<PAGE>
File Nos. 33-86738
811-4092
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Post-Effective Amendment No. [_]
-----
Post-Effective Amendment No. 5 [X]
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 30 [X]
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FIRST VARIABLE ANNUITY FUND E
-----------------------------
(Exact Name of Registrant)
FIRST VARIABLE LIFE INSURANCE COMPANY
-------------------------------------
(Name of Depositor)
2122 York Road
Oak Brook, IL 60523
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(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's telephone number including area code: (630) 684-9200
Name and Address of Agent for Service
-------------------------------------
Arnold R. Bergman
Vice President, General Counsel and Secretary
First Variable Life Insurance Company
2122 York Road
Oak Brook, IL 60523
Copies to:
Raymond A. O'Hara III, Esq.
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
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X on May 1, 1999 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a) (1) of Rule 485
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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.
Title of Securities Being Registered: Interests under Variable Annuity Contracts
<PAGE>
FIRST VARIABLE ANNUITY FUND E
CROSS REFERENCE SHEET
(Pursuant to Rule 495(a))
Item No. in
Form N-4
- --------
PART A Location
- ------ --------
Item 1. Cover Page Cover Page
Item 2. Definitions DEFINITIONS
Item 3. Synopsis or Highlights HIGHLIGHTS
Item 4. Condensed Financial Information ACCUMULATION UNIT DATA;
OTHER MATTERS,
FINANCIAL STATEMENTS;
STATEMENT OF ADDITIONAL
INFORMATION
Item 5. General Description of Registrant, First Variable Life Insurance
Depositor and Portfolio Companies Company; The Separate Account;
Separate Account Investment
Options; MFS Variable Insurance
Trust; Variable Investors Series
Trust
Item 6. Deductions MORE ABOUT CHARGES AND
DEDUCTIONS
Item 7. General Description of Variable THE CONTRACT
Annuity Contracts
Item 8. Annuity Period ANNUITY BENEFITS
Item 9. Death Benefit THE CONTRACT; ANNUITY BENEFITS
AND VALUES; Death Benefits
before the Annuity Date; Death
Benefits after the Annuity Date.
Item 10. Purchases and Contract Value HIGHLIGHTS; YOUR INVESTMENT
OPTIONS; Purchase Payments;
Allocation of Purchase Payment;
CONTRACT BENEFITS AND VALUES
Item 11. Redemptions SURRENDER AND WITHDRAWALS
Item 12. Taxes FEDERAL TAX MATTERS
Item 13. Legal Proceedings OTHER MATTERS; Financial
Statements; Legal Proceedings
Item 14. Table of Contents of the TABLE OF CONTENTS OF THE
Statement of Additional STATEMENT OF ADDITIONAL
Information INFORMATION
<PAGE>
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 FIRST VARIABLE LIFE
INSURANCE COMPANY
Item 18. Services Not Applicable
Item 19. Purchase of Securities Being Offered Not Applicable
Item 20. Underwriters DISTRIBUTOR; DISTRIBUTION AND
OTHER AGREEMENTS
Item 21. Calculation of Performance Data YIELD CALCULATION FOR FIS PRIME
MONEY FUND II INVESTMENT OPTION;
CALCULATION OF OTHER PERFORMANCE
INFORMATION
Item 22. Annuity Payments ANNUITY BENEFITS;
ANNUITY PROVISIONS
Item 23. Financial Statements FINANCIAL STATEMENTS
PART C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Registration Statement.
<PAGE>
Prospectus May 1, 1999
CAPITAL NO LOAD
FLEXIBLE PREMIUM VARIABLE ANNUITY CONTRACTS
Issued by
FIRST VARIABLE LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
Our Marketing and Executive Office: Our Variable Service Center: Or, for express deliveries:
<S> <C> <C>
2122 York Road P.O. Box 1317 1206 Mulberry Street
Oak Brook, IL 60523 Des Moines, IA 50305-1317 Des Moines, IA 50309
Automated Information Line: (800) 845-0689
(800)-59-FUNDS
</TABLE>
The Contract described in this prospectus provides for the payment of monthly
annuity payments on a fixed or variable basis beginning on a preselected Annuity
Date. The Contract also permits you to accumulate Account Value until the
Annuity Date, based on the payments you make, the charges and expenses of the
Contract, and the investment results of your underlying investment options. You
have the flexibility to adjust the amount and frequency of payments, and may use
the Contract as a "Qualified Contract" in a tax-qualified retirement plan or as
a "Non-Qualified Contract" for other long-term savings and retirement purposes.
You may allocate your payments and your Contract's Account Value among nineteen
different investment options, or to our Fixed Account. The investment options
are available through our segregated asset account called First Variable Annuity
Fund E (the "Separate Account"). The Separate Account invests in selected
portfolios of eight mutual funds (the "Funds"). The portfolios currently
available under the Contract are:
<TABLE>
<CAPTION>
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SEPARATE ACCOUNT INVESTMENT OPTIONS
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<S> <C> <C> <C> <C> <C> <C>
AIM American BT Insurance Federated Templeton Lord Abbett
Mutual Variable Century Funds Insurance Variable Series
Fund Insurance Variable Trust Series Products Fund, Inc.
Funds, Inc. Portfolios, ("BT") ("FIS") Series Fund ("LA")
("AIM") Inc. ("ACS") ("FT")
- ------------------------------------------------------------------------------------------------------
V.I. Capital Small Cap Prime International Growth &
Appreciation V.P. Value Index Money Fund Income
Portfolios Fund II (Class 2)
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V.I. Growth Equity 500
Index
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======================================================================================================
Mutual MFS Variable Insurance Trust Variable Investors Series Trust
Fund ("MFS") ("VIST")
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MFS New Matrix
Discovery MFS Growth Small Cap Growth Growth & Equity -
Series - seeks Series Growth Income sector
Portfolios capital weighted
appreciation equities
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MFS Growth Multiple World High U.S.
with Income Strategies - Equity Income Government
Series stocks, Bond Bond
bonds,
& cash
======================================================================================================
</TABLE>
This prospectus contains information you should know before investing.
Additional information about the Contract and Separate Account is in our
Statement of Additional Information (the "Statement"). For a free copy, please
write to our Variable Service Center or call the number shown above. The
Statement, dated May 1, 1999, has been filed with the Securities and Exchange
Commission and is incorporated into this prospectus by reference. The table of
contents of the Statement is on page __ of this prospectus.
The Contracts are not bank deposits; are not federally insured; are not endorsed
by any bank or government agency; are not guaranteed, and may be subject to loss
of principal.
Neither the Securities and Exchange Commission nor any state securities
commission approved or disapproved these securities or passed upon the accuracy
or adequacy of the prospectus. Any representation to the contrary is a criminal
offense. This prospectus is accompanied by the current prospectuses of the
Funds. All prospectuses should be read and retained for future reference.
We have not authorized any person to give any information not contained in this
prospectus (or in any sales literature we have approved.) We do not offer the
Contracts everywhere, and this prospectus does not constitute an offer anywhere
that it would be unlawful. In certain jurisdictions, various time periods and
other terms and conditions may vary from what is described in this prospectus.
Any such variations that apply to your Contract will be included in the Contract
or a related rider or endorsement.
<PAGE>
TABLE OF CONTENTS
DEFINITIONS...........................................................
HIGHLIGHTS............................................................
SUMMARY OF EXPENSES...................................................
FIRST VARIABLE LIFE INSURANCE COMPANY.................................
THE SEPARATE ACCOUNT..................................................
YOUR INVESTMENT OPTIONS...............................................
The Available Options................................................
Transfers Among Investment Options...................................
General Requirements..............................................
Automatic Transfer Programs.........................................
Restrictions on Transfers.........................................
Mixed and Shared Funding..........................................
MORE ABOUT CHARGES AND DEDUCTIONS.....................................
Daily Deductions....................................................
Annual Deductions...................................................
Annual Contract Maintenance Charge..................................
Optional Additional Benefit Charges..................................
Premium Taxes.......................................................
Other Charges and Expenses...........................................
Fund Expenses.......................................................
Income Taxes........................................................
Special Service Fees................................................
Elimination, Reduction or Refund of Charges and Deductions..........
Group and Sponsored Arrangements.....................................
Gender-Neutral Policies..............................................
Purpose of Contract Charges..........................................
THE CONTRACT..........................................................
Application and Issuance of a Contract..............................
Free Look Right...................................................
Purchase Payments...................................................
Allocation of Purchase Payments......................................
Delayed Investment Allocation Date...................................
Telephone Transactions...............................................
CONTRACT BENEFITS AND VALUES..........................................
Determination of Account Value.......................................
Death Benefits Before the Annuity Date..............................
Death of the Annuitant...............................................
Death of the Owner..................................................
BASIC DEATH BENEFIT...................................................
<PAGE>
TABLE OF CONTENTS (continued)
OPTIONAL DEATH BENEFIT RIDERS.......................................
BEST ANNIVERSARY VALUE DEATH BENEFIT..................................
EXTRA PROTECTOR DEATH BENEFIT.........................................
Surrender and Withdrawals.............................................
Surrender.............................................................
Withdrawals...........................................................
Systematic Withdrawals................................................
Payment of Proceeds...................................................
Tax Withholding and Tax Penalties.....................................
Annuity Benefits....................................................
General...............................................................
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.....................
Form of Annuity Payments..............................................
Annuity Date..........................................................
Annuitization Bonus...................................................
Calculation of Annuity Payments.......................................
Guaranteed Minimum Income Rider.......................................
Death Benefits After the Annuity Date.................................
Death Of the Annuitant................................................
Death of the Owner....................................................
OTHER PROVISIONS OF THE CONTRACT......................................
Misstatement of Age or Sex..........................................
Owner and Beneficiary.................................................
Beneficiary...........................................................
Changes and assignments...............................................
Assignments...........................................................
Change of Annuitant Designation.......................................
Texas Optional Retirement Program.....................................
Voting Rights.........................................................
Suspension of Payments or Transfers...................................
DISTRIBUTION AND OTHER AGREEMENTS.....................................
FEDERAL TAX MATTERS...................................................
General.............................................................
Our Taxation..........................................................
Income Tax Deferral on Increases in Account Value.....................
Contracts Owned by Other than Natural Persons.........................
Diversification Requirements.........................................
Investment Control....................................................
Investment Control..................................................
Distributions from Non-Qualified Contracts............................
Penalty tax on Premature Distributions................................
Annuity Payments......................................................
Death Benefits........................................................
Multiple Contracts....................................................
Tax-Qualified Retirement Plans......................................
Traditional IRAs and Roth IRAs........................................
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and
Profit Sharing Plans...............................................
403(b) Annuities......................................................
Section 457 Plans...................................................
Distributions from Qualified Contracts................................
Roth IRAs.............................................................
Penalty tax on Pre-Retirement Distributions...........................
Tax Sheltered Annuities - Withdrawal Limitations....................
Federal Income Tax Withholding........................................
ADVERTISING PRACTICES.................................................
FIS Prime Money Fund II Portfolio.....................................
Other Portfolios......................................................
OTHER MATTERS......................................................
Financial Statements...............................................
Legal Proceedings..................................................
Transfers by Company...............................................
YEAR 2000 ISSUES...................................................
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
APPENDIX A ACCUMULATION UNIT DATA
<PAGE>
DEFINITIONS
Account Value - The value of a Contract during the Accumulation Period.
Accumulation Period - The time between the Contract Date and the Annuity Date.
Accumulation Unit - An accounting unit of measure used to calculate the Account
Value.
Annuitant - The natural person on whose life annuity payments are based.
Annuity Date - The date on which annuity payments are scheduled to begin.
Annuity - A series of payments we make to the payee you select. "Fixed" annuity
payments are those where we guarantee the dollar amount of each payment.
"Variable" annuity payments are those where the dollar amount of each payment
will change to reflect the investment experience of the applicable Separate
Account Investment Option.
Business Day - Each day the New York Stock Exchange is open for regular trading.
The New York Stock Exchange is currently closed on weekends and on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Each Business Day ends at the close of regular trading for the
day on the exchange, which usually is 4:00 p.m. Eastern time.
Contract Anniversary - An anniversary of the Contract Date.
