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File Nos. 333-12197
811-4092
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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. 1 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26 [X]
FIRST VARIABLE ANNUITY FUND E
-----------------------------
(Exact Name of Registrant)
FIRST VARIABLE LIFE INSURANCE COMPANY
-------------------------------------
(Name of Depositor)
10 Post Office Square, 12th Floor
Boston, MA 02109
--------------------------------------------------- ----------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's telephone number including area code: (617) 457-6700
Name and Address of Agent for Service
-------------------------------------
Arnold R. Bergman
Vice President - Legal and Administration
First Variable Life Insurance Company
10 Post Office Square, 12th Floor
Boston, MA 02109
Copies to:
Lynn K. Stone
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective:
|_| immediately upon filing pursuant to paragraph (b) of Rule 485
|X| on May 1, 1997 pursuant to paragraph (b) of Rule 485
|_| 60 days after filing pursuant to paragraph (a) (1) of Rule 485
|_| on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following:
_________ This Post-Effective Amendment designates a new effective date
for a previously filed Post-Effective Amendment.
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Registrant has declared that it has registered an indefinite number or amount of
securities in accordance with Rule 24f-2 under the Investment Company Act of
1940. Registrant filed a Rule 24f-2 Notice for its most recent fiscal year on or
about February 27, 1997.
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FIRST VARIABLE ANNUITY FUND E
CROSS REFERENCE SHEET
(Pursuant to Rule 495(a))
<TABLE>
<CAPTION>
Item No. in
Form N-4
- --------
PART A Location
- ------ --------
<S> <C>
Item 1. Cover Page Cover Page
Item 2. Definitions Definitions
Item 3. Synopsis or Highlights Highlights
Item 4. Condensed Financial Information Accumulation Unit Data; Financial Statements
Item 5. General Description of Registrant, The Company; The Separate Account; Variable
Depositor and Portfolio Companies Investors Series Trust; Federated Insurance
Series
Item 6. Deductions Charges and Deductions
Item 7. General Description of Variable Annuity The Contracts
Contracts
Item 8. Annuity Period Annuity Provisions
Item 9. Death Benefit The Contracts; Annuity Provisions
Item 10. Purchases and Contract Value Purchase Payments; Contract Value
Item 11. Redemptions Withdrawals
Item 12. Taxes Tax Considerations
Item 13. Legal Proceedings Legal Proceedings
Item 14. Table of Contents of Statement of Table of Contents of Statement of Additional
Additional Information Information
</TABLE>
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Item No. in
Form N-4 Location
- -------- --------
PART B
- ------
Item 15. Cover Page .................................Cover Page
Item 16. Table of Contents .................................Table of Contents
Item 17. General Information and History....................Company
Item 18. Services .................................Not Applicable
Item 19. Purchase of Securities Being Offered...............Not Applicable
Item 20. Underwriters .................................Distributor
Item 21. Calculation of Performance Data....................Performance
Information
Item 22. Annuity Payment .................................Annuity Provisions
Item 23. Financial Statements...............................Financial Statements
PART C
Information required to included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
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PART A
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[LOGO] FIRST VARIABLE LIFE INSURANCE COMPANY
Marketing and Executive Office: Variable Service Center:
10 Post Office Square P.O. Box 1317
Boston, MA 02109 Des Moines, IA 50305-1317
Automated Information Line: (800) 59-FUNDS (800) 845 - 0689
CAPITAL SIX VA
A Variable Annuity Contract
Funded in
FIRST VARIABLE ANNUITY FUND E
Prospectus
Dated: May 1, 19___
This Prospectus describes the Capital 6 contract (the "Contract"), an individual
flexible payment deferred variable annuity contract issued by First Variable
Life Insurance Company (the "Company"). The Contract provides for accumulation
of Contract Values and payment of monthly annuity payments on a fixed and
variable basis. The Contract is designed for use by individuals in tax-qualified
retirement plans (a "Qualified Contract") or for other long-term savings and
retirement purposes (a "Non-Qualified Contract").
Purchase Payments for a Contract may be allocated to the Company's segregated
investment account called First Variable Annuity Fund E (the "Separate Account")
or to the Company's Fixed Account. The Separate Account invests in selected
Portfolios of two mutual funds: Variable Investors Series Trust ("VIST") and
Federated Insurance Series ("Federated"). The Portfolios currently available
under a Contract are: VIST Growth, VIST Growth & Income, VIST High Income Bond,
VIST Matrix Equity, VIST Multiple Strategies, VIST Small Cap Growth, VIST U.S.
Government Bond, VIST World Equity and Federated Prime Money Fund II. (See
"Investment Options.") The Company reserves the right, under certain
circumstances, to delay the investment of initial Purchase Payments in VIST
Portfolios, but does not currently do so. (See "Application and Issuance of a
Contract.")
An investment in a Contract is not a deposit or obligation of, or guaranteed or
endorsed by, any financial institution, nor is a Contract federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency. An investment in the Contract is subject to risk that may cause
the value of the Owner's investment to fluctuate, and when the Contract is
surrendered, the value may be higher or lower than the Purchase Payment.
This Prospectus contains information that an investor should know before
investing. A Statement of Additional Information about the Contract and the
Separate Account, which has the same date as this Prospectus, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. The table of contents of the Statement of Additional Information can
be found on page ___ of this Prospectus. For a copy of the Statement of
Additional Information, which is available at no cost, write the Company at its
Variable Service Center or call the number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
Page
----
DEFINITIONS.............................................................
HIGHLIGHTS..............................................................
FEE TABLE AND EXAMPLES..................................................
ACCUMULATION UNIT DATA..................................................
THE COMPANY.............................................................
THE SEPARATE ACCOUNT....................................................
INVESTMENT OPTIONS......................................................
Variable Investors Series Trust.......................................
Federated Insurance Series............................................
Fixed Account Option..................................................
Transfers Among Investment Options....................................
Prior to the Annuity Date........................................
During the Annuity Period........................................
General Requirements.............................................
Systematic Transfers - Dollar Cost Averaging.....................
Asset Rebalancing Program........................................
Restrictions on Transfers
Automatic Transfer of Small Accounts
Telephone Transactions..................................................
Changes to Investment Options...........................................
CHARGES AND DEDUCTIONS..................................................
Administrative Charge.................................................
Annual Contract Maintenance Charge....................................
Mortality and Expense Risk Charge.....................................
Optional Enhanced Death Benefit Charge................................
Premium Taxes.........................................................
Withdrawal Charge.....................................................
Withdrawal Charge Percentages....................................
Partial Withdrawals..............................................
Free Withdrawal Amount...........................................
Waiver of Withdrawal Charge......................................
Other Charges and Expenses............................................
Fund Expenses....................................................
Income Taxes.....................................................
Special Service Fees.............................................
Elimination or Reduction of Charges and Expenses.................
THE CONTRACT............................................................
Application and Issuance of a Contract................................
Free Look Right..................................................
Delayed Investment Start Date....................................
Purchase Payments.....................................................
General Requirements.............................................
Conversion to Accumulation Units.................................
Automatic Investment Plan........................................
Contract Value........................................................
Accumulation Unit Value..........................................
Reports..........................................................
Ownership.............................................................
Assignment.......................................................
Change of Designations................................................
Owner............................................................
Annuitant........................................................
Beneficiary......................................................
Restrictions on Qualified Contracts..............................
Minimum Value Requirements............................................
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Termination of Small Accounts....................................
Transfer of Small Contract Value.................................
DEATH BENEFIT PROVISIONS................................................
Death of the Annuitant...............................................
Death of the Owner...................................................
Basic Death Benefit..............................................
Bonus Death Benefit..............................................
Optional Enhanced Death Benefit..................................
Payment of Death Benefit..............................................
Owners Other than a Single Person.....................................
Beneficiaries.........................................................
ANNUITY PROVISIONS......................................................
Annuity Date .........................................................
Annuity Payments......................................................
Allocation.......................................................
Amount...........................................................
Annuitization Bonus..............................................
Variable Annuity Payments........................................
Annuity Options.......................................................
Option A. Life Annuity...........................................
Option B. Life Annuity with Periods Certain of 60, 120, 180 or
240 Months......................................................
Option C. Joint and Survivor Annuity.............................
Option D. Joint and Contingent Annuity...........................
Option E. Fixed Payments for a Period Certain....................
Misstatement of Age or Sex............................................
WITHDRAWALS.............................................................
Partial Withdrawals...................................................
Systematic Withdrawals................................................
Tax Penalties and Restrictions........................................
Texas Optional Retirement Program.....................................
Suspension of Payments or Transfers...................................
PERFORMANCE INFORMATION.................................................
TAX CONSIDERATIONS......................................................
General...............................................................
Death Benefits........................................................
Diversification.......................................................
Contracts Owned by Other than Natural Persons.........................
Multiple Contracts....................................................
Income Tax Withholding................................................
Withdrawals from Non-Qualified Contracts..............................
Qualified Plans.......................................................
H.R. 10 Plans...................................................
403(b) Annuities.................................................
Individual Retirement Annuities..................................
Corporate Pension and Profit-Sharing Plans.......................
Section 457 Plans................................................
Withdrawals from Qualified Contracts..................................
Tax Sheltered Annuities - Withdrawal Limitations......................
OTHER MATTERS...........................................................
Financial Statements..................................................
Distribution..........................................................
Legal Proceedings.....................................................
Transfers by Company..................................................
Voting Rights.........................................................
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............
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DEFINITIONS
Account - Fixed Account and/or one or more of the Sub-Accounts of the Separate
Account.
Accumulation Period - The period during which Purchase Payments may be made
prior to the Annuity Date.
Accumulation Unit - A unit of measure used to calculate the Contract Value of a
Sub-Account of the Separate Account prior to the Annuity Date.
Accumulation Unit Value or AUV - The value of an Accumulation Unit on a Business
Day.
Annuitant - The natural person on whose life Annuity Payments are based.
Annuity Date - The date on which Annuity Payments begin.
Annuity Payments - The series of payments made to the Annuitant, or other payee
selected by the Owner, after the Annuity Date under the Annuity Option elected.
Annuity Period -The period after the Annuity Date during which Annuity Payments
are made.
Annuity Unit - A unit of measure used to calculate Variable Annuity Payments
after the Annuity Date.
Beneficiary -The person(s) or entity who will receive the death benefit.
Business Day - Each day that the New York Stock Exchange is open for trading,
which is Monday through Friday, except for normal business holidays.
Company - First Variable Life Insurance Company.
Contract Anniversary - An anniversary of the Issue Date.
Contract Quarter - One quarter of a Contract Year. The first Contract Quarter
begins on the Issue Date and ends on the last Business Day of the third contract
month.
Contract Value - The sum of the Owner's interest in the Sub-Accounts of the
Separate Account and in the Fixed Account.
Contract Year - One year from the Issue Date and from each Contract Anniversary.
Distributor - First Variable Capital Services, Inc., 10 Post Office Square,
Boston, MA 02109.
Fixed Account - The Company's general investment account which contains all the
assets of the Company with the exception of the Separate Account and other
segregated asset accounts.
Fixed Account Value - The Owner's interest in the Fixed Account during the
Accumulation Period.
Fixed Annuity Payments - A series of payments made during the Annuity Period
which are guaranteed as to dollar amount by the Company.
Funds - Variable Investors Series Trust and Federated Insurance Series, each of
which is an open-end management investment company in which the Separate Account
invests.
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Investment Option - The Fixed Account or any of the Sub-Accounts of the Separate
Account which can be selected by the Owner of a Contract.
Issue Date - The date on which the first Contract Year begins.
Non-Qualified Contracts - Contracts issued under retirement plans, or for other
purposes, which do not receive favorable tax treatment under Sections 401,
403(b), 408, or 457 of the Internal Revenue Code.
Owner - The person, persons or entity entitled to all the ownership rights under
a Contract and in whose name a Contract has been issued.
Portfolio - A Fund's separate and distinct class of shares that is available as
an underlying investment under a Contract.
Purchase Payment - An amount paid to the Company to provide benefits under the
Contracts.
Qualified Contracts - Contracts issued under retirement plans which receive
favorable tax treatment under Sections 401, 403(b), 408, or 457 of the Internal
Revenue Code.
Separate Account - A separate investment account of the Company, designated as
First Variable Annuity Fund E, into which Purchase Payments or Contract Values
may be allocated.
Sub-Account - A segment of the Separate Account which invests in a specified
Portfolio of one of the Funds.
Valuation Period - The period of time between the close of one Business Day and
the close of business for the next succeeding Business Day.
Variable Account Value - The Owner's interests in the Sub-Accounts of the
Separate Account during the Accumulation Period, which vary in amount with the
investment experience of each applicable Sub-Account.
Variable Annuity Payments - A series of payments made during the Annuity Period
which varies in amount with the investment experience of each applicable
Sub-Account.
Variable Service Center - The Company's administrative service center for a
Contract is P.O. Box 1317, 1206 Mulberry Street, Des Moines, IA 50305-1317.
Withdrawal Value - The value of a Contract that is available during the
Accumulation Period upon withdrawal or surrender. The Withdrawal Value is also
used to determine Annuity Payments that begin during the first 2 Contract Years.
Withdrawal Value equals the Contract Value as of the date the Company prices the
transaction, less:
o any applicable taxes not previously deducted; less
o the Withdrawal Charge, if any; less
o the Annual Contract Maintenance Charge, if any; less
o the Optional Enhanced Death Benefit Charge, if any.
HIGHLIGHTS
The Capital Six VA is an individual flexible payment variable annuity contract
(the "Contract"). The Owner may allocate Purchase Payments among ten Investment
Options under a Contract issued by First Variable Life Insurance Company (the
"Company"). Nine of these options are Sub-Accounts of First Variable Annuity
Fund E (the "Separate Account"), a segregated investment account of the Company.
Purchase Payments may also be allocated to the Fixed Account of the Company.
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Each Sub-Account invests exclusively in shares of a corresponding Portfolio of a
selected mutual fund (a "Fund"). The selected Funds are Variable Investors
Series Trust ("VIST") and Federated Insurance Series ("Federated"). The
Portfolios currently available are: VIST Growth, VIST Growth & Income, VIST High
Income Bond, VIST Matrix Equity, VIST Multiple Strategies, VIST Small Cap
Growth, VIST U.S. Government Bond, VIST World Equity, and Federated Prime Money
Fund II. (See "Investment Options.") Owners bear the investment risk for any
amounts allocated to a Sub-Account.
Owners have the right to return a Contract according to the terms of its
"free-look" right. The Company reserves the right to delay initial investments
of Purchase Payments in the VIST Portfolios in certain instances, but it does
not currently do so. (See "Application and Issuance of a Contract.")
Purchase Payments and other Contract Value allocated to the Fixed Account are
guaranteed by the Company as to safety of principal and are credited a minimum
3% rate of interest on an annual basis. The Company, in its discretion, may
credit a higher "current" interest rate. (See "Fixed Account Option.")
There is a daily Administrative Charge which is equal to a percentage of the
daily net assets in each Sub-Account of the Separate Account for this class of
Contract. The annual rate for this charge is .25%. This charge compensates the
Company for costs associated with the administration of a Contract and the
Separate Account. (See "Charges and Deductions--Administrative Charge.")
There is an Annual Contract Maintenance Charge of $30 each Contract Year during
the Accumulation Period. However, if the Contract Value on a Contract
Anniversary is at least $100,000, then no charge is taken. (See "Charges and
Deductions--Annual Contract Maintenance Charge.")
There is a daily Mortality and Expense Risk Charge which is equal to a
percentage of the daily net assets in each Sub-Account of the Separate Account
for this class of Contract. The annual rate for this charge is 1.25%. This
charge compensates the Company for assuming the mortality and expense risks
under the Contracts. (See "Charges and Deductions--Mortality and Expense Risk
Charge.")
The Contract provides different forms of Death Benefits if the Owner dies before
the Annuity Date. (See "Death Benefit Provisions.") If an Optional Enhanced
Death Benefit is elected, there is a charge which is taken on each Contract
Anniversary during the Accumulation Period up to the earlier of the Annuity Date
or the Owner's 80th birthday. The charge is .35% of the Contract Value on the
Contract Anniversary. The charge is also taken on the Annuity Date if the
Annuity Date is other than a Contract Anniversary or at the time of surrender if
a Contract is surrendered during a Contract Year, based on the Contract Value at
that time. (See "Charges and Deductions--Optional Enhanced Death Benefit
Charge.")
Premium taxes or other taxes payable to a state or other governmental entity
will be charged against the Purchase Payments or Contract Values. (See "Charges
and Deductions--Premium Taxes.")
A Withdrawal Charge of up to 7% of Purchase Payments may be deducted during the
first 6 Contract Years for a withdrawal or surrender of all or a portion of the
Contract Value. The Withdrawal Charge will also apply if Contract Value is
applied to an Annuity Option within the first 2 Contract Years. (See "Annuity
Provisions.") No Withdrawal Charge will be taken in any Contract Year on a
partial withdrawal unless the amount withdrawn exceeds the annual Free
Withdrawal Amount. The annual Free Withdrawal Amount is equal to 15% of Purchase
Payments. The Withdrawal Charge will vary in amount, depending upon the Contract
Year in which the Purchase Payment being surrendered was made. (See "Charges and
Deductions--Withdrawal Charge.")
A ten percent (10%) federal income tax penalty may be applied to the income
portion of any distribution from a Non-Qualified Contract before the Owner
reaches age 59 1/2, with certain exceptions. Separate tax withdrawal penalties
and restrictions apply to a Qualified Contract. Special restrictions apply to
distributions
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from a 403(b) annuity. (See "Tax Considerations--Withdrawals from Non-Qualified
Contracts," and "Withdrawals from Qualified Contracts," and "Withdrawal
Limitations on 403(b) Annuities.")
For a further discussion on the taxation of a Contract, see "Tax Considerations"
and "Tax Considerations--Diversification" for a discussion of owner control of
the underlying investments in a variable annuity contract.
VARIOUS CONTRACT RIGHTS, BENEFITS, AND INVESTMENT OPTIONS DESCRIBED IN THIS
PROSPECTUS MAY NOT BE AVAILABLE IN ALL JURISDICTIONS, OR MAY DIFFER BETWEEN
JURISDICTIONS TO MEET APPLICABLE LOCAL LAWS AND/OR REGULATIONS.
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FEE TABLE AND EXAMPLES
The charges and deductions under a Contract are summarized in the following
table. This table is designed to help an Owner understand direct and indirect
costs for a Contract, but should be read only in conjunction with the detailed
descriptions in the "Charges and Deductions" section of this prospectus. The
table assumes that the entire Contract Value is invested in the Separate
Account, and reflects expenses of the Separate Account as well as the
Portfolios. Owners should read the accompanying prospectuses of the Funds
carefully for further information of the expenses shown for each Portfolio. In
addition to the expenses listed below, a charge for premium taxes may be
applicable.
Owner Transaction Expenses
Withdrawal Charge (see Note 1 below) 7%, reducing by 1% each
(as a percentage of Purchase Payment) Contract Year after the
Issue Date until the
beginning of the seventh
Contract Year, when the
charge is 0%.
Annual Contract Maintenance Charge $30 per Contract Year if
Contract Value on a Contract
Anniversary is less than
$100,000.
Optional Enhanced Death Benefit Charge .35% (as a percentage of
(see Note 2 below) Contract Value at the time
the charge is taken each
Contract Year until earlier
of surrender, Annuity Date
or the Owner's 80th
birthday).
Separate Account Annual Expenses
(as a percentage of average Variable Account Value)
Mortality and Expense Risk Charge 1.25%
Administrative Charge .25%
-----
Total Separate Account Annual Expenses 1.50%
Funds' Annual Expenses
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
VIST Federated
VIST VIST VIST VIST Small VIST VIST Prime
VIST Growth Hi. Inc. Matrix Multiple Cap US Gov. World Money
Growth & Income Bond Equity Strat. Growth Bond Equity Fund II
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mgmt. Fees....... .70% .75% .70% .65% .70% .85% .60% .70% .55%
Other Operating
Expenses -
After Expense
Reimbursement .47% .50% .50% .50% .50% .50% .25% .50% .25%
---- ---- ---- ---- ---- ---- ---- ---- ----
(see Note 3)
Total Annual
Expenses 1.17% 1.25% 1.20% 1.15% 1.20% 1.35% .85% 1.20% .80%
</TABLE>
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Examples
An Owner would pay the following expenses on a $1,000 investment in a Contract,
assuming a 5% annual return on assets and allocation of 100% of Purchase
Payments to the Portfolio shown:
a) upon surrender at the end of each time period (or if the Contract is
annuitized during the first 2 Contract Years);
b) if the Contract is not surrendered: (or if the Contract is annuitized
after the first 2 Contract Years).
