation/depreciation
of investments 9,304 -
---------- ----------
Net realized and unrealized capital gain
from investments 12,122 -
---------- ----------
Increase From Operations 23,336 3,937
========== ==========
</TABLE>
(1) Period from May 1, 1997 (commencement of operations) to December 31, 1997
See accompanying Notes to Financial Statements.
Page 2
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
Statements of Changes in Contract Owners' Equity
Years Ended December 31, 1997 and 1996, Except as Noted
<TABLE>
<CAPTION>
Money High
Market Income
Total Subaccount Subaccount
-------------------------- ----------------------- ----------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) $ 48,606,652 34,713,206 5,376,791 5,146,400 4,516,001 4,684,672
Net realized capital gain (loss) 73,971,587 48,783,983 - - 6,136,930 1,767,599
Net change in unrealized appreciation/
depreciation of investments 23,379,629 614,632 - - (1,229,453) 565,871
-------------- ------------ ------------ ------------ ----------- -----------
Increase (decrease) from operations 145,957,868 84,111,821 5,376,791 5,146,400 9,423,478 7,018,142
-------------- ------------ ------------ ------------ ----------- -----------
Contract Transactions
Net contract purchase payments 11,806,899 19,236,938 2,708,017 3,536,307 775,021 1,146,491
Transfer payments from (to) other subaccounts
or general account 85,262 (1) 5,858,356 17,794,992 (190,946) (565,904)
Contract terminations, withdrawals,
and other deductions (104,275,539) (39,567,671) (29,875,279) (12,815,398) (4,360,469) (2,749,780)
-------------- ------------ ------------ ------------ ----------- -----------
Increase (decrease) from contract transactions (92,383,378) (20,330,734) (21,308,906) 8,515,901 (3,776,394) (2,169,193)
-------------- ------------ ------------ ------------ ----------- -----------
Net increase (decrease) in contract owners'
-------------- ------------ ------------ ------------ ----------- -----------
equity 53,574,490 63,781,087 (15,932,115) 13,662,301 5,647,084 4,848,949
-------------- ------------ ------------ ------------ ----------- -----------
Contract Owners' Equity
Beginning of the period 783,398,059 719,616,972 125,342,437 111,680,136 61,457,568 56,608,619
-------------- ------------ ------------ ------------ ----------- -----------
End of the period $ 836,972,549 783,398,059 109,410,322 125,342,437 67,104,652 61,457,568
============== ============ ============ ============ =========== ===========
<CAPTION>
Equity
Income Growth Overseas
Subaccount Subaccount Subaccount
------------------------ ------------------------ -----------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) 20,394,268 9,027,231 4,094,344 8,968,657 2,797,171 605,034
Net realized capital gain (loss) 22,886,462 24,236,555 15,956,754 14,047,849 4,909,981 3,261,759
Net change in unrealized appreciation/
depreciation of investments 12,780,273 (4,499,155) 9,650,586 (4,738,733) (2,727,821) 350,988
------------ ----------- ----------- ----------- ---------- ----------
Increase (decrease) from operations 56,061,003 28,764,631 29,701,684 18,277,773 4,979,331 4,217,781
------------ ----------- ----------- ----------- ---------- ----------
Contract Transactions
Net contract purchase payments 1,830,003 4,151,108 1,190,589 3,338,190 394,643 812,829
Transfer payments from (to) other subaccounts
or general account (14,244,814) (36,950,439) (19,592,463) (15,212,679) (5,584,328) 647,333
Contract terminations, withdrawals,
and other deductions (27,682,225) (8,878,658) (13,900,101) (6,026,189) (3,294,011) (1,364,709)
------------ ----------- ----------- ----------- ---------- ----------
Increase (decrease) from contract transactions (40,097,036) (41,677,989) (32,301,975) (17,900,678) (8,483,696) 95,453
------------ ----------- ----------- ----------- ---------- ----------
Net increase (decrease) in contract owners'
------------ ----------- ----------- ----------- ---------- ----------
equity 15,963,967 (12,913,358) (2,600,291) 377,095 (3,504,365) 4,313,234
------------ ----------- ----------- ----------- ---------- ----------
Contract Owners' Equity
Beginning of the period 227,948,232 240,861,590 145,279,551 144,902,456 36,305,124 31,991,890
------------ ----------- ----------- ----------- ---------- ----------
End of the period 243,912,199 227,948,232 142,679,260 145,279,551 32,800,759 36,305,124
============ =========== =========== =========== ========== ==========
<CAPTION>
Investment Asset Asset
Grade Bond Manager Manager
Subaccount Subaccount Growth
------------------ ------------------ ----------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) 758,440 758,393 8,692,101 4,761,989 (97,203) 424,648
Net realized capital gain (loss) (29,342) 37,581 2,334,468 1,504,618 2,389,514 334,143
Net change in unrealized appreciation/
depreciation of investments 559,505 (482,781) 3,358,859 3,668,263 559,775 70,652
----------- ----------- ----------- ----------- ----------- -----------
Increase (decrease) from operations 1,288,603 313,193 14,385,428 9,934,870 2,852,086 829,443
----------- ----------- ----------- ----------- ----------- -----------
Contract Transactions
Net contract purchase payments 100,125 334,759 852,040 928,290 893,953 525,261
Transfer payments from (to) other subaccounts
or general account 3,419,943 188,386 (3,206,963) (12,356,923) 4,720,169 5,970,024
Contract terminations, withdrawals,
and other deductions (1,275,904) (1,018,945) (7,174,124) (5,121,431) (763,990) (165,953)
Increase (decrease) from contract
----------- ----------- ----------- ----------- ----------- -----------
transactions 2,244,164 (495,800) (9,529,047) (16,550,064) 4,850,132 6,329,332
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in contract owners'
----------- ----------- ----------- ----------- ----------- -----------
equity 3,532,767 (182,607) 4,856,381 (6,615,194) 7,702,218 7,158,775
----------- ----------- ----------- ----------- ----------- -----------
Contract Owners' Equity
Beginning of the period 16,540,767 16,723,374 77,156,677 83,771,871 9,358,687 2,199,912
----------- ----------- ----------- ----------- ----------- -----------
End of the period 20,073,534 16,540,767 82,013,058 77,156,677 17,060,905 9,358,687
=========== =========== =========== =========== =========== ===========
<CAPTION>
Growth
Contrafund Index 500 Opportunities
Subaccount Subaccount Subaccount (1)
---------------------------- ---------------------------- -----------------------
1997 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) $ 1,124,837 (46,352) 778,597 345,463 (21,984)
Net realized capital gain (loss) 9,372,699 2,261,439 9,240,397 1,328,095 368,019
Net change in unrealized appreciation/
depreciation of investments (741,619) 4,461,227 935,584 1,220,285 157,875
------------- ------------ -------------- ------------ -----------
Increase (decrease) from operations 9,755,917 6,676,314 10,954,578 2,893,843 503,910
------------- ------------ -------------- ------------ -----------
Contract Transactions
Net contract purchase payments 1,331,010 3,121,093 1,240,820 1,342,610 164,096
Transfer payments from (to) other subaccounts
or general account (3,483,116) 22,391,424 18,679,498 18,103,785 5,501,416
Contract terminations, withdrawals,
and other deductions (9,809,751) (576,052) (5,455,157) (737,844) (473,171)
------------- ------------ -------------- ------------ -----------
Increase (decrease) from contract transactions (11,961,857) 24,936,465 14,465,161 18,708,551 5,192,341
------------- ------------ -------------- ------------ -----------
Net increase (decrease) in contract owners' equity (2,205,940) 31,612,779 25,419,739 21,602,394 5,696,251
------------- ------------ -------------- ------------ -----------
Contract Owners' Equity
Beginning of the period 52,552,866 20,940,087 30,849,251 9,246,857 -
------------- ------------ -------------- ------------ -----------
End of the period $ 50,346,926 52,552,866 56,268,990 30,849,251 5,696,251
============= ============ ============== ============ ===========
<CAPTION>
Fidelity
Daily
Growth & Income
Income Balanced Trust
Subaccount (1) Subaccount (1) Subaccount
-------------------------- -------------------------- --------------------
1997 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) 167,056 (4,311) 15,393 19,776
Net realized capital gain (loss) 345,112 57,775 - -
Net change in unrealized appreciation/
depreciation of investments 50,738 16,023 - -
------------ ------------- -------------- -------------
Increase (decrease) from operations 562,906 69,487 15,393 19,776
------------ ------------- -------------- -------------
Contract Transactions
Net contract purchase payments 299,439 27,142 - -
Transfer payments from (to) other subaccounts
or general account 7,067,726 1,204,834 (64,076) (10,000)
Contract terminations, withdrawals,
and other deductions (131,987) (6,045) (29,585) (42,325)
------------ ------------- -------------- -------------
Increase (decrease) from contract transactions 7,235,178 1,225,931 (93,661) (52,325)
------------ ------------- -------------- -------------
Net increase (decrease) in contract owners' equity 7,798,084 1,295,418 (78,268) (32,549)
------------ ------------- -------------- -------------
Contract Owners' Equity
Beginning of the period - - 372,977 405,526
------------ ------------- -------------- -------------
End of the period 7,798,084 1,295,418 294,709 372,977
============ ============= ============== =============
<CAPTION>
Fidelity Fidelity
Government Capital and Fidelity
Securities Income Cash
Fund, Ltd. Fund Reserves
Subaccount Subaccount Subaccount
----------------- --------------- --------------
1996 1997 1996 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) 550 11,214 13,112 3,937 3,633
Net realized capital gain (loss) 596 2,818 3,749 - -
Net change in unrealized appreciation/
depreciation of investments (2,046) 9,304 61 - -
------- -------- -------- ------- -------
Increase (decrease) from operations (900) 23,336 16,922 3,937 3,633
------- -------- -------- ------- -------
Contract Transactions
Net contract purchase payments - 1 - - -
Transfer payments from (to) other subaccounts
or general account - 7 - 19 -
Contract terminations, withdrawals,
and other deductions (36,363) (43,740) (34,024) - -
------- -------- -------- ------- -------
Increase (decrease) from contract
------- -------- -------- ------- -------
transactions (36,363) (43,732) (34,024) 19 -
------- -------- -------- ------- -------
Net increase (decrease) in contract owners'
------- -------- -------- ------- -------
equity (37,263) (20,396) (17,102) 3,956 3,633
------- -------- -------- ------- -------
Contract Owners' Equity
Beginning of the period 37,263 158,205 175,307 75,717 72,084
------- -------- -------- ------- -------
End of the period - 137,809 158,205 79,673 75,717
======= ======== ======== ======= =======
</TABLE>
(1) Period from May 1, 1997 (commencement of operations) to December 31, 1997
See accompanying Notes to Financial Statements.
Page 3
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
Notes to Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization --- The Fidelity Variable Annuity Account ("Variable Account")
is a segregated investment account of PFL Life Insurance Company ("PFL
Life"), an indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AUSA"), a
holding company. AUSA is an indirect, wholly-owned subsidiary of AEGON nv, a
holding company organized under the laws of The Netherlands.
The Growth Opportunities, Growth and Income, and Balanced subaccounts
commenced operations on May 1, 1997.
The Variable Account is registered with the Securities Exchange Commission as
a Unit Investment Trust pursuant to provisions of the Investment Company Act
of 1940.
Investments --- Net purchase payments received by the Variable Account are
invested in the subaccounts of the eligible mutual funds, Variable Insurance
Products Fund , Variable Insurance Products Fund II and Variable Insurance
Products Fund III as selected by the contract owner. Transfers into the
subaccounts of the eligible funds are permitted from the formerly eligible
funds. Investments are stated at the closing net asset values per share on
December 31, 1997.
Realized capital gains and losses from sale of shares in the mutual funds are
determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed)
and dividend income is recorded on the ex-dividend date. Unrealized gains or
losses from investments in the mutual funds are credited or charged to
contract owners' equity.
Dividend Income --- Dividends received from the mutual fund investments are
reinvested to purchase additional mutual fund shares.