Contract Date - The date the Contract takes effect, as shown on the Owner's
Contract data page.
Contract Month - Each one-month period beginning on the Contract Date and
generally on the same day of each month after that.
Contract Quarter - One quarter of a Contract Year. The first Contract Quarter
begins on the Contract Date and ends on the last Business Day of the third
Contract Month.
Contract Year - One year from the Contract Date and from each Contract
Anniversary.
Withdrawal Value - The value of a Contract available during the Accumulation
Period upon surrender or withdrawal. Withdrawal Value equals your Account Value
reduced by any taxes not previously deducted, and by any annual deductions for
the Contract Year.
HIGHLIGHTS
These highlights discuss certain important aspects of the Contract. The rest of
this prospectus explains these and other aspects in greater detail. Be sure to
read the prospectus and the prospectuses of the Funds for more complete
information.
How do investment results affect a Contract?
You invest purchase payments and the Account Value under your Contract in one or
more of the investment options we offer. Your Account Value increases or
decreases by the amount of any positive or negative return it earns in those
options. Your Account Value also will decrease by the amount of all charges and
deductions we make under your Contract.
Account Value invested in our Separate Account investment options is not
guaranteed, and you bear the entire investment risk under those options.
Account Value allocated to our Fixed Account, however, is provided with our
guarantees of principal and a minimum 3% rate of interest on an annual basis.
After the Annuity Date, the investment results of our Separate Account will
affect the dollar amount of variable annuity payments. If you select a fixed
annuity, we will guarantee the amount of each annuity payment.
<PAGE>
How much can I (or must I) invest in a Contract?
We generally require you to make a minimum initial purchase payment of $20,000
for Non-Qualified Contracts and $2,000 for Qualified Contracts. You may make
additional purchase payments after that, but each additional purchase payment
must be at least $500 for Non-Qualified Contracts and $100 for Qualified
Contracts.
We will reduce our minimum purchase payment requirements if you participate in
certain automatic investment plans described in this prospectus. We reserve the
right to decline any purchase payment and, unless we consent otherwise, the
maximum amount of a purchase payment for a Contract is $1 million.
Will I have access to my Account Value?
You may take amounts from your Contract's Withdrawal Value at any time up to the
Annuity Date. You may surrender (i.e., cancel) your Contract at any time up to
the Annuity Date, and we will pay you the Withdrawal Value.
On the Annuity Date, we will use your Account Value to determine the amount of
annuity payments that we will make.
What general income tax consequences will I have from owning a Contract?
A 10% percent federal income tax penalty may apply to the income portion of any
distribution that you take from a Non-Qualified Contract before you are age 59
1/2, with certain exceptions. Separate tax withdrawal penalties and restrictions
apply to a Qualified Contract.
This prospectus contains more information in the FEDERAL TAX MATTERS section,
including a discussion of owner control of the underlying investments in a
variable annuity contract and general information on the taxation of death
benefits.
What are the charges and deductions under a Contract?
We make the following charges and deductions:
Daily Deductions - composed of an administrative charge at an annual rate of
.25% of the daily net assets in each Separate Account Investment Option, and a
mortality and expense risk charge at an annual rate of 1.25% of the daily net
assets in each Separate Account Investment Option.
Annual Deductions - composed of a contract maintenance charge of $30 if your
Account Value is less than $100,000, and any charges for optional additional
benefit riders.
Premium Taxes - no deductions are made for premium or other taxes payable to a
state or other governmental entity, unless imposed by the state where you
reside.
Fund Expenses - there are deductions and expenses paid out of the assets of the
Funds that are described in the accompanying prospectuses for the Funds.
Other Expenses - currently none, but we reserve the right to impose charges for
other taxes that may be payable and are attributable to the Contracts in the
future.
<PAGE>
SUMMARY OF EXPENSES
- --------------------------------------------------------------------------------
Owner Transaction Expenses
Sales Load on Purchase Payments NONE
Withdrawal Charge - as a % of purchase payments: NONE
Transfer Fee - on transfers of Account Value between NONE
Investment Options
Annual Contract Maintenance Charge - waived for $30
Contracts with Account Value of $50,000 or more
Separate Account Expenses - as a percentage of
average Account Value
Administrative Charge 0.25%
Mortality and Expense Risk Charge 1.25%
-----
Total Separate Account Annual Expenses 1.50%
Annual Fund Expenses After Expense Reimbursements
<TABLE>
<CAPTION>
Other
Management 12b-1 Operating Total
Mutual Fund Portfolio Fees Fees Expenses Expenses*
- --------------------- ---- ---- -------- ---------
<S> <C> <C> <C> <C>
AIM V.I. Capital -
Appreciation 0.62% 0.00% 0.05% 0.67%
AIM V.I. Growth 0.64% 0.00% 0.08% 0.72%
ACS V.P. Value 1.00% - 0.00% 1.00%
BT Small Cap Index 0.35% - 0.10% 0.45%
BT Equity 500 Index 0.20% - 0.10% 0.30%
FIS Prime Money -
Fund II 0.50% 0.30% 0.80%
FT International
(Class 2) 0.69% 0.25% 0.17% 1.11%
LA Growth & Income 0.50% - 0.01% 0.51%
MFS New Discovery Series 0.90% - 0.27% 1.17%
MFS Growth Series 0.75% - 0.25% 1.00%
MFS Growth with -
Income Series 0.75% 0.20% 0.95%
VIST Small Cap -
Growth 0.85% 0.50% 1.35%
VIST World Equity 0.70% - 0.50% 1.20%
VIST Growth 0.70% - 0.32% 1.02%
VIST Matrix Equity 0.65% - 0.50% 1.15%
VIST Growth & -
Income 0.75% 0.50% 1.25%
VIST Multiple -
Strategies 0.70% 0.45% 1.15%
VIST High Income -
Bond 0.70% 0.50% 1.20%
VIST U.S. -
Government Bond 0.60% 0.25% 0.85%
- --------------------------------------------------------------------------------
</TABLE>
* "Total Expenses" for the Portfolios before reimbursement by the relevant
Fund's investment advisor, for the period ended December 31, 1998, were as
follows: 5.22% for the MFS New Discovery Portfolio; 1.84% for the VIST Small
Cap Growth Portfolio; 1.51% for the VIST World Equity Portfolio; 1.03% for the
VIST Growth Portfolio; 1.48% for the VIST Matrix Equity Portfolio; 1.33% for the
<PAGE>
VIST Growth & Income Portfolio; 1.46% for the VIST High Income Bond Portfolio;
and 1.59% for the VIST U.S. Government Bond Portfolio of average daily net
assets.
The purpose of this Table is to assist you in understanding the various costs
and expenses that you will bear directly and indirectly. The Table reflects
charges and expenses of the Separate Account as well as the Funds. For
additional information, see "MORE ABOUT CHARGES AND DEDUCTIONS" on page __ and
the Funds prospectuses that accompany this prospectus.
Expenses on a Hypothetical $1,000 Contract, Assuming 5% Growth, in existing
Investment Options:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
If you Annuitize a Contract during the first 2
Contract Years, or if you surrender
Mutual Fund Portfolio 1 Year 3 Years 5 Years 10 Years
- ---------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
FIS Prime Money Fund II $25 $77 $131 $279
VIST Small Cap Growth $31 $94 $159 $335
VIST World Equity $29 $89 $152 $320
VIST Growth $27 $83 $142 $302
VIST Matrix Equity $29 $88 $149 $315
VIST Growth & Income $30 $91 $154 $325
VIST Multiple Strategies $29 $88 $149 $315
VIST High Income Bond $29 $89 $152 $320
VIST U.S. Government Bond $25 $78 $133 $284
- ------------------------------------------------------------------------------------
</TABLE>
Expenses on a Hypothetical $1,000 Contract, Assuming 5% Growth, in Investment
Options available May 1, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
If you Annuitize a Contract during the
first 2 Contract Years, or if you surrender
Mutual Fund Portfolio 1 Year 3 Years
- --------------------- ------ -------
<S> <C> <C>
AIM V.I. Capital Appreciation $24 $72
AIM V.I. Growth $24 $74
ACS V.P. Value $27 $83
BT Small Cap Index $21 $65
BT Equity 500 Index $20 $61
FIS Prime Money Fund II $25 $77
FT International $28 $86
LA Growth & Income $22 $67
MFS New Discovery Series $29 $88
MFS Growth Series $27 $83
MFS Growth with Income $26 $81
- -----------------------------------------------------------------------
</TABLE>
Do not consider the examples a representation of past or future expenses. Actual
expenses may be greater or less than those shown. For example, the examples do
not reflect premium tax charges or any optional benefit riders
FIRST VARIABLE LIFE INSURANCE COMPANY
We are a stock life insurance company that was organized under Arkansas law in
1968. We engage principally in the business of variable life insurance,
variable annuities, and fixed annuities. We hold licenses to sell insurance in
49 states, the District of Columbia and the U.S. Virgin Islands. Irish Life of
North America, Inc. ("ILoNA") owns all of our outstanding stock, and Irish Life
& Permanent plc. ("Irish Life & Permanent"), in turn, owns all of ILoNA. Irish
Life & Permanent is a leading life and financial services group in Ireland with
total assets of over $25 billion at May 1, 1999.
We have an A (Excellent) rating from A.M. Best Company, an independent firm that
analyzes insurance carriers. We also have an AA- rating from Standard and
Poor's and an AA- rating from Duff & Phelps Credit Rating Co. on claims paying
ability. These ratings only reflect the opinion of the rating company on our
relative financial strength, and on our ability to satisfy our obligations under
the Policies. The ratings do not reflect the investment performance of the
Separate Account, or the degree of risk associated with an investment in the
Separate Account.
<PAGE>
THE SEPARATE ACCOUNT
We authorized the establishment of First Variable Separate Account E (the
"Separate Account) under Arkansas law on December 4, 1979; and we have
registered the Separate Account with the Securities and Exchange Commission
("SEC") as a unit investment trust-type investment company.
The Separate Account's assets belong to us. However, our other creditors could
reach only the amount (if any) in the Separate Account that exceeds the current
value of our obligations to policyholders who have chosen a Separate Account
investment option.
The Separate Account has several different investment options within it. We
invest the assets allocated to each investment option in one Portfolio of a
Fund.
We may add other investment options to the Contracts that, in turn, may be
invested in other Portfolios of a Fund, or in portfolios of other mutual funds.
We may restrict these other investment options to customers of specified
distributors.
YOUR INVESTMENT OPTIONS
The Available Options
You may allocate your premium payments and existing Account Value to one or more
of our Separate Account investment options and/or to our Fixed Account. The
currently available Portfolios for our Separate Account investment options are
listed on the cover page of this prospectus. More information, including a
discussion of potential risks, appears in the current prospectuses for the
Funds, which accompany this prospectus. (The prospectuses for the Funds may
also describe other portfolios that are not available under a Contract.) You
should read this prospectus and the prospectuses for the Funds carefully before
investing in any Separate Account investment option.
We do 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 our judgment, further investment in the shares should become inappropriate or
inadvisable in view of the purpose of the Contracts, we may substitute shares of
another portfolio or investment vehicle for shares already purchased or to be
purchased in the future. We also may, in our discretion, remove Portfolios for
transfers or new investments. No substitution of securities may take place
without prior approval of the SEC, to the extent required, and in compliance
with requirements the SEC may impose.
We may also combine separate account investment options or operate them in any
form permitted by law, including a form that allows them to make direct
investments.
This prospectus generally describes only the Contract and Separate Account
investment options. Because of certain exemptions, interests in our Fixed
Account are not registered under the securities laws, nor have we registered the
Fixed Account as an investment company. Accordingly, the protections of the
federal securities laws do not apply to our Fixed Account. We will credit your
Account Values in the Fixed Account with at least a minimum effective rate of
interest per year. We may credit additional amounts of "current" interest in our
sole discretion. New purchase payments and transfers from the Separate Account
to the Fixed Account may each receive different current interest rate(s) than
the current interest rate(s) credited to Account Value that has been previously
invested in the Fixed Account. We determine current interest rates in advance,
and credit interest daily to your Account Value in the Fixed Account.