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
VIST Growth a) $100 $139 $180 $310
b) $ 28 $ 86 $46 $310
VIST Growth & Income a) $100 $142 $184 $318
b) $ 29 $ 88 $150 $318
VIST High Income Bond a) $100 $140 $181 $313
b) $ 28 $ 87 $148 $313
VIST Matrix Equity a) $ 99 $139 $179 $308
b) $ 28 $ 85 $145 $308
VIST Multiple Strategies a) $100 $140 $181 $313
b) $ 28 $ 87 $148 $313
VIST Small Cap Growth a) $101 $145 $189 $328
b) $ 30 $ 91 $156 $328
VIST U.S. Government Bond a) $ 97 $130 $164 $278
b) $ 25 $ 76 $130 $278
VIST World Equity a) $100 $140 $181 $313
b) $ 28 $ 87 $148 $313
Federated Prime Money Fund II a) $ 96 $129 $162 $272
b) $ 24 $ 75 $128 $272
Notes on Fee Tables and Examples
1. After the second Contract Year, the entire Contract Value may be applied to
an Annuity Option and no Withdrawal Charge will be taken. In each Contract Year
during the Accumulation Period, an Owner may request a "partial withdrawal" of
an amount of up to 15% of Purchase Payments without a Withdrawal Charge. Amounts
so withdrawn do not reduce the Purchase Payments subject to a withdrawal charge.
The 15% free withdrawal has not been factored into the Examples above, and is
not available on a full surrender.
2. If an Optional Enhanced Death Benefit is elected by the Owner at time of
application for a Contract, the Company deducts an annual charge on each
Contract Anniversary during the Accumulation Period until the earlier of the
Annuity Date or the Owner's 80th birthday. Also, the charge is taken if the
Annuity Date is other than a Contract Anniversary or if a Contract is
surrendered during a Contract Year, based on the Contract Value at that time.
(See "Charges and Deductions--Optional Enhanced Death Benefit Charge.")
3. First Variable Advisory Services Corp. ( "Investment Adviser" ) has agreed
through April 1, 1998 to reimburse Variable Investors Series Trust for all
operating expenses (exclusive of management fees) in excess of .50% of a
Portfolio's average net assets (.25% in the case of the U.S. Government Bond
Portfolio). Had the Investment Adviser not reimbursed expenses of the
Portfolios, for the year ended December 31, 1996, the VIST Annual Expenses would
have been 1.17% for the Growth Portfolio; 2.63% for the Growth & Income
Portfolio; 1.99% for the High Income Bond Portfolio; 1.48% for the Matrix Equity
Portfolio; 1.32% for the Multiple Strategies Portfolio; 2.38% for the Small Cap
Growth Portfolio; 1.66% for the U.S. Government
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Bond Portfolio; and 1.50% for the World Equity Portfolio. Federated Advisors,
the investment adviser for Federated, has voluntarily agreed to waive any
portion of its fee and/or reimburse certain operating expenses of Federated in
excess of .80% of the Federated Prime Money Fund II Portfolio's average net
assets, but can modify or terminate this voluntary agreement at any time at its
sole discretion. Had this investment adviser not waived expenses and/or
reimbursed expenses of the Federated Prime Money Fund II Portfolio for the year
ended December 31, 1996, the annual expenses, as a percentage of the Portfolio's
average assets, would have been 1.37%.
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ACCUMULATION UNIT DATA
On the date of this Prospectus, sales of the Contract had not commenced and,
accordingly, the value of Accumulation Units is not shown.
THE COMPANY
First Variable Life Insurance Company (the "Company") is a stock life insurance
company which was organized under the laws of the State of Arkansas in 1968. The
Company is principally engaged in the annuity business. The Company is licensed
in 49 states, the District of Columbia and the U.S. Virgin Islands. The Company
is a wholly-owned subsidiary of Irish Life of North America, Inc. ("ILoNA")
which in turn is beneficially owned by Irish Life plc ("Irish Life"). ILoNA also
owns Interstate Assurance Company ("Interstate") of Des Moines, IA. Irish Life
was formed in 1939 through a consolidation of a number of Irish and British Life
offices transacting business in Ireland. In terms of assets, Irish Life controls
over 50% of the Irish domestic life insurance market. As Ireland's leading
institutional investor, it owns in excess of 10% of the leading Irish publicly
traded stocks. Irish Life, through its international subsidiaries, conducts
business in Ireland, the United Kingdom, the United States and France. As of the
end of 1996, the Irish Life consolidated group had in excess of $11 billion in
assets. ILoNA is a Delaware corporation, incorporated as Carrig International,
Inc. in 1986, which is the holding company for Interstate and the Company.
The Company has an A- (Excellent) rating from A.M. Best, an independent firm
that analyzes insurance carriers. This rating is assigned to companies that have
a strong ability to meet obligations to policyholders over a long period of
time. The Company also has an AA- rating from Standard and Poor's and an AA
rating from Duff & Phelps Credit Rating Co. on claims paying ability. The
financial strength of the Company may be relevant with respect to the Company's
ability to satisfy its Fixed Account obligations under the Contracts.
THE SEPARATE ACCOUNT
The Board of Directors of the Company adopted a resolution to establish a
segregated asset account pursuant to Arkansas insurance law on December 4, 1979.
This account has been designated First Variable Annuity Fund E (the "Separate
Account"). The Company has registered the Separate Account with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended.
The assets of the Separate Account are the property of the Company. However, the
assets of the Separate Account, equal to the reserves and other contract
liabilities with respect to the Separate Account, are not chargeable with
liabilities arising out of any other business the Company may conduct. Income,
gains and losses, whether or not realized, are, in accordance with the
Contracts, credited to or charged against the Separate Account without regard to
other income, gains or losses of the Company. The Company's obligations arising
under a Contract are general obligations.
The Separate Account meets the definition of a "separate account" under the
federal securities laws.
The Separate Account is divided into Sub-Accounts, with the assets of each
Sub-Account invested in one Portfolio of a selected Fund. Owners bear the
complete investment risk for Purchase Payments and Contract Value allocated or
transferred to a Sub-Account. Contract Values fluctuate in accordance with the
investment performance of the Sub-Account(s), and reflect the imposition of fees
and charges assessed under a Contract.
INVESTMENT OPTIONS
Owners of a Contract may allocate Purchase Payments and Contract Value to one or
more Sub-Accounts of the Separate Account and to the Fixed Account. Each
Sub-Account invests exclusively in a Portfolio of a selected Fund. A brief
summary of the Funds and the investment objectives of the currently available
Portfolios is set forth below. More comprehensive information, including a
discussion of potential risks, is found in the current prospectuses for the
Portfolios which are included with this prospectus. The prospectuses
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for the Funds may describe other portfolios that are not available under a
Contract. THERE IS NO ASSURANCE THAT THE AVAILABLE PORTFOLIOS WILL ACHIEVE THEIR
STATED OBJECTIVES. Investors should read this prospectus and the prospectuses
for the Funds carefully before investing. To obtain prospectuses for the Funds,
write the Company at its Variable Service Center or call the number shown on the
cover page.
Variable Investors Series Trust
Variable Investors Series Trust ("VIST") is an open-end management investment
company that was formed as a series trust to provide funding options for
variable life insurance and variable annuity contracts. Effective April 1, 1994,
VIST retained First Variable Advisory Services Corp. ("FVAS") to manage its
assets. FVAS is a wholly-owned subsidiary of the Company and retains the
services of sub-advisers under agreements to manage the assets of the VIST
Portfolios. The sub-advisers for the VIST Portfolios currently available under a
Contract are: Value Line, Inc. with respect to VIST Growth and Multiple
Strategies; Warburg, Pincus Counsellors, Inc. with respect to VIST Growth &
Income; Federated Investment Counseling with respect to VIST High Income Bond;
Pilgrim Baxter & Associates, Ltd. with respect to VIST Small Cap Growth; State
Street Bank and Trust Company with respect to VIST Matrix Equity; Strong Capital
Management, Inc. with respect to VIST U.S. Government Bond; and Keystone
Investment Management Co. with respect to VIST World Equity. Prior to April 1,
1994, INVESCO Capital Management, Inc. was the investment adviser of VIST and
managed its assets.
Each Portfolio has a distinct investment objective and policy. The investment
objectives of the Portfolios available under a Contract are:
VIST Growth. The investment objective of this Portfolio is capital growth which
it seeks to achieve through a policy of investing primarily in a diversified
portfolio of common stocks and securities convertible into or exchangeable for
common stock. The secondary objective is current income when consistent with its
primary objective.
VIST Growth & Income. The investment objectives of this Portfolio are to provide
current income and growth of capital. The Portfolio seeks to achieve its
objectives by investing in equity securities, fixed income securities and money
market instruments. The portion of the Portfolio invested at any given time in
each of these asset classes will vary depending on market conditions, and there
may be extended periods when the Portfolio is primarily invested in one of them.
In addition, the amount of income derived from the Portfolio will fluctuate
depending on the composition of the Portfolio's holdings and will tend to be
lower when a higher portion of the Portfolio is invested in equity securities.
The Portfolio may also purchase without limitation dollar-denominated American
Depository Receipts ("ADRs"). ADRs are issued by domestic banks and evidence
ownership of underlying foreign securities.
VIST High Income Bond. The investment objective of this Portfolio is to obtain
as high a level of current income as is believed to be consistent with prudent
investment management. As a secondary objective, the Portfolio seeks capital
appreciation when consistent with its primary objective. The Portfolio seeks to
achieve its investment objectives by investing primarily in fixed-income
securities rated lower than A. Many of the high yield securities in which the
Portfolio may invest are commonly referred to as "junk bonds." For special risks
involved with investing in such securities (including among others, risk of
default and illiquidity), see "Investment Objectives and Policies of the
Portfolios--High Income Bond Portfolio" in the VIST prospectus.
VIST Matrix Equity. The investment objective of this Portfolio is capital
appreciation and current income. The Portfolio will seek to achieve its
investment objective by investing in a diversified portfolio that is selected by
the Sub-Adviser on the basis of its proprietary analytical model. Sector weights
are normally
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maintained at a similar level to that of the S&P 500 Index. The Portfolio will
invest at least 65% of its total assets in equity securities. (Prior to May 1,
1997, the VIST Matrix Equity Portfolio was known as the "VIST Tilt Utility
Portfolio" and had different policies, but maintained the same investment
objective.)
VIST Multiple Strategies. The investment objective of this Portfolio is to seek
as high a level of total return over an extended period of time as is considered
consistent with prudent investment risk by investing in equity securities, bonds
and money market instruments in varying proportions.
VIST Small Cap Growth. The investment objective of this Portfolio is to seek
capital appreciation. The Portfolio will invest, under normal conditions, at
least 65% of its total assets in securities of companies with market
capitalization or annual revenues under $1 billion at the time of purchase.
VIST U.S. Government Bond. The investment objective of this Portfolio is to seek
current income and preservation of capital through investment primarily in
securities issued or guaranteed as to principal and interest by the U.S.
Government or by its agencies, authorities or instrumentalities.
VIST World Equity. The investment objective of this Portfolio is to maximize
long-term total return by investing primarily in common stocks, and securities
convertible into common stocks, traded in securities markets located in
countries around the world, including the United States. See "Foreign
Investments" under "Policies and Techniques Applicable to all Portfolios" in the
VIST prospectus for a discussion of the risks involved in investing in foreign
securities.
Federated Insurance Series
Federated Insurance Series ("Federated") is an open-end investment management
company that was formed as a series trust to provide funding options for
variable life insurance and variable annuity contracts. Pursuant to an
investment advisory contract with Federated, investment decisions for Federated
are made by Federated Advisers, an affiliate of Federated Investment Counseling.
Federated Prime Money Fund II. The investment objective of the Portfolio is to
provide current income consistent with stability of principal and liquidity. The
Fund pursues its investment objective by investing exclusively in a portfolio of
money market instruments maturing in 397 days or less. An investment in the
Federated Prime Money Fund II Portfolio is neither insured nor guaranteed by the
U.S Government.
Fixed Account Option
This Prospectus is generally intended to describe the Contract and Separate
Account. Because of certain exemptive and exclusionary provisions, interests in
the Fixed Account are not registered under the Securities Act of 1933 and the
Fixed Account is not registered as an investment company under the Investment
Company Act of 1940, as amended. Accordingly, neither the Fixed Account nor any
interests therein are subject to the provisions of these Acts, and the Company
has been advised that the staff of the Securities and Exchange Commission has
not reviewed the disclosures in the Prospectus relating to the Fixed Account.
The Company guarantees that it will credit interest to Contract Value in the
Fixed Account at a minimum rate of 3% per year. Additional amounts of "current"
interest may be credited by the Company in its sole discretion. The initial
current interest rate will be guaranteed for at least one year. New Purchase
Payments and transfers from the Separate Account allocated to the Fixed Account
may each receive different current interest rate(s) than the current interest
rate(s) credited to Contract Value existing in the Fixed Account. The Company
determines current interest rates in advance and credits interest daily to Fixed
Account Value.
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Transfers Among Investment Options
An Owner may transfer Contract Value among Investment Options each Contract Year
without a Transfer Fee. Transfers may be initiated by either written or
telephone request. (See "Telephone Transactions.")
Prior to the Annuity Date. Contract Value to be transferred from the Fixed
Account to other Investment Options in any Contract Year may not exceed:
o 25% of the Fixed Account Value on the Issue Date for transfers during the
first Contract Year; or
o For transfers after the first Contract Year, the greater of 25% of Fixed
Account Value on the immediately preceding Contract Anniversary or 100% of
the Fixed Account Value transferred to other Investment Options during the
immediately preceding Contract Year.
During the Annuity Period. The Owner may make a transfer once each Contract
Year: (i) from one or more Sub-Accounts to other Sub-Accounts; or (ii) to the
Fixed Account. No transfers will be permitted from the Fixed Account to the
Separate Account. Amounts transferred from a Sub-Account to the Fixed Account
are subject to certain procedures set out in the Contract.
General Requirements. All transfers are subject to the following:
o The minimum amount which may be transferred is the lesser of (i) $1,000;
or (ii) the Owner's entire interest in the applicable Sub-Account or Fixed
Account.
o Any transfer instruction must clearly specify the amount which is to be
transferred and the Accounts which are to be affected.
o The Company reserves the right at any time and without prior notice to any
party to modify, suspend or terminate the transfer privileges, including,
but not limited to, the description in "Suspension of Payments or
Transfers."
Systematic Transfers - Dollar Cost Averaging. The Company permits systematic
transfers, such as a dollar cost averaging program, that an Owner may elect by
written request. Through systematic transfers, amounts are systematically
transferred each month or quarter from a selected Investment Option to other
pre-selected Investment Options. The dollar cost averaging program permits
transfers from the Federated Prime Money Fund II Sub-Account or the Fixed
Account to other Sub-Account(s) on a regularly scheduled basis. Through use of
systematic transfers, instead of transfers of the total Contract Value at one
particular time, an Owner may be less susceptible to the impact of market
fluctuations. The minimum amount which may be transferred is $250. The Company
may require a minimum amount of Contract Value before permitting systematic
transfers. The Company requires $6,000 of Contract Value to be in the Prime
Money Fund II Sub-Account or the Fixed Account, as applicable, before a "dollar
cost averaging" program may begin.
All systematic transfers are made on the same day of each month or quarter (or
the next Business Day if the same day of the month or quarter is not a Business
Day). Under certain circumstances, the Company may impose restrictions on an
Owner's ability to participate in the dollar cost averaging program and
limitations on the amounts that can be transferred from the Fixed Account to any
Sub-Accounts under a systematic transfer program. An Owner participating in the
dollar cost averaging program may not participate in the systematic withdrawal
program. (See "Withdrawals--Systematic Withdrawals.")
Asset Rebalancing Program. The Company administers an asset rebalancing program
that an Owner may elect by written request to the Company at its Variable
Service Center. The asset rebalancing program enables the Owner to indicate to
the Company the percentage levels of Contract Value he or she would like to
maintain in particular Sub-Accounts. On the last Business Day of each Contract
Quarter, the Contract Value will be automatically rebalanced to maintain the
indicated percentages by transfers among the Separate Account Investment
Options. All Contract Value allocated to the Separate Account Investment Options
must
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be included in the asset rebalancing program. Other investment programs, such as
systematic transfers and systematic withdrawals, or other transfers or
withdrawals may not work in concert with the asset rebalancing program.
Therefore, Owners should monitor their use of these programs and other transfers
or withdrawals while the asset rebalancing program is being used.
Restrictions on Transfers. Programmed or other frequent requests to transfer
Investment Options by, or on behalf of, an Owner may have a detrimental effect
on the Fund share values held in the Separate Account. The Company may,
therefore, limit the number of permitted transfers in any Contract Year, or
refuse to honor any transfer request on behalf of an Owner or a group of Owners
if it is informed that the purchase or redemption of shares of one or more of
the Portfolios is to be restricted because of excessive trading, or if a
specific transfer or group of transfers is deemed to have a detrimental effect
on AUV or Portfolio share prices.
The Company may also at any time suspend or cancel its acceptance of third party
authorizations on behalf of an Owner or restrict the Investment Options that
will be available for transfers. Notice will be provided to the third party in
advance of the restrictions. The restrictions will not be imposed, however, if
the Company is given satisfactory evidence that: (a) the third party has been
appointed by the Owner to act on the Owner's behalf for all financial affairs;
or (b) the third party has been appointed by a court of competent jurisdiction
to act on the Owner's behalf.
Automatic Transfer of Small Accounts. The Company reserves the right, to the
extent permitted by law, on any Business Day to transfer Contract Value held in
any Investment Option if the Contract Value in that Investment Option is less
than $250, to the Investment Option with the then highest Contract Value.
(See "The Contract--Minimum Value Requirements.")
Telephone Transactions
An Owner may initiate various transactions by telephone. The Variable Service
Center (1-800-845-0689) is available for telephone transfers of Account Value,
notification of change of address, change of premium allocations among
Investment Options, partial withdrawal requests and systematic withdrawals.
The Company's automated information line (1-800-59-FUNDS) is available for
current information on Accumulation Unit Values, current Account Value, and for
telephone transfers of Account Value.
If there are joint owners of a Contract, unless the Company is informed to the
contrary, instructions will be accepted from either one of the joint owners.
Requests for transfers or reallocations by telephone will be automatically
permitted. The Company will use reasonable procedures such as requiring certain
identifying information from the caller, tape recording the telephone
instructions, and providing written confirmation of the transaction, in order to
confirm that instructions communicated by telephone are genuine. Any telephone
instructions reasonably believed by the Company to be genuine will be the
Owner's responsibility, including losses arising from any errors in the
communication of instructions. As a result of this, the Owner will bear the risk
of loss. If the Company does not employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, the Company may be liable
for any losses due to dishonored or fraudulent instructions.
Changes to Investment Options
New Sub-Accounts may be established and additional Portfolios or mutual funds
may be made available by the Company when, in its sole discretion, it determines
that conditions so warrant. Any new Sub-Accounts may be made available to
existing Owners on a basis to be determined by the Company. Each additional
Sub-Account will purchase shares in a Portfolio of a Fund, or in another mutual
fund or investment vehicle.
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The Company does not guarantee that continued purchase of Portfolio shares will
remain appropriate in view of the purposes of the Separate Account. If shares of
a Portfolio are no longer available for investment by the Separate Account, or,
if in the judgment of the Company, further investment in the shares should
become inappropriate in view of the purpose of the Contracts, the Company may
limit further purchase of these shares or may substitute shares of another
Portfolio, or mutual fund or other investment option for shares already
purchased or to be purchased in the future. No substitution of securities may
take place without prior approval of the Securities and Exchange Commission and
under the requirements it may impose. The Company will send prior notice of any
substitution to Contract Owners.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Contract Value and the Separate
Account. These are:
Administrative Charge
The Company deducts on each Business Day, both prior to and during the Annuity
Period, an Administrative Charge which is equal to a percentage of the daily net
assets in each Sub-Account for this class of Contract. The annual rate for this
charge is .25%. This charge, together with the Annual Contract Maintenance
Charge (see below), compensates the Company for costs associated with the
administration of a Contract and the Separate Account. The Company does not
intend to profit from this charge.
Annual Contract Maintenance Charge
During the Accumulation Period, the Company deducts an Annual Contract
Maintenance Charge of $30 from the Contract Value on each Contract Anniversary.
However, if the Contract Value on a Contract Anniversary is at least $100,000,
then no Annual Contract Maintenance Charge will be deducted. If a total
withdrawal is made on other than a Contract Anniversary, and the Contract Value
at the time is less than $100,000, then the Annual Contract Maintenance Charge
will be deducted.
This charge is to reimburse the Company for its administrative expenses. This
charge is deducted by subtracting values from the Fixed Account and/or canceling
Accumulation Units from each applicable Sub-Account in the ratio that the value
of each Account bears to the total Contract Value. If the Annuity Date is not a
Contract Anniversary, the Annual Contract Maintenance Charge will be deducted on
the Annuity Date. After the Annuity Date, no Annual Contract Maintenance Charge
is taken. The Company does not intend to profit from this charge.
Mortality and Expense Risk Charge
The Company deducts on each Business Day, both prior to and during the Annuity
Period, a Mortality and Expense Risk Charge which is equal to a percentage of
the daily net assets in each Sub-Account of the Separate Account for this class
of Contract. The annual rate for this charge is 1.25%. The mortality risks
assumed by the Company arise from its contractual obligation to make annuity
payments after the Annuity Date for the life of the Annuitant and to waive the
Withdrawal Charge in the event of the death of the Owner. The Company also bears
a mortality risk with respect to the death benefit. The expense risk assumed by
the Company is that all actual expenses involved in administering the Contracts,
including Contract maintenance costs, administrative costs, mailing costs, data
processing costs, legal fees, accounting fees, filing fees and the costs of
other services may exceed the amount recovered from the Annual Contract
Maintenance Charge and the Administrative Charge.