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
Notes to Financial Statements
December 31, 1997
2. Investments
A summary of the mutual fund investment at December 31, 1997 follows:
<TABLE>
<CAPTION>
Net Asset Value
Number of Per Share
Shares Held (in dollars) Market Value Cost
--------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Variable Insurance Products Fund:
Money Market Portfolio 109,409,481.930 $ 1.00 $ 109,409,482 $109,409,482
High Income Portfolio 4,941,433.341 13.58 67,104,665 65,753,432
Equity Income Portfolio 10,045,808.231 24.28 243,912,224 191,569,909
Growth Portfolio 3,845,802.099 37.10 142,679,258 125,542,138
Overseas Portfolio 1,708,372.781 19.20 32,800,757 33,417,706
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 1,598,211.153 12.56 20,073,532 19,280,294
Asset Manager Portfolio 4,553,750.437 18.01 82,013,045 69,652,510
Asset Manager Growth Portfolio 1,042,843.194 16.36 17,060,915 16,453,472
Contrafund Portfolio 2,524,923.273 19.94 50,346,970 46,594,950
Index 500 Portfolio 491,904.841 114.39 56,268,995 53,878,911
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 295,602.015 19.27 5,696,251 5,538,376
Growth & Income Portfolio 622,352.997 12.53 7,798,083 7,747,345
Balanced Portfolio 88,848.882 14.58 1,295,417 1,279,394
Fidelity Daily Income Trust 294,972.442 1.00 294,972 294,972
Fidelity Capital and Income Fund 13,773.730 10.01 137,875 132,915
Fidelity Cash Reserves 79,764.770 1.00 79,765 79,765
------------- ------------
$ 836,972,206 $746,625,571
============= ============
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, or
Commencement of Operations to December 31,
-----------------------------------------------------------------
1997 1996
-------------------------------- -----------------------------
Purchases Sales Purchases Sales
--------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Variable Insurance Products Fund:
Money Market Portfolio $ 266,120,253 282,028,442 254,065,237 240,469,711
High Income Portfolio 110,016,938 109,277,373 115,569,194 113,075,656
Equity Income Portfolio 56,981,867 76,684,279 65,599,367 98,352,734
Growth Portfolio 92,562,507 120,769,794 136,042,802 145,037,702
Overseas Portfolio 93,973,249 99,659,637 49,786,187 49,100,694
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 12,208,000 9,205,345 10,422,577 10,165,771
Asset Manager Portfolio 24,115,151 24,952,146 11,267,371 23,099,740
Asset Manager Growth Portfolio 24,474,997 19,722,181 16,516,916 9,763,409
Contrafund Portfolio 44,076,789 54,914,191 54,378,350 29,493,250
Index 500 Portfolio 103,187,512 87,943,806 51,483,062 32,431,521
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 15,128,082 9,957,725 0 0
Growth & Income Portfolio 19,513,038 12,110,805 0 0
Balanced Portfolio 3,565,747 2,344,128 0 0
Fidelity Daily Income Trust 16,622 94,063 48,408 81,047
Fidelity Government Securities Fund, Ltd. -- -- -- 35,721
Fidelity Capital and Income Fund 11,361 43,845 13,170 34,164
Fidelity Cash Reserves 4,252 92 3,708 92
------------- ------------- ------------ -----------
$ 865,956,365 909,707,852 765,196,349 751,141,212
============= ============= ============ ===========
</TABLE>
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
Notes to Financial Statements
December 31, 1997
3. Contract Owners' Equity
A summary of deferred annuity contracts terminable by owners at December 31,
1997 follows:
<TABLE>
<CAPTION>
Accumulation Accumulation Total
Units Owned Unit Value Contract Value
--------------- -------------- ---------------
<S> <C> <C> <C>
Variable Insurance Products Fund:
Money Market Portfolio 43,319,514.745 $ 2.525659 $ 109,410,322
High Income Portfolio 17,495,330.353 3.835575 67,104,652
Equity Income Portfolio 57,352,295.075 4.252876 243,912,199
Growth Portfolio 30,726,907.924 4.643463 142,679,260
Overseas Portfolio 15,101,589.750 2.172007 32,800,759
Variable Insurance Products Fund II:
Investment Grade Bond Portfolio 10,859,598.713 1.848460 20,073,534
Asset Manager Portfolio 33,046,715.565 2.481731 82,013,058
Asset Manager Growth Portfolio 11,443,467.081 1.490886 17,060,905
Contrafund Portfolio 33,372,392.534 1.508640 50,346,926
Index 500 Portfolio 31,990,011.025 1.758955 56,268,990
Variable Insurance Products Fund III:
Growth Opportunities Portfolio 4,621,108.553 1.232659 5,696,251
Growth & Income Portfolio 6,281,887.718 1.241360 7,798,084
Balanced Portfolio 1,126,357.174 1.150095 1,295,418
Fidelity Daily Income Trust 86,061.186 3.424415 294,709
Fidelity Capital and Income Fund 15,980.956 8.623329 137,809
Fidelity Cash Reserves 23,137.187 3.443500 79,673
--------------
$ 836,972,549
==============
</TABLE>
At December 31, 1997 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
Money High Equity
Market Income Income Growth Overseas
Total Subaccount Subaccount Subaccount Subaccount Subaccount
----- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains $746,625,914 109,410,322 65,753,419 191,569,884 125,542,140 33,417,708
Adjustment for appreciation/
depreciation to market value 90,346,635 - 1,351,233 52,342,315 17,137,120 (616,949)
-------------- ------------- ------------- ------------- ------------- -------------
Total Contract Owners' Equity $836,972,549 109,410,322 67,104,652 243,912,199 142,679,260 32,800,759
============== ============= ============= ============= ============= =============
<CAPTION>
A summary of changes in contract owners' account units follows
Money High Equity
Market Income Income Growth Overseas
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at 1/1/96 48,392,069 19,488,863 81,601,360 43,498,210 18,307,715
Units purchased 1,501,866 370,044 1,348,684 939,692 443,822
Units redeemed and transferred 2,043,008 (1,154,776) (14,830,620) (6,110,947) (253,044)
------------- ------------- ------------- ------------- --------------
Units outstanding 12/31/96 51,936,943 18,704,131 68,119,424 38,326,955 18,498,493
Units purchased 1,099,198 222,731 485,233 287,154 183,589
Units redeemed and transferred (9,716,626) (1,431,532) (11,252,362) (7,887,201) (3,580,492)
------------- ------------- ------------- ------------- --------------
Units outstanding 12/31/97 43,319,515 17,495,330 57,352,295 30,726,908 15,101,590
============= ============= ============= ============= ==============
<CAPTION>
At December 31, 1997 contract owners' equity was comprised of:
Asset
Investment Asset Manager
Grade Bond Manager Growth Contrafund Index 500
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains 19,280,296 69,652,523 16,453,462 46,594,906 53,878,906
Adjustment for appreciation/
depreciation to market value 793,238 12,360,535 607,443 3,752,020 2,390,084
------------ ------------ ------------- ------------ ------------
Total Contract Owners' Equity 20,073,534 82,013,058 17,060,905 50,346,926 56,268,990
============ ============ ============= ============ ============
<CAPTION>
A summary of changes in contract owners' account units follows
Asset
Investment Asset Manager
Grade Bond Manager Growth Contrafund Index 500
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at 1/1/96 10,019,781 45,933,251 2,178,271 20,570,759 8,432,120
Units purchased 199,705 485,107 479,425 2,899,569 1,094,231
Units redeemed and transferred (537,701) (9,205,742) 5,130,909 19,430,811 13,562,090
------------- ------------- ------------ ------------- -------------
Units outstanding 12/31/96 9,681,785 37,212,616 7,788,605 42,901,139 23,088,441
Units purchased 57,316 376,670 673,816 1,014,090 812,591
Units redeemed and transferred 1,120,498 (4,542,570) 2,981,046 (10,542,836) 8,088,979
------------- ------------- ------------ -------------- ------------
Units outstanding 12/31/97 10,859,599 33,046,716 11,443,467 33,372,393 31,990,011
============= ============= ============ ============== ============
<CAPTION>
At December 31, 1997 contract owners' equity was comprised of:
Fidelity Fidelity
Daily Capital and Fidelity
Growth Growth & Income Income Cash
Opportunities Income Balanced Trust Fund Reserves
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains 5,538,376 7,747,346 1,279,395 294,709 132,849 79,673
Adjustment for appreciation/
depreciation to market value 157,875 50,738 16,023 - 4,960 -
----------- ----------- ----------- --------- --------- --------
Total Contract Owners' Equity 5,696,251 7,798,084 1,295,418 294,709 137,809 79,673
=========== =========== =========== ========= ========= ========
<CAPTION>
A summary of changes in contract owners' account units follows
Fidelity Fidelity Fidelity
Daily Capital and Fidelity Government
Growth Growth & Income Income Cash Securities
Opportunities Income Balanced Trust Fund Reserves Fund, Ltd.
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at 1/1/96 - - - 131,064 25,993 23,192 8
Units purchased - - - - - - -
Units redeemed and transferred - - - (16,402) (4,944) (28) (8)
------------ ------------ ----------- ------------ ----------- ---------- ----------
Units outstanding 12/31/96 - - - 114,662 21,049 23,164 -
Units purchased 142,747 257,468 25,011 - - - -
Units redeemed and transferred 4,478,362 6,024,420 1,101,346 (28,601) (5,068) (27) -
------------ ------------ ------------ ----------- ----------- ---------- ----------
Units outstanding 12/31/97 4,621,109 6,281,888 1,126,357 86,061 15,981 23,137 -
============ ============ ============ =========== =========== ========== ==========
</TABLE>
<PAGE>
THE FIDELITY VARIABLE ANNUITY ACCOUNT
Notes to Financial Statements
December 31, 1997
4. Mortality and Expense Risk Charge
Administrative charges include an annual charge of $35 per contract. Charges
for administrative fees to the variable annuity contracts are an expense of the
Variable Account.
PFL Life deducts a daily charge equal to an annual rate of .80% of the value of
the contract owners' individual account of the eligible funds as a charge for
assuming the mortality risk.
5. Taxes
Operations of the Variable Account form a part of PFL Life, which is taxed as
a life insurance company under Subchapter L of the Internal Revenue Code of
1986, as amended (the "Code"). The operations of the Variable Account are
accounted for separately from other operations of PFL Life for purposes of
federal income taxation. The Variable Account is not separately taxable as a
regulated investment company under Subchapter M of the Code and is not
otherwise taxable as an entity separate from PFL Life. Under existing federal
income tax laws, the income of the Variable Account, to the extent applied to
increase reserves under the variable annuity contracts, is not taxable to PFL
Life.
6. Year 2000 (Unaudited)
PFL Life and its parent have adopted and have in place a Year 2000 Assessment
and Planning Project (the "Project") to review and analyze its information
technology and systems to determine if they are Year 2000 compatible. PFL
Life has begun to convert, remediate or modify, where necessary, critical
data processing systems. It is contemplated that the Project will be
substantially completed by early 1999. PFL Life does not expect this Project
to have a significant effect on operations. However, to mitigate the effect
of outside influences upon the success of the Project, PFL Life has
undertaken communications with its significant customers, suppliers and other
third parties to determine their Year 2000 compatibility and readiness.
Management believes that the issues associated with the Year 2000 will be
resolved with no material financial impact on PFL Life.
Since the Year 2000 computer problem, and its resolution, is complex and
multifaceted, the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that systems
or equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including
testing procedures, there is no certainty that any company will achieve
complete success. Notwithstanding the efforts or results of PFL Life, its
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond its knowledge
or control.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
a) All required financial statements are included in Part B of this
Registration Statement.
b) Exhibits:
(1) Resolution of the Board of Directors of PFL Life
Insurance Company establishing the Fidelity Variable
Annuity Account. Note 1.
(2) Not applicable.
(3) (i) Distribution Agreement between Fidelity
Distributiors Corporation (Underwriter) and
PFL Life Insurance Company (Depositor). Note 2.
(ii) Specimen selling group agreement. Note 3.
(4) Form for the Fidelity Variable Annuity Account Contract.
Note 6 .
(5) Application for the Fidelity Variable Annuity Account
Contract. Note 1.
(6) (i) Articles of Incoproration of PFL Life Insurance
Company. Note 6.
(7) Not applicable
(8) (i) Administrative Service Agreement. Note 5.
(ii) Amendment and Assignment of Administrative Services
Agreement. Note 6.
(iii) Second Amendment to Administrative Service
Agreement. Note 7.
(iv) Participation Agreement between Variable Insurance
Products Fund III, Fidelity Distributions
Corporation (Underwriter), and PFL Life Insurance
Company (Depositor). Note 10.
(v) Termination Notice of Administrative Services
Agreement by and between PFL Life Insurance Company
and Vantage Computer Systems, Inc.
(vi) Participation Agreement between Variable Insurance
Products Funds I and II, Fidelity Distributors
Corporation and PFL Life Insurance Company, and
Addendums thereto. Note 11.
(vii) Addendum to Participation Agreement between Variable
Insurance Product Funds, Fidelity Distribution
Corporation and PFL Life Insurance Company. Note 11.
(9) (i) Opinion of counsel as to the legality of the
securities being registered. Note 1.
(ii) Consent of counsel to use its opinion. Note 1.
C - 1
<PAGE>
(10)(i) Consent of Independent Auditors. Note 11.
(10)(ii) Opinion and Consent of Actuary. Note 11.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Powers of Attorney (P.S. Baird, W.L. Busler,
P.E. Falconio, D.C. Kolsrud, R.J. Kontz) (Note
8). (Craig D. Vermie) Note 9. (Brenda K.
Clancy) Note 10.
Note 1 Filed with Post-Effective Amendment No. 8 to Form N-4,
File No. 2-65365 filed on March 2, 1987.
Note 2 Incorporated by reference to Exhibit 3(a) to Form N-8B-2,
File No. 811-2954 filed April 27, 1984, on behalf of the
Fidelity Variable Annuity Account (formerly the PFL
Variable Separate Account), and filed herewith.
Note 3 Incorporated by reference to Exhibit 3(b) to Form N-8B-2,
File No. 811-2954 filed April 27, 1984, on behalf of the
Fidelity Variable Annuity Account (formerly the PFL
Variable Separate Account), and filed herewith.
Note 4 Filed with Post-Effective Amendment No. 9, Registration
No. 2-65365, Exhibit 4 to Form N-4, filed on April 27,
1987.
Note 5 Filed with Pre-Effective Amendment No. 4 to Form S-6,
File No. 2-65365 filed on August 14, 1980.