Transfers Among Investment Options
General Requirements. You may transfer Account Value among investment options by
written request or telephone. The minimum amount you may transfer is the lesser
of (a) $1,000 or (b) your entire interest in the applicable investment option. A
minimum of $1,000 must remain in an investment option after a transfer. You
should mail, fax or express written transfer requests to our Variable Service
Center shown on the front cover of this prospectus. You can also request a
transfer by phoning 1-800-845-0689.
Transfer requests must clearly specify the amount to be transferred and the
investment options affected. All transfer requests made at the same time for
Separate Account investment options will be treated as a single request. The
transfer will be effective at the prices we next compute after we receive the
transfer request at our Variable Service Center.
<PAGE>
Prior to the Annuity Date. Contract Value to be transferred is subject to the
following:
Unless we consent, all Purchase Payments and transfers allocated to the Fixed
Account must remain in the Fixed Account for one year prior to any transfer from
the Fixed Account.
After the Annuity Date, you may make a transfer once each Contract Year, subject
to certain procedures outlined in the Contract:
. from one or more Separate Account investment options to other Separate
Account Investment Options; or
. to the Fixed Account.
No transfers are permitted from the Fixed Account to the Separate Account once
annuity payments begin.
Automatic Transfer Programs - You can participate in automatic transfer
arrangements, including dollar cost averaging and asset rebalancing programs.
You initiate these programs by making a written or telephone request to our
Variable Service Center shown on the front cover of this prospectus. We make
the automatic transfers on the last business day of whichever of the following
intervals you request: quarterly, semi-annually, annually, monthly (for dollar
cost averaging only), or at any other interval that we approve. You may request
us to cease automatic transfers at any time.
Automatic transfers from the Fixed Account are subject to the restrictions
described above in General Requirements (except that, for dollar cost averaging
only, you can transfer up to 100% of your Account Value in the Fixed Account
within one Contract Year if you have selected the monthly interval.) We
currently do not charge you for an automatic transaction program, although we
reserve the right to do so in the future.
The dollar cost averaging program permits transfers from the FIS Prime Money
Fund II investment option or the Fixed Account to other Separate Account
investment options on a regularly scheduled basis. Such systematic transfers may
prevent investing too much when the price of securities is high or too little
when the price is low. There is no guarantee of this, however.
Also, since systematic transfers, such as dollar cost averaging, involve
continuous investment regardless of fluctuating price levels, you should
consider your ability to continue purchases through all phases of the market
cycle.
The minimum amount, for each dollar cost averaging transfer, is $100. You must
have $1,200 of Account Value in the FIS Prime Money Fund II investment option or
the Fixed Account, as applicable, before a "dollar cost averaging" program may
begin. Transfers from the Fixed Account are also subject to the restrictions
above, except that 100% of amounts in the Fixed Account may be systematically
transferred before the Annuity Date if transfers are made monthly for a one-year
period.
The asset rebalancing program enables you to select the percentage levels of
Account Value you wish to maintain in particular investment options. At the
intervals you select, we will automatically rebalance your Account Value to
maintain the indicated percentages by transfers among the investment options.
You must include all of your Account Value allocated to the Separate Account
investment options in any asset rebalancing program.
Other investment programs, such as systematic transfers and systematic
withdrawals, or other transfers or withdrawals may not work well in concert with
the asset rebalancing program. Therefore, you should monitor your use of these
programs while the asset rebalancing program is being used.
We currently do not charge for enrolling in these programs, but we reserve the
right to do so.
Restrictions on Transfers. Generally, you may make an unlimited number of
transfers in any Contract Year. Frequent requests to transfer, however, may have
a detrimental effect on the value of Portfolio shares held in the Separate
Account. We may therefore limit the number of permitted transfers in any
Contract Year, or refuse to honor any transfer request for an owner or a group
of owners, if:
. the purchase 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 Account Value or Portfolio share prices.
We may also at any time suspend or cancel acceptance of third party transfer
requests on behalf of an Owner; or restrict the Investment Options that will be
available for such transfers. Notice will be provided to the third party in
advance of the restrictions. We will not impose any restrictions, however, if
we have received satisfactory evidence that:
. you, as Owner, have appointed the third party to act on your behalf for all
financial affairs; or
. a court of competent jurisdiction has appointed the third party to act on the
Owner's behalf.
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We also reserve the right at any time and without prior notice to otherwise
modify, suspend or stop the transfer privileges.
Mixed and Shared Funding
We buy shares of the Funds for the Separate Account in connection with the
Contracts, and for allocation to separate accounts funding variable annuity
policies and other variable life insurance policies issued by us. The Funds
offer shares to other insurance companies and to other separate accounts, either
affiliated or unaffiliated with us, for the same purpose. In the future, it may
conceivably become disadvantageous for variable life insurance separate accounts
and variable annuity separate accounts to invest in one or more of the
Portfolios simultaneously, if the interests of variable life insurance and
variable annuity policy owners differ. The boards of trustees of the Funds
intend to monitor events to identify any material irreconcilable conflicts that
may arise and to determine what action, if any, they or the insurance companies
should take in response.
MORE ABOUT CHARGES AND DEDUCTIONS
Daily Deductions
Each Business Day, we deduct an administrative charge and a mortality and
expense risk charge, both before and after the Annuity Date, that we calculate
as a percentage of your Contract's net assets in each Separate Account
investment option. The annual rate for the administrative charge is 0.25%, and
the annual rate for the mortality and expense risk charge is 1.25%.
Annual Deductions
At the end of each Contract Year, we make an annual deduction from each
Contract's Account Value. We make the deduction from your Investment Options
in proportion to the amount of your Account Value in each (i.e., on a "pro-rata
basis") or by any other method you select and we approve.
For example, we will permit you to have deductions first taken from one or more
pre-selected investment options. You may also request deductions to first be
taken from the Separate Account investment option that has had the best
investment performance over the prior Contract Month.
The annual deductions are generally taken on each Contract Anniversary, based on
your Account Value at that time. If your Annuity Date is not a Contract
Anniversary, however, we will calculate the annual deductions on the Annuity
Date. Similarly, if you surrender your Contract, or make a total withdrawal at
a time other than a Contract Anniversary, we will calculate the annual
deductions on the transaction date.
The annual deductions include the following charges:
Annual Contract Maintenance Charge. This charge is $30.00 per Contract Year for
each Contract Year during the Accumulation Period. We will waive this charge for
a Contract Year if your Account Value for that year is $50,000 or more.
Optional Additional Benefit Charges. We will deduct additional amounts if you
elected to add optional additional benefit riders to your Contract. Charges for
the riders will be separately stated in your Contract. The charges for currently
offered riders range from 0.15% of your Account Value (for the Best Anniversary
Value Death Benefit Rider), to 0.20% of your Account Value (for the Extra
Protector Death Benefit Rider), to 0.25% of your Account Value (for the
Guaranteed Minimum Income Payment Rider). The charges for a rider are not
taken for any Contract Year that begins after:
. the date annuity payments begin; or
. the date the rider otherwise terminates
Premium Taxes
We will deduct premium taxes or other taxes payable to a state or other
governmental entity from your Contract. Some states assess premium taxes at the
time purchase payments are made; others assess premium taxes at the time annuity
payments begin. We currently intend to deduct premium taxes when incurred.
Premium taxes generally range from 0% to 4%.
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Other Charges and Expenses
Fund Expenses. Our Separate Account purchases shares of the Funds at net asset
value, which reflects investment management fees, other operating expenses and
any expense reimbursement paid by an investment adviser to the applicable
Portfolio. (See "Highlights - Fund Expenses.")
Income Taxes. While we currently do not reduce Account Value for federal income
taxes of the Separate Account, we reserve the right to do so, if we determine
that we will incur a tax because of the operation of the Separate Account. We
will deduct for any income taxes incurred as a result of the operation of the
Separate Account whether or not our possible reserve for taxes was sufficient.
We will deduct any withholding taxes required by applicable law when amounts are
distributed from a Contract.
Special Service Fees. We do not charge you for special services, such as
additional reports, dollar cost averaging, and asset rebalancing. Although we do
not currently intend to do so, we reserve the right to charge you for these
special services in the future.
Elimination, Reduction or Refund of Charges and Deductions
We may eliminate, reduce, or refund any charges and deductions on a Contract
when sales of Contracts are made to certain individuals or to group and
sponsored arrangements. We will do this when we expect savings of sales,
administration or other expenses, or a reduction in the level of risks we expect
to assume under the Contracts. (This prospectus describes such groups under
"Group and Sponsored Arrangements" below.) We determine any such adjustment to
charges and deductions after examination of relevant factors such as:
. the size and type of group, because large numbers of Contracts tend to lower
our per-Contract expenses;
. the total amount of premium payments to be received, because certain expenses
tend to be a smaller percentage of larger premium payments;
. any prior or existing relationship we have with the purchaser, because of the
likelihood of reduced marketing and implementation expenses;
. other circumstances, of which we are not presently aware, which could result
in reduced expenses; and
. after a Contract is issued, if we anticipate expenses for later Contract
Years that are lower than initially projected.
We also may eliminate, reduce or refund charges and deductions when we issue a
Contract to an officer, director, employee or agent of ours or any of our
affiliates. We do not, however, guarantee any adjustment in charges and
deductions, and any adjustment may vary by group.
All adjustments will be made under our uniform administrative rules then in
effect. In no event will adjustments to charges or deductions be permitted if
the adjustment would be unfairly discriminatory to any person.
Group and Sponsored Arrangements. Group arrangements include those in which a
trustee, employer, association or similar entity purchases individual Contracts
covering a group of individuals on a group basis. An example of such an
arrangement is a non-tax qualified deferred compensation plan. Sponsored
arrangements include those in which an employer, an association or similar
entity permits the Company to offer Contracts to its employees or members on an
individual basis.
Gender-Neutral Policies. In 1983, the United States Supreme Court decided in
Arizona Governing Committee v. Norris that certain annuity contracts may not be
used to fund certain employee benefit programs where the contracts provided
values and benefits that varied with the gender of the participant. We may
therefor offer Contracts that do not vary by gender for use in connection with
certain employee benefit programs. We recommend that any employer proposing to
offer the Contracts to employees under a group or sponsored arrangement consult
its attorney before doing so.
We may also offer the Contract with provisions and charges that are gender
neutral in states where required, and where the "unisex" version of the Contract
has been approved. Currently, the State of Montana prohibits the use of
actuarial tables that distinguish between men and women in determining premiums
and annuity benefits.
Purpose of Contract Charges
We have designed the Contract charges to cover our direct and indirect costs of
selling, administering and providing benefits under the Contracts. Taken
together, these charges are also designed to compensate us for the risks we
assume. These include:
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. mortality risks (such as the risk that Contract owners may, on average, die
before we expect, or Annuitants may, on average, live longer than we expect,
thereby increasing the amount of claims we must pay);
. investment risks (such as the risk that adverse investment performance will
make it more costly for us to provide the death benefits under the Contracts
or reduce the amount of our asset-based fee revenues below what we
anticipate);
. sales risks (such as the risk that we sell fewer Contracts and receive lower
net revenue than we expect, thereby depriving us of expected economies of
scale);
. regulatory risks (such as the risk that tax or other regulations may be
changed in ways adverse to issuers of annuity contracts); and
. expense risks (such as the risk that the costs of administrative services
that we must provide will exceed what we currently project).
If, as expected, the charges we collect from the Contracts exceed our total
costs concerning the Contracts, we earn a profit. Otherwise, we incur a loss. We
have set the current and maximum rates of certain of our charges with reference
to estimates of the amount of specific types of expenses or risks that we will
incur. In some cases, this prospectus identifies such expenses or risks in the
name of the charge: e.g., the administrative charge, contract maintenance
charge, and mortality and expense risk charge.
However, the fact that any charge bears the name of a particular expense or risk
does not mean the amount we collect from that charge will never be more than the
amount of such expense or risk. It also does not mean that we may not be
compensated for such expense or risk out of any other charges deducted under
terms of the Contracts.