If the Mortality and Expense Risk Charge 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. The
Company expects a profit from this charge. If the actual costs for distribution
of the Contract exceed the amount realized by the Company from the Withdrawal
Charge, the deficiency will be met from the
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Company's general assets which may include amounts, if any, derived from the
Mortality and Expense Risk Charge. The Mortality and Expense Risk Charge is
guaranteed by the Company and cannot be increased.
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Optional Enhanced Death Benefit Charge
An Owner may elect an enhanced death benefit at the time of application for a
Contract. This benefit guarantees that upon death of the Owner while the
enhanced death benefit is in effect, the death benefit payable under the
Contract will be at least equal to the sum of Purchase Payments less amounts
attributable to Withdrawals (including applicable charges), accumulated at an
annual rate of 4.5% up to a maximum amount equal to twice the sum of Purchase
Payments. The enhanced death benefit ends on the earliest of: (a) the date of
the Owner's death; (b) the Owner's 80th birthday; or (c) the Annuity Date. The
enhanced death benefit may also end if a new owner is designated. If this option
is elected, the Company deducts an Enhanced Death Benefit Charge on each
Contract Anniversary prior to the earlier of the Annuity Date or the Owner's
80th birthday based on the Contract Value on the Contract Anniversary. The
charge is also deducted on the Annuity Date if the Annuity Date is on a date
other than a Contract Anniversary, at the time of surrender, or if the Contract
is surrendered based on the Contract Value at that time. The Enhanced Death
Benefit Charge is equal to .35% of the Contract Value at the time the charge is
taken. The charge is assessed pro-rata among the Investment Options under a
Contract, and will result in a cancellation of Accumulation Units credited to a
Contract and reduction in Fixed Account Value. (See "Death of the Owner.")
Premium Taxes
Premium taxes or other taxes payable to a state or other governmental entity
will be charged against the Contract Values. The Company currently intends to
deduct premium taxes when incurred. Some states assess premium taxes at the time
Purchase Payments are made; others assess premium taxes at the time annuity
payments begin. Premium taxes generally range from 0% to 4%.
Withdrawal Charge
The Company incurs expenses in connection with the promotion, sale and
distribution of the Contract. To recover these expenses, the Company imposes a
Withdrawal Charge on the withdrawal or surrender of Contract Value during the
first 6 Contract Years. (See "Withdrawals.") The Withdrawal Charge is also
imposed on the Annuity Date if the Annuity Date is within the first 2 Contract
Years. (See "Annuity Provisions--Annuity Date.") To the extent that the
Withdrawal Charge is insufficient to cover the actual cost of distribution, the
Company may use any of its corporate assets, including potential profit which
may arise from the Mortality and Expense Risk Charge, to provide for any
difference.
The Withdrawal Charge is determined by applying the Withdrawal Charge
percentages shown below to the Purchase Payments deemed withdrawn, surrendered
or applied to an Annuity Option. The charge will vary depending on the Contract
Year. Purchase Payments are deemed withdrawn in the order in which they are
made. The amount deducted from the Contract Value will be determined by
subtracting values from the Fixed Account and/or canceling Accumulation Units
from each applicable Sub-Account in the ratio that the value of each Account
bears to the total Contract Value, unless another method is requested and the
Company approves the request.
Withdrawal Charge Percentages. The Withdrawal Charge percentages are:
- --------------------------------------------------------------------------------
Contract Year 1 2 3 4 5 6 7+
Withdrawal Charge Percentage 7% 6% 5% 4% 3% 2% 0%
- --------------------------------------------------------------------------------
Partial Withdrawals. Prior to the Annuity Date, an Owner may make partial
withdrawals each Contract Year provided that the minimum Contract Value after
each partial withdrawal is $1,000. A partial withdrawal may be requested by
either written or telephone request. (See "Telephone Transactions.") A partial
withdrawal must be for at least $1,000 or, if less, the Owner's entire interest
in the Investment Option from which the partial withdrawal is requested to be
taken. (See "Withdrawals--Systematic Withdrawals.") The Withdrawal
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Charge on a partial withdrawal is deducted from the remaining Contract Value, if
sufficient; otherwise it is deducted from the amount withdrawn. Unless the Owner
requests otherwise, partial withdrawals will ordinarily result in the
cancellation of Accumulation Units from each Sub-Account and a reduction in
Fixed Account Value in the ratio that each Sub-Account and the Fixed Account
bears to the total Contract Value. (See "Withdrawals.")
Withdrawal requests that would result in remaining Withdrawal Value of less than
$1,000 may be deemed a surrender and termination of the Contract. (See "Minimum
Value Requirements - Termination of Small Accounts.")
Free Withdrawal Amount. No Withdrawal Charge will be taken on a partial
withdrawal unless the amount withdrawn exceeds the Free Withdrawal Amount. In
any Contract Year, the annual Free Withdrawal Amount for partial withdrawals is
equal to 15% of Purchase Payments. These 15% withdrawals do not reduce Purchase
Payments for purposes of computing the Withdrawal Charge. The Withdrawal Charge
will apply to the amount withdrawn or surrendered during any of the first 6
Contract Years that exceeds 15% of Purchase Payments. The unused portion of the
Free Withdrawal Amount for one Contract Year will not carry over to the next
Contract Year. The Free Withdrawal Amount is not available on a total surrender
or on withdrawal requests that fail to meet the minimum remaining Contract Value
requirement for a partial withdrawal. (See "Minimum Value Requirements -
Termination of Small Accounts.")
Waiver of Withdrawal Charge. The Company will waive the Withdrawal Charge:
o If any death benefits are paid; or
o If the Contract Value is applied after the first 2 Contract Years to an
Annuity Option. (See "Annuity Provisions.")
Subject to state availability, the Company will also waive the Withdrawal
Charge:
o If the Owner or Owner's spouse is diagnosed with a terminal illness. The
Company may require evidence of such illness, including an examination by
a licensed physician of the Company's choice; or
o After the first Contract Year if the Owner or the Owner's spouse is
confined for the immediately preceding 90 consecutive days in a qualifying
nursing home.
To qualify for a waiver of charges based on confinement in a qualifying nursing
home, the Owner or the Owner's spouse, as the case may be, must never have been
confined in a qualifying nursing home on or before the date of application for
the Contract.
Owners should review their Contracts carefully for a complete description of the
terminal illness and nursing home waiver of charges requirements.
Other Charges and Expenses
Fund Expenses. There are other deductions from, and expenses paid out of, the
assets of the Portfolios of a Fund which are described in the accompanying
prospectuses for the Funds.
Income Taxes. While the Company is not currently reducing Contract Value for
federal income taxes of the Separate Account, the Company reserves the right to
do so if it determines, in its sole discretion, that it will incur a tax as a
result of the operation of the Separate Account. The Company will deduct for any
income taxes incurred by it as a result of the operation of the Separate Account
whether or not there was a Company reserve for taxes and whether or not it was
sufficient.
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The Company will deduct any withholding taxes required by applicable law when
amounts are distributed from a Contract. (See "Tax Status--Income Tax
Withholding.")
Special Service Fees. The Company may charge Owners for special services, such
as additional reports, systematic withdrawals, dollar cost averaging, the asset
rebalancing program and minimum distributions. As of the date of this
Prospectus, it does not charge for these special services.
Elimination or Reduction of Charges and Expenses. The charges and expenses on a
Contract may be reduced or eliminated, in whole or in part, when sales of a
Contract are made to individuals or to a group of individuals in a manner that
results in savings of sales or administration expenses. Any reduction will be
determined by the Company after examination of relevant factors such as:
o the size and type of group to which sales are to be made because the
expenses for a larger group are generally less than for a smaller group
since large numbers of Contracts may be implemented with fewer contacts;
o the total amount of Purchase Payments to be received because expenses are
likely to be less on larger Purchase Payments than on smaller ones;
o any prior or existing relationship with the Company because of the
likelihood of implementing the Contract with fewer contacts; and
o other circumstances, of which the Company is not presently aware, which
could result in reduced expenses.
Charges may also be eliminated when a Contract is issued to an officer, director
or employee of the Company or any of its affiliates. In no event will reductions
or elimination of the charges be permitted where reductions or elimination will
be unfairly discriminatory to any person.
THE CONTRACT
Application and Issuance of a Contract
An application, or other request form acceptable to the Company, must be
completed and submitted to the Company to purchase a Contract, together with the
minimum required initial Purchase Payment. (See "Purchase Payments - General
Requirements.") A Contract ordinarily will be issued in respect of Owners and
Annuitants up to Age 85. Investors in Qualified Contracts for Owners and
Annuitants beyond Age 70 1/2 should consult with qualified tax advisers on the
impact of minimum distribution requirements under their retirement plans. Any
required annual minimum distribution amount should be withdrawn from an existing
retirement plan before amounts are transferred to purchase a Qualified Contract.
(See "Tax Considerations - Withdrawals from Qualified Contracts.")
The Owner, Annuitant and Beneficiary on a Contract are initially designated by
the applicant and subject to the Company's underwriting rules. If the
application for a Contract is in good order, the Company will apply the Purchase
Payment within 2 business days of receipt: (a) to the Separate Account and
credit the Contract with Accumulation Units; and/or (b) to the Fixed Account and
credit the Contract with dollars. If the application for a Contract is not in
good order, the Company will attempt to get it in good order or the Company will
return the application and the Purchase Payment within 5 business days. The
Company will not retain a Purchase Payment for more than 5 business days while
processing an incomplete application unless it has been authorized by the
purchaser. The Company may decline any application.
Free Look Right. An Owner has the right to review a Contract during an initial
inspection period specified in the Contract and, if dissatisfied, to return it
to the Company or to the agent through whom it was purchased. When the Contract
is returned to the Company during the permitted period, it will be voided as if
it had never been in force. The Company will ordinarily refund the Contract
Value (which may be greater or less than the
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Purchase Payments received) on a Contract returned during the permitted period,
unless a different amount is required. The "free look" period is typically 10
days and may be greater depending on state requirements.
Delayed Investment Start Date. Initial Purchase Payments are allocated to the
Sub-Accounts or to the Fixed Account as selected by the Owner. On the date of
this Prospectus, the Company does not delay investment start dates and will
allocate Purchase Payments to the selected Investment Options upon issuance of a
Contract. The Company reserves the right, however, to allocate initial Purchase
Payments to the Prime Money Fund II Sub-Account for an investment delay period
before they will be invested (together with any investment gain) in any other
Sub-Account(s) designated by the Owner. If the Company elects to delay such
initial investments in Sub-Accounts, the delay would apply where a Contract is
issued subject to a requirement that Purchase Payments be refunded upon the
exercise of the Free Look Right. Allocation to the Sub-Account(s) designated by
the Owner would be made at the end of the "free look" inspection period. The
investment delay period would be measured from the date a Contract is issued
from the Variable Service Center. It would include up to 5 days to provide time
for mail or other delivery of the Contract to the Owner in addition to the
applicable "free look" inspection period. Should the Company elect to delay
investment start dates, it will so advise prospective investors in a Contract.
Purchase Payments
General Requirements. The initial Purchase Payment is due on the Issue Date.
Unless the Owner participates in the automatic investment plan described below,
the minimum initial Purchase Payment is $5,000 for Non-Qualified Contracts and
$2,000 for Qualified Contracts. The minimum amount for each subsequent Purchase
Payment is $200, unless an automatic investment plan is in effect. The Company
reserves the right to decline any Purchase Payment. Unless the Company consents
otherwise, the maximum amount of cumulative Purchase Payments is $1,000,000.
Conversion to Accumulation Units. Purchase Payments allocated to the
Sub-Account(s) of the Separate Account are converted into Accumulation Units and
credited to a Contract on the basis of Accumulation Unit Value next determined
after receipt of a Purchase Payment. Calculations of Accumulation Unit Value for
each Sub-Account are made as of the end of each Business Day. This is done by
dividing each Purchase Payment allocated to a Sub-Account by the dollar value of
an Accumulation Unit of that Sub-Account as of the end of the Business Day.
Initial Purchase Payments are converted into Accumulation Units when a Contract
is issued.
Automatic Investment Plan. An Owner may elect to make Purchase Payments to a
Contract by pre-authorized transfers from a checking account. The checking
account must be with a bank that is a member of the Automated Clearing House
(ACH). Purchase Payments under this method may be allocated to a Sub-Account,
but not to the Fixed Account. (See "Investment Options.") If an automatic
investment plan is elected, the Company will lower its Purchase Payment
requirements as follows:
o For a Non-Qualified Contract, the initial Purchase Payment may be as low
as $1,000 if the applicant furnishes bank draft instructions for
subsequent Purchase Payments of at least $100 each.
o For a Qualified Contract, the initial Purchase Payment may be as low as
$500 if the applicant furnishes bank draft instructions for subsequent
Purchase Payments of at least $100 each.
The Company may further reduce the minimum Purchase Payment requirement on
automatic investment plans for a Contract issued under certain group sponsored
arrangements. Participation in the automatic investment plan may be suspended or
terminated if there are insufficient funds in the checking account to cover any
transfer.
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Contract Value
The Contract Value on any Business Day is the sum of the Owner's interest in the
Sub-Accounts of the Separate Account and in the Fixed Account. The Owner's
interest in a Sub-Account is determined by multiplying the number of that
Sub-Account's Accumulation Units credited to a Contract by the Accumulation Unit
Value, or "AUV," for the Sub-Account.
Accumulation Unit Value. AUVs for each Valuation Period fluctuate to reflect the
performance of the Sub-Accounts. The AUV for a Sub-Account on any Business Day
is priced by the Company as follows:
o The Accumulation Unit Value of the Sub-Account is based on the net asset
value per share of the underlying Portfolio.
o Any applicable charge (or credit) for federal and state taxes attributable
to the Sub-Account is subtracted (or added).
o The cumulative unpaid Mortality and Expense Risk Charge, and the
cumulative unpaid Administrative Charge is subtracted.
o The result is divided by the total number of Accumulation Units held in
the Sub-Account, before the purchase or redemption of any Accumulation
Units at the end of the current Business Day.
The AUV for one Sub-Account may differ from the AUV of a different Sub-Account
and may increase or decrease from Business Day to Business Day.
Reports. The Company will provide the Owner with reports on Contract Value at
least annually. Additional reports may be requested by the Owner. The Company
reserves the right to impose a charge for the cost of providing any additional
reports, but does not currently do so.
Ownership
The Owner has all rights and may receive all benefits under the Contract. The
Owner is the person designated by the applicant, unless changed. Upon the death
of the Owner, the Beneficiary is the Owner.
Assignment. The Owner may, at any time during his or her lifetime, assign his or
her rights under the Contract. The Company will not be bound by any assignment
until written notice is received by the Company at its Variable Service Center.
The Company is not responsible for the validity or tax consequences of any
assignment. The Company will not be liable as to any payment or other settlement
made by the Company before receipt of the assignment. Assignment of a
Non-Qualified Contract may be considered a distribution subject to federal
income taxes including, with certain exceptions, a 10% penalty tax before age 59
1/2. Owners of Qualified Contracts should consult a competent tax adviser as to
any mandatory restrictions on assignment in their retirement plans and the
impact of income taxes on permitted assignments. (See "Tax Considerations.")
Change of Designations
A request to change the designated Owner, Annuitant, or Beneficiary must be made
in writing and received by the Company at the Variable Service Center. The
change will become effective as of the date the written request is signed. A new
designation will not apply to any payment made or action taken by the Company
prior to the time it records the change.
A permitted change of a designation will automatically revoke any prior
designation of the same type (e.g., a change of Owner revokes a prior change of
Owner; a change of Annuitant revokes a prior change of Annuitant; a change of
Beneficiary revokes a prior change of Beneficiary).
Owner. The Owner may change the Owner at any time prior to the Annuity Date.
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Annuitant. A new Annuitant may be designated by the Owner prior to the Annuity
Date, but not if the Contract is owned by a non-natural person. The Owner may
automatically become the Annuitant if a new Annuitant is not designated within
30 days of the death of the Annuitant prior to the Annuity Date.
(See "Death of Annuitant.")
Beneficiary. Subject to the rights of any irrevocable Beneficiary(ies), the
Owner may change the primary Beneficiary(ies) or contingent Beneficiary(ies).
Restrictions on Qualified Contracts. Any Qualified Contract may have
restrictions on changes of Owner, Annuitant or Beneficiary. An Owner should
consult a competent tax adviser as to the tax consequences which may result.
Minimum Value Requirements
Termination of Small Accounts. A withdrawal request that would cause the
remaining Withdrawal Value to be less than $1,000 may be deemed a surrender of
the Contract by the Company. The Company reserves the right to terminate the
Contract. In such event, the Company will pay the Withdrawal Value to the Owner.
The Company also reserves the right to terminate a Contract if the Withdrawal
Value on any Business Day falls below $1,000 and no Purchase Payments were
received by the Company during the current Contract Year and the preceding 2
Contract Years. Prior to terminating small accounts for failure to pay Purchase
Payments, the Company will provide Owners with 30 days notice, and an
opportunity to make an additional Purchase Payment to increase the Contract
Value above the minimum amount during this period.
Payments resulting from the termination of a Contract may be considered a
taxable distribution and may be subject, with certain exceptions, to a 10%
penalty tax for distributions before age 59 1/2. (See "Tax Considerations.")
Transfer of Small Contract Value. The Company reserves the right, to the extent
permitted by law, to transfer the amount of Contract Value held in a particular
Investment Option if, on any Business Day, the Contract Value in that Investment
Option is less than $250, to the Investment Option under a Contract that has the
highest Contract Value.
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DEATH BENEFIT PROVISIONS
Death of the Annuitant
Upon the death of the Annuitant prior to the Annuity Date, the Owner may
designate a new Annuitant. If no designation is made within 30 days of the death
of the Annuitant, the Owner will become the Annuitant. However, if the Owner is
a non-natural person, then the death of the Annuitant will be treated as the
death of the Owner and a new Annuitant may not be designated. (See "Death of the
Owner.")
Upon the death of the Annuitant after the Annuity Date, the Death Benefit, if
any, will be as specified in the Annuity Option elected and will be paid at
least as rapidly as under the method in effect prior to the Owner's death. (See
"Annuity Provisions --Annuity Options.")
Death of the Owner
The Contract provides for a Death Benefit to be paid to the Beneficiary upon the
death of an Owner prior to the Annuity Date. Subject to state availability, the
Death Benefit is:
o the Basic Death Benefit; or
o if greater and if no withdrawals of Contract Value have been taken during
the Owner's lifetime, the Bonus Death Benefit; or
o if greater and if elected, the Enhanced Death Benefit.
Upon the death of an Owner on or after the Annuity Date, any remaining payments
under the Contract will be distributed at least as rapidly as under the method
of distribution being used as of the date of the Owner's death.
Basic Death Benefit. The Basic Death Benefit is the greater of:
o Purchase Payments less the sum of any reductions in Contract Value
attributable to partial withdrawals during the Owner's lifetime (including
applicable charges); or
o the Contract Value
Bonus Death Benefit. The Bonus Death Benefit is the greater of:
o The Basic Death Benefit on the date of the Owner's death; or
o The Step Up Amount in effect on the date of the Owner's death.
A Step Up Amount is determined at the start of each Bonus Period while a
Contract is in force. The first Bonus Period begins on the Issue Date and ends
on the earlier of the sixth Contract Anniversary or the day on which the Owner
attains Age 80. Each succeeding Bonus Period is for the next 6 Contract Years
or, if earlier, until the Owner attains Age 80.
The Step Up Amount at the start of the first Bonus Period is the initial
Purchase Payment. The Step Up Amount at the start of each succeeding Bonus
Period is the greater of:
o The Step Up Amount at the end of the preceding Bonus Period; or
o The Contract Value at the end of the preceding Bonus Period.
The Step Up Amount during any Bonus Period is increased by the amount of
Purchase Payments received by the Company during that Bonus Period.
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The Step Up Amount on and after the day the Owner attains Age 80 is zero. Unless
the Company consents otherwise, the Bonus Death Benefit will end if the Owner is
changed.
Optional Enhanced Death Benefit. The Owner may elect an Enhanced Death Benefit
at the time a Contract is purchased. The Enhanced Death Benefit, up to the
Owner's 80th birthday, is an amount equal to:
o Purchase Payments, less the sum of any reductions in Contract Value
attributable to partial withdrawals during the Owner's lifetime (including
applicable charges); and
o interest accumulated at an annual rate of 4.5%.
up to a maximum amount equal to two (2) times the sum of Purchase Payments. The
Enhanced Death Benefit on and after the day the Owner attains Age 80 is zero.
Unless the Company consents otherwise, the Enhanced Death Benefit will end if
the Owner is changed.
If the Enhanced Death Benefit is elected by the Owner, the Company deducts an
Enhanced Death Benefit Charge on each Contract Anniversary prior to the Annuity
Date or the Owner's 80th birthday, if earlier. The charge is also deducted if
the Annuity Date is on a date other than a Contract Anniversary or if the
Contract is surrendered, based on the Contract Value at that time. The Enhanced
Death Benefit Charge is equal to .35% of the Contract Value at the time the
charge is taken. (See "Charges and Deductions Optional Enhanced Death Benefit
Charge.")