Note 6 Filed with Post-Effective Amendment No. 1 to Form N-4,
Registration No. 33-37498, filed March 29, 1991.
Note 7 Filed with Post-Effective Amendment No. 2 to Form N-4,
Registration No. 33-37498, filed April 29, 1992.
Note 8 Filed with Post-Effective Amendment No. 5 to Form N-4,
Registration No. 33-37478, filed April 24, 1995.
Note 9 Filed with Post-Effective Amendment No. 6 to Form N-4,
Registration No. 33-37478, filed April 19, 1996.
Note 10 Filed with Post-Effective Amendment No. 7 to Form N-4,
Registration No. 33-37498 on April 29, 1997.
Note 11 Filed herewith.
C - 2
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
---------------------------------------
Principal Positions
Name and and Offices with
Business Address Depositor
- ---------------- ---------
Craig D. Vermie Director, Vice President,
1111 North Charles Street Secretary and Corporate
Baltimore, MD 21201 Counsel
William L. Busler Director, Chairman of the
4333 Edgewood Road N.E. Board and President
Cedar Rapids, IA 52499
Patrick E. Falconio Director, Senior Vice
4333 Edgewood Road N.E. President and Chief
Cedar Rapids, IA 52499 Investment Officer
Robert J. Kontz Vice President and
4333 Edgewood Road N.E. Controller
Cedar Rapids, IA 52499
Brenda K. Clancy Vice President and
4333 Edgewood Road N.E. Treasurer and Chief Financial Officer
Cedar Rapids, IA 52499
Patrick S. Baird Director, Senior Vice President
4333 Edgewood Road N.E. and Chief Operating
Cedar Rapids, IA 52499 Officer
Douglas C. Kolsrud Director, Vice President
4333 Edgewood Road N.E. and Corporate Actuary
Cedar Rapids, IA 52499
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE DEPOSITOR OR REGISTRANT
--------------------------------
<TABLE>
<CAPTION>
Jurisdication of Percent of Voting
Name Incorporation Securities Owned Business
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C>
AEGON N.V. Netherlands 53.63% of Vereniging Holding company
Corporation AEGON Netherlands
Membership Association
Groninger Financieringen B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON Netherland N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON Nevak Holding B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON International N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
Voting Trust Delaware Voting Trust
Trustees:
K.J. Storm
Donald J. Shepard
H.B. Van Wijk
Dennis Hersch
AEGON U.S. Holding Delaware 100% of Voting Trust Holding company
Corporation
Short Hills Management New Jersey 100% of AEGON U.S. Holding company
Company Holding Corporation
CORPA Reinsurance New York 100% of AEGON U.S. Holding company
Company Holding Corporation
AEGON Management Indiana 100% of AEGON U.S. Holding company
Company Holding Corporation
RCC North America Inc. Delaware 100% of AEGON U.S. Holding company
Holding Corporation
AEGON USA, Inc. Iowa 100% AEGON U.S. Holding company
Holding Corporation
AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company
Monumental General Insurance Maryland 100% AUSA Holding Co. Holding company
Group, Inc.
Trip Mate Insurance Agency, Inc. Kansas 100% Monumental General Sale/admin. of travel
Insurance Group, Inc. insurance
Monumental General Maryland 100% Monumental General Provides management srvcs.
Administrators, Inc. Insurance Group, Inc. to unaffiliated third party
administrator
Executive Management and Maryland 100% Monumental General Provides actuarial consulting
Consultant Services, Inc. Administrators, Inc. services
Monumental General Mass Maryland 100% Monumental General Marketing arm for sale of
Marketing, Inc. Insurance Group, Inc. mass marketed insurance
coverages
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment advisor
Advisors, Inc.
Diversified Investors Securities Delaware 100% Diversified Investment Broker-Dealer
Corp. Advsiors, Inc.
AEGON USA Securities, Inc. Iowa 100% AUSA Holding Co. Broker-Dealer
Supplemental Ins. Division, Inc. Tennessee 100% AUSA Holding Co. Insurance
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Resources, Inc. Insurance agency
Canadian Dealer Network Inc.
AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor
Management, Inc.
AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate
Advisors, Inc. administrative and real
estate investment services
Quantra Corporation Delaware 100% AEGON USA Realty Real estate and financial
Advisors, Inc. software production and sales
Quantra Software Corporation Delaware 100% Quantra Corporation Manufacture and sell
mortgage loan and security
management software
Landauer Realty Advisors, Inc. Iowa 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Landauer Associates, Inc. Delaware 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Realty Information Systems, Inc. Iowa 100% AEGON USA Realty Information Systems for
Advisors, Inc. real estate investment
management
AEGON USA Realty Iowa 100% AEGON USA Real estate management
Management, Inc Realty Advisors, Inc.
USP Real Estate Investment Trust Iowa 21.89% First AUSA Life Ins. Co. Real estate investment trust
13.11% PFL Life Ins. Co.
4.86% Bankers United Life
Assurance Co.
Cedar Income Fund, Ltd. Iowa 16.73% PFL Life Ins. Co. Real estate investment trust
3.77% Bankers United Life
Assurance Company
3.38% Life Investors Co. of
America
1.97% AEGON USA Realty
Advisors, Inc.
.18% First AUSA Life Ins. Co.
RCC Properties Limited Iowa AEGON USA Realty Advisors, Limited Partnership
Partnership Inc. is General Partner and 5%
owner.
AUSA Financial Markets, Inc. Iowa 100% AUSA Holding Co. Marketing
Endeavor Investment Advisors California 49.9% AUSA Financial General Partnership
Markets, Inc.
Universal Benefits Corporation Iowa 100% AUSA Holding Co. Third party administrator
Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile
America, Inc. extended maintenance
contracts
Massachusetts Fidelity Trust Co. Iowa 100% AUSA Holding Co. Trust company
Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial counseling
for employees and agents of
affiliated companies
Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
ZCI, Inc. Alabama 100% Zahorik Company, Inc. Insurance agency
AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment advisor
Services, Inc.
Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer
ISI Insurance Agency, Inc. California 100% Intersecurities, Inc. Insurance agency
ISI Insurance Agency Ohio 100% ISI Insurance Agency, Inc. Insurance agency
of Ohio, Inc.
ISI Insurance Agency Texas 100% ISI Insurance Agency, Inc. Insurance agency
of Texas, Inc.
ISI Insurance Agency Massachusetts 100% ISI Insurance Agency Inc. Insurance Agency
of Massachusetts, Inc.
Associated Mariner Financial Michigan 100% Intersecurities, Inc. Holding co./management
Group, Inc. services
Mariner Financial Services, Inc. Michigan 100% Associated Mariner Broker/Dealer
Financial Group, Inc.
Mariner Planning Corporation Michigan 100% Mariner Financial Financial planning
Services, Inc.
Associated Mariner Agency, Inc. Michigan 100% Associated Mariner Insurance agency
Financial Group, Inc.
Associated Mariner Agency Hawaii 100% Associated Mariner Insurance agency
of Hawaii, Inc. Agency, Inc.
Associated Mariner Ins. Agency Massachusetts 100% Associated Mariner Insurance agency
of Massachusetts, Inc. Agency, Inc.
Associated Mariner Agency Ohio 100% Associated Mariner Insurance agency
Ohio, Inc. Agency, Inc.
Associated Mariner Agency Texas 100% Associated Mariner Insurance agency
Texas, Inc. Agency, Inc.
Associated Mariner Agency New Mexico 100% Associated Mariner Insurance agency
New Mexico, Inc. Agency, Inc.
Mariner Mortgage Corp. Michigan 100% Associated Mariner Mortgage origination
Financial Group, Inc.
Idex Investor Services, Inc. Florida 100% AUSA Holding Co. Shareholder services
Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor
50% Janus Capital Corp.
IDEX II Series Fund Massachusetts Various Mutual fund
IDEX Fund Massachusetts Various Mutual fund
IDEX Fund 3 Massachusetts Various Mutual fund
First AUSA Life Insurance Maryland 100% AEGON USA, Inc. Insurance holding company
Company
AUSA Life Insurance New York 100% First AUSA Life Insurance
Company, Inc. Insurance Company
Life Investors Insurance Iowa 100% First AUSA Life Ins. Co. Insurance
Company of America
Bankers United Life Iowa 100% Life Investors Ins. Insurance
Assurance Company Company of America
Life Investors Agency Iowa 100% Life Investors Ins. Marketing
Group, Inc. Company of America
PFL Life Insurance Company Iowa 100% First AUSA Life Ins. Co. Insurance
AEGON Financial Services Minnesota 100% PFL Life Insurance Co. Marketing
Group, Inc.
AEGON Assignment Corporation Kentucky 100% AEGON Financial Administrator of structured
Services Group, Inc. settlements
Southwest Equity Life Ins. Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Iowa Fidelity Life Insurance Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Western Reserve Life Assurance Ohio 100% First AUSA Life Ins. Co. Insurance
Co. of Ohio
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Inc. Florida 100% Western Reserve Life Provides administration for
Assurance Co. of Ohio affiliated mutual fund
WRL Investment Florida 100% Western Reserve Life Registered investment advisor
Management, Inc. Assurance Co. of Ohio
Monumental Life Insurance Co. Maryland 100% First AUSA Life Ins. Co. Insurance
AEGON Special Markets Maryland 100% Monumental Life Ins. Co. Marketing
Group, Inc.
Monumental General Casualty Co. Maryland 100% First AUSA Life Ins. Co. Insurance
United Financial Services, Inc. Maryland 100% First AUSA Life Ins. Co. General agency
Bankers Financial Life Ins. Co. Arizona 100% First AUSA Life Ins. Co. Insurance
The Whitestone Corporation Maryland 100% First AUSA Life Ins. Co. Insurance agency
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Commonwealth General Delaware 100% AEGON USA Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Inc. Kentucky 100% CGC Provider of srvcs. to ins. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security Life
Insurance Company
Durco Agency, Inc. Virginia 100% Benefit Plans, Inc. General agent
Commonwealth General. Kentucky 100% CGC Administrator of structured
Assignment Corporation settlements
Providian Financial Services,
Inc. Pennsylvania 100% CGC Financial services
AFSG Securities Corporation Pennsylvania 100% CGC Broker-Dealer
PB Investment Advisors, Inc. Delaware 100% CGC Registered investment advisor
Diversified Financial Products Delaware 100% CGC Provider of investment,
Inc. marketing and admin.
services to ins. cos.
AEGON USA Real Estate Delaware 100% Diversified Financial Real estate and mortgage
Services, Inc. Products Inc. holding company
Capital Real Estate Delaware 100% CGC Furniture and equiment lessor
Development Corporation
Capital General Development Delaware 100% CGC Holding company
Corporation
Commonwealth Life Kentucky 100% Capital General Insurance company
Insurance Company Development Corporation
Agency Holding I, Inc. Delaware 100% Commonwealth Life Investment subsidiary
Insurance Company
Agency Investments I, Inc. Delaware 100% Agency Holding I, Inc. Investment subsidiary
Peoples Security Life North Carolina 100% Capital General Insurance company
Insurance Company Development Corporation
Ammest Realty Corporation Texas 100% Peoples Security Life Special purpose subsidiary
Insurance Company
Agency Holding II, Inc. Delaware 100% Peoples Security Life Investment subsidiary
Insurance Company
Agency Investments II, Inc. Delaware 100% Agency Holding II, Inc. Investment subsidiary
Agency Holding III, Inc. Delaware 100% Peoples Security Life Investment subsidiary
Insurance Company
Agency Investments III, Inc. Delaware 100% Agency Holding III, Inc. Investment subsidiary
JMH Operating Company, Inc. Mississippi 100% Peoples Security Life Real estate holdings
Insurance Company
Capital Security Life Ins. Co. North Carolina 100% Capital General Insurance company
Development Corporation
Independence Automobile Florida 100% Capital Security Automobile Club
Association, Inc. Life Insurance Company
Independence Automobile Georgia 100% Capital Security Automobile Club
Club, Inc. Life Insurance Company
Capital 200 Block Corporation Delaware 100% CGC Real estate holdings
Capital Broadway Corporation Kentucky 100% CGC Real estate holdings
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Inc. Pennsylvania 100% CGC Provider of management
(EIN 23-1720755) support services
National Home Life Corporation Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Corporation Agency, Inc.
Association Consultants, Inc. Illinois 100% Ampac Insurance TPA license-holder
Agency, Inc.
Valley Forge Associates, Inc. Pennsylvania 100% Ampac Insurance Furniture & equipment lessor
Agency, Inc.
Veterans Benefits Plans, Inc. Pennsylvania 100% Ampac Insurance Administator of group
Agency, Inc. insurance programs
Veterans Insurance Services, Inc. Delaware 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Financial Planning Services, Inc. Dist. Columbia 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Providian Auto and Home Missouri 100% CGC Insurance company
Insurance Company
Academy Insurance Group, Inc. Delaware 100% CGC Holding company
Academy Life Insurance Co. Missouri 100% Academy Insurance Insurance company
Group, Inc.
Pension Life Insurance New Jersey 100% Academy Insurance Insurance company
Company of America Group, Inc.
Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Development Corp. Inc. Kansas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Insurance Agency, Inc. California 100% Academy Insurance General agent
Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose subsidiary
Insurance Agency, Inc. Group, Inc.
Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ampac, Inc. Texas 100% Academy Insurance Managing general agent
Group, Inc.