THE CONTRACT
Application and Issuance of a Contract
If you wish to purchase a Contract, you must submit an application to our
Variable Service Center, together with the minimum required initial Purchase
Payment. You select:
. the Annuitant, Annuity Date, and Annuity Option;
. the investment options to which we will allocate your purchase payment;
. the Beneficiary who will receive death benefits under the Contract if you die
during the Accumulation Period; and
. any optional additional benefit riders.
We generally will not issue Contracts to owners and Annuitants older than age
85. We will review an application under our underwriting rules, and we may
request additional information or reject the application. We will not retain a
purchase payment for more than 5 business days while processing an incomplete
application unless the purchaser has authorized us to do so. If we decline an
application, we will refund any purchase payment made.
If you or the Annuitant is older than age 70 1/2, you should consult with a
qualified tax adviser on the impact of minimum distribution requirements under
your tax-qualified retirement plan before purchasing a Qualified Contract. We
recommend that any required annual minimum distribution amount be withdrawn from
your existing tax qualified retirement plan before amounts are transferred to
purchase a Qualified Contract. (See "FEDERAL TAX MATTERS - Withdrawals from
Qualified Contracts.")
"Free Look Right." You have the right to review your Contract during an initial
inspection period specified in the Contract and, if dissatisfied, to return it
to us or to the agent through whom you purchased it. We will refund the Account
Value on a Contract returned during the permitted period, unless state law
requires a different amount. The "free look" period is typically 10 days, but
may be greater depending on state requirements.
Purchase Payments
Your initial purchase payment is due on the Contract Date and is generally
required to be at least $20,000 for Non-Qualified Contracts and $2,000 for
Qualified Contracts. Each subsequent purchase payment is generally required to
be $500. We reserve the right to decline any purchase payment, and, unless we
consent otherwise, the maximum permitted additional purchase payment is $1
million.
Allocation of Purchase Payments
General. We allocate the purchase payments you make (after any deductions) to
the investment options you select. We use "Accumulation Units" to keep track of
your interest in any Separate Account investment option you select. We determine
the number of Accumulation
<PAGE>
Units credited to a Contract by dividing the amount allocated to a Separate
Account investment option by the value of the applicable Accumulation Unit next
determined after receipt of your purchase payment. We calculate Accumulation
Unit Values as of the end of each Business Day. Purchase payments allocated to
the Fixed Account are credited in dollars. Premium payments are generally
allocated to the Separate Account or the Fixed Account as of the later of the
Contract Date or the date we receive your payment.
Delayed Investment Allocation Date. We reserve the right to allocate purchase
payments to the FIS Prime Money Fund II investment option for an investment
delay period before they will be invested (together with any investment gain) in
any other investment option(s) you designate. In that case, we would reallocate
your Account Value to the investment options you have selected at the end of
your Contract's "free look" period. We would measure the investment delay period
from the date your Contract is issued from our Variable Service Center and would
include up to 5 extra days in addition to the applicable "free look" inspection
period to provide time for mail or other delivery of the Contract to you.
If we elect to delay your investment allocation date, your Contract will contain
a provision to that effect.
Telephone Transactions
You may initiate various transactions by calling 1-800-845-0689. These are:
transfers of Account Value, notification of a change in your address, change of
premium allocations among investment options, partial withdrawal requests, and
systematic withdrawals. You may authorize your representative to make these
calls on your behalf.
You may also call 1-800-59-FUNDS for current Accumulation Unit values, current
Account Value, and for telephone transfers of Account Value.
If you own a Contract jointly with another owner, unless both owners have
advised us to the contrary, we will accept instructions from either one of the
joint owners.
We will use reasonable procedures (such as requiring identifying information
from the caller, tape recording the telephone instructions, and providing
written confirmation of the transaction) in order to authenticate instructions
communicated by telephone. You will be responsible for any telephone
instructions we reasonably believe to be genuine. Therefore, you will bear any
losses arising from any errors in the communication of instructions. If we do
not employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, we may be liable to you for any losses due to dishonored
or fraudulent instructions. We may modify or terminate our procedures for
telephone transactions at any time.
CONTRACT BENEFITS AND VALUES
Determination of Account Value
Your Account Value under a Contract includes its value in the Separate Account
and in the Fixed Account. Your Account Value in a Separate Account investment
option at any time before the Annuity Date equals the number of Accumulation
Units you hold in that option multiplied by the then-current value of one such
Accumulation Unit. We compute this value in such a way that the investment
return on your Account Value in any Separate Account investment option will
differ from the total return achieved by the underlying Fund Portfolio only by
the amount of the charges and deductions we make under your Contract from that
investment option.
Your Account Value in the Fixed Account investment option earns fixed rates of
interest as described elsewhere in this prospectus. Your Account Value in the
Fixed Account will increase by the amount of such interest, but will decrease by
the amount of any charges or deductions that we take from that account for your
Contract.
Your Account Value in any investment option will also vary by the amount of
transfers we make among those components of Account Value in response to
requests that you make. Your Account Value in each investment option also will
increase by the amount that you direct to that option from your purchase
payments and will decrease by the amount of any withdrawals that you take from
that option (including any applicable withdrawal charges).
<PAGE>
Death Benefits Before the Annuity Date
Death of the Annuitant. We generally do not pay a death benefit if you are not
the Annuitant and the Annuitant dies before the Annuity Date. Instead, you may
designate a new Annuitant within 30 days of the Annuitant's death. If you do
not, you will become the Annuitant. If you are a non-natural person, however,
the death of the Annuitant is treated as your death and a new Annuitant cannot
be designated.
Death of the Owner. If we receive proof that you have died before the Annuity
Date, we will pay a death benefit to the Beneficiary. (If you are a non-natural
person, we will consider the Annuitant to be "you" for purposes of determining a
death benefit.) You may elect for the death benefit to be paid in a single sum
or under one of our other Annuity Options. If no such election is in effect, the
Beneficiary may make an election during a 60-day period following our receipt of
proof of death. We will hold up payment of the death benefit in the meantime.
If the Beneficiary is your spouse, he or she may elect to become the owner of
your Contract. If so, the Contract will continue in effect and we will not then
determine a death benefit. We will generally pay the entire death benefit within
5 years of the date of your death unless the Beneficiary elects to have the
death benefit payable under an Annuity Option based on his or her life or
lifetime expectancy; and distributions start within one year after the date of
death.
The death benefit amount is the greater of:
. the BASIC DEATH BENEFIT; or
. the death benefit amount under any optional death benefit rider in effect.
If your Contract is owned jointly:
. we will determine a death benefit only when the first owner dies before the
Annuity Date; and
. the optional death benefit riders will not be available
BASIC DEATH BENEFIT. The Basic Death Benefit before the Annuity Date is the
greater of:
. your adjusted purchase payments (i.e., all amounts you paid for your Contract
less any withdrawals of Account Value, and less any charges on your
withdrawals of Account Value); or
. the Account Value on the date of your death.
OPTIONAL DEATH BENEFIT RIDERS. We intend to offer one or more optional death
benefit riders subject to regulatory approval in your local area and to our
underwriting and issuance standards. For more complete information about the
following riders and their availability, you should consult your sales
representative or request a copy of the form of the rider in which you are
interested. Coverage under these riders provides our guarantee of a minimum
death benefit amount. The guaranteed amount will vary by the form of rider you
select. Annual Deductions from your Account Value increase if you purchase an
optional death benefit rider.
You may generally select an optional death benefit rider only at the time you
purchase a Contract. We may also offer one or more optional death benefit riders
from time to time after you purchase a Contract.
BEST ANNIVERSARY VALUE DEATH BENEFIT. The Best Anniversary Value Death Benefit
before the Annuity Date is based on the maximum adjusted Anniversary Value Death
Benefit we previously determined prior to your death:
. plus the sum of any purchase payments you paid for your Contract after our
last determination date to the date of your death; and
. less any withdrawals of Account Value after our last determination date to
the date of your death; and
. less any charges on these withdrawals.
We determine an Anniversary Value Death Benefit Value on each Contract
Anniversary Date up to the Contract Anniversary on or next following your 80th
birthday. The Anniversary Value Death Benefit is based on your Contract's then
current Account Value, the purchase payments you made, and the amount of
withdrawals (and charges on withdrawals) taken from Account Value. We will also
adjust any previously determined Anniversary Value Death Benefit at that time to
reflect purchase payments, withdrawals of Account Value, and charges on these
withdrawals, from the date of our last determination.
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The BEST ANNIVERSARY VALUE DEATH BENEFIT ends on the Annuity Date. Unless we
agree otherwise, it will also end if you change the owner of your Contract.
EXTRA PROTECTOR DEATH BENEFIT. The Extra Protector Death Benefit before the
Annuity Date is based on the higher of:
. the maximum adjusted Anniversary Value Death Benefit; or
. a "roll-up value" that we compute.
We compute the maximum adjusted Anniversary Value Death Benefit in the same
manner as under the Best Anniversary Value Death Benefit rider. The "roll-up
value" is generally the sum of:
. your adjusted purchase payments (i.e., all amounts you paid for your Contract
less any withdrawals of Account Value, and less any charges on your withdrawals
of Account Value); and
. interest accumulated at an annual rate of 5.0 % to the date of your death.
The EXTRA PROTECTOR DEATH BENEFIT ends on the Annuity Date. Unless we agree
otherwise, it will also end if you change the owner of your Contract.
Surrender and Withdrawals
Surrender. You may surrender your Contract for its entire Withdrawal Value at
any time before the Annuity Date by a signed written request conforming to our
administrative procedures. We calculate the Withdrawal Value as of the close of
the Business Day when your surrender request is received at our Variable Service
Center. The Withdrawal Value equals your Account Value reduced by any taxes not
previously deducted, and by any annual deductions for the Contract Year. Our
liability to pay any death benefit ends when you surrender your Contract.
Withdrawals. You may make a partial withdrawal of the Contract's Withdrawal
Value before the Annuity Date. Each partial withdrawal must be for an amount
which is not less than $1,000 or, if smaller, the remaining value in the Sub-
Account or Fixed Account. The remaining value in each Sub-Account or the Fixed
Account from which a partial withdrawal is requested must be at least $1,000
after the partial withdrawal is completed.
We will take any withdrawals from your Policy's investment options on a pro-rata
basis, unless you make a request in writing in advance for a different method.
We reserve the right to approve or disapprove any such request.
Systematic Withdrawals. You may elect to take partial withdrawals under a
systematic withdrawal program by either written or telephone request. Under the
program, systematic withdrawals are made on the same day (or next Business Day)
of each month or quarter. Systematic withdrawals may be transferred
automatically to your bank account if your bank is a member of the Automated
Clearing House (ACH). Systematic withdrawals are not allowed simultaneously with
a dollar cost averaging program.
We do not currently impose a fee for systematic withdrawals, but may do so in
the future.
We reserve the right to modify, suspend or eliminate the systematic withdrawal
program at any time.
Payment of Proceeds
We ordinarily will pay any Withdrawal Value (or death benefit proceeds) from the
Separate Account investment options within 7 days after receipt by our Variable
Service Center of a request (or proof of death), and all other required
elections and documentation in a form satisfactory to us. However, we may delay
payment or transfers from a Separate Account investment option in certain
circumstances. (See "Suspension of Payments and Transfers.")
Tax Withholding and Tax Penalties. All distributions from your Contract, or
portions thereof, which are included in your gross income are subject to federal
income tax withholding. We will generally withhold federal taxes at the rate of
10% from each distribution, unless you have previously provided us with a
written election not to have taxes withheld or to have taxes withheld at a
different rate. Mandatory withholding rules apply to certain distributions from
Qualified Contracts issued to 403(b) plans. Additionally, the Internal Revenue
Code provides that a 10% penalty tax may be imposed on certain early surrenders
and withdrawals. See the FEDERAL TAX MATTERS section of this prospectus for a
general discussion.
<PAGE>
Annuity Benefits
General. We will make annuity payments after the Annuity Date to the Annuitant
unless you designate a different payee when you purchase a Contract. You may
also designate a payee, or change a previously designated payee, by sending a
written notice to the Variable Service Center at least 7 days before the Annuity
Date.
Annuity Options. You elect the Annuity Option and may change it by written
request to our Variable Service Center at least 30 days before the Annuity Date.