In the case of Joint Owners, the Bonus Death Benefit and the Enhanced Death
Benefit are not available.
If the Owner is a non-natural person, the Annuitant will be considered the Owner
for purposes of determining the Basic Death Benefit, the Bonus Death Benefit and
the Enhanced Death Benefit.
Owners should refer to their Contract for the applicable Death Benefit
provisions.
Payment of Death Benefit
In the event of an Owner's death prior to the Annuity Date, the Death Benefit
will be determined by the Company as of the date of an Owner's death. The Death
Benefit will be paid as of the Valuation Period next following the date of
receipt by the Company of both due proof of death and, if no election of payment
method was previously made by the Owner, an election by the Beneficiary for the
payment method.
If a single sum payment is requested, the proceeds will be paid within seven (7)
days of receipt of proof of death and the election. Payment under an Annuity
Option may only be elected by a Beneficiary during the sixty-day period
beginning with the date of receipt of proof of death or a single sum payment
will be made to the Beneficiary at the end of the sixty-day period.
The entire Death Benefit must be paid within five (5) years of the date of death
unless:
1. the Beneficiary elects to have the Death Benefit payable under an Annuity
Option over the life of the Beneficiary or over a period not extending
beyond the life expectancy of the Beneficiary with distribution beginning
within one year of the date of death; or
2. if the Beneficiary is the spouse of the Owner, the Beneficiary may elect
to become the Owner of the Contract. If this election is made, the
Contract will continue in effect and no determination of Death Benefit
will then be made.
The dollar amount of each Death Benefit payment made under an Annuity Option
will depend on a number of factors, such as the Annuity Option elected, the type
of Contract (i.e., Qualified Contract or Non-Qualified Contract), the frequency
of payments elected and, for certain Annuity Options, the Age of the
Beneficiary. The Contract contains Annuity Option Tables. These tables show the
dollar amount of periodic Annuity
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Payments for each $1,000 applied to an Annuity Option. For example, if a
Beneficiary is Age 55 when $100,000 of Death Benefits becomes payable, and
elects Annuity Option A (lifetime with a minimum of 10 years guaranteed), the
monthly Fixed Annuity Payment would be calculated as follows:
Annuity Option A Rate x No. of $1,000's of Death = Minimum Monthly
Proceeds Payment
4.44 x 100 = $444
If, however, a Beneficiary is Age 75 when $100,000 of Death Benefits first
becomes payable, and elects the same Annuity Option, the monthly payment would
be calculated as follows:
Annuity Option A Rate x No. of $1,000's of Death = Minimum Monthly
Proceeds Payment
7.20 x 100 = $720
See "Annuity Options" for a description of other payment options available under
a Contract, including Variable Annuity Payments. Available Annuity Options may
be limited to the extent required by law. Because individual circumstances vary,
Owners and Beneficiaries under the Contracts should seek competent tax advice
about the tax consequences of any distribution of Death Benefits. (See "Tax
Considerations.")
Owners Other Than a Single Person
If there are Joint Owners, any reference to the death of the Owner shall mean
the death of the Owner who dies first. Any Joint Owner must be the spouse of the
other Owner. Upon the death of either Owner, the surviving spouse will be the
primary Beneficiary. Any other Beneficiary designated by the applicant, or as
subsequently changed, will be treated as a contingent Beneficiary unless
otherwise indicated in writing to the Company.
If the Owner is a non-natural person, then for purposes of the Death Benefit the
Annuitant shall be treated as the Owner and the death of the Annuitant shall be
treated as the death of the Owner.
Beneficiaries
Unless the Owner provides otherwise, the Death Benefit will be paid in equal
shares to the survivor(s) as follows: (a) to the primary Beneficiary(ies) who
survive the Owner or Annuitant's death, as applicable; or if there are none, (b)
to the contingent Beneficiary(ies) who survive the Owner or Annuitant's death as
applicable; or if there are none, (c) to the estate of the Owner.
ANNUITY PROVISIONS
Annuity Date
The Owner selects an Annuity Date at the time of application, and may later
change it by written request at least 30 days prior to the existing Annuity
Date. If the Annuity Date selected is less than 2 Contract Years from the Issue
Date, a Withdrawal Charge will be deducted from Contract Value before the first
annuity payment is made. (See "Charges and Deductions--Withdrawal Charge.") If
the selected Annuity Date occurs when the Annuitant is at an advanced age, such
as over Age 85, it is possible that the Contract will not be considered an
annuity for federal tax purposes. Investors in a Qualified Contract should
select an Annuity Date that is consistent with the requirements of their
retirement plans. (See "Tax Considerations--Withdrawals from Qualified
Contracts.") A qualified tax advisor should be consulted for further
information.
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Annuity Payments
Allocation. The Owner may elect by written request to the Company at its
Variable Service Center no later than seven (7) calendar days prior to the
Annuity Date, to receive Fixed Annuity Payments, Variable Annuity Payments or a
combination of Fixed Annuity Payments and Variable Annuity Payments. The
Annuitant is the payee, unless a different payee is selected by the Owner by
written request to the Company at its Variable Service Center at least 30 days
prior to the Annuity Date. If all of the Contract Value on the seventh calendar
day before the Annuity Date is allocated to the Fixed Account, Fixed Annuity
Payments will be made. If all of the Contract Value on that date is allocated to
the Separate Account, Variable Annuity Payments will be made. If the Contract
Value on that date is allocated to both the Fixed Account and the Separate
Account, a combination of Fixed Annuity Payments and Variable Annuity Payments
will be made to reflect the allocation between the Accounts.
Amount. The total dollar amount of each payment is the sum of the Variable
Annuity Payment and the Fixed Annuity Payment. The Company reserves the right to
pay Annuity Payments in one sum when the remaining payments are less than $2,000
or other minimum amount established by the Company from time to time, or when
the Annuity Option elected would result in periodic payments of less than $100.
Annuitization Bonus. Subject to state availability, the Company intends to
increase the Contract Value on the Annuity Date by an "Annuitization Bonus" if
Contract Value is applied to an Annuity Option. The increase in Contract Value
will be calculated by the Company with respect to Contract Value as of the
immediately preceding Business Day. The increase in Contract Value will be
allocated pro-rata to the Investment Options to which Contract Value is then
allocated, and will be deemed "income" on a Contract for federal income tax
purposes. (See "Tax Considerations.")
The Annuitization Bonus for a Contract will be determined by the Company at the
time of issuance of a Contract, but may be modified, reduced or eliminated for
Contracts subsequently issued. On the date of this Prospectus, the Annuitization
Bonus is 3% of Contract Value.
Variable Annuity Payments. The actual dollar amount of Variable Annuity Payments
is dependent upon (a) the Contract Value (plus any Annuitization Bonus) on the
Annuity Date, (b) the annuity table specified in the Contract for the Annuity
Option selected, and (c) the investment performance of the Sub-Account selected.
The annuity tables contained in the Contract for Variable Annuity Payments are
based on a 3% assumed investment rate. If the actual net investment rate exceeds
3%, Variable Annuity Payments will increase. Conversely, if the actual rate is
less than 3%, Variable Annuity Payments will decrease.
Variable Annuity Payments will initially reflect the investment performance of
the Separate Account in accordance with the allocation of the Contract Value to
the Sub-Account(s) on the Annuity Date. After the Annuity Date, allocations may
be changed among Sub-Account Investment Options once each Contract Year. (See
"Changes Among Investment Options.")
Annuity Options
The Annuity Option is elected by the Owner and may be changed by written request
at least 30 days prior to the Annuity Date. If no Annuity Option election is in
effect at least 30 days before the Annuity Date, Annuity Payments will be made
under Option B. Life Annuity with a Period Certain of 120 Months, as described
below.
The Annuity Payments payable under the Contract may be made under one of the
following options or any other option acceptable to the Company:
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Option A. Life Annuity. An annuity payable monthly during the lifetime of the
Annuitant. Annuity Payments cease at the death of the Annuitant.
Option B. Life Annuity with Periods Certain of 60, 120, 180 or 240 Months. An
annuity payable monthly during the lifetime of the Annuitant and in any event
for 60, 120,180 or 240 months certain as selected.
Option C. Joint and Survivor Annuity. An annuity payable monthly during the
joint lifetime of the Annuitant and a designated second person. At the death of
either Payee, Annuity Payments will continue to be made to the survivor Payee.
The survivor's Annuity Payments will be equal to 100%, 75%, 662/3% or 50% of the
amount payable during the joint lifetime, as chosen.
Option D. Joint and Contingent Annuity. An annuity payable monthly during the
lifetime of the Annuitant and continuing during the lifetime of a designated
second person after the Annuitant's death. The second person's Annuity Payments
will be equal to 100%, 75%, 662/3% or 50% of the amount payable, as chosen.
Option E. Fixed Payments for a Period Certain. An annuity payable monthly for a
fixed amount for any specified period (at least 5 years but not exceeding 30
years), as chosen.
Annuity Options A, B, C & D are available for Fixed Annuity Payments, Variable
Annuity Payments or a combination of both. Annuity Option E is available for
Fixed Annuity Payments only.
If the Annuitant dies during a period certain (Annuity Options B or E), the
remaining Annuity Payments will be made to the Beneficiary. The Beneficiary may
elect to receive the commuted value of the remaining Annuity Payments in a
single sum instead. The Company will determine the commuted value by discounting
the remaining Annuity Payments at its then current interest rate used for
commutation.
Misstatement of Age or Sex
If the age or sex of the Annuitant has been misstated, the Company may change
the annuity benefits to those which the Contract Value would have provided had
the correct age and sex been stated. If the misstatement is discovered after the
Annuity Date: (a) the Company will add interest to any overpayments at the rate
of 6% per year, compounded annually, and deduct the amount against remaining
annuity payments; and (b) the Company will add interest to any underpayments at
the rate of 6% per year, compounded annually, and pay the amount in a single sum
with the next Annuity Payment.
WITHDRAWALS
Before the Annuity Date, the Owner may make a written request to the Company at
its Variable Service Center to surrender the Contract or may request a partial
withdrawal of Withdrawal Value by written or telephone request. (See "Telephone
Transactions.") Contract Value available upon surrender or withdrawal may be
reduced by any applicable: (a) Withdrawal Charge; (b) taxes not previously
deducted; (c) Annual Contract Maintenance Charge; and (d) Optional Enhanced
Death Benefit Charge. (See "Charges and Deductions"). Partial withdrawals and
surrenders will ordinarily result in the cancellation of Accumulation Units from
each applicable Sub-Account of the Separate Account or a reduction in the Fixed
Account Value in the ratio that the Sub-Account Value and/or the Fixed Account
Value bears to the total Contract Value. The Owner may request in writing in
advance if a different method of cancellation of units and reduction of Fixed
Account Value is desired. The Company will pay the amount of any withdrawal from
the Separate Account within 7 days of receipt of a request in good order, unless
the "Suspension of Payments or Transfers" provision is in effect. (See
"Suspension of Payments or Transfers.")
Partial Withdrawals
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Each partial withdrawal must be for an amount which is not less than $1,000. If
a partial withdrawal request is made which would reduce the remaining Withdrawal
Value below $1,000, the Company may deem the Contract surrendered. In such
event, the Contract will terminate and the Company will pay an Owner the
Withdrawal Value of a Contract. (See "The Contract--Minimum Value
Requirements.")
Systematic Withdrawals
Subject to any conditions and fees the Company may impose, an Owner may elect to
take partial withdrawals under a systematic withdrawal program by either written
or telephone request. (See "Telephone Transactions.") The Company does not
currently impose a fee for systematic withdrawals. Amounts withdrawn under the
program will be subject to a Withdrawal Charge to the extent that total amounts
withdrawn during a Contract Year exceed the Free Withdrawal Amount. (See
"Withdrawal Charge--Free Withdrawal Amount.")
Under the program, systematic withdrawals are made on the same day (or next
Business Day) of each month or quarter. Systematic withdrawals are transferred
automatically to an Owner's bank account, provided the account is maintained at
a bank that is a member of the Automated Clearing House (ACH). Systematic
withdrawals are not allowed simultaneously with the dollar cost averaging
program. (See "Systematic Transfers--Dollar Cost Averaging.") Owners less than
59 1/2 who participate in this program may be subject to a 10% penalty tax
surcharge. (See "Tax Considerations -- Withdrawals from Non-Qualified Contracts"
and "Tax Considerations -- Withdrawals from Qualified Contracts.")
The Company reserves the right to modify, suspend or eliminate the program at
any time.
Tax Penalties and Restrictions
Certain tax withdrawal penalties and restrictions may apply to withdrawals from
a Contract. The withdrawal penalties and restrictions differ between a
Non-Qualified Contract and a Qualified Contract. (See "Tax Considerations.")
Special restrictions apply to a Qualified Contract issued as a 403(b) annuity.
(See "Tax Considerations--Withdrawal Limitations on 403(b) Annuities.")
Owners should consult their own tax counsel or other tax adviser before
requesting any withdrawals.
Texas Optional Retirement Program
A Contract issued to a participant in the Texas Optional Retirement Program
("ORP") will contain an ORP endorsement that will amend the Contract to provide:
(a) if for any reason a second year of ORP participation is not begun, the total
amount of the State of Texas' first-year contribution will be returned to the
appropriate institute of higher education upon its request; and (b) no benefits
will be payable, through surrender of the Contract or otherwise, until the
participant dies, accepts retirement, terminates employment in all Texas
institutions of higher education or attains the age of 701/2. The value of the
Contract may, however, be transferred to other contracts or carriers during the
period of ORP participation. A participant in the ORP is required to obtain a
certificate of termination from the participant's employer before the value of a
Contract can be withdrawn.
Suspension of Payments or Transfers
The Company reserves the right to suspend or postpone payments for withdrawals
or transfers from the Sub-Accounts for any period when:
o the New York Stock Exchange is closed;
o trading on the New York Stock Exchange is restricted;
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o an emergency exists as a result of which disposal of securities held in
the Separate Account is not reasonably practicable or it is not reasonably
practicable to determine the value of the Separate Account's net assets;
or
o during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of Owners.
The Company reserves the right to defer payment for a withdrawal or transfer
from the Fixed Account for the period permitted by law but not for more than six
months after written election is received by the Company.
PERFORMANCE INFORMATION
Performance information for the Sub-Accounts of the Separate Account, except the
Federated Prime Money Fund II Sub-Account, may appear in advertisements, reports
and promotional literature provided to current or prospective Owners.
Quotations of standardized total return for any Sub-Account will be expressed in
terms of the average annual compounded rate of return on a hypothetical
investment in a Contract over a period of one, five and ten years (or, if less,
up to the life of the Sub-Account), and will reflect the deduction of the
applicable Withdrawal Charge, the Administrative Charge, the Annual Contract
Maintenance Charge, the Mortality and Expense Risk Charge and deductions for the
fees and expenses of the underlying Portfolio. Quotations of non-standardized
total return may simultaneously be shown for the time periods indicated in the
advertisement that may not reflect some or all of these deductions.
Total return performance information for Sub-Accounts may also be advertised
based on the historical performance of the Portfolio underlying a Sub-Account
for periods beginning prior to the date Accumulation Unit Values were first
calculated for Contracts funded in that Sub-Account. Any such performance
calculation will be based on the assumption that the Sub-Account corresponding
to the applicable Portfolio was in existence throughout the stated period and
that contractual charges and expenses of the Sub-Account during the period were
equal to those currently assessed under the Contract.
The Company may distribute sales literature which compares the percentage change
in share values for any of the Sub-Accounts against established market indices
such as the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average or other management investment companies which have
investment objectives similar to the Portfolio being compared. The Standard &
Poor's 500 Composite Stock Price Index is an unmanaged, unweighted average of
500 stocks, the majority of which are listed on the New York Stock Exchange. The
Dow Jones Industrial Average is an unmanaged, weighted average of thirty blue
chip industrial corporations listed on the New York Stock Exchange. Both the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones Industrial
Average assume quarterly reinvestment of dividends. Unmanaged indices may assume
the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses. Performance information for
any Sub-Account reflects only the performance of a hypothetical Contract under
which Contract Value is allocated to a Sub-Account during a particular time
period on which the calculations are based. Performance information should be
considered in light of the investment objectives and policies, characteristics,
and quality of the Portfolio in which the Sub-Account invests, and the market
conditions during the given time period and should not be considered as a
representation of what may be achieved in the future. For a description of the
method used to determine total return for the Sub-Accounts, see the Statement of
Additional Information.
The Company may also distribute sales literature which compares the performance
of the AUVs of a Contract issued through the Separate Account with the unit
values of variable annuities issued through the separate accounts of other
insurance companies. Such information will be derived from the Lipper Variable
Insurance
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Products Performance Analysis Service, Morningstar or from the VARDS Report. The
Company may publish charts and other information concerning dollar cost
averaging, tax-deferral and other investment methods.
The Lipper Variable Insurance Products Performance Analysis Service is published
by Lipper Analytical Services, Inc., a publisher of statistical data which
tracks the performance of investment companies. The rankings compiled by Lipper
may or may not reflect the deduction of asset-based insurance charges. The
Company's sales literature utilizing these rankings will indicate whether or not
such charges have been deducted. Where the charges have not been deducted, the
sales literature will indicate that if the charges had been deducted, the
ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect the
deduction of asset-based insurance charges.
Morningstar rates a variable annuity sub-account against its peers with similar
investment objectives. Morningstar does not rate any Sub-Account that has less
than three years of performance data.
TAX CONSIDERATIONS
General
NOTE: The following description is based upon the Company's understanding of
current federal income tax law applicable to annuities in general. The Company
cannot predict the probability that any changes in such laws will be made.
Purchasers are cautioned to seek competent tax advice regarding the possibility
of such changes. The Company does not guarantee the tax status of the Contracts.
Purchasers bear the complete risk that the Contracts may not be treated as
"annuity contracts" under federal income tax laws. It should be further
understood that the following discussion is not exhaustive and that special
rules not described in this Prospectus may be applicable in certain situations.
Moreover, no attempt has been made to consider any applicable state or other tax
laws.
Section 72 of the Code governs taxation of annuities in general. An Owner is not
taxed on increases in the value of a Contract until distribution occurs, either
in the form of a lump sum payment or as annuity payments under the Annuity
Option selected. For a lump sum payment received as a total withdrawal (total
surrender), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the Purchase Payments, while for Qualified Contracts there may be no
cost basis. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period certain or refund
feature) bears to the expected return under the Contract. The exclusion amount
for payments based on a variable annuity option is determined by dividing the
cost basis of the Contract (adjusted for any period certain or refund guarantee)
by the number of years over which the annuity is expected to be paid. Payments
received after the investment in the Contract has been recovered (i.e., when the
total of the excludable amounts equals the investment in the Contract) are fully
taxable. The taxable portion is taxed at ordinary income tax rates. For certain
types of Qualified Plans, there may be no cost basis in the Contract within the
meaning of Section 72 of the Code. Owners, Annuitants and Beneficiaries under a
Contract should seek competent financial advice about the tax consequences of
any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
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Death Benefits
For Death Benefits under the Contract, the Beneficiary will be taxed on the
portion of the Death Benefit which exceeds the cost basis of the Contract.
However, if the Beneficiary elects to receive the Death Benefit under an Annuity
Option, the payments made to the Beneficiary will be taxed as annuity payments
as discussed above.
Diversification
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in imposition of federal income tax
to the Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract.
The Company intends that all Portfolios of a Fund underlying a Contract will be
managed by the Fund or its investment adviser to comply with the diversification
requirements set forth in Section 817(h) of the Code and Treas. Reg. 1.817-5
promulgated thereunder.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time, it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the Separate Account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered the owner of the assets of the Separate Account
resulting in the imposition of federal income tax to the Owner with respect to
earnings allocable to the Contract prior to receipt of payments under the
Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
Contracts Owned by Other than Natural Persons
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the owner is a non-natural
person, e.g., a corporation, or certain other entities. Such Contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to Contracts held by a trust or other entity as an
agent for a natural person or to Contracts held by a tax-qualified retirement
plan described in sections 401, 403(a), 403(b), 408 or 457 of the Code.
Purchasers should consult their own tax counsel or other tax adviser before
purchasing a Contract to be owned by a non-natural person.
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Multiple Contracts
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
Income Tax Withholding
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non- periodic payments. However, the Owner, in most cases, may elect
not to have taxes withheld or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
(a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary, or distributions for a specified
period of 10 years or more; or (b) distributions which are required minimum
distributions; or (c) the portion of the distributions not includible in gross
income (i.e., return of after-tax contributions). Participants should consult
their own tax counsel or other tax adviser regarding withholding requirements.
Withdrawals from Non-Qualified Contracts
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any distribution. However, the penalty is not imposed on amounts received: (a)
after the taxpayer reaches age 591/2; (b) after the death of the Owner; (c) if
the taxpayer is totally disabled (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life expectancies)
of the taxpayer and his or her Beneficiary; (e) under an immediate annuity; or
(f) which are allocable to purchase payments made prior to August 14, 1982.