Ampac Insurance Agency, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
(EIN 23-2364438) Group, Inc.
Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt. services
Group, Inc.
Force Financial Group, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Force Financial Services, Inc. Massachusetts 100% Force Fin. Group, Inc. Special-purpose subsidiary
Military Associates, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club
Group, Inc.
NCOAA Management Company Texas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin. services
Services, Inc. Group, Inc.
Unicom Administrative Germany 100% Unicom Administrative Provider of admin. servcies
Services, GmbH Services, Inc.
Providian Property and Casualty Kentucky 100% Providian Auto and Insurance company
Insurance Company Home Insurance Company
Providian Fire Insurance Co. Kentucky 100% Providian Property Insurance company
and Casualty Insurance Co.
Capital Liberty, L.P. Delaware 79.2% Commonwealth Life Holding Company
Insurance Company
19.8% Peoples Security Life
Insurance Company
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose subsidiary
Caicos Islands
Providian Life and Health Missouri 3.7% CGC Insurance company
Insurance Company 15.3% Peoples Security Life
Insurance Company
20% Capital Liberty, L.P.
61% Commonwealth Life
Insurance Company
Veterans Life Insurance Co. Illinois 100% Providian Life and Insurance company
Health Insurance Company
Peoples Benefit Services, Inc. Pennsylvania 100% Veterans Life Ins. Co. Special-purpose subsidiary
First Providian Life and New York 100% Veterans Life Ins. Co. Insurance Company
Health Insurance Company
</TABLE>
2/11/98
C - 3
<PAGE>
ITEM 27. NUMBER OF CONTRACTOWNERS
------------------------
The number of Contractowners of Registrant as of December 31,
1997, was 7,936.
ITEM 28. INDEMNIFICATION
---------------
The Iowa Code (Sections 490.850 et. seq.) provides for permissive
--------
indemnification in certain situations, mandatory indemnification
in certain situations. The Code also specifies procedures for
determining when indemnification payments can be made.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Depositor pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person 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.
C - 4
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
----------------------
(a) Fidelity Brokerage Services, Inc. and its affiliate, Fidelity
Insurance Agency, Inc. act as distributor of the contracts.
Fidelity Brokerage Services, Inc. acts as distributor for other
variable annuity and variable life contracts registered by
separate accounts of Fidelity Investments Life Insurance Company
and Empire Fidelity Investments Life Insurance Company.
(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* With Underwriter
---------------------------------------------------
<S> <C>
Roger T. Servison Director
Rodney R. Rohda Director
Robert P. Mazzarella Director and President
J. Peter Benzie Executive Vice President
Edward L. McCartney Executive Vice President
Bruce MacAlpine Vice President
Jeffrey R. Larsen Legal Counsel and Clerk
Jay Freedman Assistant Clerk
Kenneth Klipper Treasurer
Gary Greenstein Assistant Treasurer
Linda Holland Compliance Officer
Richard Blades Compliance Registered Options
Principal
*82 Devonshire Street, Boston, MA 02109.
</TABLE>
(c) Commission and other compensation received by principal
underwriter.
Fidelity Insurance Agency, Inc. receives insurance
commissions for its services as an insurance general agent in
distributing the Contracts. Fidelity Insurance Agency, Inc.
is an affiliate of the principal underwriter of the
Contracts, Fidelity Brokerage Services, Inc., a registered
broker-dealer. Fidelity Insurance Agency, Inc. received
$4,869,350 in commissions from the Registrant during the
last fiscal year. No other
C - 5
<PAGE>
commission or compensation was received by the principal
underwriter, directly or indirectly, from the Registrant
during the fiscal year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated
thereunder, are maintained by PFL Life Insurance Company at 4333
Edgewood Road N.E., Cedar Rapids, IA 52499.
ITEM 31. MANAGEMENT SERVICES
-------------------
Not applicable.
ITEM 32. UNDERTAKINGS
------------
(a) Registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as necessary to ensure
that the audited financial statements in the registration statement are never
more than 16 months old for so long as Premiums under the Policy may be
accepted.
(b) Registrant undertakes that it will include either (i) 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 or
(ii) a space in the Policy application that an applicant can check to request a
Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request at the address or phone number
listed in the Prospectus.
(d) PFL Life Insurance Company hereby represents that the fees and
charges deducted under the policies, in the aggregate, are
reasonable in relation to the services rendered, the expenses to
be incurred, and the risks assumed by PFL Life Insurance
Company.
PARTC
C - 6
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant hereby certifies that this Amendment to the Registration
Statement meets the requirements for effectiveness pursuant to paragraph (b) of
Rule 485 and has caused this Registration Statement to be signed on its behalf,
in the City of Cedar Rapids and State of Iowa, on this 20th day of April, 1998.
FIDELITY VARIABLE
ANNUITY ACCOUNT
PFL LIFE INSURANCE COMPANY
Depositor
/s/ William L. Busler
----------------------
William L. Busler
President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the duties indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- -------------------------- ----------------------------- -----------------
<S> <C> <C>
/s/ Patrick S. Baird Director April 20, 1998
- --------------------------
Patrick S. Baird
/s/ Craig D. Vermie Director April 20, 1998
- --------------------------
Craig D. Vermie
/s/ William L. Busler Director April 20, 1998
- -------------------------- (Principal Executive Officer)
William L. Busler
/s/ Patrick E. Falconio Director April 20, 1998
- --------------------------
Patrick E. Falconio
/s/ Douglas C. Kolsrud Director April 20, 1998
- --------------------------
Douglas C. Kolsrud
/s/ Robert J. Kontz Vice President and April 20, 1998
- -------------------------- Corporate Controller
Robert J. Kontz
/s/ Brenda K. Clancy Treasurer April 20, 1998
- --------------------------
Brenda K. Clancy
</TABLE>
<PAGE>
Registration No.
33-37498
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
EXHIBITS
TO
FORM N-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FOR
FIDELITY VARIABLE ANNUITY ACCOUNT
---------------
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page No.*
- ----------- ---------------------- ---------
<S> <C> <C>
(3)(i) Distribution Agreement between Fidelity Distributors
Corporation (Underwriter) and PFL Life Insurance Company
(Depositor).
(3)(ii) Specimen Selling Group Agreement.
(8)(v) Termination Notice of Administrative Services Agreement
by and between PFL Life Insurance Company and Vantage
Computer Systems, Inc.
(8)(vi) Participation Agreement between Variable Insurance
Products Funds I and II, Fidelity Distributors
Corporation and PFL Life Insurance Company, and
Addendums thereto.
(8)(vii) Addendum to Participation Agreement between Variable
Insurance Products Funds, Fidelity Distributors
Corporation and PFL Life Insurance Company.
(10)(i) Consent of Independent Auditors
(10)(ii) Opinion and Consent of Actuary
</TABLE>
- -------------------------------
* Page numbers included only in manually executed original.
<PAGE>
EXHIBIT (3)(I)
--------------
DISTRIBUTION AGREEMENT BETWEEN
FIDELITY DISTRIBUTORS CORPORATION (UNDERWRITER)
AND PFL LIFE INSURANCE COMPANY (DEPOSITOR).
<PAGE>
PRINCIPAL UNDERWRITER AGREEMENT
-------------------------------
IN IS HEREBY AGREED by and between PACIFIC FIDELITY LIFE INSURANCE COMPANY
("PFL") on behalf of the FIDELITY VARIABLE ANNUITY ACCOUNT and FIDELITY
DISTRIBUTORS CORPORATION ("FDC") as follows:
I
PFL proposes to issue and sell variable annuity contracts ("Annuity Contracts")
to the public through FDC. FDC agrees to provide sales services subject to the
terms and conditions hereof. Annuity Contracts to be sold are more fully
described in the registration statement and the prospectus hereinafter
mentioned. Such Annuity Contracts will be issued by PFL through the FIDELITY
VARIABLE ANNUITY ACCOUNT.
II
PFL grants to FDC the non-exclusive right, during the term of this Agreement,
subject to registration requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 and the provisions of the Securities Exchange Act
of 1934, to distribute the Annuity Contracts issued through the FIDELITY
VARIABLE ANNUITY ACCOUNT. FDC will sell Annuity Contracts at price to be set by
PFL and will make such sales to purchasers permitted to buy such Annuity
Contracts as specified in the Prospectus.
III
PFL reserves the right to review and accept or reject all applications for
Annuity Contracts. All payments for such Annuity Contracts shall be sent to the
office designated for such by PFL.
IV
On behalf of the FIDELITY VARIABLE ANNUITY ACCOUNT, PFL shall furnish FDC with
copies of all information, financial statements and other documents which FDC
may reasonably request for use in connection with the distribution of Annuity
Contracts. PFL shall provide to FDC each currently effective prospectus. PFL
shall not be responsible for the cost of printing or distributing prospectuses.
1
<PAGE>
V
FDC is not authorized to give any information, or to make any representations
concerning the FIDELITY VARIABLE ANNUITY ACCOUNT or PFL other than those
contained in the current registration statement or prospectus filed with the
Securities and Exchange Commission or such sales literature as may be authorized
by PFL.
VI
Both parties to this Agreement agree to keep necessary records as indicated by
applicable state and federal law and to render the necessary assistance to one
another for the accurate and timely preparation of such records. Further, PFL
agrees that all books and records in connection with the offer and sale of
variable annuity interests funded by the Fidelity Variable Annuity Account will
be maintained and preserved in conformity with the requirements of Rule 17a-3
and 17a-4 under Securities Exchange Act of 1934, to the extent that such
requirements are applicable to the variable annuity operations. All such books
and records will be maintained and held by PFL on behalf of, and as agent for
FDC, whose property they are and shall remain. All such books and records will
be at all times subject to inspection by the Securities and Exchange Commission
in accordance with Section 17(a) of the Act.
VII
This Agreement shall be effective upon the execution hereof and shall be
co-terminous with the General Agency Agreement between PFL and Fidelity
Insurance Agency, Inc. This Agreement shall automatically terminate in the event
of its assignment by FDC.
VIII
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been given on the date of
service if served personally on the party to whom notice is to be given, or on
the date of mailing if sent by First Class Mail, Registered or Certified,
postage prepaid and properly addressed as follows:
TO: PFL AND FIDELITY VARIABLE ANNUITY ACCOUNT
Pacific Fidelity Life Insurance Company
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499
Attention: Gerald W. Holmes
2
<PAGE>
TO FDC:
Fidelity Distributors Corporation
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Arthur S. Loring
IX
Both parties to this Agreement agree that FDC shall receive no compensation for
its services, nor reimbursement of expenses incurred hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be signed
on their behalf by their respective officers thereunto duly authorized.
EXECUTED this 31st day of July, 1980.
FIDELITY DISTRIBUTORS CORPORATION
ATTEST: /s/ BY: /s/
--------------------------- ----------------------------------
Clerk President
ATTEST: /s/ BY: /s/
--------------------------- ----------------------------------
Secretary Senior Vice President
3
<PAGE>
EXHIBIT (3)(ii)
SPECIMEN SELLING GROUP AGREEMENT.
<PAGE>
GENERAL AGENCY AGREEMENT
IT IS HEREBY AGREED by and between PACIFIC FIDELITY LIFE INSURANCE COMPANY
("insurance Company") and FIDELITY INSURANCE AGENCY, INC. ("General Agent") as
follows:
I. APPOINTMENT
1. Subject to the terms and conditions of this Agreement, Insurance Company
hereby appoints General Agent to solicit applications for variable annuity
contracts which exclusively or primarily utilize investment companies advised by
Fidelity Management & Research Company, or its successors or assigns as their
investment medium ("Contracts" or "Fidelity annuities"). General Agent hereby
accepts such appointment.
2. The General Agent shall:
(a) Devote time and abilities to the establishment and maintenance of a
general agency for Insurance Company;
(b) Recruit, train and supervise insurance representatives in connection
with the sale of Fidelity annuities;
(c) Maintain proper records and accounts of business transacted under this
appointment, in such manner and form as may be reasonably required by
Insurance Company; and
(d) Render services to Contract Owners and beneficiaries of Contracts, as
reasonably required by Insurance Company; and generally endeavor to
promote the interests of Insurance Company as contemplated by this
Agreement.
II. THE CONTRACTS
1. Insurance Company proposes to issue and sell Contracts to the public.
General Agent agrees to provide sales services subject to the terms and
conditions hereof.
2. Contracts to be sold hereunder will be issued by Insurance Company
through a separate account.
3. Insurance Company shall file all necessary documents and applications in
the usual form and shall use its Best efforts to have declared effective
registration statements for Contracts under which shares of the Funds in the
Fidelity Group, as designated by General Agent, or shares of such other funds as
General Agent may designate, would serve as the investment medium. (It is
understood that no fund will be used as the investment medium unless Insurance
Company shall have consented thereto, which consent shall not be unreasonably
withheld.) Insurance Company shall not file any such documents and applications
or amendments thereto, however, without giving General Agent reasonable
opportunity to review and comment thereon in advance of such filings. such
filings may not be made without the consent of General Agent, which consent
shall not be unreasonably withheld.
Insurance Company shall submit Contracts for approval in all fifty states
and shall utilize its best efforts to secure variable annuity sales
qualifications in all states by December 31, 1980.
<PAGE>
Insurance Company shall utilize its best efforts to maintain all such
qualifications, except as otherwise agreed between General Agent and Insurance
Company.