If no Annuity Option election is in effect 30 days before the Annuity Date, we
will make Annuity payments under Option B as a life Annuity with a 120 month
period certain.
You can choose from the following Annuity Options, or any other option we
approve:
OPTION A - Life Annuity. Monthly payments during the lifetime of the Annuitant.
Annuity payments cease when the Annuitant dies.
OPTION B - Life Annuity with Periods Certain of 60, 120, 180 or 240 Months.
Monthly payments 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. Monthly payments during the joint
lifetime of the Annuitant and a designated second person. At the death of either
payee, Annuity payments continue to the survivor payee. The survivor's Annuity
payments will equal 100%, 75%, 66 2/3% or 50% of the amount payable during the
joint lifetime, as chosen.
OPTION D - Joint and Contingent Annuity. Monthly payments during the lifetime of
the Annuitant and continued during the lifetime of a designated second person
after the Annuitant's death. The second person's Annuity payments will equal
100%, 75%, 66 2/3% or 50% of the amount payable, as chosen.
OPTION E - Fixed Payments for a Period Certain. Monthly payments of a fixed
amount for any specified period (at least 5 years but not exceeding 30 years),
as chosen.
Form of Annuity Payments. 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. You may make a selection
of the form of Annuity payments by sending a written request to our Variable
Service Center no later than 7 calendar days before the Annuity Date. If you do
not, we will make a combination of fixed Annuity payments and variable Annuity
payments to reflect the allocation of your Account Value among the fixed Account
and the Separate Account investment options. (We will, however, transfer your
Account Value to the Fixed Account before making payments under Annuity Option
E.)
Annuity Date. You select the Annuity Date when you purchase a Contract, and may
later change it by sending a written request to our Variable Service Center at
least 30 days before the existing Annuity Date.
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. If your Contract is a Qualified Contract, you
should select an Annuity Date that is consistent with the requirements of your
tax-qualified retirement plans. A qualified tax advisor should be consulted for
more information.
Annuitization Bonus. We will increase your Account Value by an "Annuitization
Bonus" when Account Value is applied to an Annuity Option. The increase will be
based on your Account Value at the end of the Business Day immediately preceding
the Annuity Date.
We determine the Annuitization Bonus rate for a Contract at the time of issue,
but the Bonus may be modified, reduced or eliminated for subsequently issued
Contracts. On the date of this prospectus, the Annuitization Bonus rate is 3% of
Account Value. We will pro-rate any increase among your Contract's investment
options on the Annuity Date. Under current federal income tax rules, this
increase is deemed "income" on a Contract. (See "FEDERAL TAX MATTERS.")
Calculation of Annuity Payments. The initial dollar amount of an Annuity payment
is based on the Account Value applied to a specific Annuity Option and the
annuity tables in your Contract. The annuity tables for variable Annuity
payments are based on a 4% assumed investment rate. If the actual net investment
rate exceeds 4%, variable Annuity payments increase. Conversely, if the actual
rate is less than 4%, variable Annuity payments decrease. Variable Annuity
payments will reflect the performance of your Contract's Separate Account
investment options.
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We reserve the right to pay Annuity payments in one sum when the remaining
payments are less than $5,000 (or other minimum amount we may establish), or
when the Annuity option elected results in periodic payments of less than $200.
($100 if a combination of Fixed and Variable Annuity is selected).
Guaranteed Minimum Income Payment Rider. This optional additional benefit
guarantees a minimum fixed lifetime Annuity payment for an additional annual
charge. You may select this rider only at the time you purchase a Contract, and
you may elect to begin payments under this rider only within a 30-day period
following the 7th or later Contract Anniversary. In addition, payments under the
rider may not begin until the Anniversary Date on or immediately following the
Annuitant's 60th birthday, nor may they begin after the Annuitant's 91st
birthday.
Guaranteed Monthly Income Payments are made either:
. for the lifetime of a single Annuitant or for 120 months, whichever is
longer; or
. for the lifetime of two Annuitants or for 240 months, whichever is longer.
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GMIP VALUE. The amount of a fixed annuity payment payable as a Guaranteed
Minimum Income Payment is based on the "GMIP Value," less any premium taxes,
that is applied to the GMIP Annuity Tables stated in the rider.
We determine a GMIP Value each year up to, and including, the Anniversary Date
on or immediately following the Annuitant's 80th birthday (the "Age 80
Anniversary Date"). After that, the GMIP Value is based on GMIP Value on the Age
80 Anniversary Date:
. plus any Purchase Payments we receive after the Age 80 Anniversary Date; and
. less a proportional reduction for any withdrawals of Contract Value after the
Age 80 Anniversary Date.
The GMIP Value up to the Age 80 Anniversary Date is the greater of:
. the "Best Anniversary Value" in effect; or
. the "Roll-Up Value" in effect.
Best Anniversary Value - based on the highest "Anniversary Value Amount" in
effect. We determine an Anniversary Value Amount, and adjust previously
determined Anniversary Value Amounts, each year up to, and including, the Age 80
Anniversary Date. An Anniversary Value Amount equals the Contract Value at the
time of determination. Previously determined Anniversary Value amounts reflect:
. an increase for any Purchase Payments we received since our last
determination; and
. a proportional reduction for any withdrawals of Contract Value since our last
determination.
Roll-Up Value - based on:
. Purchase Payments; and
. a proportional reduction for any withdrawals of Contract Value (including
charges) attributable to Purchase Payments; and
. interest accumulated at an annual rate of 5.0%.
Proportional Reductions - based on the ratio that a withdrawal of Contract
Value, including charges on the withdrawal, bears to the total Contract Value
before the withdrawal.
GMIP Annuity Tables - based on the 1983a Annuity Mortality Table (40% Male,
pivotal age 65) and a benchmark rate of 2.5% per year, compounded annually. The
level of income provided under these tables is based on conservative actuarial
factors, and may often be less than the level that would be provided by applying
the Contract Value to other tables. If more favorable to the Annuitant, we will
determine monthly income by applying Contract Value to our current fixed annuity
payment rates for the annuity option selected.
GMIP Value does not guarantee performance of any investment option in your
Contract, and cannot be used to increase the amounts available for withdrawal,
surrender, or as a death benefit before the Annuity Date. The GMIP Value is not
increased by the amount of any Annuitization Bonus.
- --------------------------------------------------------------------------------
<PAGE>
Death Benefits after the Annuity Date
Death of the Annuitant. Any remaining Annuity payments under Annuity Options B
or E are made to the Beneficiary. The Beneficiary may elect to receive the
commuted value of the remaining Annuity Payments in a single sum instead. We
determine the commuted value by discounting the remaining Annuity Payments at
the then current interest rate used for commutation.
Death of the Owner. No death benefits are provided under a Contract if you die
after the Annuity Date, unless you are also the Annuitant and Annuity payments
are made under Annuity Options B or E.
OTHER PROVISIONS OF THE CONTRACT
Misstatement of Age or Sex
If the age or sex of the Annuitant is misstated, we may change the annuity
benefits to those that correspond with the correct age and sex.
If the misstatement is discovered after the Annuity Date:
. we will deduct any overpayments against remaining annuity payments; and
. we 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.
Owner and Beneficiary
The Contract application names the Contract owner, who in turn may name a new
owner at any time before the Annuity Date. At the death of the owner, the
designated Beneficiary becomes the owner. Because the owner has the authority to
exercise most rights under a Contract, this prospectus generally refers to the
owner when it refers to "you" or "your."
We will permit the Contract to be owned jointly if one owner is the spouse of
the other, and we will generally assume that each owner has the authority to act
for all owners. However, we may require the written consent of all owners for
certain transactions, such as an assignment of a Contract.
Beneficiary. The Contract application also names the Beneficiary under the
Contract and any contingent Beneficiary. You may change the Beneficiary of the
Contract (other than an irrevocably named Beneficiary) at any time before death
benefits are payable. If your Contract is owned jointly by two spouses, we will
treat each spouse as the designated beneficiary for any death benefits that may
be payable upon the death of the other, unless you tell us otherwise.
Changes and Assignments. A change of owner or Beneficiary requires a written
request satisfactory to us that is dated and signed by all of the owners. The
change will take effect on the date it is signed, but is subject to all payments
made and actions taken by us under the Contract before we receive the request at
our Variable Service Center.
Assignments
The owner may assign (transfer) the owner's rights in a Contract to someone
else. An assignment requires a written request signed by all of the Contract's
owners. An assignment will take effect only when we record it at our Variable
Service Center. We have no responsibility for any assignment not submitted for
recording; nor for the sufficiency or validity of any assignment.
Unfavorable tax consequences, including recognition of taxable income and the
imposition of a 10% penalty tax may result from transferring ownership or making
an assignment. In addition, Qualified Contracts owned by tax-qualified
retirement plans may be subject to mandatory assignment restrictions. Therefore,
you should consult with a qualified tax adviser before transferring your
Contract.
Change of Annuitant Designation
The Owner may designate a new Annuitant before the Annuity Date, but not if a
non-natural person owns the Contract.
<PAGE>
Texas Optional Retirement Program
A Contract issued to a participant in the Texas Optional Retirement Program
("ORP") contains an ORP endorsement that amends the Contract to provide that:
. 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
. 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 70 1/2.
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.
Voting Rights
We will vote the shares of the Portfolios held by the Separate Account at
regular or special meetings of the Portfolio's shareholders in accordance with
instructions received from you and other owners having the voting interest in
the affected Portfolio(s). We compute the number of votes that an owner has the
right to instruct for a particular Portfolio by dividing the owner's Account
Value in that Portfolio by that Portfolio's net asset value per share. We will
vote a Portfolio's shares held in our Separate Account for which we do not
receive instructions, as well as shares held in our Separate Account that are
not attributable to owners in the same proportion as we vote that Portfolio's
shares held in the Separate Account for which we have received instructions.
Suspension of Payments or Transfers
We reserve the right to suspend or postpone payments for withdrawals or
transfers from the Separate Account investment options for any period when:
. the New York Stock Exchange is closed;
. trading on the New York Stock Exchange is restricted;
. an emergency exists that makes it impracticable to dispose of Separate
Account securities or determine the Separate Account net asset values; or
. any other period when so ordered by the Securities and Exchange Commission
for the protection of Owners.
We reserve 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 we receive the transaction request.
DISTRIBUTION AND OTHER AGREEMENTS
First Variable Capital Services, Inc. ("FVCS"), 2122 York Road, Oak Brook,
Illinois 60523, acts as distributor of the Contracts. FVCS, our wholly owned
subsidiary, was incorporated in Arkansas on July 26, 1991. It is registered with
the SEC as a broker/dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. FVCS offers the
Contracts on a continuous basis.
We 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 1.2% of Purchase Payments and a trail commission each
year in the amount of 1% of Contract Value beginning in the 13th month after the
Issue Date. Broker-dealers may also receive expense allowances, wholesalers
fees, bonuses and training fees.
FEDERAL TAX MATTERS
General
BECAUSE OF THE COMPLEXITY OF THE LAW AND BECAUSE TAX RESULTS WILL VARY ACCORDING
TO YOUR IDENTITY AND STATUS, YOU SHOULD SEEK INDIVIDUALIZED LEGAL AND TAX ADVICE
BEFORE PURCHASING OR TAKING ANY ACTION UNDER A CONTRACT.
<PAGE>
We cannot provide a comprehensive description of the federal income tax
consequences regarding the Contracts in this prospectus, and special tax rules
may apply that we have not discussed herein. Nor does this discussion address
any applicable state, local, gift, inheritance, estate, and foreign or other tax
laws. This discussion assumes that you, the Contract's owner, are a natural
person and a U.S. citizen and resident. Finally, we would caution that the law
and the related regulations and interpretations on which we base our tax
analysis can change, and such changes can be retroactive.
Our Taxation
Under current federal income tax law, the operations of the Separate Account and
the Fixed Account do not require us to pay any tax. Thus, we currently impose no
charge for our federal income taxes. However, we may decide to charge the
Separate Account or Fixed Account for our federal income taxes, if there are
changes in federal tax law.