Qualified Plans
A Contract offered by this Prospectus is designed to be suitable for use under
various types of Qualified Plans. Taxation of participants in each Qualified
Plan varies with the type of plan and terms and conditions of each specific
plan. Owners, Annuitants and Beneficiaries are cautioned that contributions and
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan regardless of the terms and conditions of a Contract issued pursuant to
the plan. Some retirement plans are subject to distribution and other
requirements that are not incorporated into the Company's administrative
procedures. Contract Owners, participants and beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contract comply with applicable law. Following are general
descriptions of the types of Qualified Plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding Qualified Plans are very complex and will
have differing applications depending on individual facts and circumstances.
Each purchaser should obtain competent tax advice prior to purchasing a Contract
issued under a Qualified Plan.
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Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described in
this Prospectus. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals--Qualified Contracts," below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
Qualified Plans will utilize annuity tables which do not differentiate on the
basis of sex. Such annuity tables will also be available for use in connection
with certain non-qualified deferred compensation plans.
H.R. 10 Plans. Section 401 of the Code permits self-employed individuals to
establish Qualified Plans for themselves and their employees, commonly referred
to as "H.R. 10" or "Keogh" plans. Contributions made to the Plan for the benefit
of the employees will not be included in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places limitations
and restrictions on all Plans including on such items as: amount of allowable
contributions; form, manner and timing of distributions; transferability of
benefits; vesting and nonforfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions,
withdrawals and surrenders. (See "Tax Treatment of Withdrawals--Qualified
Contracts" below.) Purchasers of Contracts for use with an H.R. 10 Plan should
obtain competent tax advice as to the tax treatment and suitability of such an
investment.
403(b) Annuities. Section 403(b) of the Code permits the purchase of "403(b)" or
"tax-sheltered annuities" by public schools and certain charitable, educational
and scientific organizations described in Section 501(c)(3) of the Code. These
qualifying employers may make contributions to a Contract for the benefit of
their employees. Such contributions are not includible in the gross income of
the employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals--Qualified
Contracts" and "Tax Sheltered Annuities--Withdrawal Limitations" below.) Any
employee should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
Individual Retirement Annuities. Section 408(b) of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" ("IRA"). Under applicable limitations, certain
amounts may be contributed to an IRA which will be deductible from the
individual's gross income. These IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. (See "Tax Treatment of
Withdrawals--Qualified Contracts" below.) Under certain conditions,
distributions from other IRAs and other Qualified Plans may be rolled over or
transferred on a tax-deferred basis into an IRA. Sales of Contracts for use with
IRAs are subject to special requirements imposed by the Code, including the
requirement that certain informational disclosure be given to persons desiring
to establish an IRA. Purchasers of Contracts to be qualified as Individual
Retirement Annuities should obtain competent tax advice as to the tax treatment
and suitability of such an investment.
Corporate Pension and Profit-Sharing Plans. Sections 401(a) and 401(k) of the
Code permit corporate employers to establish various types of retirement plans
for employees. These retirement plans may permit the purchase of a Contract to
provide benefits under the Plan. Contributions to the Plan for the benefit of
employees will not be includible in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places limitations
and restrictions on all plans including on such items as: amount of allowable
contributions; form, manner and timing of distributions; transferability of
benefits; vesting and nonforfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions,
withdrawals and
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surrenders. Purchasers of Contracts for use with Corporate Pension or
Profit-Sharing Plans should obtain competent tax advice as to the tax treatment
and suitability of such an investment. Unless the Company otherwise permits,
participant loans are not allowed in connection with Contracts purchased in
connection with these plans.
Section 457 Plans. Under Section 457 of the Code, governmental and certain other
tax-exempt employers may establish deferred compensation plans for the benefit
of their employees which may invest in annuity contracts. The Code, as in the
case of Qualified Plans, establishes limitations and restrictions on
eligibility, contributions and distributions. Under these Plans, contributions
made for the benefit of the employees will not be includible in the employee's
gross income until distributed from the Plan.
Withdrawals from Qualified Contracts
In the case of a withdrawal under a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the individual's
cost basis to the individual's total accrued benefit under the retirement plan.
Special tax rules may be available for certain distributions from a Qualified
Contract. Section 72(t) of the Code imposes a 10% penalty tax on the taxable
portion of any distribution from qualified retirement plans, including Contracts
issued and qualified under Code Sections 401 (H.R. 10 and Corporate Pension and
Profit-Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408(b) (Individual
Retirement Annuities). To the extent amounts are not includible in gross income
because they have been rolled over to an IRA or to another eligible Qualified
Plan, no tax penalty will be imposed. The tax penalty will not apply to the
following distributions: (a) if distribution is made on or after the date on
which the Owner or Annuitant (as applicable) reaches age 591/2; (b)
distributions following the death or disability of the Owner or Annuitant (as
applicable) (for this purpose disability is as defined in Section 72(m)(7) of
the Code); (c) after separation from service, distributions that are part of
substantially equal periodic payments made not less frequently than annually for
the life (or life expectancy) of the Owner or Annuitant (as applicable) or the
joint lives (or joint life expectancies) of such Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (d) distributions to an Owner
or Annuitant (as applicable) who has separated from service after he has
attained age 55; (e) distributions made to the Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Owner or Annuitant (as applicable)
for amounts paid during the taxable year for medical care; (f) distributions
made to an alternate payee pursuant to a qualified domestic relations order; and
(g) distributions from an Individual Retirement Annuity for the purchase of
medical insurance (as described in Section 213(d)(1)(D) of the Code) for the
Owner or Annuitant (as applicable) and his or her spouse and dependents if the
Owner has received unemployment compensation for at least 12 weeks. This
exception will no longer apply after the Owner has been re-employed for at least
60 days. The exceptions stated in (d) and (f) above do not apply in the case of
an Individual Retirement Annuity. The exception stated in (c) above applies to
an Individual Retirement Annuity without the requirement that there be a
separation from service.
Generally, distributions from a qualified plan must commence no later than April
1 of the calendar year, following the year in which the employee attains age
701/2 or retires, whichever is later. Required distributions must be over a
period not exceeding the life expectancy of the individual or the joint lives or
life expectancies of the individual and his or her designated beneficiary. If
the required minimum distributions are not made, a 50% penalty tax is imposed as
to the amount not distributed.
Tax-Sheltered Annuities--Withdrawal Limitations
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (a) attains age 591/2; (b)
separates from service; (c) dies; (d) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (e) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of
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the Owner's Contract Value which represents contributions made by the Owner and
does not include any investment results. The limitations on withdrawals became
effective on January 1, 1989 and apply only to salary reduction contributions
made after December 31, 1988, to income attributable to such contributions and
to income attributable to amounts held as of December 31, 1988. The limitations
on withdrawals do not affect rollovers or transfer between certain Qualified
Plans. Owners should consult their own tax counsel or other tax adviser
regarding any distributions.
OTHER MATTERS
Financial Statements
The full financial statements for the Separate Account and the Company are
included in the Statement of Additional Information. As of the date of this
Prospectus, the Separate Account had not commenced sales of the Capital Six VA.
Distribution
First Variable Capital Services, Inc. ("FVCS"), 10 Post Office Square, Boston,
MA 02109, acts as the distributor of the Contracts. FVCS is a wholly-owned
subsidiary of the Company. The Contracts are offered on a continuous basis
through FVCS and approved broker-dealers who are members of the National
Association of Securities Dealers, Inc.
The Company and FVCS have agreements with various broker-dealers under which the
Contracts will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable state
regulations to sell variable annuity contracts. The commissions payable to a
broker-dealer for sales of the Contract may vary with the sales agreement, but
are not expected to exceed 7.00% of first year Purchase Payments and annual
renewal compensation of up to 1.00% of Contract Value in later Contract Years.
Broker-dealers may also receive expense allowances, wholesaler fees, bonuses and
training fees.
Legal Proceedings
There are no material pending legal proceedings to which the Separate Account,
the Distributor or the Company is a party.
Transfers by the Company
The Company may, subject to applicable regulatory approvals, transfer its
obligations under a Contract to another qualified life insurance company under
an assumption reinsurance arrangement without the prior consent of the Owner.
Voting Rights
In accordance with its view of present applicable law, the Company will vote the
shares of a Fund held in the Separate Account at regular or special meetings of
the shareholders in accordance with instructions received from Owners having the
voting interest in the affected Portfolio(s) held in the Separate Account. The
number of votes that an Owner has the right to instruct for a particular
Sub-Account is determined by dividing the Contract Value in the Sub-Account by
the net asset value per share of the corresponding Portfolio in which the
Sub-Account invests. The Company will vote shares for which it has not received
instructions, as well as shares attributable to it, in the same proportion as it
votes shares for which it has received instructions. The Funds do not intend to
hold routine annual meetings of its shareholders.
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The Funds' shares are used solely as the investment vehicle for separate
accounts of insurance companies offering variable annuity contracts and variable
life insurance policies. The use of Funds' shares as investments for both
variable annuity contracts and variable life insurance policies is referred to
as "mixed funding." The use of Funds' shares as investments by separate accounts
of unaffiliated life insurance companies is referred to as "shared funding."
The Funds intend to engage in mixed funding and shared funding. Although the
Funds do not currently foresee any disadvantage to Contract owners due to
differences in redemption rates, tax treatment, or other considerations
resulting from mixed funding or shared funding, the Trustees of the Funds will
closely monitor the operation of mixed funding and shared funding and will
consider appropriate action to avoid material conflict and take appropriate
action in response to any material conflicts which occur.
The number of shares which an Owner has a right to vote will be determined as of
a date to be chosen by the Company not more than sixty (60) days prior to a
shareholder meeting of a Fund. Each Owner having a voting interest will receive
proxy material, reports, and other materials relating to the appropriate
Portfolio.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION
Item Page
- ---- ----
Company.................................................................
Independent Auditors....................................................
Legal Opinions..........................................................
Distributor.............................................................
Performance Information.................................................
Annuity Provisions......................................................
Variable Annuity......................................................
Fixed Annuity.........................................................
Annuity Unit..........................................................
Mortality and Expense Guarantee.......................................
Financial Statements....................................................
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PART B
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CAPITAL SIX VA
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
issued by
FIRST VARIABLE ANNUITY FUND E
and
FIRST VARIABLE LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED ______ FOR THE INDIVIDUAL FLEXIBLE
PURCHASE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS WHICH ARE REFERRED TO
HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT 10 POST OFFICE SQUARE, BOSTON, MASSACHUSETTS 02109, (800) 845-0689.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED ______
TABLE OF CONTENTS
Page
----
Company....................................................................
Independent Auditors.......................................................
Legal Opinions.............................................................
Distributor................................................................
Performance Information....................................................
Annuity Provisions.........................................................
Variable Annuity..................................................
Fixed Annuity.....................................................
Annuity Unit......................................................
Mortality and Expense Guarantee...................................
Financial Statements.......................................................
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COMPANY
Information regarding the Company and its ownership is contained in the
Prospectus.
INDEPENDENT AUDITORS
The Company's independent auditor is Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. The consolidated balance sheets for the
Company as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholder's equity and cash flows for the
years then ended and for the period September 22, 1994 through December 31,
1994, and the financial statements for First Variable Annuity Fund E as of
December 31, 1996 and for the periods indicated included in this Statement of
Additional Information, which is incorporated by reference into the Prospectus,
have been so included in reliance on the report of Ernst & Young LLP,
independent auditors, given on the authority of said Firm as experts in auditing
and accounting.
LEGAL OPINIONS
Legal matters in connection with the Contracts have been reviewed by the
Company's Legal Department. Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut, has provided advice on certain matters relating to the federal
securities and tax laws.
DISTRIBUTOR
First Variable Capital Services, Inc. ("FVCS") acts as the distributor. FVCS is
a wholly-owned subsidiary of the Company. The offering is on a continuous basis.
Omitted paragraph
PERFORMANCE INFORMATION
From time to time, the Company may advertise standardized performance data of
Sub-Accounts other than the Federated Prime Money Fund II Sub-Account. Any such
advertisement will include total return figures for the time periods indicated
in the advertisement. Such total return figures will reflect the deductions of a
1.25% Mortality and Expense Risk Charge, a .25% Administrative Charge, the
investment advisory fee and expenses for the underlying Portfolio being
advertised and any applicable Withdrawal Charges and Annual Contract Maintenance
Charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the Accumulation Unit Values for
an initial $1,000 purchase payment, and deducting any applicable Annual Contract
Maintenance Charges and Withdrawal Charges to arrive at the ending hypothetical
value. For periods before the date that actual Accumulation Unit Values were
first computed for the Contracts, the Company has prepared hypothetical
Accumulation Unit Value performance which is derived from the financial
statements of the Separate Account (Policy Form 20230). The average annual total
return is then determined by computing the fixed interest rate that a $1,000
purchase payment would have to earn annually, compounded annually, to grow to
the hypothetical value at the end of time periods described.
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The formula used in these calculations is:
[P x (1+T)(n)] = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10 year
periods at the end of the 1, 5 or 10 year periods (or
fractional portion thereof).
The standardized average annualized total returns as of December 31, 1996 for 1
year, for 5 years and for the life of the Sub-Account are listed below:
LIFE OF SUB-
1 YEAR 5 YEARS ACCOUNT
------ ------- -------
Growth (inception 5/1/87) 11.39% 10.94% 12.33%
Growth & Income (inception 5/31/95) 1.36% N/A 10.19%
High Income Bond (inception 6/1/87) 5.91% 9.52% 9.83%
Matrix Equity (inception 6/16/88) -3.98% 9.23% 10.52%
Multiple Strategies (inception 5/5/87) 6.53% 10.67% 11.65%
Small Cap Growth (inception 5/4/95) 31.41% N/A 46.66%
US Govt Bond (inception 5/27/87) -3.64% 5.69% 6.93%
World Equity (inception 6/10/88) -.65% 9.56% 7.53%
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The Company may also advertise non-standardized performance data of Sub-Accounts
other than the Federated Prime Money Fund II Sub-Account. Any such advertisement
will include total return figures computed under the formula shown above for the
time periods indicated in the advertisement. Such total return figures may not
reflect the deductions of a 1.25% Mortality and Expense Risk Charge, a .25%
Administrative Charge, the investment advisory fee for the underlying Portfolio
being advertised and any applicable Withdrawal Charges and Annual Contract
Maintenance Charges. Non-standardized performance data may be shown for periods
of one, three, five and ten years (or, if less up to the life of the
Sub-Account).
Owners should note that the investment results of each Sub-Account will
fluctuate over time, and any presentation of the Sub-Account's total return for
any period should not be considered as a representation of what an investment
may earn or what an Owner's total return may be in any future period.
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<PAGE>
ANNUITY PROVISIONS
Variable Annuity
A variable annuity is an annuity with payments which: (1) are not predetermined
as to dollar amount: and (2) will vary in amount with the net investment results
of the applicable Sub-Account(s) of the Separate Account. At the Annuity Date,
the Contract Value in each Sub-Account will be applied to the applicable Annuity
Tables. The Annuity Table used will depend upon the Annuity Option chosen. If,
as of the Annuity Date, the then current Annuity Option rates applicable to this
class of Contracts provide a first Annuity Payment greater than guaranteed under
the same Annuity Option under this Contract, the greater payment will be made.
The dollar amount of Annuity Payments after the first is determined as follows:
(1) the dollar amount of the first Annuity Payment is divided by the value of an
Annuity Unit as of the Annuity Date. This establishes the number of Annuity
Units for each monthly payment. The number of Annuity Units remains fixed during
the Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity Unit value
for the last Valuation Period of the month preceding the month for which the
payment is due. This result is the dollar amount of the payment.
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments.
Fixed Annuity
A fixed annuity is a series of payments made during the Annuity Period which are
guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Separate Account. The Fixed Account Value on the
day immediately preceding the Annuity Date will be used to determine the Fixed
Annuity monthly payment. The first monthly Annuity Payment will be based upon
the Annuity Option elected and the appropriate Annuity Option Table.
Annuity Unit
The value of an Annuity Unit for each Sub-Account was arbitrarily set initially
at $10.
The Sub-Account Annuity Unit Value at the end of any subsequent Valuation Period
is determined by subtracting (2) from (1) and dividing the result by (3) and
multiplying the result by a factor which neutralizes the assumed investment rate
of 3% contained in the Annuity Tables where:
1. is the net result of:
a. the assets of the Sub-Account attributable to the Annuity Units;
plus or minus
b. the cumulative charge or credit for taxes reserved which is
determined by the Company to have resulted from the operation or
maintenance of the Sub-Account;
2. is the cumulative unpaid charge for the Mortality and Expense Risk Charge
and for the Administrative Charge.
3. is the number of Annuity Units outstanding at the end of the Valuation
Period.
The value of an Annuity Unit may increase or decrease from Valuation Period to
Valuation Period.
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Mortality and Expense Guarantee
The Company guarantees that the dollar amount of each Annuity Payment after the
first Annuity Payment will not be affected by variations in mortality or expense
experience.
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be considered
only as bearing upon the ability of the Company to meet its obligations under
the Contracts.
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Financial Statements
First Variable Life Insurance Company--First Variable Annuity Fund E
Year ended December 31, 1996
50
<PAGE>
Report of Independent Auditors
To the Board of Directors of First Variable Life Insurance Company
and Contract Owners of First Variable Annuity Fund E
We have audited the accompanying statement of assets, liabilities and contract
owners' equity of First Variable Life Insurance Company--First Variable Annuity
Fund E as of December 31, 1996, and the related statement of operations for the
year then ended, and the statements of changes in net assets for each of the two
years in the period then ended. These financial statements are the
responsibility of First Variable Life Insurance Company'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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
Our procedures included confirmation of the securities owned as of December 31,
1996 by correspondence with Variable Investors Series Trust. 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 First Variable Life Insurance
Company--First Variable Annuity Fund E at December 31, 1996, the results of its
operations for the year then ended, and the changes in its net assets for each
of the two years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Boston, Massachusetts
January 31, 1997
51
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statement of Assets, Liabilities and
Contract Owners' Equity
December 31, 1996
<TABLE>
<CAPTION>
High
Cash Common Income Multiple
Management Stock Bond Strategies
Total Division Division Division Division
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Investments in Variable
Investors Series Trust, at value
(cost $133,237,828) $137,890,098 $6,973,163 $25,912,691 $11,899,073 $27,156,998
Receivable from First Variable
Life Insurance Company 2,980
------------------------------------------------------------------------
Total $137,893,078 $6,973,163 $25,912,691 $11,899,073 $27,156,998
========================================================================
Liabilities
Payable to First Variable Life
Insurance Company $ 16,981 $ 11,457 $ 116 $ 868 $ 1,536
------------------------------------------------------------------------
Total liabilities 16,981 11,457 116 868 1,536
Contract owners' equity:
Annuity contracts in payment
period 253,187 235,371 17,816
Variable annuity contract
owners' equity 137,622,910 6,726,335 25,894,759 11,898,205 27,155,462
------------------------------------------------------------------------
Total contract owners' equity 137,876,097 6,961,706 25,912,575 11,898,205 27,155,462
------------------------------------------------------------------------
Total liabilities and contract
owners' equity $137,893,078 $6,973,163 $25,912,691 $11,899,073 $27,156,998
========================================================================
<CAPTION>
U.S.
Government World Growth &
Tilt Utility Bond Equity Income Small Cap
Division Division Division Division Division
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Investments in Variable
Investors Series Trust, at value
(cost $133,237,828) $12,629,143 $7,610,921 $21,776,961 $10,275,650 $13,655,498
Receivable from First Variable
Life Insurance Company 2,980
--------------------------------------------------------------------
Total $12,629,143 $7,610,921 $21,776,961 $10,275,650 $13,658,478
====================================================================
Liabilities
Payable to First Variable Life
Insurance Company $ 162 $ 245 $ 1,746 $ 851 $
--------------------------------------------------------------------
Total liabilities 162 245 1,746 851
Contract owners' equity:
Annuity contracts in payment
period
Variable annuity contract
owners' equity 12,628,981 7,610,676 21,775,215 10,274,799 $13,658,478
--------------------------------------------------------------------
Total contract owners' equity 12,628,981 7,610,676 21,775,215 10,274,799 13,658,478
--------------------------------------------------------------------
Total liabilities and contract
owners' equity $12,629,143 $7,610,921 $21,776,961 $10,275,650 $13,658,478
====================================================================
</TABLE>
See accompanying notes.
52
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statement of Operations
Year ended December 31, 1996
<TABLE>
<CAPTION>
High
Cash Common Income Multiple
Management Stock Bond Strategies
Total Division Division Division Division
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 7,973,892 $492,996 $1,522,709 $ 755,468 $ 2,964,646
Expenses:
Fees paid to First Variable Life
Insurance Company:
Risk and administrative
charges 1,706,523 148,033 294,351 124,172 330,354
--------------------------------------------------------------------
Total expenses 1,706,523 148,033 294,351 124,172 330,354
--------------------------------------------------------------------
Net investment income (loss) 6,267,369 344,963 1,228,358 631,296 2,634,292
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) on Series
Trust:
Variable Investors Series
Trust shares redeemed 8,170,635 2,738,627 390,298 2,254,416
Net unrealized appreciation
(depreciation) on
investments during the year (1,058,566) 335,516 42,516 (1,259,021)
--------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 7,112,069 3,074,143 432,814 995,395
--------------------------------------------------------------------
Net increase in net assets
resulting from operations $13,379,438 $344,963 $4,302,501 $1,064,110 $ 3,629,687
====================================================================
<CAPTION>
U.S.