4. General Agent will receive insurance commissions from Insurance Company
for the sale of Contracts as set forth in Section 6, and will be responsible for
the payment of insurance commissions to any insurance subagents who sell
Contracts for General Agent. Such insurance commissions may be financed, and
such financing may be secured, by insurance commissions due or which will become
due to General Agent.
5. General Agent agrees that it will use its best efforts to make available
shares of Fidelity Daily Income Trust, Fidelity Cash Reserves, Fidelity
Government Securities, Fidelity Thrift Trust, Fidelity Corporate Bond Fund,
Inc., and Fidelity Aggressive Income Fund on a no load basis, as the investment
medium for Contracts. Shares of such other funds in the Fidelity Group or shares
of such other funds which General Agent may designate, and upon which the
parties shall mutually agree, may also be utilized with respect to all Fidelity
annuities for which General Agent shall serve as general agent hereunder.
6. Insurance Company will receive from the Contract Owners an annual
insurance premium on Contracts of 0.8% of the value of all amounts accumulated
under the Contract. Insurance Company shall pay to General Agent as insurance
commissions 68.75% of insurance premiums (0.55% out of the 0.8% insurance
premiums) 'received by it on Contracts. Insurance commissions shall be paid to
General Agent monthly in arrears, within ten days following the end of each
month.
7. General Agent will undertake a marketing program of reasonable size and
scope and will use its best efforts to implement this program. The size and
scope of the program shall be within the sole discretion of General Agent, and
such program may be halted if General Agent determines that market conditions
are improvident.
8. (a) General-Agent shall have the right to sell Fidelity annuities for
Insurance Company for a minimum two years after the effective date of the
offering of the Contracts (the "Offering"), provided that Insurance Company
shall be entitled to continue, in its present form, its program involving the
Lexington Funds. Insurance Company also reserves the right to establish separate
account(s) for the sales & service of variable annuity contracts sponsored by
Life Investors (on a load basis of 4% or greater). If the General Agent agrees
to the sale for Insurance Company of variable annuities other than the Fidelity
annuities, then any commissions paid on such other variable annuities shall be
under such terms and conditions as are then agreed to by Insurance Company and
General Agent. For the purposes of this Section 8, the term variable annuity
will include a fixed annuity which is sold with the same contract as a variable
annuity.
(b) If this Agreement is cancelled by General Agent, then General Agent
agrees that for a period of two years following such cancellation, it will not
knowingly solicit any Fidelity Contract holders either to terminate or exchange
their existing Contract for the variable annuity contract offered by any other
insurance company.
9. (a) The arrangement between General Agent and Insurance Company is
cancellable by either pa rty on six months prior written notice, provided that
such cancellation shall not become effective prior to the termination of the
initial 24 months of this Agreement. After cancellation, payments of
insurance~commissions referred to in Section 6 to General Agent shall continue
to be made by Insurance Company for any Contracts written prior to cancellation,
including any future payments on contracts written prior to cancellation.
<PAGE>
(b) (i) In the event that Insurance Company shall reasonably determine
that its continued engagement in the sale of variable annuity contracts is not
permitted by applicable laws, rules, or regulations, then Insurance Company
shall be entitled upon 90 days' prior written notice to General Agent to
terminate this arrangement with the same force and effect as if terminated under
Section 9(a).
(ii) In no event shall Insurance Company be entitled to effect any
termination under this Section 9(b) if it engages in the sale of variable
annuities through others. If Insurance Company effects any such termination, it
will not engage in the variable annuity business for a period of two years,
other than through the reservation set forth i in Section 8 (a]
10. The assets underlying the Contracts will be held in a separate
account(s) of Insurance Company which shall not be chargeable with liabilities
arising out of any other business of Insurance Company. This provision will be
included in all applicable agreements and filings made in connection with the
Offering of the Fidelity annuities.
11. Insurance Company acknowledges that for purposes of solicitation, the
names of Fidelity Contract holders belong to General Agent and Insurance Company
will in no event knowingly solicit Fidelity Contract holders except with General
Agent's express written consent. The provisions of this Section shall survive
any cancellation of this Agreement.
12. The name(s) of the separate account(s) through which the Fidelity
annuities are offered and sold will include "Fidelity," if General Agent so
desires.
13. Shares only of such companies as are expressly approved by General
Agent and Insurance Company may be substituted as the investment media of the
Fidelity annuities. Notwithstanding any termination of the Agreement, only
securities designated by General Agent will serve as the investment medium of
the Fidelity annuities in accordance with the provisions of Section 5 and only
such securities as are specifically approved by General Agent and Insurance
Company may be substituted as the investment medium of such Fidelity annuities
in accordance with the provisions of this Section 13, provided that,
notwithstanding the foregoing, Insurance Company may take other action acting as
a fiduciary in its fiduciary capacity, with respect to any company whose
securities form part of the investment media, (a) if required by the SEC, or (b)
if the SEC shall have issued a final stop order, which has not been rectified
within a period of 30 days with respect to such company, or (c) if any required
registration under the Securities Act of 1933 of such company is not able to
become effective, or (d) if any such security or company is subject to a
judgment or decree by any court of competent jurisdiction finally revoking or
suspending the registration of such security or company under the Securities
Act, or (e) if such company whose securities form part of the investment media
is permanently enjoined from engaging in business or issuing its securities, or
(f) if such company files petitions in bankruptcy or receivership or fails to
vacate within 30 days any involuntary bankruptcy petition against it.
14. General Agent will bear the cost of advertising promotional and sales
literature, including costs of typesetting and printing the Fidelity Annuity
prospectus of marketing General Agent will also supply, at no cost to Insurance
Company, prospectuses of the eligible Fidelity funds in which the assets Of
Fidelity Contract holders will be invested. Insurance Company agrees that it
will not disseminate any advertising, promotional or sales literature relating
-----------
to Fidelity annuities without first obtaining the express written consent of
General Agent. If insurance company undertakes to
<PAGE>
produce sales literature at the expense of General Agent, such literature may be
printed only with such printers on such terms and conditions and at such vices
as agreed to by General Agent.
15. This Agreement may be assigned by General Agent to any majority
owned subsidiary of FMR Corp. or Fidelity Management & Research Company which
has the word "Fidelity" in its name. If either of the above companies shall
propose to sell any interest in General Agent or in any assignee, then prior
thereto it shall cause General Agent or such assignee to assign its rights and
obligations under this Agreement to an assignee permitted under the preceding
sentence. If Insurance Company shall merge or sell all or substantially all of
its assets, the successor shall assume and succeed to all rights and obligations
of Insurance Company under this Agreement.
16. In order to effectuate the offer and sale of Fidelity annuities,
Insurance Company will use its best efforts to license as its agents those
individuals designated by General Agent. General Agent shall bear out pocket
license fees. Insurance Company shall maintain appropriate records relating to
licensing and shall bear any and all costs relating to required
countersignatures by resident agents.
17. During the period of this Agreement and thereafter, Insurance Company
will proportionately vote the shares of the eligible funds held in the variable
account(s) at meetings of the shareholders of those funds in accordance with
instructions from the Contract owners, unless a different method of voting
proposed by Insurance Company is deemed permissible by the SEC and General Agent
agrees that such different method be used.
III. DISTRIBUTION
1. General Agent is hereby authorized to enter into separate agreements
with broker/dealers registered under the Securities Exchange Act of 1934 to
participate in the distribution of Contracts, as General Agent shall deem
appropriate. Insurance Company reserves the right to review and accept or
reject, on a reasonable basis, all applications for Contracts. All payments for
such Contracts shall be sent to the office designated for such by Insurance
Company.
2. On behalf of the separate account(s) issuing the Contracts, Insurance
Company shall furnish General Agent with copies of all information, financial
statements and other documents which General Agent reasonably requests for use
in connection with the distribution of Contracts. General Agent shall be
responsible for the costs of typesetting and printing the variable annuity
prospectus. General Agent shall provide to Insurance Company, at General Agent's
expense, such number of copies of the currently effective annuity prospectus as
Insurance Company shall reasonably require. In the event Insurance Company
undertakes to print such prospectuses at General Agent's expense, such
prospectuses may be printed only with such printers on such terms and conditions
and at such prices as reed to by General Agent.
3. General Agent is not authorized to give any information, or to make any
representations concerning the variable accounts or Insurance Company contrary
to those contained in the current registration statement of prospectus filed
with the SEC or in the sales literature.
IV. MISCELLANOUS
1. Each party to this Agreement (indemnifying party) agrees to release and
hold harmless the other party, its officers, directors, agents, representatives,
employees, successors or assigns from any claims or liabilities arising out of
the breach of this Agreement by the indemnifying party, or
<PAGE>
arising out of acts or omissions of the indemnifying party not authorized by
this Agreement, including violation of the Federal securities laws
2. Upon reasonable demand and during reasonable business hours, either
party shall have the right to examine any and all of each other's books and
records and the auditors' reports thereon pertaining to business for which
General Agent has received or may receive commissions under this Agreement
3. This Agreement shall be governed by the internal laws of the
Commonwealth of Massachusetts, and may not be modified without the written
consent of both parties hereto.
4. This Agreement shall be binding upon the successors or assigns of each
of the parties.
5. This Agreement is the sole instrument which governs the relationship of
the parties in respect of the subject matter hereof.
6. All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been given on the date
of service if served personally on the party to whom notice is to be given, or
on the date of mailing if sent Registered or Certified, postage prepaid and
properly addressed as follows:
<PAGE>
TO INSURANCE COMPANY:
Pacific Fidelity Life Insurance Company
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Attn: Gerald W. Holmes
TO GENERAL AGENT
Fidelity Insurance Agency, Inc.
82 Devonshire Street
Boston, Massachusetts 02109
Attn: Arthur S. Loring, Clerk
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed on their behalf by their respective officers "there unto duly authorized.
EXECUTED THIS 30TH day of July,1980.
PACIFIC FIDELITY
LIFE INSURANCE COMPANY
Attest: /s/ BY: /s/
------------------------------ ----------------------------------
Assistant Secretary Executive Vice President
FIDELITY INSURANCE AGENCY, INC
Attest: /s/ BY: /s/
------------------------------ ----------------------------------
Clerk President
<PAGE>
EXHIBIT (8)(v)
--------------
TERMINATION NOTICE OF ADMINSTRATIVE SERVICES AGREEMENT
BY AND BETWEEN PFL LIFE INSURANCE COMPANY
AND VANTAGE COMPUTER SYSTEMS, INC.
<PAGE>
[PFL Life Insurance Company Letterhead]
May 4, 1995
Mr. Paul D. Carter, Jr.
Senior Vice President
Vantage Computer Systems, Inc.
301 W. 11th Street
Kansas City, MO 64105
Re: Remote Service Agreement
Dear Paul:
Our Remote Services Agreement with Vantage Computer Systems, Inc. provides
that the remote services will be provided on a month to month basis and "...can
be terminated with two weeks notice".
Both our staffs have been working hard toward the successful relocation of
our variable annuity inforce block from the DST Data Center in Kansas City to
the AEGON USA Data Center in Cedar Rapids. Due to an unfortunate price problem
from the Boston Company during parallel testing, a slight delay has now caused
the target date to move to May 20, 1995.
This letter will serve as the required termination notice. In the event of
any unplanned delays, we do not anticipate slippage past the weekend of May
27th.
For billing purposes, we assume our Vantage Remote Service Charges for May,
1995, will be calculated on a daily pro-rata basis up to the actual termination
date the data center is moved.
Even though the Remote Service Agreement will terminate in May, we fully
expect Vantage's continued commitment to met it's legal obligation in completing
the transfer of policy file records acceptable to PFL Life.
We greatly appreciate your assistance in migrating our inforce block from
full service, to remote service, to PFL Life in Cedar Rapids. It has been a
learning experience for both parties, to say the least. The main goal of making
the migration as invisible to the outside world (policyholders, marketing
organizations, etc.) as possible has been successful, I believe.
<PAGE>
If I can be of any further assistance or if any questions should arise,
please let me know.
Sincerely,
/s/ Michael A. Wapp
Michael A. Wapp, CLU, ChFC, FLMI
Chief Administrative Officer
Financial Markets Division
PFL Life Insurance Company
cc: Steve Geisinger, Vantage Project Director
Steve Price, PFL Life
JoAnn Herndon, PFL Life
<PAGE>
EXHIBIT (8)(vi)
---------------
PARTICIPATION AGREEMENT BETWEEN
VARIABLE INSURANCE PRODUCTS FUNDS I AND II,
FIDELITY DISTRIBUTORS CORPORATION AND
PFL LIFE INSURANCE COMPANY,
AND ADDENDUMS THERETO.
<PAGE>
AMENDMENT NO. 1
Amendment to the Participation Agreement among PFL Life Insurance Company
(the "Company"), Variable Insurance Products Fund (the "Fund") and Fidelity
Distributors Corporation the "Underwriter")dated April 1, 1991 (the
"Agreement").
WHEREAS, each of the parties is desirous of expanding the ability of
Company to participate in the qualified markets, the Company, the Underwriter
and the Fund hereby agree to amend the Agreement by deleting from Section 1.4
the reference to Section 2.12 and by deleting Section 2.12 in its entirety.
In witness whereof, each of the parties has caused this Amendment to be
executed in its name and on its behalf by its duly authorized representative as
of November 1, 1991.