We may incur state and local taxes (in addition to premium taxes) in several
states. At present, these taxes are not significant and, accordingly, we do not
currently impose a charge for them. If they increase, however, we may impose a
charge for such taxes attributable to the Separate Account and/or Fixed Account.
Income Tax Deferral on Increases in Account Value
In general, an owner of an annuity contract is not taxed on increases in the
contract's value until a distribution occurs, either in the form of a lump sum
payment or as annuity payments.
Contracts Owned by Other than Natural Persons. If you are a non-natural person,
e.g., a corporation, or certain other entities, your Contract will generally not
be treated as an annuity contract for federal income tax purposes, and you will
be subject to immediate taxation on the increases in your Contract's Account
Value. However, this treatment does not apply to Contracts held by a trust or
other entity as an agent for a natural person or to Qualified Contracts held by
a tax-qualified retirement plan (i.e., a plan that qualifies under section 401,
403(a), 403(b), 408, 408A or 457 of the Code).
Diversification Requirements. The Internal Revenue Code provides that a variable
annuity contract will not be treated as an annuity contract under the Code for
any period (and any subsequent period) for which the related investments are not
adequately diversified. We intend that all Portfolios of the Funds in which your
Contract may invest will comply with the diversification requirements. If your
Contract did not qualify as an annuity contract, you would be subject to
immediate taxation on the increases in your Contract's Account Value. This
treatment would apply for the period of non-compliance and subsequently, unless
and until we are able to settle the matter with the Internal Revenue Service. We
have no legal obligation to seek or agree to any such settlement, however.
Investment Control. The amount of investment control which you may exercise
under a Contract differs in some respects from the situations addressed in
published rulings issued by the Internal Revenue Service in which it held that
variable contract owners were not deemed, for federal income tax purposes, to
own the related assets held in a separate account by the issuing insurance
company. It is possible that these differences, such as your ability to transfer
among investment choices or the number and type of investment choices available,
would cause you to be taxed as if you were the owner of the Portfolio shares
that are attributable to your Contract. In that case, you would be liable for
income tax on an allocable portion of any current income and gains realized by
the Separate Account, even though you have received no distribution of those
amounts.
In the event any forthcoming guidance or ruling by federal income tax
authorities sets 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, result in your being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, we reserve the right to modify your
Contract in an attempt to maintain its intended tax treatment.
Distributions from Non-Qualified Contracts
For a lump sum payment received upon surrender of a Contract, or upon a
withdrawal of Account Value, you will be taxed on the portion that exceeds your
investment in the Contract. The taxable portion is taxed as ordinary income.
Amounts that are not received as an annuity payment will be treated as coming
first from the earnings and then, only after that income portion is exhausted,
as coming from your investment in the Contract.
<PAGE>
Penalty tax on Premature Distributions. The taxable portion of a distribution
from a Contract may be subject to a 10% penalty tax. However, the penalty is not
imposed on amounts received:
. after you reach age 59 1/2;
. after the death of the owner;
. if you are totally disabled as defined in Code section 72(m)(7));
. in a series of substantially equal periodic payments made not less frequently
than annually for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and your Beneficiary;
. under an immediate annuity; or
. that are allocable to purchase payments made before August 14, 1982.
Annuity Payments. For annuity payments, the portion of each payment that exceeds
a pre-determined "exclusion amount" is considered taxable income. The
exclusion amount is determined:
. for payments based on a fixed annuity option, by multiplying the payment by
the ratio that your investment in the Contract (adjusted for any period
certain or refund feature) bears to the expected return under the Contract.
. for payments based on a variable annuity option, by dividing your investment
in 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 total of the excludable amounts equals the
investment in the Contract are fully taxable. The taxable portion is taxed at
ordinary income tax rates.
Death Benefits. The Beneficiary is taxed on the portion of the Death Benefit
that exceeds your investment in the Contract. However, if the Beneficiary elects
to receive the Death Benefit under an Annuity Option, payments made to the
Beneficiary are taxed as annuity payments as discussed above.
Multiple Contracts. Multiple non-qualified annuity contracts issued within a
calendar year to the same contract owner by one company or its affiliates are
treated as one annuity contract when determining the tax consequences of any
distribution. Such treatment may result in adverse tax consequences, including
more rapid taxation of the distributed amounts from the combined contracts.
Owners should consult a tax adviser before purchasing more than one non-
qualified annuity contract in a calendar year.
Tax-Qualified Retirement Plans
This prospectus offers a Contract that may be used under various types of tax-
qualified retirement plans. Taxation of participants varies with the type of
plan and terms and conditions of each specific qualified plan. The terms and
conditions of a plan may restrict the permitted contributions to, and benefits
of, a Contract issued to the plan, regardless of the terms and conditions of the
Contract itself. Because a retirement plan's contribution limits and
distribution and other requirements may not be not incorporated into our
administrative procedures, Contract owners, participants and beneficiaries are
responsible for determining that transactions with respect to the Contract
comply with applicable law.
The tax rules for tax-qualified retirement plans are very complex and will have
different applications depending on individual facts and circumstances. For
example, Contracts issued under tax qualified retirement plans are generally not
transferable, except upon surrender or annuitization. Contract owners,
annuitants and beneficiaries should therefor obtain competent tax advice before
purchasing a Contract issued under a tax-qualified retirement plan, or engaging
in various transactions (i.e., making contributions or taking distributions) in
connection with a Contract.
The 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:
Traditional IRAs and Roth IRAs. Eligible individuals may maintain: (a) an
individual retirement account or individual retirement annuity under section 408
of the Code ("Traditional IRA"); and (b) a non-tax deductible individual
retirement account or individual retirement annuity under section 408A of the
Code ("Roth IRA").
Under applicable limitations, amounts may be contributed to a Traditional IRA
that will be deductible from the individual's gross income. The amounts
contributed to a Traditional IRA may be reduced if an individual also
contributes to a Roth IRA.
Traditional IRAs and Roth IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. Under certain conditions,
distributions from other IRAs and other Qualified Plans may be rolled over or
transferred on a tax-deferred basis into a
<PAGE>
Traditional IRA (An "education IRA" under section 530 of the Code does not
qualify for this treatment.). Rollovers may also be made to a Roth IRA, but only
from a Traditional IRA or from another Roth IRA. Rollovers from a Traditional
IRA to a Roth IRA are subject to immediate federal income taxation.
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit Sharing
Plans. Section 401(a) and 403(a) of the Code permit corporate and self-employed
individuals to establish Qualified Plans for themselves and their employees.
These retirement plans may permit the purchase of a Contract to provide benefits
under the plan. Contributions made to the plan for the benefit of the employees
are not 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 Internal Revenue Code places limitations
and restrictions on all plans including items such as:
. amount of allowable contributions;
. form, manner and timing of distributions;
. transferability of benefits;
. vesting and nonforfeitability of interests;
. incidental death benefits;
. nondiscrimination in eligibility and participation; and
. the tax treatment of distributions, withdrawals and surrenders.
403(b) Annuities. Public schools and certain charitable, educational and
scientific organizations may purchase "403(b)" or "tax-sheltered annuities" (IRC
Section 501(c)(3)). These qualifying employers may contribute to a Contract for
the benefit of their employees. Such contributions are not included in the gross
income of the employees until employees receive distributions from the
Contracts. Tax-sheltered annuity contributions are limited to certain maximums.
Plus, additional restrictions govern such items as transferability,
distributions, nondiscrimination and withdrawals.
Section 457 Plans. Government and certain other tax-exempt employers may
establish deferred compensation plans for the benefit of their employees that
invest in annuity contracts. As in the case of Qualified Plans, limitations and
restrictions exist on eligibility, contributions and distributions. Under these
Plans, contributions made for the benefit of the employees will not be included
in the employee's gross income until distributed from the Plan.
Distributions from Qualified Contracts
In the case of a withdrawal under a Qualified Contract (other than a "qualified
distribution" from a Roth IRA), a portion of the amount received is taxable.
This is generally based on the ratio of the individual's cost basis to the
individual's total accrued benefit under the retirement plan.
Roth IRAs. A "qualified distribution" from a Roth IRA is generally not subject
to federal income taxation, but can only be made after the assets have been in
the Roth IRA for 5 years and the Owner:
. reaches age 59 1/2;
. dies or is disabled (IRC Section 72(m)(7)); or
. takes a qualified first-time homebuyer distribution (as defined in section
72(t)(8) of the Code). Special tax rules may be available for certain other
distributions from a Qualified Contract.
Penalty tax on Pre-retirement Distributions. The taxable portion of any
distribution from a qualified retirement plan may be subject to a 10% penalty
tax. This tax could apply to withdrawals from a Contract issued and qualified
under Code sections 401 (Corporate and Self-Employed Pension and Profit-Sharing
Plans), 403(b) (Tax-Sheltered Annuities), 408 (Traditional IRAs) or 408A (Roth
IRAs - "nonqualified distributions" only). It is not imposed on:
. qualified rollovers or permitted direct transfers to a Traditional IRA, a
Roth IRA, or to another eligible qualified plan;
. distributions made on or after the date on which the Owner or Annuitant (as
applicable) reaches age 59 1/2;
. distributions following the death or disability (as defined in section
72(m)(7) of the Code) of the Owner or Annuitant (as applicable);
. distributions that are part of substantially equal periodic payments made not
less 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
(Qualified Plans other than Traditional IRAs and Roth IRAs require the
employee to be separated from service for this exception to apply);
. distributions made to the Owner or Annuitant (as applicable) for payment of
medical expenses which exceed 7.5% of adjusted gross income;
<PAGE>
. distributions from a Traditional IRA or from a Roth IRA for payment of health
insurance premiums while unemployed, if certain conditions are met;
. amounts paid from a Traditional IRA and Roth IRA for qualified higher
education expenses (IRC Section 72(t)(7) of the Code); and
. amounts paid from a Traditional IRA or Roth IRA as a qualified first-time
homebuyer distribution (IRC Section 72(t)(8) of the Code).
The penalty tax for a Contract issued and qualified under Code sections 401 or
403(b) is also not imposed on:
. distributions to an Owner or Annuitant (as applicable) who has separated from
service after he has attained age 55; and
. distributions made to an alternate payee pursuant to a qualified domestic
relations order.
Generally, distributions from a qualified plan (other than a Roth IRA) must
start no later than April 1 of the calendar year following the year in which the
employee attains age 70 1/2 or retires, whichever is later. These required
distributions must span a period that does not exceed the life expectancy of the
individual or the joint lives or life expectancies of the individual and his or
her designated beneficiary. If required minimum distributions are not made, a
50% penalty tax is imposed on the amount not distributed.
Tax-Sheltered Annuities--Withdrawal Limitations. Withdrawals from contributions
made according to a salary reduction agreement are limited to when the Owner:
. attains age 59 1/2;
. separates from service;
. dies;
. becomes disabled (IRC Section 72(m)(7) of the Code); or
. in the case of hardship.
Hardship withdrawals are restricted to the portion of the Owner's Contract Value
that represents contributions made by the Owner and do not include investment
results.
Withdrawal limitations 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 about distributions.
Federal Income Tax Withholding
All distributions from your Contract, or portions thereof, that are included in
your gross income are subject to federal income tax withholding. We will
withhold federal taxes at the rate of 10% from each distribution. However, you
may elect not to have taxes withheld or to have taxes withheld at a different
rate.
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, may be subject to a mandatory 20% withholding for federal
income tax.
ADVERTISING PRACTICES
FIS Prime Money Fund II Portfolio
From time to time, the FIS Prime Money Fund II investment option of the Separate
Account may advertise its "yield" and "effective yield." Both yield figures are
based on historical earnings and are not intended to indicate future
performance.
The "yield" of the FIS Prime Money Fund II investment option refers to the
income generated by Account Values in the FIS Prime Money Fund II investment
option over a seven-day period (which will be stated in the advertisement). This
income is "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the Account Values in the FIS Prime Money
Fund II investment option.
<PAGE>
The "effective yield" is calculated similarly. However, when annualized, the
income earned by Account Values is assumed to be reinvested. This results in the
"effective yield" being slightly higher than the "yield" because of the
compounding effect of the assumed reinvestment. The yield figure will reflect
the deduction of any asset-based charges and any applicable annual contract
maintenance charge.