Government World Growth &
Tilt Utility Bond Equity Income Small Cap
Division Division Division Division Division
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 933,232 $ 586,190 $ 590,302 $ 88,369 $ 39,980
Expenses:
Fees paid to First Variable Life
Insurance Company:
Risk and administrative
charges 198,150 107,867 276,417 102,635 124,544
----------------------------------------------------------------
Total expenses 198,150 107,867 276,417 102,635 124,544
----------------------------------------------------------------
Net investment income (loss) 735,082 478,323 313,885 (14,266) (84,564)
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) on Series
Trust:
Variable Investors Series
Trust shares redeemed 227,868 (80,014) 1,545,356 208,000 886,084
Net unrealized appreciation
(depreciation) on
investments during the year (600,941) (320,136) 26,985 133,352 583,163
----------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (373,073) (400,150) 1,572,341 341,352 1,469,247
----------------------------------------------------------------
Net increase in net assets
resulting from operations $ 362,009 $ 78,173 $1,886,226 $327,086 $1,384,683
================================================================
</TABLE>
See accompanying notes.
53
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Cash Management Common Stock
Total Division Division
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) $ 6,267,369 $ 5,352,071 $ 344,963 $ 321,757 $ 1,228,358 $ 764,949
Realized gain (loss) on Variable
Investors Series Trust shares 8,170,635 47,339 2,738,627 892,623
redeemed
Net unrealized appreciation
(depreciation)
on investments during the year (1,058,566) 11,878,900 335,516 2,078,887
----------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 13,379,438 17,278,310 344,963 321,757 4,302,501 3,736,459
From contract owner transactions
Net proceeds from sale of accumulation
units 34,399,440 31,781,440 10,564,557 11,592,315 3,593,917 2,892,495
Cost of accumulation units terminated
and exchanged (7,267,908) (16,119,230) (12,228,761) (10,154,829) 2,067,637 247
----------------------------------------------------------------------------------
Increase (decrease) in net assets from
contract owner transactions 27,131,532 15,662,210 (1,664,204) 1,437,486 5,661,554 2,892,742
----------------------------------------------------------------------------------
Increase (decrease) in net assets 40,510,970 32,940,520 (1,319,241) 1,759,243 9,964,055 6,629,201
Net assets at beginning of period 97,365,127 64,424,607 8,280,947 6,521,704 15,948,520 9,319,319
----------------------------------------------------------------------------------
Net assets at end of period $137,876,097 $ 97,365,127 $ 6,961,706 $ 8,280,947 $ 25,912,575 $15,948,520
==================================================================================
<CAPTION>
High Income Multiple Strategies
Bond Division Division
1996 1995 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) $ 631,296 $ 574,269 $ 2,634,292 $ 1,708,699
Realized gain (loss) on Variable
Investors Series Trust shares 390,298 (325,633) 2,254,416 (363,483)
redeemed
Net unrealized appreciation
(depreciation)
on investments during the year 42,516 763,785 (1,259,021) 3,447,663
-------------------------------------------------
Net increase in net assets resulting
from operations 1,064,110 1,012,421 3,629,687 4,792,879
From contract owner transactions
Net proceeds from sale of accumulation
units 2,454,662 1,825,744 3,358,539 3,644,779
Cost of accumulation units terminated
and exchanged 804,489 (767,511) (1,446,981) (2,723,046)
-------------------------------------------------
Increase (decrease) in net assets from
contract owner transactions 3,259,151 1,058,233 1,911,558 921,733
-------------------------------------------------
Increase (decrease) in net assets 4,323,261 2,070,654 5,541,245 5,714,612
Net assets at beginning of period 7,574,944 5,504,290 21,614,217 15,899,605
-------------------------------------------------
Net assets at end of period $11,898,205 $7,574,944 $27,155,462 $21,614,217
=================================================
</TABLE>
54
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
Tilt Utility U.S. Government World Equity
Division Bond Division Division
Year ended December 31 Year ended December 31 Year ended December 31
1996 1995 1996 1995 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) $ 735,082 $ 491,113 $ 478,323 $ 695,249 $ 313,885 $ 682,769
Realized gain (loss) on Variable
Investors Series Trust shares
redeemed 227,868 (510,575) (80,014) (433,224) 1,545,356 651,108
-------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation)
on investments during the period (600,941) 3,134,928 (320,136) 1,155,615 26,985 1,181,856
-------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 362,009 3,115,466 78,173 1,417,640 1,886,226 2,515,733
From contract owner transactions
Net proceeds from sale of
accumulation units 1,335,852 2,850,015 816,878 833,394 3,279,713 4,087,219
Cost of accumulation units
terminated and exchanged (2,515,452) (1,749,546) (1,357,965) (3,642,421) 1,330,357 191,892
-------------------------------------------------------------------------------
Increase (decrease) in net assets
from contract owner transactions (1,179,600) 1,100,469 (541,087) (2,809,027) 4,610,070 4,279,111
-------------------------------------------------------------------------------
Increase (decrease) in net assets (817,591) 4,215,935 (462,914) (1,391,387) 6,496,296 6,794,844
Net assets at beginning of period 13,446,572 9,230,637 8,073,590 9,464,977 15,278,919 8,484,075
-------------------------------------------------------------------------------
Net assets at end of period $12,628,981 $13,446,572 $ 7,610,676 $ 8,073,590 $21,775,215 $15,278,919
===============================================================================
<CAPTION>
Growth &
Income Division(1) Small Cap Division(2)
Seven months Eight months
Year ended ended Year ended ended
December 31 December 31 December 31 December 31
1996 1995 1996 1995
-----------------------------------------------------
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) $ (14,266) $ 28,149 $ (84,564) $ 85,117
Realized gain (loss) on Variable
Investors Series Trust shares
redeemed 208,000 13,164 886,084 123,359
-----------------------------------------------------
Net unrealized appreciation
(depreciation)
on investments during the period 133,352 44,376 583,163 71,790
-----------------------------------------------------
Net increase in net assets
resulting from operations 327,086 85,689 1,384,683 280,266
From contract owner transactions
Net proceeds from sale of
accumulation units 3,544,556 2,069,284 5,450,766 1,986,195
Cost of accumulation units
terminated and exchanged 3,068,222 1,179,962 3,010,546 1,546,022
-----------------------------------------------------
Increase (decrease) in net assets
from contract owner transactions 6,612,778 3,249,246 8,461,312 3,532,217
-----------------------------------------------------
Increase (decrease) in net assets 6,939,864 3,334,935 9,845,995 3,812,483
Net assets at beginning of period 3,334,935 3,812,483
-----------------------------------------------------
Net assets at end of period $10,274,799 $3,334,935 $13,658,478 $3,812,483
=====================================================
</TABLE>
See accompanying notes.
(1) From commencement of operations, May 31, 1995.
(2) From commencement of operations, May 4, 1995.
55
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements
December 31, 1996
1. Organization
First Variable Annuity Fund E (the Fund) is a segregated account of First
Variable Life Insurance Company (First Variable Life) and is registered as a
unit investment trust under the Investment Company Act of 1940, as amended (the
1940 Act). Each of the nine investment divisions of the Fund are invested solely
in the shares of the nine corresponding portfolios of the Variable Investors
Series Trust (the Trust), a no-load, diversified, open-end, series management
investment company registered under the 1940 Act. Under applicable insurance
law, the assets and liabilities of the Fund are clearly identified and
distinguished from the other assets and liabilities of First Variable Life. The
Fund cannot be charged with liabilities arising out of any other business of
First Variable Life.
First Variable Life is a wholly-owned subsidiary of Irish Life of North America,
Inc. (ILoNA), which is a wholly-owned subsidiary of Irish Life, plc. (Irish
Life) of Dublin, Ireland. First Variable Life is domiciled in the State of
Arkansas.
The assets of the Fund are not available to meet the general obligations of
First Variable Life or ILoNA and are held for the exclusive benefit of the
contract owners participating in the Fund.
The Small Cap Division commenced operations on May 4, 1995, and the Growth &
Income Division commenced operations on May 31, 1995.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
Investments
The investments in shares of the Trust are stated at the net asset value per
share of the respective portfolios of the Trust. Investment transactions are
accounted for on the date the shares are purchased or sold. The cost of shares
sold and redeemed is determined on the first-in, first-out method. Dividends and
capital gain distributions received from the Trust are reinvested in additional
shares of the Trust and are recorded as income by the Fund on the ex-dividend
date.
56
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Federal Income Taxes
For federal income tax purposes, operations of the Fund are combined with those
of First Variable Life, which is taxed as a life insurance company. First
Variable Life anticipates no tax liability resulting from the operations of the
Fund. Therefore, no provision for income taxes has been charged against the
Fund.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Investments
The following table presents selected data for investments in each of the
Portfolios of the Trust at December 31, 1996.
Number of Net Asset
Shares Cost Value
-----------------------------------------------
Cash Management Portfolio 6,973,163 $ 6,973,163 $ 6,973,163
Common Stock Portfolio 846,175 23,609,085 25,912,691
High Income Bond Portfolio 1,297,382 11,929,469 11,899,073
Multiple Strategies Portfolio 2,138,489 27,166,284 27,156,998
Tilt Utility Portfolio 828,088 11,901,529 12,629,143
U.S. Government Bond Portfolio 765,750 7,920,063 7,610,921
World Equity Portfolio 1,445,849 20,639,767 21,776,961
Growth & Income Portfolio 827,292 10,097,923 10,275,650
--------------------------------
Small Cap Portfolio 850,860 13,000,545 13,655,498
--------------------------------
Totals $133,237,828 $137,890,098
================================
57
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
4. Contract Owners' Equity
Variable annuity contract owners' equity at December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
Accumulation Units Accumulation Unit
Value Equity
--------------------------------------------------------
<S> <C> <C> <C>
Policy Forms 7500.1, 7600.1, 7700 and 7750
Cash Management Division 183,120.999 14.901 $ 2,728,686
Common Stock Division (7500.1) 27,945.432 30.549 853,705
Common Stock Division 257,476.378 27.178 6,997,693
High Income Bond Division 88,313.761 22.890 2,021,502
Multiple Strategies Division 304,389.714 24.228 7,374,754
Tilt Utility Division 122,183.190 26.115 3,190,814
U.S. Government Bond Division 203,127.886 18.970 3,853,336
World Equity Division 233,749.972 18.022 4,212,642
Growth & Income Division 23,331.323 12.438 290,195
Small Cap Division 32,278.480 16.292 525,881
------------
Subtotal 32,049,208
Policy Forms 7800 and 20224
Cash Management Division 297,512.319 12.055 3,586,511
Common Stock Division 834,688.962 21.155 17,657,840
High Income Bond Division 520,065.210 18.310 9,522,384
Multiple Strategies Division 960,499.975 20.213 19,414,603
Tilt Utility Division 466,606.257 19.947 9,307,396
U.S. Government Bond Division 213,747.332 15.463 3,305,174
World Equity Division 1,054,102.540 16.257 17,136,546
Growth & Income Division 755,872.512 12.409 9,379,621
Small Cap Division 787,628.499 16.253 12,801,324
------------
Subtotal 102,111,399
</TABLE>
58
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
4. Contract Owners' Equity (continued)
<TABLE>
<CAPTION>
Accumulation Units Accumulation Unit
Value Equity
-----------------------------------------------------------
<S> <C> <C> <C>
Policy Form 20230
Cash Management Division 39,581.977 10.387 $ 411,138
Common Stock Division 30,672.369 12.569 385,521
High Income Bond Division 30,955.705 11.446 354,319
Multiple Strategies Division 30,934.094 11.835 366,105
Tilt Utility Division 11,951.289 10.942 130,771
U.S. Government Bond Division 43,540.299 10.385 452,166
World Equity Division 37,591.723 11.333 426,027
Growth & Income Division 51,501.064 11.747 604,983
Small Cap Division 25,464.909 13.009 331,273
---------------
Subtotal 3,462,303
---------------
Total $137,622,910
===============
</TABLE>
5. Purchases and Sales of Securities
Cost of purchases and proceeds from sales of Trust shares by the Fund during the
year ended December 31, 1996 are shown below.
Purchases Sales
----------------------------------
Cash Management Portfolio $ 39,337,280 $ 40,645,084
Common Stock Portfolio 16,044,781 9,153,125
High Income Bond Portfolio 10,416,762 6,523,648
Multiple Strategies Portfolio 20,164,829 15,614,538
Tilt Utility Portfolio 4,769,770 5,213,454
U.S. Government Bond Portfolio 3,248,756 3,303,334
World Equity Portfolio 14,331,796 9,404,565
Growth & Income Portfolio 8,654,920 2,055,379
Small Cap Portfolio 13,779,515 5,404,782
----------------------------------
Totals $130,748,409 $ 97,317,909
==================================
59
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
6. Expenses
First Variable Life charges the Fund, based on the value of the Fund, at an
annual rate of 0.6% for mortality risks, 0.15% for distribution expense risks
and .40% for administrative expense risks on policies issued prior to May 1,
1987 which were not exchanged from policy form 7500.1 to policy form 7600.1.
First Variable Life charges the Fund, based on the value of the Fund, at an
annual rate of 0.75% for mortality expense risks and 0.50% for administrative
expense risks on policies issued after April 30, 1987 and on policies exchanged
for policy form 7600.1. First Variable Life charges the Fund, based on the value
of the Fund, at an annual rate of 0.85% for mortality risks, 0.40% for expense
risks and 0.15% for administrative charges on policies issued under policy forms
7800 and 20224. First Variable Life charges the Fund, based on the value of the
Fund, at an annual value of 0.85% for mortality risks, 0.40% for expense risks
and 0.25% for administrative charges on policies issued under policy form 20230.
Total charges to the Fund for all the policy forms for the year ended December
31, 1996 was $1,706,523.
7. Diversification Requirements
Under the provisions of Section 817(h) of the Internal Revenue Code, a variable
annuity contract, other than a contract issued in connection with certain types
of employee benefits plans, will not be treated as an annuity contract for
federal tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
Treasury.
The Internal Revenue Service has issued regulations under section 817(h) of the
Code. First Variable Life believes that the Fund satisfies the current
requirements of the regulations, and it intends that the Fund will continue to
meet such requirements.
8. Principal Underwriter and General Distributor
First Variable Capital Services, Inc., a wholly-owned subsidiary of First
Variable Life, is principal underwriter and general distributor of the contracts
issued through the Fund.
60
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Report of Independent Auditors
The Board of Directors and Stockholder
First Variable Life Insurance Company
We have audited the accompanying consolidated balance sheets of First Variable
Life Insurance Company (the Company) as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholder's equity, and
cash flows for the years then ended and for the period September 22, 1994 (date
operations acquired) through December 31, 1994. These financial statements are
the responsibility of the Company'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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Variable Life Insurance Company at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for the years then
ended and for the period September 22, 1994 (date operations acquired) through
December 31, 1994, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Boston, Massachusetts
February 7, 1997
61
<PAGE>
First Variable Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities--available-for-sale, at market (amortized
cost: 1996--$278,305,000; 1995--$290,943,000) $294,195,000 $319,589,000
Equity securities, at market value (cost: $684,000 in 1996 and
1995) 691,000 322,000
Other invested assets 94,000 --
--------------------------
Total investments 294,980,000 319,911,000
Cash and cash equivalents 2,433,000 5,585,000
Accrued investment income 5,636,000 5,943,000
Deferred policy acquisition costs 5,486,000 3,046,000
Value of insurance in force acquired 19,494,000 16,733,000
Property and equipment, less allowances for depreciation of
$508,000 in 1996 and $228,000 in 1995 649,000 739,000
Goodwill, less accumulated amortization of $329,000 in 1996 and
$183,000 in 1995 2,594,000 2,740,000
Other assets 2,273,000 151,000
Assets held in separate accounts 176,306,000 132,176,000
--------------------------
Total assets $509,851,000 $487,024,000
==========================
Liabilities and stockholder's equity
Liabilities:
Future policy benefits for annuity products $239,509,000 $255,694,000
Unearned revenue reserve 52,000 --
Supplementary contracts without life contingencies 21,008,000 19,543,000
Deferred income tax liability 5,642,000 7,826,000
Other liabilities 938,000 1,128,000
Liabilities related to separate accounts 176,306,000 132,176,000
--------------------------
Total liabilities 443,455,000 416,367,000
Commitments and contingencies
Stockholder's equity:
Capital stock, par value $1.00 per share--authorized 3,500,000
shares, issued and outstanding 2,500,000 shares 2,500,000 2,500,000
Additional paid-in capital 53,104,000 53,104,000
Net unrealized investment gains 7,324,000 13,189,000
Retained earnings 3,468,000 1,864,000
Total stockholder's equity 66,396,000 70,657,000
--------------------------
Total liabilities and stockholder's equity $509,851,000 $487,024,000
==========================
</TABLE>
See accompanying notes.
62
<PAGE>
First Variable Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
Period from
September 22, 1994 (date
operations acquired)
Year ended December 31 through
1996 1995 December 31, 1994
----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Annuity product charges $ 2,408,000 $ 1,786,000 $ 344,000
Net investment income 23,458,000 23,465,000 5,318,000
Realized gains on investments 972,000 900,000 541,000
Other income 1,114,000 829,000 178,000
----------------------------------------------------
Total revenues 27,952,000 26,980,000 6,381,000
Benefits and expenses:
Annuity benefits 16,336,000 16,694,000 4,038,000
Underwriting, acquisition and insurance expenses
7,275,000 6,600,000 1,281,000
Management fee paid to parent 480,000 480,000 120,000
Other expenses 1,421,000 1,269,000 214,000
----------------------------------------------------
Total benefits and expenses 25,512,000 25,043,000 5,653,000
----------------------------------------------------
Income before income taxes 2,440,000 1,937,000 728,000
Income taxes 836,000 666,000 135,000
----------------------------------------------------
Net income $ 1,604,000 $ 1,271,000 $ 593,000
====================================================
</TABLE>
See accompanying notes.
63
<PAGE>
First Variable Life Insurance Company
Consolidated Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Net Unrealized
Additional Investment Total
Capital Stock Paid-in Gains Retained Stockholder's
Capital (Losses) Earnings Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial capitalization on
September 22, 1994 $1,500,000 $49,104,000 $50,604,000
Issuance of 1,000,000 shares of
capital stock pursuant to stock
dividend 1,000,000 (1,000,000) --
Net income for 1994 -- -- $ 593,000 593,000
Change in net unrealized
investment gains/losses -- -- $(3,308,000) -- (3,308,000)
Balance at December 31, 1994 2,500,000 48,104,000 (3,308,000) 593,000 47,889,000
Contribution from parent -- 5,000,000 -- -- 5,000,000
Net income for 1995 -- -- -- 1,271,000 1,271,000
Change in net unrealized
investment gains/losses -- -- 16,497,000 -- 16,497,000
-----------------------------------------------------------------------------
Balance at December 31, 1995 2,500,000 53,104,000 13,189,000 1,864,000 70,657,000
Net income for 1996 -- -- -- 1,604,000 1,604,000
Change in net unrealized
investment gains/losses -- -- (5,865,000) -- (5,865,000)
-----------------------------------------------------------------------------
Balance at December 31, 1996 $2,500,000 $53,104,000 $ 7,324,000 $3,468,000 $66,396,000
=============================================================================
</TABLE>
See accompanying notes.
64
<PAGE>
First Variable Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
September 22, 1994 (date
operations acquired)
Year ended December 31 through
1996 1995 December 31, 1994
----------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,604,000 $ 1,271,000 $ 593,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustments related to interest-sensitive
products:
Annuity benefits 16,336,000 16,694,000 4,038,000
Annuity product charges (2,408,000) (1,786,000) (344,000)
Realized gains on investments (972,000) (900,000) (541,000)
Policy acquisition costs deferred (2,800,000) (3,693,000) (693,000)
Amortization of deferred policy acquisition costs
360,000 132,000 8,000
Provision for depreciation and other amortization
524,000 481,000 243,000
Provision for deferred income taxes 836,000 666,000 135,000
Other (1,949,000) (6,765,000) 1,724,000
----------------------------------------------------------
Net cash provided by operating activities 11,531,000 6,100,000 5,163,000
Investing activities
Sale, maturity or repayment of investments:
Fixed maturities--available-for-sale 21,770,000 19,378,000 5,554,000
Equity securities -- 1,807,000 --
----------------------------------------------------------
21,770,000 21,185,000 5,554,000
Acquisition of investments:
Fixed maturities--available-for-sale (7,517,000) (74,567,000) (29,543,000)
Equity securities -- (1,500,000) --
Other (94,000) -- --
----------------------------------------------------------
(7,611,000) (76,067,000) (29,543,000)
Other (193,000) (252,000) (81,000)
----------------------------------------------------------
Net cash provided (used) by investing activities
13,966,000 (55,134,000) (24,070,000)
</TABLE>
65
<PAGE>
First Variable Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Period from
September 22, 1994 (date
operations acquired)
Year ended December 31 through
1996 1995 December 31, 1994
-------------------------------------------------------------
<S> <C> <C> <C>
Financing activities
Receipts from interest-sensitive products credited
to policyholder account balances $ 58,175,000 $ 67,063,000 $ 14,153,000
Return of policyholder account balances on
interest-sensitive products (86,824,000) (72,196,000) (16,285,000)
Contribution from parent -- 5,000,000 75,791,000
-------------------------------------------------------------
Net cash provided (used) by financing activities
(28,649,000) (133,000) 73,659,000
-------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents
(3,152,000) (49,167,000) 54,752,000
Cash and cash equivalents at beginning of period
5,585,000 54,752,000 --
-------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,433,000 $ 5,585,000 $ 54,752,000
=============================================================
</TABLE>
See accompanying notes.