PFL LIFE INSURANCE COMPANY FIDELITY DISTRIBUTORS CORPORATION
By. /s/ Craig D. Vermie By: /s/ Roger T. Servison
Name: Craig D. Vermie Name: Roger T. Servison
Title: Title: President
VARIABLE INSURANCE PRODUCTS FUND
By. /s/ J. Gary Burkhead
Name: J. Gary Burkhead
Title: Senior Vice President
<PAGE>
PARTICIPATION AGREEMENT
-----------------------
Among
VARIABLE INSURANCE PRODUCTS FUND,
--------------------------------
FIDELITY DISTRIBUTORS CORPORATION
---------------------------------
and
PFL LIFE INSURANCE COMPANY
--------------------------
THIS AGREEMENT, made and entered into this 1st day of April, 1991 by and
among PFL LIFE INSURANCE COMPANY, (hereinafter the "Company"), an Iowa
corporation, on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account"), a segregated asset
account of the Company, and the VARIABLE INSURANCE PRODUCTS FUND, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION
(hereinafter the "Underwriter") , a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements substantially
identical to this Agreement (hereinafter "Participating Insurance Companies");
and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated October 15, 1985 (File No. 812-6102), granting Participating
Insurance Companies and variable annuity and variable life insurance separate
accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive
order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act
of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
annuity contracts under the 1933 Act; and
<PAGE>
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register the Accounts as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, (hereinafter the "1934 Act") , and is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") ; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of the Accounts to fund certain of the aforesaid variable annuity contracts and
the Underwriter is authorized to sell such shares to unit investment trusts such
as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE 1. Sale of Fund Shares
-------------------
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Accounts orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from the Accounts
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such order by 9:30 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange commission.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Trustees") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
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 such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Sections 2.5 and 2.12 of
Article II of this Agreement is in effect to govern such sales.
<PAGE>
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable annuity contracts with the form number(s) which are
listed on Schedule B attached hereto and incorporated herein by this reference,
as such Schedule B may be amended from time to time hereafter by mutual written
agreement of all the parties hereto, (the "Contracts") shall be invested in the
Fund, in such other Funds advised by the Adviser as may be mutually agreed to in
writing by the parties hereto, or in the Company's general account, provided
that such amounts may also be invested in an investment company other than the
Fund if (a) such other investment company, or series thereof, has investment
objectives or policies that are substantially different from the investment
objectives and policies of all the Portfolios Of the Fund; or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company so
informs the Fund and Underwriter prior to their signing this Agreement; or (d)
the Fund or Underwriter consents to the use of such other investment company.
1.7. The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For
the purpose of Sections 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Funds' shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 7 p.m. Boston time.
<PAGE>
ARTICLE II. Representations and Warranties
------------------------------
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established the Account
prior to any issuance or sale thereof as a segregated asset account under
Section 508A.1 of the Iowa Insurance Code and has registered or, prior to any
issuance or sale of the Contracts, will register the 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.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the state of Iowa and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to affect the continuous offering of its snares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
endowment or annuity insurance contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will 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.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
feel" or "defensive" Rule 12b-i Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a majority of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
state of Iowa and the Fund and the Underwriter represent that their respective
operations are and shall at all times remain in material compliance with the
laws of the state of Iowa to the extent required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents
<PAGE>
that it will sell and distribute the Fund shares in accordance with the laws of
the state of Iowa and all applicable state and federal securities laws,
including without limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and shall
remain duly registered in all material respects under all applicable federal and
state securities laws and that the Adviser shall perform its obligations for the
Fund in compliance in all material respects with the laws of the state of Iowa
and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Section 17g-(l) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Fund, in an amount not less than the minimal coverage as required currently
by entities subject to the requirements of Rule 17g-1 of the 1940 Act or related
provisions or may be promulgated from time to time. The aforesaid Bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.12. The Company represents and warrants that it will not purchase Fund
shares with Account assets derived from the sale of Contracts to deferred
compensation plans with respect to service for state and local governments which
qualify under Section 457 of the federal Internal Revenue Code, as may be
amended. The Company may purchase Fund shares with Account assets derived from
any sale of a Contract to any other type of tax-advantaged employee benefit
plan; provided however that such plan has no more than 500 employees who are
--------
eligible to participate at the time of the first such purchase by the Company of
Fund shares derived from the sale of such Contract.
ARTICLE III. Prospectuses and Proxy Statements; Voting
-----------------------------------------
3.1. The Underwriter shall provide the Company (at the Company's expense)
with as many copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company in lieu thereof, the Fund shall
provide such documentation (including a final copy of the new prospectus as set
in type at the Fund's expense) and other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
for the Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document (such printing to be at the
Company's expense).
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter (or in the Fund's
discretion, the Prospectus shall state that such Statement is available from the
Fund), and the Underwriter (or the Fund), at its expense, shall print and
provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
<PAGE>
3.3. The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to stockholders and other communications to
stockholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such portfolio for which
instructions have been received: so long as and to the extent that the
Securities and Exchange Commission continues to interpret the 1940 Act
to require pass-through voting privileges for variable contract
owners. The Company reserves the right to vote Fund shares held in
any segregated asset account in its own right, to the extent permitted
by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the
Fund calculates voting privileges in a manner consistent with the
standards set forth on Schedule C attached hereto and incorporated
herein by this reference, which standards will also be provided to the
other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of trustees
and with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
------------------------------
4.1. 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 or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee object to such use within fifteen Business
Days after receipt of such material.
4.2. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Contracts other than the information or representations
contained in the registration statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee or
by the Underwriter, except with the permission of the Fund or the underwriter or
the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or its separate
account(s), is named at least fifteen Business Days prior to its use. No such
material shall be used if the Company or its designee object to such use within
fifteen Business Days after receipt of such material.
<PAGE>
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for the Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange Commission or
other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
the Account, contemporaneously with the filing of such document with the
Securities and Exchange Commission.
4.7. For purposes of this Article IV, the phrase "sales literature or other
promotional material", includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media), sales literature
any written communication distributed or made generally available to customers
or the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, Statements of
Additional Information, shareholder reports, and proxy materials.
ARTICLE V. Fees and Expenses
-----------------
5.1. The Fund and Underwriter shall pay no fee or other compensation to the
Company under this agreement, except that if the Fund or any Portfolio adopts
and implements a plan pursuant to Rule 12b-i to finance distribution expenses,
then the Underwriter may make payments to the Company or to the underwriter for
the Contracts if and in amounts agreed to by the Underwriter in writing and such
payments will be made out of existing fees otherwise payable to the Underwriter,
past profits of the Underwriter or other resources available to the Underwriter.
No such payments shall be made directly by the Fund. Currently, no such
payments are contemplated.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state ,laws prior to their sale. The Fund shall bear the expenses
for the cost of registration and qualification of the Fund's shares, preparation
and filing of the Fund's prospectus and registration statement, proxy materials
and reports, setting the prospectus in type, setting in type and printing the
proxy materials and reports to shareholders (including the costs of printing a
prospectus that constitutes an annual report), the preparation of
<PAGE>
all statements and notices required by any federal or state law, all taxes on
the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing the
Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. Diversification
---------------
6.1. The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will at all times comply with Section 817(h) of
the Code and Treasury Regulation S1.817-5 relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations.
ARTICLE VII. Potential Conflicts
-------------------
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. 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 regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether 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, life insurance 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 (2), establishing a new
registered management investment company or managed separate account.
<PAGE>
7.4. 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
investment in the Fund and terminate this Agreement with respect to such
Account; 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 members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulators decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account within six months after the Board 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 members of the Board. Until
the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 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 Board determines that any proposed
action does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw the Account's investment in the Fund and terminate this
Agreement within six (6) months after the Board informs 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 members
of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive order,
then (a) the Fund and/or the Participating Insurance companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. Indemnification
---------------
8.l. Indemnification By The Company
------------------------------
8.1(a). The Company agrees to indemnify and hold harmless the Fund and each
trustee of the Board and officers and each person, if any, who controls the Fund
within the meaning of
<PAGE>
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the Registration Statement or
prospectus for the Contracts or contained in the Contracts or sales
literature for the Contracts (or any amendment or supplement to any of the
foregoing), 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
agreement to indemnify 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 in conformity with information furnished to the Company
by or on behalf of the Fund for use in the Registration Statement or
prospectus for the Contracts or in the Contracts or sales literature (or
any amendment or supplement) or otherwise for use in connection with the
sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the Registration Statement,
prospectus or sales literature of the Fund not supplied by the Company, or
persons under its control) or wrongful conduct of the Company or persons
under its control, with respect to the sale or distribution of the
Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus, or sales
literature of the Fund or any amendment thereof or supplement thereto 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 a statement or omission was made in reliance upon
information furnished to the Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) 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, as
limited by and in accordance with the provisions of Sections 9.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross 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 or to
the Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the company in writing within a
reasonable time after the summons or other first legal process giving
-------
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on,
<PAGE>
any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
8.2. Indemnification by the Underwriter
----------------------------------
8.2 (a). The Underwriter agrees to indemnify and hold
harmless the Company and each of its directors and officers 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 Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), 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 agreement to indemnify 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 in conformity with, information
furnished to the Underwriter or Fund by or on behalf of the Company for use
in the Registration Statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the Registration Statement,
prospectus or sales literature for the Contracts not supplied by the
Underwriter or persons under its control) or wrongful conduct of the Fund,
Adviser or Underwriter or persons under their control, with respect to the
sale or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus, or sales
literature covering the Contracts, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or omission was made
in reliance upon information furnished to the Company by or on behalf of
the Fund; or
<PAGE>
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement (including a
failure, whether unintentional or in good faith or otherwise, to comply
with the diversification requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Underwriter in this Agreement or arise out of
or result from any other material breach of this Agreement by the
Underwriter; as limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b) The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties , under this Agreement or
to the Company or the Account, whichever is applicable.
8.2(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d) The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3. Indemnification By the Fund
---------------------------
8.3(a). The Fund agrees to indemnify and hold harmless the Company , and
each of its directors and officers 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 Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Trustees or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement (including a
failure to comply with the diversification requirements specified in
Article VI of this Agreement); or
<PAGE>
(ii) 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;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company, the Fund, the Underwriter or the Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the Fund
of the commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. Applicable-Law
--------------
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. Termination
-----------
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written notice to the
other parties; or
<PAGE>
(b) at the option of the Company to the extent that shares of Portfolios
are not reasonably available to meet the requirements of the Contracts as
determined by the Company, provided however, that such termination shall
apply only to the Portfolio(s) not reasonably available. Prompt notice of
the election to terminate for such cause shall be furnished by the Company;
or
(c) at the option of the Fund in the event that formal administrative
proceedings are instituted against the Company by the NASD, the Securities
and Exchange Commission, the Insurance Commissioner or any other regulatory
body regarding the Company's duties under this Agreement or related to the
sale of the Contracts, the operation of any Account, or the purchase of the
Fund shares, provided, however, that the Fund determines in its sole
judgment exercised in good faith, that any such administrative proceedings
will have a material adverse affect upon the ability of the Company to
perform its obligations under this Agreement; or
(d) at the option of the Company in the event that formal administrative
proceedings are instituted against the Fund or Underwriter by the NASD, the
Securities and Exchange Commission, or any state securities or insurance
department or any other regulatory body, provided, however, that the
Company determines in its sole judgment exercised in good faith, that any
such administrative proceedings will have a material adverse effect upon
the ability of the Fund or Underwriter to perform its obligations under
this Agreement; or
(e) with respect to any Account, upon requisite vote of the Contract
owners having an interest in such Account (or any subaccount) to
substitute the shares of another investment company for the corresponding
Portfolio shares of the Fund in accordance with the terms of the Contracts
for which those Portfolio shares had been selected to serve as the
underlying investment media. The Company will give 30 days prior written
notice to the Fund of the date of any proposed vote to replace the Fund's
shares; or
(f) at the option of the Company, in the event any of the fund's shares are
not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Contracts issued or to be issued by the Company; or
(g) at the option of the Company, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter X of the Code or under any
successor or similar provision, or if the Company reasonably believes that
the Fund may fail to so qualify; or
(h) at the option of the Company, if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
(i) at the option of either the Fund or the Underwriter, if (1) the Fund or
the Underwriter, respectively, shall determine, in their sole judgment
reasonably exercised in good faith, that the Company has suffered a
material adverse change in its business or financial condition or is the
subject of material adverse publicity and such material adverse change or
material adverse publicity will have a material adverse impact upon the
business and operations of either the Fund or the Underwriter, (2) the Fund
or the Underwriter shall notify the Company in writing of such
determination and its intent to terminate this Agreement, and (3) after
considering the actions taken by the Company and any other changes in
circumstances since the giving of such notice, such determination of the
Fund or the Underwriter shall continue to apply on the sixtieth (60th) day
following the giving of such notice, which sixtieth day shall be the
effective date of termination; or
<PAGE>
(j) at the option of the Company, if (1) the Company shall determine, in
its sole judgment reasonably exercised in good faith, that either the Fund
or the Underwriter has suffered a material adverse change in its business
or financial condition or is the subject of material adverse publicity and
such material adverse change or material adverse publicity will have a
material adverse impact upon the business and operations of the Company,
(2) the Company shall notify the Fund and the Underwriter in writing of
such determination and its intent to terminate the Agreement, and (3) after
considering the actions taken by the Fund and/or the Underwriter and any
other changes in circumstances since the giving of such notice, such
determination shall continue to apply on the sixtieth (60th) day following
the giving of such notice, which sixtieth day shall be the effective date
of termination; or
(k) at the option of either the Fund or the Underwriter, if the Company
gives the Fund and the Underwriter the written notice specified in Section
1.6(b) hereof and at the time such notice was given there was no notice of
termination outstanding under any other provision of this Agreement;
provided, however any termination under this Section 10.1(k) shall be
effective forty five (45) days after the notice specified in Section 1.6(b)
was given.