Other Portfolios
From time to time, we may advertise performance data for the Contract's other
Portfolios. Such data will show the percentage change in the value of an
Accumulation Unit based on the performance of an investment over a period of
time, usually a calendar year. It is determined by dividing the increase
(decrease) in value for that Unit by the Accumulation Unit value at the
beginning of the period. This percentage will reflect the deduction of any
asset-based charges and any applicable annual contract maintenance charges under
the Contracts.
Advertisements also will include total return figures calculated as described in
the Statement of Additional Information. The total return figures reflect the
deduction of any applicable annual contract maintenance charges, as well as any
asset-based charges.
We may make yield information available, with respect to some of the Portfolios.
Such yield information will be calculated as described in the Statement of
Additional Information. The yield information will reflect the deduction of any
applicable annual contract maintenance charge, as well as any asset-based
charges.
We may also show historical Accumulation Unit values in certain advertisements
that contain illustrations. These illustrations will be based on Accumulation
Unit values for a specific period.
Quotations of standardized total return for any Investment Option 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 Investment Option). They will reflect the
deduction of a Contract's daily and annual charges, the applicable withdrawal
charge, and fees and expenses of the underlying Portfolio. Quotations of non-
standardized total return may simultaneously be shown for the periods indicated
in the advertisement and may not reflect some or all of these deductions.
Total return performance information for Investment Options may also be
advertised based on the historical performance of the Portfolio underlying an
Investment Option for periods beginning before the date Accumulation Unit Values
were first calculated for Contracts funded in that Investment Option. Any such
performance calculation will be based on the assumption that the Investment
Option corresponding to the applicable Portfolio was in existence throughout the
stated period and that contractual charges and expenses of the Investment Option
during the period were equal to those currently assessed under a Contract.
We may also distribute sales literature that compares the percentage change in
Accumulation Unit values for any of the Portfolios 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 that have
investment objectives similar to the Portfolio being compared.
The Standard & Poor's 500 Stock 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 Stock Index and the Dow Jones Industrial Average
assume quarterly reinvestment of dividends.
We may also distribute sales literature that compares the performance of our
variable annuities' Accumulation Unit values with the unit values of variable
annuities issued through other insurance companies. Such information will be
derived from the Lipper Variable Insurance Products Performance Analysis
Service, Morningstar or from the VARDS Report.
The Lipper Variable Insurance Products Performance Analysis Service is published
by Lipper Analytical Services, Inc., a publisher of statistical data that tracks
the performance of investment companies. The rankings compiled by Lipper may or
may not reflect the deduction of asset-based insurance charges. Our sales
literature using these rankings will indicate whether such charges were
deducted. Where the charges have not been deducted, the sales literature will
indicate that, had the charges been deducted, the ranking might have been lower.
<PAGE>
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 each variable annuity investment option against its peers with
similar investment objectives. Morningstar does not rate any investment option
with fewer than three years of performance data.
OTHER MATTERS
Financial Statements
Our financial statements and the financial statements of the Separate Account
are included in the Statement of Additional Information.
Legal Proceedings
We are not subject to any material pending legal proceedings nor is the Separate
Account or the Distributor.
Transfers by the Company
We may, subject to applicable regulatory approvals, transfer obligations under a
Contract to another qualified life insurance company under an assumption
reinsurance arrangement without the prior consent of the Owner.
YEAR 2000 ISSUES
Like other financial and business organizations around the world, we could be
adversely affected if our computer systems and those of our service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. We have completed an assessment of the Year 2000 impact
on our systems, procedures, customers and business processes. At December 31,
1998, our management is satisfied that our main operating systems are Year 2000
compliant. We are currently reviewing our general office systems and contacting
our service providers.
We believe that we will complete our Year 2000 project prior to any anticipated
impact on our operating systems. The date on which we believe we will complete
the Year 2000 project is based on our management's best estimates. Although
there can be no guarantee that these estimates will be achieved, our management
does not at this time believe that actual results will differ materially from
those anticipated. Specific factors that might cause such material differences
would most likely result from our service providers.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information for the Separate Account and the
Contract contains the following information:
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C>
First Variable Life Insurance Company............
Independent Auditors.............................
Legal Counsel....................................
Distributor......................................
Yield Calculation for the FIS Prime Money Fund II
Investment Option...............................
Calculation of Other Performance Information.....
Annuity Provisions...............................
Variable Annuity................................
Fixed Annuity...................................
Annuity Unit....................................
Mortality and Expense Guarantee.................
Financial Statements.............................
</TABLE>
<PAGE>
APPENDIX A
ACCUMULATION UNIT DATA
(for a unit outstanding throughout the period)
The following condensed financial information should be read in conjunction with
the financial statements, related notes and other financial information for the
Separate Account included in the Statement of Additional Information. Our
financial statements and report of independent auditors are also contained in
the Statement of Additional Information.
<TABLE>
<CAPTION>
Period Ended Period Ended Period Ended Period Ended
------------ ------------ ------------ ------------
12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Small Cap Growth Investment Option (1)
Beginning of Period $ 12.91 $ 13.01 $ 10.36 $10.00
End of Period $ 12.32 $ 12.91 $ 13.01 $10.36
Number of Accum. Units Outstanding 157,939 112,393 25,465 2,212
World Equity Investment Option
Beginning of Period $ 12.28 $ 11.33 $ 10.24 $10.00
End of Period $ 12.71 $ 12.28 $ 11.33 $10.24
Number of Accum. Units Outstanding 129,010 75,105 37,590 3,989
Growth Investment Option (2)
Beginning of Period $ 15.31 $ 12.57 $ 10.14 $10.00
End of Period $ 20.10 $ 15.31 $ 12.57 $10.14
Number of Accum. Units Outstanding 282,153 106,746 30,672 6,026
Matrix Equity Investment Option (3)
Beginning of Period $ 13.16 $ 10.94 $ 10.62 $10.00
End of Period $ 15.70 $ 13.16 $ 10.94 $10.62
Number of Accum. Units Outstanding 186,146 43,263 11,951 918
Growth & Income Investment Option
Beginning of Period $ 14.84 $ 11.75 $ 10.63 $10.00
End of Period $ 16.43 $ 14.84 $ 11.75 $10.63
Number of Accum. Units Outstanding 358,265 152,210 51,500 2,754
Multiple Strategies Investment Option
Beginning of Period $ 14.10 $ 11.84 $ 10.15 $10.00
End of Period $ 18.07 $ 14.10 $ 11.84 $10.15
Number of Accum. Units Outstanding 264,274 77,185 30,934 5,995
High Income Bond Investment Option
Beginning of Period $ 12.80 $ 11.45 $ 10.17 $10.00
End of Period $ 13.00 $ 12.80 $ 11.45 $10.17
Number of Accum. Units Outstanding 306,492 114,612 30,956 1,905
U.S. Government Bond Investment Option
Beginning of Period $ 11.19 $ 10.39 $ 10.30 $10.00
End of Period $ 11.88 $ 11.19 $ 10.39 $10.30
Number of Accum. Units Outstanding 490,078 63,534 43,540 7,532
Prime Money Fund II Investment Option (4)
Beginning of Period $ 10.74 $ 10.39 $ 10.06 $10.00
End of Period 11.10 $ 10.74 $ 10.39 $10.06
Number of Accum. Units Outstanding 135,376 89,012 39,582 0
</TABLE>
(1) Before May 1, 1997, the Small Cap Growth Sub-Account was known as the "Small
Cap Sub-Account."
(2) Before May 1, 1997, the Growth Investment Option was known as the "Common
Stock Sub-Account."
(3) Before May 1, 1997, the Matrix Equity Sub-Account was known as the "Tilt
Utility Sub-Account" and had different investment policies.
(4) On January 2, 1997, shares of Federated Prime Money Fund II were substituted
for shares of the VIST Cash Management Portfolio. Accumulation Unit Values
before that date are based on the value of VIST Cash Management Portfolio
shares held for the periods shown.
<PAGE>
PART B
CAPITAL NO LOAD
FLEXIBLE PREMIUM VARIABLE ANNUITY CONTRACT
(the "Contract")
Issued by
FIRST VARIABLE LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
for
FIRST VARIABLE ANNUITY FUND E
(the "Separate Account")
This is not a prospectus. You should read this Statement of Additional
Information with the prospectus dated May 1, 1999 for the Contract referred to
above.
The prospectus concisely sets forth information that you ought to know before
investing in a Contract. For a copy of the prospectus, call or write us at 2122
York Road, Oak Brook, IL 60523 (800) 228-1035.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C>
First Variable Life Insurance Company................ SA - 2
Independent Auditors................................. SA - 2
Legal Counsel........................................ SA - 2
Distributor.......................................... SA - 2
Yield Calculation for the FIS Prime Money Fund II
Investment Option................................... SA - 2
Calculation of Other Performance Information......... SA - 3
Annuity Provisions................................... SA - 6
Variable Annuity.................................... SA - 6
Fixed Annuity....................................... SA - 7
Annuity Unit........................................ SA - 7
Mortality and Expense Guarantee..................... SA - 7
Financial Statements................................. SA - 7
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1999.
SA - 1
<PAGE>
FIRST VARIABLE LIFE INSURANCE COMPANY
You will find information about our company and its ownership in the prospectus.
INDEPENDENT AUDITORS
The consolidated financial statements of First Variable Life Insurance Company
at December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998 and the financial statements of First Variable Life
Insurance Company--First Variable Annuity Fund E at December 31, 1998 and 1997
appearing in this Statement of Additional Information have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
LEGAL COUNSEL
Our Legal Department reviewed legal matters about the Contracts. Blazzard, Grodd
& Hasenauer, P.C., Westport, Connecticut, advised us 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 First Variable Life Insurance Company. The
offering is on a continuous basis.
YIELD CALCULATION FOR FIS PRIME MONEY FUND II INVESTMENT OPTION
The FIS Prime Money Fund II Investment Option of the Separate Account calculates
its current yield based upon the seven-day period that ends on the date of
calculation. For the seven calendar days ended December 31, 1998, the annualized
yield was 3.06% and the effective yield was 3.10%.
To calculate the current yield, we create a hypothetical Contract account with a
balance of one Accumulation Unit of this investment option. We determine the net
change (exclusive of capital changes) in the value of the Accumulation Unit at
the beginning and at the end of the period. Next, we subtract the Annual
Contract Maintenance Charge and divide the difference by the value of the
hypothetical account at the beginning of the same period to obtain the base
period return. We then multiply the result by (365/7) to obtain the current
yield.
We calculate the "effective" yield according to the method prescribed by the
Securities and Exchange Commission. The effective yield reflects the
reinvestment of net income earned daily on FIS Prime Money Fund II Investment
Option assets. Net investment income for yield quotation purposes will not
include either realized capital gains and losses or unrealized appreciation and
depreciation, whether reinvested or not.
You may find yield information useful as you review the performance of the FIS
Prime Money Fund II Investment Option and compare it with other investments.
However, the yield fluctuates, unlike bank deposits or other investments that
typically pay a fixed yield for a set period. You should therefor not consider
any yields quoted as a representation of the yield of the FIS Prime Money Fund
II Investment Option in the future. Actual yields depend on the type, quality
and maturities of the investments held by the Portfolio and changes in the
interest rates on such investments, as well as changes in expenses during the
period.
SA - 2
<PAGE>
CALCULATION OF OTHER PERFORMANCE INFORMATION
From time to time, we may advertise standardized performance data as described
in the prospectus. These advertisements will include total return figures for
the times indicated in the advertisement. Total return figures will reflect the
deductions of
. 1.25% Mortality and Expense Risk Charge,
. .25% Administrative Charge,
. investment advisory fee for the underlying Portfolio being advertised and
. any applicable withdrawal charges and Annual Charges (charges for
optional riders excluded).
To determine the hypothetical value of a Contract for the time periods described
in the advertisement, we will use the Accumulation Unit values for an initial
$1,000 purchase payment, and deduct any applicable Annual Contract Maintenance
Charges and Withdrawal Charges. For periods before the date that actual
Accumulation Unit Values were first computed for the Contracts, we have derived
Accumulation Unit Value performance from the historical performance of the
Portfolios. We determine the average annual total return 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 the periods
described.