66
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1996
1. Significant Accounting Policies
Organization and Nature of Business
First Variable Life Insurance Company (the Company), a life insurance company
domiciled in the State of Arkansas, is a wholly-owned subsidiary of Irish Life
of North America, Inc. (ILoNA), which is owned by Irish Life, plc (Irish Life)
of Dublin, Ireland. The Company is licensed in 49 states and sells variable and
fixed annuity products through regional wholesalers and insurance brokers.
On September 22, 1994, ILoNA purchased the Company for $49,514,000 plus expenses
of $1,090,000. The financial statements presented herein represent operations
since the date of purchase.
Consolidation
The consolidated financial statements include the Company and its wholly-owned
subsidiaries, First Variable Advisory Services Corp. and First Variable Capital
Services, Inc. All significant intercompany transactions have been eliminated.
Investments
Fixed Maturities and Equity Securities
Fixed-maturity securities (bonds) may be categorized as "available-for-sale,"
"held for investment" or "trading." Fixed-maturity securities which may be sold
are designated as "available-for-sale." Available-for-sale securities are
reported at market value, and unrealized gains and losses on these securities
are included directly in stockholder's equity, net of certain adjustments (see
Note 3). Fixed-maturity securities that the Company has the positive intent and
ability to hold to maturity are designated as "held-for-investment."
Held-for-investment securities are reported at cost adjusted for amortization of
premiums and discounts. Changes in the market value of these securities, except
for declines that are other than temporary, are not reflected in the Company's
financial statements. Securities that are bought and held principally for the
purpose of selling them in the near term are designated as "trading securities."
Unrealized gains and losses on trading securities are included in current
earnings. At December 31, 1996 and 1995, all of the Company's fixed-maturity
securities are designated as available-for-sale, although the Company is not
precluded from designating fixed-maturity securities as held-for-investment or
trading at some future date.
67
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Premiums and discounts on investments are amortized/accrued using methods which
result in a constant yield over the securities' expected lives.
Amortization/accrual of premiums and discounts on mortgage and asset-backed
securities incorporates a prepayment assumption to estimate the securities'
expected lives.
Equity securities (common stocks) are reported at market. The change in
unrealized appreciation and depreciation of marketable equity securities (net of
related deferred income taxes, if any) is included directly in stockholder's
equity.
Realized Gains and Losses on Investments
The carrying values of all the Company's investments are reviewed on an ongoing
basis for credit deterioration, and if this review indicates a decline in market
value that is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value (the sum of the
estimated nondiscounted cash flows) and a specific writedown is taken. Such
reductions in carrying value are recognized as realized losses and charged to
income. Realized gains and losses on sales are determined on the basis of
specific identification of investments. If the Company expects that an issuer of
a security will modify its payment pattern from contractual terms but no
writedown is required, future investment income is recognized at the rate
implicit in the calculation of net realizable value under the expected payment
pattern.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Deferred Policy Acquisition Costs and Value of Insurance in Force Acquired
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions and other
expenses related to the production of new business, have been deferred. The
value of insurance in force acquired is an asset that arose at the date the
Company was acquired by ILoNA. The initial value was determined by an actuarial
study using expected future gross profits as a measurement of the net present
value of the insurance acquired. Interest accrues on the current unamortized
balance at 7%.
68
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
These costs are being amortized generally in proportion to expected gross
profits from surrender charges and investment, mortality and expense margins.
That amortization is adjusted retrospectively when estimates of current or
future gross profits (including the impact of investment gains and losses) to be
realized from a group of products are revised.
Property and Equipment
Property and equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily using the straight-line method over
the estimated useful lives of the assets.
Goodwill
Goodwill represents the excess of the fair value of assets exchanged over the
net assets acquired. Goodwill is being amortized on a straight-line basis over a
period of twenty years.
The carrying value of goodwill is regularly reviewed for indicators of
impairment in value which, in the view of management, are other than temporary.
If facts and circumstances suggest that goodwill is impaired, the Company
assesses the fair value of the underlying business and reduces goodwill to an
amount that results in the book value of the underlying business approximating
fair value. The Company has not recorded any such writedowns during the periods
ended December 31, 1996, 1995 or 1994.
Future Policy Benefits
Future policy benefit reserves for annuity products are computed under a
retrospective deposit method and represent policy account balances before
applicable surrender charges. Policy benefits and claims that are charged to
expense include benefit claims incurred in the period in excess of related
policy account balances. Interest crediting rates for annuity products ranged
from 4.5% to 6.5% in 1996, 4.5% to 6.8% in 1995 and 5.0% to 7.0% in 1994.
Deferred Income Taxes
Deferred income tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
69
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Separate Accounts
The separate account assets and liabilities reported in the accompanying
consolidated balance sheets represent funds that are separately administered,
principally for the benefit of certain policyholders who bear the investment
risk. The separate account assets and liabilities are carried at fair value.
Revenues and expenses related to the separate account assets and liabilities, to
the extent of benefits paid or provided to the separate account policyholders,
are excluded from the amounts reported in the accompanying consolidated
statements of income.
Recognition of Premium Revenues and Costs
Revenues for annuity products consist of policy charges for the cost of
insurance, administration charges and surrender charges assessed against
policyholder account balances during the period. Expenses related to these
products include interest credited to policyholder account balances and benefit
claims incurred in excess of policyholder account balances.
Approximately 22%, 49% and 0% of the direct business written (as measured by
premiums received) during the periods ended December 31, 1996, 1995 and 1994,
respectively, were written through one wholesaler. The Company's management
believes that other broker/dealers could generate the same level of sales on
comparable terms. Direct premiums are not concentrated in any geographical area.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant estimates and assumptions are utilized in the calculation of
deferred policy acquisition costs, policyholder liabilities and accruals,
postretirement benefits, 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 consolidated financial statements.
70
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. Fair Values of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that value.
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 comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 also excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements and allows companies to forego the
disclosures when those estimates can only be made at excessive cost.
Accordingly, the aggregate fair value amounts presented herein are limited by
each of these factors and do not purport to 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:
Fixed-Maturity Securities: Fair values for fixed-maturity securities have
been determined by the Company's outside investment manager and are based
on quoted market prices, when available, or price matrices for securities
which are not actively traded, developed using yield data and other factors
relating to instruments or securities with similar characteristics.
Equity Securities: The fair values for equity securities are based on
quoted market prices.
Other Invested Assets and Cash and Cash Equivalents: The carrying amounts
reported in the consolidated balance sheets for these instruments
approximate their fair values.
Assets and Liabilities of Separate Accounts: Separate account assets and
liabilities are reported at estimated fair value in the Company's
consolidated balance sheets.
71
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. Fair Values of Financial Instruments (continued)
Future Policy Benefits and Supplementary Contracts Without Life
Contingencies: Fair values of the Company's liabilities under contracts not
involving significant mortality or morbidity risks (principally deferred
annuities) are stated at the cost the Company would incur to extinguish the
liability; i.e., the cash surrender value.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of SFAS No. 107 at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------------------ --------------------------------
Carrying Carrying
Value Fair Value Value Fair Value
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturities--
available-for-sale $294,195,000 $294,195,000 $319,589,000 $319,589,000
Equity securities 691,000 691,000 322,000 322,000
Other invested assets 94,000 94,000 -- --
Cash and cash equivalents 2,433,000 2,433,000 5,585,000 5,585,000
Assets held in separate accounts 176,306,000 176,306,000 132,176,000 132,176,000
Liabilities
Future policy benefits for
annuity products 239,509,000 239,562,000 255,694,000 251,669,000
Supplementary contracts without
life contingencies 21,008,000 21,008,000 19,543,000 19,543,000
Liabilities related to separate
accounts 176,306,000 176,306,000 132,176,000 132,176,000
</TABLE>
72
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investment Operations
Fixed Maturities and Equity Securities
The following tables contain amortized cost and market value information on
fixed maturities (bonds) and equity securities (common stocks) at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996
Fixed maturities--available-for-
sale:
United States Government
and agencies:
Mortgage and asset-
backed securities $ 25,641,000 $ 1,315,000 $ (105,000) $ 26,851,000
Other 22,483,000 1,109,000 (20,000) 23,572,000
State, municipal and other
governments 3,994,000 270,000 -- 4,264,000
Public utilities 81,053,000 6,224,000 (44,000) 87,233,000
Industrial and
miscellaneous 145,134,000 7,406,000 (265,000) 152,275,000
========================================================================
Total fixed maturities--
available-for-sale $278,305,000 $16,324,000 $ (434,000) $ 294,195,000
========================================================================
Equity securities $ 684,000 $ 7,000 $ -- $ 691,000
========================================================================
December 31, 1995
Fixed maturities--available-for-
sale:
United States Government
and agencies:
Mortgage and asset-
backed securities $ 27,766,000 $ 2,465,000 $ (333,000) $ 29,898,000
Other 33,823,000 2,937,000 (63,000) 36,697,000
State, municipal and other
governments -- -- -- --
Public utilities 89,454,000 11,691,000 (698,000) 100,447,000
Industrial and
miscellaneous 139,900,000 12,700,000 (53,000) 152,547,000
========================================================================
Total fixed
maturities--available-for-sale $ 290,943,000 $ 29,793,000 $ (1,147,000) $ 319,589,000
========================================================================
Equity securities $ 684,000 $ -- $ (362,000) $ 322,000
========================================================================
</TABLE>
73
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investment Operations (continued)
The amortized cost and estimated market value of the Company's portfolio of
fixed-maturity securities at December 31, 1996, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Estimated
Amortized Market
Cost Value
-----------------------------------
Due in one year or less $ 1,011,000 $ 1,019,000
Due after one year through five years 65,683,000 67,758,000
Due after five years through ten years 102,261,000 107,206,000
Due after ten years 83,709,000 91,361,000
Mortgage and asset-backed securities 25,641,000 26,851,000
-----------------------------------
$278,305,000 $294,195,000
===================================
The unrealized appreciation or depreciation on fixed-maturity and equity
securities available-for-sale is reported as a separate component of
stockholder's equity, reduced by adjustments to deferred policy acquisition
costs and value of insurance in force acquired that would have been required as
a charge or credit to income had such amounts been realized and a provision for
deferred income taxes. Net unrealized investment gains (losses) as reported were
comprised of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
------------------------------
<S> <C> <C>
Unrealized appreciation on fixed-maturity and equity securities
available-for-sale $ 15,897,000 $ 28,284,000
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs (1,200,000) (1,200,000)
Value of insurance in force acquired (3,600,000) (7,100,000)
Provision for deferred income taxes (benefit) (3,773,000) (6,795,000)
------------------------------
Net unrealized investment gains $ 7,324,000 $ 13,189,000
==============================
</TABLE>
74
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investment Operations (continued)
Net Investment Income
Components of net investment income are as follows:
<TABLE>
<CAPTION>
Period from
September 22, 1994 (date
operations acquired)
Year ended December 31 through
1996 1995 December 31, 1994
--------------------------------------------------------------
<S> <C> <C> <C>
Income from:
Fixed maturities--available-for-
sale $ 23,364,000 $22,635,000 $ 4,713,000
Cash and cash equivalents 288,000 1,051,000 667,000
--------------------------------------------------------------
23,652,000 23,686,000 5,380,000
Less investment expenses (194,000) (221,000) (62,000)
--------------------------------------------------------------
Net investment income $ 23,458,000 $23,465,000 $ 5,318,000
==============================================================
</TABLE>
Realized and Unrealized Gains and Losses
Realized gains (losses) and the change in unrealized appreciation/depreciation
on investments are summarized below:
<TABLE>
<CAPTION>
Period from
September 22, 1994 (date
operations acquired)
Year ended December 31 through
1996 1995 December 31, 1994
-------------------------------------------------------------
<S> <C> <C> <C>
Realized
Fixed maturities--available-for-
sale $ 972,000 $ 593,000 $ 541,000
Equity securities -- 307,000 --
-------------------------------------------------------------
Realized gains on investments $ 972,000 $ 900,000 $ 541,000
=============================================================
Unrealized
Fixed maturities--available-for-sale
$(12,756,000) $33,437,000 $(4,791,000)
Equity securities 369,000 (133,000) (229,000)
-------------------------------------------------------------
Change in unrealized
appreciation/depreciation of
investments $(12,387,000) $33,304,000 $(5,020,000)
=============================================================
</TABLE>
75
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investment Operations (continued)
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio (all classified as available-for-sale) for the periods
ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Realized Realized
Cost Gains Losses Proceeds
---------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Scheduled principal repayments
and calls $13,416,000 $ 329,000 $ (8,000) $13,737,000
Sales 7,382,000 715,000 (64,000) 8,033,000
---------------------------------------------------------
Total $20,798,000 $1,044,000 $ (72,000) $21,770,000
=========================================================
Year ended December 31, 1995
Scheduled principal repayments
and calls $ 6,448,000 $ 117,000 $ (38,000) $ 6,527,000
Sales 12,337,000 635,000 (121,000) 12,851,000
---------------------------------------------------------
Total $18,785,000 $ 752,000 $(159,000) $19,378,000
=========================================================
Period from September 22, 1994
(date operations acquired)
through December 31, 1994
Scheduled principal repayments
and calls $ 5,013,000 $ 541,000 -- $ 5,554,000
Sales -- -- -- --
---------------------------------------------------------
Total $ 5,013,000 $ 541,000 -- $ 5,554,000
=========================================================
</TABLE>
Income taxes during the periods ended December 31, 1996, 1995 and 1994 include a
provision of $331,000, $306,000 and $184,000, respectively, for the tax effect
of realized gains.
76
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investment Operations (continued)
Other
At December 31, 1996, fixed maturities with a carrying value of $8,500,000 were
held on deposit with state agencies to meet regulatory requirements.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States Government) exceeded 10% of stockholder's equity
at December 31, 1996.
Concentrations of Credit Risk
The Company's investment in public utility bonds at December 31, 1996 represents
30% of total investments and 17% of total assets. The holdings of public utility
bonds are widely diversified and all issues met the Company's investment
policies and credit standards when purchased.
4. Value of Insurance in Force Acquired
The value of insurance in force acquired is an asset that represents the present
value of future profits on business acquired. An analysis of the value of
insurance in force acquired for the periods ended December 31, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
------------------------------
<S> <C> <C>
Excluding impact on net unrealized investment gains and
losses:
Balance at beginning of period $ 23,833,000 $ 24,476,000
Accretion of interest during the period 1,642,000 1,691,000
Amortization of asset (2,381,000) (2,334,000)
------------------------------
Balance prior to impact of net unrealized investment gains
and losses 23,094,000 23,833,000
Offset against net unrealized investment gains and losses (3,600,000) (7,100,000)
------------------------------
Balance at end of period $ 19,494,000 $ 16,733,000
==============================
</TABLE>
77
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Value of Insurance in Force Acquired (continued)
Amortization of the value of insurance in force acquired for the next five years
ending December 31 is expected to be as follows: 1997--$1,008,000;
1998--$1,113,000; 1999--$1,280,000; 2000--$1,430,000 and 2001--$1,384,000.
5. Federal Income Taxes
The Company and its subsidiaries each file separate federal income tax returns.
Deferred income taxes have been established by the Company and its subsidiaries
based upon the temporary differences, the reversal of which will result in
taxable or deductible amounts in future years when the related asset or
liability is recovered or settled, within each entity.
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
Period from
September 22, 1994 (date
operations acquired)
Year ended December 31 through
1996 1995 December 31, 1994
-----------------------------------------------------------
<S> <C> <C> <C>
Taxes provided in consolidated
statements of income on income
before income taxes-deferred $ 836,000 $ 666,000 $ 135,000
-----------------------------------------------------------
836,000 666,000 135,000
Taxes provided in consolidated
statements of changes in stockholder's
equity:
Amounts attributable to change in
net unrealized investment
gains/losses during year--
deferred (3,022,000) 8,499,000 (1,704,000)
-----------------------------------------------------------
$(2,186,000) $9,165,000 $(1,569,000)
===========================================================
</TABLE>
78
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Federal Income Taxes (continued)
The effective tax rate on income before income taxes is different from the
prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
Period from
September 22,
1994 (date
operations
acquired)
Year ended December 31 through
1996 1995 December 31, 1994
------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 2,440,000 $ 1,937,000 $ 728,000
======================================================
Income tax at federal statutory rate
(34%) $ 830,000 $ 659,000 $ 248,000
Tax effect (decrease) of:
Business meals and entertainment
6,000 5,000 1,000
Other -- 2,000 (114,000)
------------------------------------------------------
Income tax expense $ 836,000 $ 666,000 $ 135,000
======================================================
</TABLE>
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1996 and 1995 is as follows:
December 31
1996 1995
------------------------------
Deferred tax assets:
Future policy benefits $ 1,524,000 $ 1,859,000
Operating loss carryforwards 2,245,000 1,540,000
Other 20,000 --
------------------------------
3,789,000 3,399,000
Deferred tax liabilities:
Fixed-maturity and equity securities
(4,702,000) (7,355,000)
Deferred policy acquisition costs
(1,908,000) (1,248,000)
Value of insurance in force acquired
(2,453,000) (2,280,000)
Other (368,000) (342,000)
------------------------------
(9,431,000) (11,225,000)
------------------------------
Deferred income tax liability $ (5,642,000) $ (7,826,000)
==============================
79
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Federal Income Taxes (continued)
The Company has federal net operating loss carryforwards reportable on its
federal tax return aggregating $6,603,000 at December 31, 1996 which expire from
2009 to 2011.
6. Retirement and Compensation Plans
Substantially all full-time employees of the Company are covered by a
noncontributory defined benefit pension plan sponsored by ILoNA. The benefits
are based on years of service and the employee's compensation. In addition,
effective January 1, 1996, ILoNA adopted a nonqualified supplemental plan to
provide benefits in excess of limitations established by the Internal Revenue
Code. The Company records its required contributions as pension expense related
to these plans. There were no material contributions to the plan during the
periods ended December 31, 1996, 1995 or 1994.
Employees of the Company also are eligible to participate in a contributory
defined contribution plan sponsored by ILoNA which is qualified under section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
employees of the Company. Employees can contribute up to 15% of their annual
salary (with a maximum contribution of $9,500 in 1996) to the plan. The Company
contributes an additional amount, subject to limitations, based on the voluntary
contribution of the employee. Further, the plan provides for additional employer
contributions based on the discretion of the Board of Directors of ILoNA.
Pension expense related to this plan was $27,000, $24,000 and $2,000 for the
periods ended December 31, 1996, 1995 and 1994, respectively.
The Company also has certain other benefit and incentive plans. These plans are
considered immaterial to the consolidated financial statements.
7. Stockholder's Equity
Common Stock Dividend
On December 14, 1994, the Company's Board of Directors authorized a 2/3-for-1
common stock dividend to increase the Company's capital stock to meet the
minimum statutory capital requirement as mandated by certain states in which the
Company does business. The additional $1,000,000 was transferred to capital
stock from additional paid-in capital.
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First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Stockholder's Equity (continued)
Statutory Limitations on Dividends
The ability of the Company to pay dividends to ILoNA is restricted because prior
approval of insurance regulatory authorities is normally required for payment of
dividends to the stockholder which exceed an annual limitation. During 1997,
this annual limitation aggregates $3,300,000; however, pursuant to a directive
received from the Arkansas Insurance Department in 1991, any proposed payment of
a dividend currently requires its approval. Also, the amount ($33,300,000 at
December 31, 1996) by which stockholder's equity stated in conformity with
generally accepted accounting principles exceeds statutory capital and surplus
as reported is restricted and cannot be distributed.
Statutory Accounting Policies
The financial statements of the Company included herein differ from related
statutory-basis financial statements principally as follows: (a) the bond
portfolio is designated as available-for-sale and carried at fair value rather
than generally being carried at amortized cost; (b) acquisition costs of
acquiring new business are deferred and amortized over the life of the policies
rather than charged to operations as incurred; (c) future policy benefit
reserves on certain annuity products are based on full account values, rather
than discounting methodologies utilizing statutory interest rates; (d) deferred
income taxes are provided for the differences between the financial statement
and income tax bases of assets and liabilities; (e) net realized gains or losses
attributed to changes in the level of interest rates in the market are
recognized as gains or losses in the consolidated statements of income when the
sale is completed rather than deferred and amortized over the remaining life of
the fixed maturity security; (f) declines in the estimated realizable value of
investments are charged to the consolidated statements of income for declines in
value, when such declines in value are judged to be other than temporary rather
than through the establishment of a formula-determined statutory investment
reserve (carried as a liability), changes in which are charged directly to
surplus; (g) agents' balances and certain other assets designated as
"nonadmitted assets" for statutory purposes are reported as assets rather than
being charged to surplus; (h) revenues for annuity products consist of policy
charges for the cost of insurance, policy administration charges and surrender
charges
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First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Stockholder's Equity (continued)
assessed rather than premiums received;(i) pension expense is recognized in
accordance with SFAS No. 87, Employers' Accounting for Pensions, rather than in
accordance with rules and regulations permitted by the Employee Retirement
Income Security Act of 1974; (j) the financial statements of subsidiaries are
consolidated with those of the Company and (k) assets and liabilities are
restated to fair values when a change in ownership occurs that is accounted for
as a purchase, with provisions for goodwill and other intangible assets, rather
than continuing to be presented at historical cost.