10.2. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.3. Notice Requirement. No termination of this Agreement shall be
------------------
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties to this Agreement of its intent to terminate
which notice shall set forth the basis for such termination. Furthermore,
(a) In the event that any termination is based upon the provisions of
Article VII, or the provision of Section 10.1(a), 10.1(i), 10.1(j) or
10.1(k) of this Agreement, such prior written notice shall be given in
advance of the effective date of termination as required by such
provisions; and
(b) in the event that any termination is based upon the provisions of
Section 10.1(c) or 10.1(d) of this Agreement, such prior written
notice shall be given at least ninety (90) days before the effective
date of termination.
10.4. Effect of Termination. Notwithstanding any all at termination of
---------------------
this Agreement, the Fund and the underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts 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. The parties agree that this
Section 10.4 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article V3:1 of
this Agreement.
10.5. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated
transactions, or (ii) as required by state and/or federal laws or regulations or
judicial or other legal precedent of general application (hereinafter referred
to as a "Legally Required Redemption"). Upon request, the Company will promptly
furnish to the Fund and the Underwriter the opinion of counsel for the Company
(which counsel shall be reasonably satisfactory to the Fund and the Underwriter)
to the effect that any
<PAGE>
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
<PAGE>
ARTICLE XI. 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:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
PFL Life Insurance Company
4333 Edgewood Road, Northeast
Cedar Rapids, Iowa 52499
Attention: Annuities Division, Law Department
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
-------------
12.1 All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Trustees, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 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.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 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.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, 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.
<PAGE>
12.7. 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.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
Company:
SEAL PFL LIFE INSURANCE COMPANY
By its authorized officer,
By: /s/ William L. Busler
Title: Executive Vice President
Date: 5/24/91
Fund:
SEAL VARIABLE INSURANCE PRODUCTS FUND
By its authorized officer,
By: /s/ J. Gary Burkhead
Title: Senior Vice President
Date:
Underwriter:
SEAL FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
By: /s/ Zeta B. Kencaid
Title: President
Date: 9/5/91
<PAGE>
Schedule A
----------
Contracts
---------
1. Contract Form ________________________________________
<PAGE>
Schedule B
----------
Accounts
--------
Name of Account Date of Resolution of Company's Board
which Established the Account
Fidelity Variable Annuity Account August 24, 1978 (Pacific Fidelity Life
Insurance Company)
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call
in the number of Customers to Fidelity, as soon as possible, but no
later than two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy
statement. Underwriter will provide at least one copy of the last Annual
Report to the Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to company for
insertion into envelopes (envelopes and return envelopes are provided and
paid for by the Insurance Company). Contents of envelope sent to Customers
by Company will include:
a. Voting Instruction Card(s)
b. one proxy notice and statement (one document)
<PAGE>
c. return envelope (postage pre-paid by Company) addressed to the Company
or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be supplied by the
Fund.)
e. cover letter - optional, supplied by Company and reviewed and approved
in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
The Fund must allow at least a 15-day solicitation time to the Company as
----
the shareowner. (A 5-week period is recommended.) Solicitation time is
calculated as calendar days from (but not including) the meeting, counting
backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not
been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact- legal name to be printed on the Card
and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelope. The mutilated or illegible Card is disregarded
and considered to be not received for purposes of vote tabulation. Any
------------
Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure
are "hand verified," i.e., examined as to why they did not complete the
system. Any questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of shares.) Fidelity Legal must
--------
review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate the
vote in time for the meeting.
<PAGE>
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provided a standard from for each Certification.
15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
<PAGE>
AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT AMONG
VARIABLE INSURANCE PRODUCTS FUND
FIDELITY DISTRIBUTORS CORPORATION
and
PFL LIFE INSURANCE COMPANY
WHEREAS, PFL LIFE INSURANCE COMPANY (the "Company"), VARIABLE INSURANCE
PRODUCTS FUND (the "Fund") and FIDELITY DISTRIBUTORS CORPORATION have previously
entered into a Participation Agreement (the "Agreement") containing certain
arrangements concerning prospectus costs; and
WHEREAS, the Trustees of the Fund have approved certain changes to the
expense structure of the Fund; and
NOW THEREFORE, the parties do hereby agree to amend the Agreement by
substituting the following arrangement in place of any inconsistent language in
the Participation Agreement, wherever found:
1. The Fund will provide to the Company each year, at the Fund's cost, such
number of prospectuses and Statements of Additional Information as are actually
distributed to the Company's then existing variable life and/or variable annuity
contract owners.
2. If the Company takes camera-ready film or computer diskettes containing the
Fund's prospectus and/or Statement of Additional Information in lieu of
receiving hard copies of these documents, the Fund will reimburse the Company in
an amount computed as follows. The number of prospectuses and Statements of
Additional Information actually distributed to existing contract owners by the
Company will be multiplied by the Fund's actual per-unit cost of printing the
documents.
3. The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund in order to verify that
the prospectuses and Statements of Additional Information provided to the
Company, or the reimbursement made to the Company, are or have been used only
for the purposes set forth hereinabove.
IN WITNESS WHEREOF we have set our hand as of the 15th day of December,
1994.
PFL LIFE INSURANCE COMPANY
By: /s/ Craig D. Vermie
Name: Craig D. Vermie
Title: Vice President, Assistant Secretary and Associate General Counsel
VARIABLE INSURANCE PRODUCTS FUND FIDELITY DISTRIBUTORS CORPORATION
By: /s/ J. Gary Burkhead By: /s/ Kurt A. Lange
Name: J. Gary Burkhead Name: Kurt A. Lange
Title: Senior Vice President Title: President
<PAGE>
PARTICIPATION AGREEMENT
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Among
VARIABLE INSURANCE PRODUCTS FUND II,
-----------------------------------
FIDELITY DISTRIBUTORS CORPORATION
---------------------------------
and
PFL LIFE INSURANCE COMPANY
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THIS AGREEMENT, made and entered into this lst day of April, 1991 by and
among PFL LIFE INSURANCE COMPANY, (hereinafter the "Company"), an Iowa
corporation, on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account"), a segregated asset
account of the Company, and the VARIABLE INSURANCE PRODUCTS FUND II, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION
(hereinafter the "Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements substantially
identical to this Agreement (hereinafter "Participating Insurance Companies");
and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 17, 1986 (File No. 812-6422), granting Participating
Insurance Companies and variable annuity and variable life insurance separate
accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act") and Rules 6e-2 (b) (15) and 6e-3(T) (b) (15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
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WHEREAS, the Company has registered or will register certain variable
annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register the Accounts as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, (hereinafter the "1934 Act") , and is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of the Accounts to fund certain of the aforesaid variable annuity contracts and
the Underwriter is authorized to sell such shares to unit investment trusts such
as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
-------------------
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Accounts orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from the Accounts
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such order by 9:30 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Trustees") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
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 such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles 1, 111, V, VII and Sections 2.5 and 2.12 of
Article II of this Agreement is in effect to govern such sales.
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1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable annuity contracts with the form number(s) which are
listed on Schedule B attached hereto and incorporated herein by this reference,
as such Schedule B may be amended from time to time hereafter by mutual written
agreement of all the parties hereto, (the "Contracts") shall be invested in the
Fund, in such other Funds advised by the Adviser as may be mutually agreed to in
writing by the parties hereto, or in the Company's general account, provided
that such amounts may also be invested in an investment company other than the
Fund if (a) such other investment company, or series thereof, has investment
objectives or policies that are substantially different from the investment
objectives and policies of all the Portfolios of the Fund; or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a-funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company so
informs the Fund and Underwriter prior to their signing this Agreement; or (d)
the Fund or Underwriter consents to the use of such other investment company.
1.7. The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For
the purpose of Sections 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Funds' shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
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2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established the Account
prior to any issuance or sale thereof as a segregated asset account under
Section 508A.1 of the Iowa Insurance Code and has registered or, prior to any
issuance or sale of the Contracts, will register the 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.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the state of Iowa and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares 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 Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
endowment or annuity insurance contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will 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.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a majority of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
state of Iowa and the Fund and the Underwriter represent that their respective
operations are and shall at all times remain in material compliance with the
laws of the state of Iowa to the extent required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the state of Iowa and all applicable state and
federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
<PAGE>
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and shall
remain duly registered in all material respects under all applicable federal and
state securities laws and that the Adviser shall perform its obligations for the
Fund in compliance in all material respects with the laws of the state of Iowa
and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Section 17g-(l) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Fund, in an amount not less than the minimal coverage as required currently
by entities subject to the requirements of Rule 17g-1 of the 1940 Act or related
provisions or may be promulgated from time to time. The aforesaid Bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.12. The Company represents and warrants that it will not purchase Fund
shares with Account assets derived from the sale of Contracts to deferred
compensation plans with respect to service for state and local governments which
qualify under Section 457 of the federal internal Revenue Code, as may be
amended. The Company may purchase Fund shares with Account assets derived from
any sale of a Contract to any other type of tax-advantaged employee benefit
plan; provided however that such plan has no more than 500 employees who are
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eligible to participate at the time of the first such purchase by the Company of
Fund shares derived from the sale of such Contract.
ARTICLE III. Prospectuses and Proxy Statements; Voting
-----------------------------------------
3.1. The Underwriter shall provide the Company (at the Company's expense)
with as many copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company in lieu thereof, the Fund shall
provide such documentation (including a final copy of the new prospectus as set
in type at the Fund's expense) and other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
for the Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document (such printing to be at the
Company's expense).
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter (or in the Fund's
discretion, the Prospectus shall state that such Statement is available from the
Fund), and the Underwriter (or the Fund), at its expense, shall print and
provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
<PAGE>
3.3. The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to stockholders and other communications to
stockholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received from
Contract owners; and
(iii) vote Fund shares for which no instructions have been received in the
same proportion as Fund shares of such portfolio for which
instructions have been received:
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in the Fund calculates voting
privileges in a manner consistent with the standards set forth on Schedule C
attached hereto and incorporated herein by this reference, which standards will
also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of trustees
and with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
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4.1. 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 or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee object to such use within fifteen Business
Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or its separate
account(s), is named at least fifteen Business Days prior to its use. No such
material shall be used if the Company or its designee object to such use within
fifteen Business Days after receipt of such material.
<PAGE>
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for the Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange Commission or
other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
the Account, contemporaneously with the filing of such document with the
Securities and Exchange Commission.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
-
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
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5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the Underwriter. No such payments shall be made directly by the Fund.
currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state laws prior to their sale. The Fund shall bear the expenses for
the cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials and
reports, setting the prospectus in type, setting in type and printing the proxy
materials and reports to shareholders (including the costs of printing a
prospectus that constitutes an annual report), the preparation of all statements
and notices required by any federal or state law, all taxes on the issuance or
transfer of the Funds shares.
<PAGE>
5.3. The Company shall bear the expenses of printing and distributing the
Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contractowners.
ARTICLE VI. Diversification
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6.1. The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as . variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will at all times comply with Section 817(h) of
the Code and Treasury Regulation 1.817-5 relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations.
ARTICLE VII. Potential Conflicts
-------------------
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. 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 regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether 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, life insurance 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 (2), establishing a new
registered management investment company or managed separate account.
7.4. 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
<PAGE>
would preclude a majority vote, the Company may be required, at the fund's
election, to withdraw the affected Account's investment in the Fund and
terminate this Agreement with respect to such Account; 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 members of the Board. Any such withdrawal and termination must
take place within six (6) months after the Fund gives written notice that this
provision is being implemented, and until the end of that six month period the
Underwriter and Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.5. 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 investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board 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 members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 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 Board determines that any proposed
action does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw the Account's investment in the Fund and terminate this
Agreement within six (6) months after the Board informs 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 members
of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule,. 6e-3, as adopted, to the extent such rules are
applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this
Agreement shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE VIII. Indemnification
---------------
8.1. Indemnification By The Company
------------------------------
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each trustee of the Board and officers 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 Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to
<PAGE>
which the Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the
Contracts or sales literature for the Contracts (or any amendment or
supplement to any of the foregoing), 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 agreement to indemnify
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 in conformity with information furnished to the Company by or
on behalf of the Fund for use in the Registration Statement or
prospectus for the Contracts or in the Contracts or sales literature
(or any amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature of the Fund not
supplied by the Company, or persons under its control) or wrongful
conduct of the Company or persons under its control, with respect to
the sale or distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration ' Statement,
prospectus, or sales literature of the Fund or-any amendment thereof
or supplement thereto 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 a statement or
omission was made in reliance upon information furnished to the Fund
by or on behalf of the Company: or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement;
or
(v) 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, as limited by and in accordance with the
provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross 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 or to
the Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the
<PAGE>
Company from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the Indemnified Parties,
the Company shall be entitled to participate, at its own expense, in the defense
of such action. The Company also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action. After
notice from the Company to such party of the Company's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be liable to such
party under this Agreement for any legal or other expenses subsequently incurred
by such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
8.2. Indemnification by the Underwriter
----------------------------------
8.2(a). The Underwriter agrees to indemnify and hold harmless the Company
and each of its directors and officers 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 Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or prospectus or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), 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 agreement to
indemnify 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 in conformity with information furnished to the
Underwriter or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares: or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for the
Contracts not supplied by the Underwriter or persons under its
control) or wrongful conduct of the Fund, Adviser or Underwriter or
persons under their control, with respect to the sale or distribution
of the contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement, prospectus,
or sales literature covering the Contracts, or any amendment thereof
or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
<PAGE>
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or
otherwise, to comply with the diversification requirements specified
in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Underwriter; as limited by and in accordance
with the provisions of Sections 8.2(b) and 8.2(c) hereof.