Net loss for the Company, as determined in accordance with statutory accounting
practices, was $1,507,000, $1,460,000 and $574,000 for the years ended December
31, 1996, 1995 and 1994, respectively. Total statutory capital and surplus was
$33,096,000 at December 31, 1996 and $34,637,000 at December 31, 1995.
The National Association of Insurance Commissioners currently is in the process
of codifying statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices. That
project, which is expected to be completed in 1997, will likely change, to some
extent, statutory accounting practices. The codification may result in changes
to the permitted or prescribed accounting practices that the Company uses to
prepare its statutory-basis financial statements.
8. Commitments and Contingencies
The Company leases its home office space and certain other equipment under
operating leases which expire through 2001. During the periods ended December
31, 1996, 1995 and 1994, rent expense totaled $206,000, $419,000 and $81,000,
respectively. At December 31, 1996, minimum rental payments due under all
noncancelable operating leases with initial terms of one year or more are:
Year ending December 31:
1997 $ 230,000
1998 230,000
1999 238,000
2000 241,000
2001 61,000
----------
$1,000,000
==========
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First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
The Company is involved in litigation where amounts are alleged that are
substantially in excess of contractual policy benefits or certain other
agreements. Management and its legal counsel do not believe any of these claims
will result in a material loss to the Company.
Assessments are, from time to time, levied on the Company by life and health
guaranty associations in most states in which the Company is licensed to cover
losses of policyholders of insolvent or rehabilitated companies. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. Assessments have not been material to the Company's financial
statements in the past. However, the economy and other factors have caused a
number of failures of substantially larger companies since that time. At
December 31, 1996 and 1995, the Company has accrued $180,000 and $140,000,
respectively, for guaranty fund assessments based on its historical experience
and information available from those making guaranty fund assessments.
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PART C
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FIRST VARIABLE ANNUITY FUND E
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
The following financial statements of Fund E are contained in Part B
hereof:
1. Report of Independent Auditors.
2. Statement of Assets, Liabilities and Contract Owners' Equity.
3. Statement of Operations.
4. Statements of Changes in Net Assets.
5. Notes to Financial Statements.
The following financial statements of the Company are included in Part B
hereof:
1. Report of Independent Auditors.
2. Consolidated Balance Sheets.
3. Consolidated Statements of Income.
4. Consolidated Statement of Changes in Stockholder's Equity
5. Consolidated Statements of Cash Flows.
6. Notes to Financial Statements.
(b) Exhibits
1. Resolution of Board of Directors for the Company authorizing the
establishment of the Separate Account*
2. Not Applicable
3(a). Form of Principal Underwriter's Agreement**
(b). Form of Broker-Dealer Agreement**
(c). Specimen Broker-Dealer Supervisory and Selling Agreement #
4. Individual Flexible Purchase Payment Deferred Variable Annuity
Contract#
5. Application for Variable Annuity#
6(a). Articles of Incorporation # #
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(b) By-laws of First Variable Life Insurance Company**
7. Not Applicable
8.(a) Form of Fund Participation Agreements with Variable Investors
Series Trust#
(b) Form of Fund Participation Agreements with Federated Insurance
Series
9.(a) Opinion and Consent of Arnold R. Bergman, Vice President-Legal
First Variable Life Insurance Company
(b) Consent of Blazzard, Grodd & Hasenauer, P.C.
10. Consent of Independent Auditors
11. Not Applicable
12. Not Applicable
13. Calculation of Performance Information
14. Not Applicable
- ----------
* Incorporated herein by reference to the Registrant's original Registration
Statement (File Nos. 2-92856, 811-4092).
** Incorporated herein by reference to the Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement of First Variable Life Insurance Company and
Separate Account VL, filed electronically with the Securities and Exchange
Commission on November 15, 1996 (File No. 333-05053).
# Incorporated by reference to the Registrant's Post-Effective Amendment No. 22
to Form N-4 (File Nos. 333-12197 and 811-4092) as filed electronically with the
Securities and Exchange Commission on September 14, 1996.
# # Incorporated by reference to the Registrant's Post-Effective Amendment No. 5
to Form N-4 (File Nos. 33-35749 and 811-4092) as filed with the Securities and
Exchange Commission on or about December 30, 1993.
ITEM 25. OFFICERS AND DIRECTORS OF DEPOSITOR
The following are the Officers and Directors of the Company.
Name and Principal Positions and Offices with the
Business Address Depositor
- ---------------- ---------
Ronald M. Butkiewicz Chairman and Director
2211 York Road, Suite 202
Oakbrook, IL 60521
Stephan M. Largent President and Director
10 Post Office Square
Boston, MA 02109
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Michael J. Corey Director
401 East Host Drive
Lake Geneva, WI 53147
Michael R. Ferrari Director
25th & University Avenue
Des Moines, IA 50311
Stephan Shone Director
Lower Abbey Street
Dublin 1, Ireland
T. David Kingston Director
Lower Abbey Street
Dublin 1, Ireland
Jeff S. Liebmann Director
1301 Avenue of the Americas
New York, NY 10019
Kenneth R. Meyer Director
200 South Wacker Drive, Suite 2100
Chicago, IL 60606
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ITEM 25 (continued)
- -------------------
Philip R. O'Connor Director
111 West Washington, Suite 1247
Chicago, IL 60602
Norman A. Fair Director
2211 York Road, Suite 202
Oakbrook, IL 60521
Thomas K. Neavins Director
2211 York Road, Suite 202
Oakbrook, IL 60521
Arnold R. Bergman Vice President - Legal & Administration
10 Post Office Square and Secretary
Boston, MA 02109
Martin Sheerin Vice President and Chief Actuary
10 Post Office Square
Boston, MA 02109
Thomas N. Simpson Vice President and Chief Marketing Officer
10 Post Office Square
Boston, MA 02109
Anthony J. Koenig, Jr. Vice President and Treasurer
10 Post Office Square
Boston, MA 02109
Constance Graves Assistant Vice President and Assistant
10 Post Office Square Controller
Boston, MA 02109
Mark Kelly Assistant Vice President and Assistant
10 Post Office Square Treasurer
Boston, MA 02109
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
Incorporated by reference to Registrant's Post-Effective Amendment No. 8
filed electronically on April 29, 1996. (File Nos. 33-35749 and 811-4092).
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 1997, there were no owners of the Contracts.
ITEM 28. INDEMNIFICATION
Insofar as indemnification for liability arising under the Securities Act
of 1933 ("Act") may be permitted to directors and officers and controlling
persons of the Registrant, 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
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indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) First Variable Capital Services, Inc. ("FVCS") is the principal underwriter
for the Contracts and for the following investment companies:
First Variable Annuity Fund A
Separate Account VL of First Variable Life Insurance Company
(b) The following persons are directors and officers of FVCS:
Name and Principal Business Address Positions and Offices with Underwriter
- ----------------------------------- --------------------------------------
Norman A. Fair Director
2211 York Road, Suite 202
Oakbrook, IL 60521
Stephan M. Largent President and Director
10 Post Office Square
Boston, MA 02109
Arnold R. Bergman Secretary and Director
10 Post Office Square
Boston, MA 02109
Tom Simpson Vice President and Director
10 Post Office Square
Boston, MA 02109
Anthony J. Koenig, Jr. Vice President and Treasurer
10 Post Office Square
Boston, MA 02109
Constance Graves Assistant Treasurer
10 Post Office Square
Boston, MA 02109
Mark Kelly Assistant Treasurer
10 Post Office Square
Boston, MA 02109
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Arnold R. Bergman, Secretary of the Company and Anthony J. Koenig, Jr.,
Treasurer of the Company, who are located at 10 Post Office Square, 12th Floor,
Boston, MA 02109, maintain physical possession of the accounts, books or
documents of the Separate Account required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the rules promulgated thereunder.
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ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that the audited
financial statements in the registration statement are never more than sixteen
(16) months old for so long as payment under the variable annuity contracts may
be accepted.
(b) Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
(c) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
Form promptly upon written or oral request.
(d) In accordance with section 26(e) of the Investment Company Act of 1940,
First Variable Life Insurance Company hereby represents that the fees and
charges deducted under the Contract described in this Registration Statement on
Form N-4, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by First Variable
Life Insurance Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No Action Letter issued
to the American Council of Life Insurance dated November 28, 1988 (Commission
ref. IP-6-88) and that the following provisions have been complied with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b) (11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by Section
403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b) annuity
contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restriction on
redemption imposed by Section 403(b)(11), and (2) other investment alternatives
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value.
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<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, as amended, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Registration Statement and
has caused this Registration Statement to be signed on its behalf, in the City
of Boston, and the Commonwealth of Massachusetts, on this 25th day of April,
1997.
FIRST VARIABLE ANNUITY FUND E
(Registrant)
By: FIRST VARIABLE LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Stephan M. Largent
--------------------------------------
Stephan M. Largent, President
FIRST VARIABLE LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Stephan M. Largent
--------------------------------------
Stephan M. Largent, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Ronald M. Butkiewicz* Chairman & Director April 25, 1997
- ---------------------------
Ronald M. Butkiewicz
Michael J. Corey* Director April 25, 1997
- ---------------------------
Michael J. Corey
Michael R. Ferrari* Director April 25, 1997
- ---------------------------
Michael R. Ferrari
/s/ Stephan M. Largent President and Director April 25, 1997
- ---------------------------
Stephan M. Largent
T. David Kingston* Director April 25, 1997
- ---------------------------
T. David Kingston
Jeff S. Liebmann* Director April 25, 1997
- ---------------------------
Jeff S. Liebmann
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<PAGE>
- --------------------------- Director April 25, 1997
Kenneth R. Meyer
Philip R. O'Connor* Director April 25, 1997
- ---------------------------
Philip R. O'Connor
Norman A. Fair* Director April 25, 1997
- ---------------------------
Norman A. Fair
Thomas K. Neavins* Director April 25, 1997
- ---------------------------
Thomas K. Neavins
/s/ Anthony J. Koenig, Jr. Vice President and Treasurer April 25, 1997
- ---------------------------
Anthony J. Koenig, Jr.
*By Power of Attorney
/s/ Arnold R. Bergman
---------------------
Arnold R. Bergman
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<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Ronald M. Butkiewicz, a Director of
First Variable Life Insurance Company, a corporation duly organized under the
laws of the State of Arkansas, do hereby appoint, Stephan Largent and Arnold R.
Bergman, or any one of the foregoing individually, as my attorney and agent, for
me, and in my name as a Director of this company on behalf of the Company or
otherwise, with full power to execute, deliver and file with the Securities and
Exchange Commission all documents required for registration of variable annuity
and variable life insurance contracts under the Securities Act of 1933, as
amended, and the registration of unit investment trusts under the Investment
Company Act of 1940, as amended, and to do and perform each and every act that
said attorney may deem necessary or advisable to comply with the intent of the
aforesaid Acts.
WITNESS my hand this 15th day of May, 1996
WITNESS:
/S/ MARTIN SHEERIN /S/ RONALD M. BUTKIEWICZ
- ------------------ ------------------------
Ronald M. Butkiewicz
93
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael J. Corey, a Director of First
Variable Life Insurance Company, a corporation duly organized under the laws of
the State of Arkansas, do hereby appoint, Stephan Largent and Arnold R. Bergman,
or any one of the foregoing individually, as my attorney and agent, for me, and
in my name as a Director of this company on behalf of the Company or otherwise,
with full power to execute, deliver and file with the Securities and Exchange
Commission all documents required for registration of variable annuity and
variable life insurance contracts under the Securities Act of 1933, as amended,
and the registration of unit investment trusts under the Investment Company Act
of 1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 15th day of May, 1996
WITNESS:
/S/ MARTIN SHEERIN /S/ MICHAEL J. COREY
- ------------------ --------------------
Michael J. Corey
94
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Norman A. Fair, Director of First
Variable Life Insurance Company, a corporation duly organized under the laws of
the State of Arkansas, do hereby appoint, Stephan Largent and Arnold R. Bergman,
or any one of the foregoing individually, as my attorney and agent, for me, and
in my name as a Director of this company on behalf of the Company or otherwise,
with full power to execute, deliver and file with the Securities and Exchange
Commission all documents required for registration of variable annuity and
variable life insurance contracts under the Securities Act of 1933, as amended,
and the registration of unit investment trusts under the Investment Company Act
of 1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 24th day of April, 1996
WITNESS:
/S/ THOMAS K. NEAVINS /S/ NORMAN A. FAIR
- --------------------- ------------------
Norman A. Fair
95
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael R. Ferrari, a Director of First
Variable Life Insurance Company, a corporation duly organized under the laws of
the State of Arkansas, do hereby appoint, Stephan Largent and Arnold R. Bergman,
or any one of the foregoing individually, as my attorney and agent, for me, and
in my name as a Director of this company on behalf of the Company or otherwise,
with full power to execute, deliver and file with the Securities and Exchange
Commission all documents required for registration of variable annuity and
variable life insurance contracts under the Securities Act of 1933, as amended,
and the registration of unit investment trusts under the Investment Company Act
of 1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 18th day of November, 1996
WITNESS:
/S/ MICHAEL R. FRIEDBERG /S/ MICHAEL R. FERRARI
- ------------------------ ----------------------
Michael R. Ferrari
96
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, T. David Kingston, a Director of First
Variable Life Insurance Company, a corporation duly organized under the laws of
the State of Arkansas, do hereby appoint, Stephan Largent and Arnold R. Bergman,
or any one of the foregoing individually, as my attorney and agent, for me, and
in my name as a Director of this company on behalf of the Company or otherwise,
with full power to execute, deliver and file with the Securities and Exchange
Commission all documents required for registration of variable annuity and
variable life insurance contracts under the Securities Act of 1933, as amended,
and the registration of unit investment trusts under the Investment Company Act
of 1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 15th day of May, 1996
WITNESS:
/S/ MARTIN SHEERIN /S/ T. DAVID KINGSTON
- ------------------ ---------------------
T. David Kingston
97
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Jeff S. Liebmann, Director of First
Variable Life Insurance Company, a corporation duly organized under the laws of
the State of Arkansas, do hereby appoint, Stephan Largent and Arnold R. Bergman,
or any one of the foregoing individually, as my attorney and agent, for me, and
in my name as a Director of this company on behalf of the Company or otherwise,
with full power to execute, deliver and file with the Securities and Exchange
Commission all documents required for registration of variable annuity and
variable life insurance contracts under the Securities Act of 1933, as amended,
and the registration of unit investment trusts under the Investment Company Act
of 1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 15th day of May, 1996
WITNESS:
/S/ MICHAEL R. FRIEDBERG /S/ JEFF S. LIEBMANN
- ------------------------ --------------------
Jeff S. Liebmann
98
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas K. Neavins, Director of First
Variable Life Insurance Company, a corporation duly organized under the laws of
the State of Arkansas, do hereby appoint, Stephan Largent and Arnold R. Bergman,
or any one of the foregoing individually, as my attorney and agent, for me, and
in my name as a Director of this company on behalf of the Company or otherwise,
with full power to execute, deliver and file with the Securities and Exchange
Commission all documents required for registration of variable annuity and
variable life insurance contracts under the Securities Act of 1933, as amended,
and the registration of unit investment trusts under the Investment Company Act
of 1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 15th day of May, 1996
WITNESS:
/S/ MARTIN SHEERIN /S/ THOMAS K. NEAVINS
- ------------------ ---------------------
Thomas K. Neavins
99
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Philip R. O' Connor, Director of First
Variable Life Insurance Company, a corporation duly organized under the laws of
the State of Arkansas, do hereby appoint, Stephan Largent and Arnold R. Bergman,
or any one of the foregoing individually, as my attorney and agent, for me, and
in my name as a Director of this company on behalf of the Company or otherwise,
with full power to execute, deliver and file with the Securities and Exchange
Commission all documents required for registration of variable annuity and
variable life insurance contracts under the Securities Act of 1933, as amended,
and the registration of unit investment trusts under the Investment Company Act
of 1940, as amended, and to do and perform each and every act that said attorney
may deem necessary or advisable to comply with the intent of the aforesaid Acts.
WITNESS my hand this 15th day of May, 1996
WITNESS:
/S/ MICHAEL R. FRIEDBERG /S/ PHILIP R. O'CONNOR
- ------------------------ ----------------------
Philip R. O'Connor
100
<PAGE>
FIRST VARIABLE ANNUITY FUND E
INDEX TO EXHIBITS
No. Title of Exhibit Page
- --- ---------------- ----
9.(a) Opinion and Consent of Arnold R. Bergman, Vice President,
Legal, First Variable Life Insurance Company
(b) Consent of Blazzard, Grodd & Hasenauer, P.C.
10. Consent of Ernst & Young LLP, Independent Auditors
101
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Exhibit 9 (a).
Opinion and Consent of Counsel
102
<PAGE>
[LOGO] FIRST VARIABLE LIFE INSURANCE COMPANY
April 25, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration of Contract Interests
First Variable Annuity Fund E of First Variable Life Insurance Company
(File Nos. 333-12197 and 811-4092)
Dear Sir/Madam:
In my capacity as Vice President - Legal of First Variable Life Insurance
Company ("First Variable"), I have acted as chief legal officer with regard to
variable annuity contracts ("Contracts") described in the captioned Registration
and funded in First Variable Annuity Fund E ("Separate Account") of First
Variable. I have examined the Articles of Incorporation and Bylaws of First
Variable, the Contracts and such other records as I have deemed necessary in
connection with the rendering of this opinion.
Based upon the foregoing and having regard for such legal consideration as I
have deemed relevant, I am of the opinion that:
1. First Variable is a duly organized and existing stock life insurance
company under the laws of the state of Arkansas authorized to issue life
insurance and annuity contracts.
2. The establishment of the Separate Account has been duly authorized by the
Board of Directors of First Variable.
3. Upon the acceptance of purchase payments made by an Owner pursuant to a
Contract issued in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable law, such an
Owner will have a legally-issued, fully paid, non-assessable contractual
interest under such Contract.
This opinion speaks only as of the date hereof and I expressly disclaim any
obligation to update it for any change in the law or facts occurring subsequent
to the date hereof.
I consent to the use in Registration No. 333-12197 of this opinion letter.
Very truly yours,
/s/ Arnold R. Bergman
- -------------------------
Arnold R. Bergman
Vice President - Legal*
*Admitted in NY
103
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Exhibit 9.(b)
Consent of Blazzard, Grodd & Hasenauer, P.C.
104
<PAGE>
Blazzard, Grodd & Hasenauer, P.C.
ATTORNEYS AT LAW CONNECTICUT OFFICE:
943 POST ROAD EAST - P.O. BOX 5108
NORSE N. BLAZZARD** WESTPORT, CONNECTICUT 06881-5108
LESLIE E. GRODD* TELEPHONE (203) 226-7866
JUDITH A. HASENAUER** FACSIMILE (203) 454-4028
WILLIAM E. HASENAUER*
RAYMOND A. O'HARA III* FLORIDA OFFICE:
LYNN KORMAN STONE* SUITE 213, OCEANWALK MALL
MAUREEN M. MURPHY* 101 NORTH OCEAN DRIVE
HOLLYWOOD, FLORIDA 33019
* Admitted in Connecticut TELEPHONE (305) 920-6590
** Admitted in Connecticut & Florida
FACSIMILE (305) 920-6902
April 25, 1997
Board of Directors
First Variable Life Insurance Company
10 Post Office Square, 12th Floor
Boston, MA 02109
Re: Consent of Counsel
First Variable Annuity Fund E
Dear Sir or Madam:
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Statement of Additional Information which forms a part of the
Registration Statement on Form N-4 (File No. 333-12197) for the individual
flexible payment deferred variable annuity contracts ("Contracts") to be issued
by First Variable Life Insurance Company and its separate account, First
Variable Annuity Fund E.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: s/ Raymond A. O'Hara III
------------------------------
Raymond A. O'Hara III
105
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Exhibit 10
Consent of Ernst & Young LLP, Independent Auditors
106
<PAGE>
Exhibit 10
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Auditors" in the Statement of Additional Information and to the use of our
reports dated February 7, 1997, with respect to the consolidated financial
statements of First Variable Life Insurance Company, and January 31, 1997,
with respect to the financial statements of First Variable Life Insurance
Company-First Variable Annuity Fund E, included in this Post Effective
Amendment No. 1 to the Registration Statement (Form N-4, No. 333-12197).
/s/ Ernst & Young LLP
--------------------------
ERNST & YOUNG LLP
Boston, Massachusetts
April 25, 1997
107