8.2(b) The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company or the Account, whichever is applicable.
8.2(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
-------
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d) The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3. Indemnification By the Fund
---------------------------
8.3(a). The Fund agrees to indemnify and hold harmless the Company , and
each of its directors and officers 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 Section a-3) against Any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Trustees or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including a failure to comply with the
<PAGE>
diversification requirements specified in Article VI of this
Agreement); or
(ii) 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;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3 (c) hereof.
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company, the Fund, the Underwriter or the Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3 (d) . The Company and the Underwriter agree promptly to notify the Fund
of the commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the @ d.
ARTICLE IX. Applicable Law
--------------
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. Termination
-----------
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written notice to
the other parties; or
<PAGE>
(b) at the option of the Company to the extent that shares of
Portfolios are not reasonably available to meet the requirements of
the Contracts as determined by the Company, provided however, that
such termination shall apply only to the Portfolio(s) not reasonably
available. Prompt notice of the election to terminate for such cause
shall be furnished by the Company; or
(c) at the option of the Fund in the event that formal administrative
proceedings are instituted against the Company by the NASD, the
Securities and Exchange Commission, the insurance Commissioner or any
other regulatory body regarding the Company's duties under this
Agreement or related to the sale of the Contracts, the operation of
any Account, or the purchase of the Fund shares, provided, however,
that the Fund determines in its sole judgment exercised in good faith,
that any such administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its obligations
under this Agreement; or
(d) at the option of the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the Securities and Exchange Commission, or
any state securities or insurance department or any other regulatory
body, provided, however, that the Company determines in its sole
judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the ability of
the Fund or Underwriter to perform its obligations under this
Agreement; or
(e) with respect to any Account, upon requires vote of the Contract
owners having an interest in such Account (or any subaccount) to
substitute the shares of another investment company for the
corresponding Portfolio shares of the Fund in accordance with the
terms of the Contracts for which those Portfolio shares had been
selected to serve as the underlying investment media. The Company
will give 30 days prior written notice to the Fund of the date of any
proposed vote to replace the Fund's shares; or
(f) at the option of the Company, in the event any of the fund's
shares are not registered, issued or sold in accordance with
applicable state and/or federal law or such law precludes the use of
such shares as the underlying investment media of the Contracts issued
or to be issued by the Company; or
(g) at the option of the Company, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter X of the Code or under
any successor or similar provision, or if the Company reasonably
believes that the Fund may fail to so qualify; or
(h) at the option of the Company, if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
(i) at the option of either the Fund or the Underwriter, if (1) the
Fund or the Underwriter, respectively, shall determine, in their sole
judgment reasonably exercised in good faith, that the Company has
suffered a material adverse change in its business or financial
condition or is the subject of material adverse publicity and such
material adverse change or material adverse publicity will have a
material adverse impact upon the business and operations of either the
Fund or the Underwriter, (2) the Fund or the Underwriter shall notify
the Company in writing of such determination and its intent to
terminate this Agreement, and (3) after considering the actions taken
by the Company and any other changes in circumstances since the giving
of such notice, such continue to determination of
<PAGE>
the Fund or the Underwriter shall apply on the sixtieth (60th) day
following the giving of such notice, which sixtieth day shall be the
effective date of termination; or
(j) at the option of the Company, if (1) the Company shall determine,
in its sole judgment reasonably exercised in good faith, that either
the Fund or the Underwriter has suffered a material adverse change in
its business or financial condition or is the subject of material
adverse publicity and such material adverse change or material adverse
publicity will have a material adverse impact upon the business and
operations of the Company, (2) the Company shall notify the Fund
and the Underwriter in writing of such determination and its intent to
terminate the Agreement, and (31 after considering the actions taken
by the Fund and/or the Underwriter and any other changes in
circumstances since the giving of such notice, such determination
shall continue to apply on the sixtieth (60th) day following the
giving of such notice, which sixtieth day shall be the effective date
of termination; or
(k) at the option of either the Fund or the Underwriter, if the
Company gives the Fund and the Underwriter the written notice
specified in Section 1.6(b) hereof and at the time such notice was
given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however any termination under
this Section 10.1(k) shall be effective forty five (45) days after the
notice specified in Section 1.6(b) was given.
10.2. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.3. Notice Requirement. No termination of this Agreement shall be
------------------
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties to this Agreement of its intent to terminate
which notice shall set forth the basis for such termination. Furthermore,
(a) In the event that any termination is based upon the provisions of
Article VII, or the provision of Section 10.1(a), 10.1(i), 10.1(j) or
10.1(k) of this Agreement, such prior written notice shall be given in
advance of the effective date of termination as required by such
provisions; and
(b) in the event that any termination is based upon the provisions of
Section 10.1(c) or 10.1(d) of this Agreement, such prior written
notice shall be given at least ninety (90) days before the effective
date of termination.
10.4. Effect of Termination. Notwithstanding any termination of this
---------------------
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts 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. The parties agree that this
Section 10.4 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
<PAGE>
10.5. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated
transactions, or (ii) as required by state and/or federal laws or regulations or
judicial or other legal precedent of general application (hereinafter referred
to as a "Legally Required Redemption"). Upon request, the Company will promptly
furnish to the Fund and the Underwriter the opinion of counsel for the Company
(which counsel shall be reasonably satisfactory to the Fund and the Underwriter)
to the effect that any redemption pursuant to clause (ii) above is a Legally
Required Redemption. Furthermore, except in cases where permitted under the
terms of the Contracts, the Company shall not prevent Contract Owners from
allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
ARTICLE XI. 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:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
PFL Life Insurance Company
4333 Edgewood Road, Northeast
Cedar Rapids, Iowa 52499
Attention: Annuities Division, Law Department
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
-------------
12.1 All persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither the
Trustees, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 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.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
<PAGE>
12.5 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.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, 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.
12.7. 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.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
Company:
SEAL PFL LIFE INSURANCE COMPANY
By its authorized officer,
By: /s/ William L. Busler
Title: Executive Vice President
Date: 5/24/91
Fund:
SEAL VARIABLE INSURANCE PRODUCTS FUND II
By its authorized officer,
By: /s/ J. Gary Burkhead
Title: Senior Vice President
Date:
Underwriter:
SEAL FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
By: /s/ Zeta B. Kincaid
Title: President
Date: 9/5/91
<PAGE>
Schedule A
----------
Contracts
---------
1. Contract Form ______________________
<PAGE>
Schedule B
----------
Accounts
--------
Name of Account Date of Resolution Of Company's Board
which Established the Account
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/ policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call
in the number of Customers to Fidelity, as soon as possible, but no
later than two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy statement.
Underwriter will provide at least one copy of the last Annual Report to the
Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to company for
insertion into envelopes (envelopes and return envelopes are provided and
paid for by the Insurance Company). Contents of envelope sent to Customers
by Company will include:
a. Voting Instruction Card(s)
b. one proxy-notice and statement (one document)
<PAGE>
c. return envelope (postage pro-paid by Company) addressed to the Company
or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. one copy will be supplied by the
Fund.)
e. cover letter - optional, supplied by Company and reviewed and approved
in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund allow at least a 15-day solicitation time to the Company as the
shareowner. (A 5-week period is recommended.) Solicitation time is
calculated as calendar days from (but not including) the meeting, counting
backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not
been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact legal name to be printed on the
Card and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelops. The mutilated or illegible card is disregarded
and considered to be not received for purposes of vote tabulation. Any
------------
Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure
are "hand verified," i.e., examined as to why they did not complete the
system. Any questions on those. Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fidelity Legal
must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate the
vote in time for the meeting.
<PAGE>
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provided a standard from for each Certification.
15. The Company will be required to box . and archive the cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
<PAGE>
EXHIBIT (8)(vii)
ADDENDUM TO PARTICIPATION AGREEMENT BETWEEN VARIABLE INSURANCE PRODUCT FUNDS,
FIDELITY DISTRIBUTORS CORPORATION AND PFL LIFE INSURANCE COMPANY.
<PAGE>
Participation Agreement Addendum
SCHEDULE A
----------
Accounts
--------
This Schedule shall be effective as of the date of the last signature below, and
replaces and supersedes Schedule A to the Participation Agreement dated April 1,
1991 (as amended) among the VIP Funds, Fidelity Distributors Corporation and PFL
Life Insurance Company.
<TABLE>
<CAPTION>
Date of Resolutions of
Company's Board which
Name of Contracts Name of Accounts established the Accounts
- ---------------------------- ----------------------------- ----------------------------
<S> <C> <C>
Fidelity Income Plus Fidelity Variable Annuity August 24, 1979 (by an
Individual Variable Account affiliate subsequently
Annuity Contracts acquired by the Company)
PFL Retirement Builder Retirement Builder Variable
Individual Variable Annuity Account March 29, 1996
Annuity Contracts
</TABLE>
In witness whereof, we have hereunto set our hand as of the dates indicated:
PFL Life Insurance Company
4/19/96 By: /s/ Ronald L. Ziegler
- ------- -------------------------------
Date Signed
Title: Vice President & Actuary
------------------------------
Variable Insurance Products Fund
4/29/96 By: /s/ J. Gary Burkead
- ------- ------------------------------
Date Signed
Title: Senior Vice President
------------------------------
Fidelity Distributors Corporation
4/23/96 By: /s/ Neil Litvack
- ------- ------------------------------
Date Signed
Title: President
------------------------------
<PAGE>
EXHIBIT (10)(i)
---------------
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
[ERNST & YOUNG LETTERHEAD APPEARS HERE]
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the use of our report dated March 27, 1998 with
respect to the financial statements of The Fidelity Variable Annuity Account,
and to the use of our report dated February 27, 1998 with respect to the
statutory-basis financial statements and schedules of PFL Life Insurance
Company, included in Post-Effective Amendment No. 8 to the Registration
Statement (Form N-4 No. 33-37498) and related Prospectus of The Fidelity
Variable Annuity Account.
Ernst & Young LLP
Des Moines, Iowa
April 27, 1998
<PAGE>
EXHIBIT (10)(ii)
----------------
OPINION AND CONSENT OF ACTUARY
<PAGE>
April 13, 1998
PFL Life Insurance Company
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499-0001
Re: Fidelity Variable Annuity Account Registration on Form N-4
SEC File No. 33-37498
Dear Sir/Madam:
With regard to the above registration statement, I have examined such documents
and made such inquiries as I have deemed necessary and appropriate, and on the
basis of such examination, have the following opinions:
Fees and charges deducted under the Fidelity Variable Annuity policies are those
deemed necessary to appropriately reflect:
(1) the expenses incurred in the acquisition and distribution of the Policies,
(2) the expenses associated with the development and servicing of the policies,
(3) the assumption of certain risks arising from the operation and management
of the Policies and that provides for a reasonable margin of profit.
Fees and charges assessed against the policy values in the Variable Account
include:
(i) Service Charge and Administrative Charge
(ii) Mortality and Expense Risk Fee (M&E)
(iii) Taxes (including Premium and other Taxes if applicable)
The magnitude of each of the individual charges listed above in (i) through
(iii) is established in the pricing of the Fidelity Variable Annuity, to achieve
a reasonable Return on Investment (ROI), which is within the range of industry
practice with respect to comparable variable annuity products.
In the process of determining the reasonable ROI, each individual charge is also
established within the reasonable range of industry practice. For example, in
conjunction with the pricing process the company has analyzed publicly available
information pertaining to similar industry products, taking into consideration
such factors as current charge levels, the existence of charge level guarantees,
guaranteed death benefits, and guaranteed annuity rates. The methodology and
<PAGE>
PFL Life Insurance Company
April 13, 1998
Page 2
results of the comparative surveys included in this analysis are maintained at
the company's administrative offices.
Except by coincidence, it is not expected that actual charges assessed in a
given year would exactly offset actual expenses incurred. Acquisition expenses
(as well as major product and/or systems development expenses) are incurred "up
front" and recovered, with a reasonable profit margin, through future years'
charges. In addition, the company cannot increase certain charges under the
Policies in the pricing process.
Therefore, in my opinion, the fees and charges deducted under the Policies, in
the aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the company.
I hereby consent to the use of this opinion, which is included as an Exhibit to
the Registration Statement.
/s/ Calvin R. Birkey
- ----------------------------
Calvin R. Birkey, FSA, MAAA
Managing Actuary
PFL Life Insurance Company