Here is the formula used in these calculations:
[P x (1+T)/n/] = ERV
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 applicable periods.
The standardized average annualized total returns as of December 31, 1998, for 1
year, 3 years, 5 years, 10 years and for the life of the Separate Account
investment option are listed below:
<TABLE>
<CAPTION>
Since Sub-Account
Separate Account Investment Option 1 Year Inception
- --------------------------------------------- --------------- -----------------------
<S> <C> <C>
VIST Small Cap Growth (inception 5/4/95) (4.64%) 6.73%
VIST World Equity (inception 6/10/88) 3.47% 7.79%
VIST Growth (inception 5/1/87) 31.23% 24.58%
VIST Matrix Equity (inception 6/16/88) 19.24% 15.22%
VIST Growth & Income (inception 5/31/95) 10.68% 16.91%
VIST Multiple Strategies (inception 5/5/87) 27.15% 20.45%
VIST High Income Bond (inception 6/1/87) 1.43% 8.54%
VIST US Govt. Bond (inception 5/27/87) 6.11% 5.50%
FIS Prime Money Fund II (1) 3.32% 3.26%
</TABLE>
(1) On December 3, 1997, we substituted shares of FIS Prime Money Fund II for
shares of the VIST Cash Management Portfolio. Calculations before that date are
based on the value of VIST Cash Management Portfolio shares held for the periods
shown.
SA - 3
<PAGE>
The standardized average annualized total returns as of December 31, 1998, for 1
year, 3 years, 5 years and 10 years and the Portfolios inception, based on the
historical performance of the Portfolios as listed below:
<TABLE>
<CAPTION>
Since Portfolio
Separate Account Investment Option 1 Year 3 Years 5 Years 10 Years Inception
- ---------------------------------------------- ------- ------- -------- --------- -------------------
<S> <C> <C> <C> <C> <C>
VIST Small Cap Growth (inception 5/4/95) -4.64% 5.98% N/A N/A 12.47%
VIST World Equity (inception 6/10/88) 3.47% 7.54% 10.61% 7.21% 6.38%
VIST Growth (inception 5/1/87) 31.23% 25.94% 21.47% 15.85% 14.56%
VIST Matrix Equity (inception 6/16/88) 19.24% 14.07% 13.78% 13.01% 12.69%
VIST Growth & Income (inception 5/31/95) 10.68% 15.80% N/A N/A 16.75%
VIST Multiple Strategies (inception 5/5/87) 27.15% 21.44% 17.22% 13.95% 11.73%
VIST High Income Bond (inception 6/1/87) 1.43% 8.58% 6.55% 8.66% 8.34%
VIST US Govt. Bond (inception 5/27/87) 6.11% 4.90% 5.56% 7.14% 6.89%
FIS Prime Money Fund II 3.32% 3.30% 3.15% 3.56% 3.80%
AIM V.I. Capital Appreciation (inception 5/5/93) 17.73% 15.20% 15.66% N/A 17.20%
AIM V.I. Growth (inception 5/5/93) 32.55% 24.62% 19.87% N/A 19.30%
ACS V.P. Value (inception 5/1/96) 3.24% N/A N/A N/A 14.37%
BT Equity 500 Index (inception 10/1/97) 27.14% N/A N/A N/A 22.68%
BT Small Cap Index (inception 8/25/97) -3.75% N/A N/A N/A -3.64%
LA Growth & Income (inception 12/11/89) 11.25% 17.28% 15.94% N/A 14.60%
MFS New Discovery Series (inception 5/1/98) N/A N/A N/A N/A 0.63%
MFS Growth with Income Series
(inception 10/9/95) 20.75% 23.91% N/A N/A 24.41%
FT International Fund - Class 2
(inception 5/1/97) 7.51% N/A 10.17% N/A 12.53%
</TABLE>
SA - 4
<PAGE>
We may also advertise non-standardized performance information that does not
include withdrawal charges. The non-standardized average annualized total
returns as of December 31, 1998 for 1 year, 3 years, 5 years, 10 years and
Portfolio Inception based on the historical performance of the Portfolios are
listed below:
<TABLE>
<CAPTION>
Since Portfolio
---------------
Separate Account Investment Option 1 Year 3 Years 5 Years 10 Years Inception
- ---------------------------------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
VIST Small Cap Growth (inception 5/4/95) -4.57% 6.05% N/A N/A 12.54%
VIST World Equity (inception 6/10/88) 3.54% 7.61% 10.68% 7.28% 6.45%
VIST Growth (inception 5/1/87) 31.31% 26.01% 21.54% 15.92% 14.63%
VIST Matrix Equity (inception 6/16/88) 19.31% 14.14% 13.85% 13.08% 12.76%
VIST Growth & Income (inception 5/31/95) 10.76% 15.87% N/A N/A 16.82%
VIST Multiple Strategies (inception 5/5/87) 27.23% 21.51% 17.29% 14.02% 11.80%
VIST High Income Bond (inception 6/1/87) 1.51% 8.65% 6.62% 8.73% 8.41%
VIST US Govt. Bond (inception 5/27/87) 6.19% 4.97% 5.63% 7.21% 6.96%
FIS Prime Money Fund II 3.39% 3.37% 3.22% 3.65% 3.87%
AIM V.I. Capital Appreciation (inception 5/5/93) 17.80% 15.27% 15.73% N/A 17.27%
AIM V.I. Growth (inception 5/5/93) 32.62% 24.69% 19.94% N/A 19.37%
ACS V.P. Value (inception 5/1/96) 3.31% N/A N/A N/A 14.44%
BT Equity 500 Index (inception 10/1/97) 27.21% N/A N/A N/A 22.75%
BT Small Cap Index (inception 8/25/97) -3.68% N/A N/A N/A -3.57%
LA Growth & Income (inception 12/11/89) 11.32% 17.35% 16.01% N/A 14.67%
MFS New Discovery Series (inception 5/1/98) N/A N/A N/A 0.70%
MFS Growth with Income Series (inception 10/9/95) 20.82% 23.98% N/A N/A 24.48%
FT International Fund -- Class 2 (inception 5/1/97) 7.58% N/A 10.24% N/A 12.60%
</TABLE>
SA - 5
<PAGE>
CALCULATION OF OTHER PERFORMANCE INFORMATION (continued)
In addition to total return data, we may include yield information in our
advertisements. For each Investment Option (other than the Federated Prime
Money Fund II Investment Option) for which we advertise yield, we will show a
yield quotation based on a 30-day (or one month) period ended on the date of the
most recent balance sheet of the Separate Account. We compute it by dividing the
net investment income per Accumulation Unit earned during the period by the
maximum offering price per Unit on the last day of the period, according to the
following formula:
a - b
Yield = 2 (----- + 1)/6/ - 1
cd
a = Net investment income earned during the period by the Portfolio
attributable to shares owned by the Separate Account investment option.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of Accumulation Units outstanding during the
period.
d = The maximum offering price per Accumulation Unit on the last day of the
period.
The investment results of each Separate Account investment option will fluctuate
over time. Any presentation of a Separate Account investment option's total
return for any period should not be considered as a representation of future
performance.
ANNUITY PROVISIONS
Variable Annuity
A variable annuity is an annuity with payments that:
. are not predetermined as to dollar amount; and
. will vary in amount with the net investment results of the Separate
Account investment option(s) selected.
At the Annuity Date, we will apply your Account Value in each Separate Account
investment option to the applicable Annuity table shown in your Contract to
determine the dollar amount of the initial Annuity payment. The Annuity table
we use depends on the Annuity Option chosen. If, as of the Annuity Date, the
then current Annuity Option rates applicable to this class of Contracts provide
an initial Annuity payment greater than that guaranteed under the same Annuity
Option table under your Contract, we will make the greater payment.
We next determine the number of "Annuity Units" for future payments from that
Separate Account investment option. To do this, we divide the dollar amount of
the initial Annuity payment by the applicable Annuity Unit value for that
investment option as of the Annuity Date. The number of Annuity Units remains
fixed during the Annuity Payment period.
Each month after the Annuity Date, we multiply the previously determined number
of Annuity Units by the applicable Separate Account investment option's Annuity
Unit value. (We use the Annuity Unit value at the end of the last Business Day
of the month preceding the month for which the payment is due.) This will be
the dollar amount of the current Annuity payment from that Separate Account
investment option. The total dollar amount of each variable Annuity payment is
the sum of all amounts payable from the selected Separate Account investment
options.
SA - 6
<PAGE>
ANNUITY PROVISIONS (continued)
Fixed Annuity
A fixed annuity is a series of payments made after the Annuity Date that we
guarantee as to dollar amount. Fixed annuity payments do not vary with the
investment experience of the Separate Account.
At the Annuity Date, we will apply your Account Value in the Fixed Account to
the applicable Annuity table shown in your Contract to determine the dollar
amount of each "fixed" Annuity payment. (We use your Account Value in the Fixed
Account as of the day immediately before the Annuity Date).
Annuity Unit
The initial value of an Annuity Unit for each Separate Account investment option
was arbitrarily set at $10. After that, the Annuity Unit value for that
Separate Account investment option is determined at the end of each Business
Day.
We determine an Annuity Unit's value by:
. calculating the assets of the applicable Separate Account investment option
that are attributable to Annuity Units;
. subtracting any unpaid daily and annual charges for the Contracts that are
attributable to that investment option;
. subtracting (or adding) any charges (or credits) for taxes that we have
reserved for that investment option;
. dividing the remainder by the number of then outstanding Annuity Units in
that investment option; and
. multiplying the result by a factor that neutralizes the assumed investment
rate of 3% contained in the Contract's annuity tables.
The value of an Annuity Unit will increase or decrease from Business Day to
Business Day, and will differ depending on the Separate Account investment
options selected.
Mortality and Expense Guarantee
We guarantee that the dollar amount of each Annuity payment after the Annuity
Date will not be affected by variations in our mortality or expense experience.
FINANCIAL STATEMENTS
The consolidated financial statements of First Variable Life Insurance Company
included herein should be considered only as bearing upon our ability to meet
our obligations under the Contracts.
SA - 7
<PAGE>
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our reports dated February 2, 1999 with respect to the
consolidated financial statements of First Variable Life Insurance Company and
March 18, 1999 with respect to the financial statements of First Variable Life
Insurance Company -- First Variable Annuity Fund E, in Post-Effective Amendment
No. 5 to the Registration Statement (form N-4 No. 33-86738) and related
Prospectus of First Variable Life Insurance Company.
/s/Ernst & Young
-------------------------------
Ernst & Young
Chicago, Illinois
April 27, 1999
<PAGE>
Financial Statements
First Variable Life Insurance Company
First Variable Annuity Fund E
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Financial Statements
Year ended December 31, 1998
Contents
Report of Independent Auditors................................. 1
Financial Statements
Statement of Assets, Liabilities, and Contract Owners' Equity.. 2
Statement of Operations........................................ 3
Statements of Changes in Contract Owners' Equity............... 4
Notes to Financial Statements.................................. 6
<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, 1998, and the related statement of operations for the
year then ended, and the statements of changes in contract owners' equity 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,
1998 by correspondence with Variable Investors Series Trust and Federated
Insurance 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, 1998, the results of its
operations for the year then ended, and the changes in its contract owners'
equity for each of the two years in the period then ended, in conformity with
generally accepted accounting principles.
March 18, 1999
1
<PAGE>
First Variable Life Insurance Company -
Separate Account VL
Statement of Assets, Liabilities, and Contract Owners' Equity
December 31, 1998
<TABLE>
<CAPTION>
Federated High
Prime Income Multiple
Money Growth Bond Strategies
Total Fund II Division Division Division
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Investments in Variable Investors Series Trust
at net asset value (cost $187,047,144) $189,876,015 $ -- $41,208,914 $ 19,827,645 $37,628,235
Investments in Federated Prime Money Fund II
at net asset value (cost $8,850,552) 8,850,552 8,850,552 -- -- --
Receivable from First Variable Life Insurance
Company 23,035 -- 2,758 254 9,158
--------------------------------------------------------------------
Total assets $198,749,602 $8,850,552 $41,211,672 $19,827,899 $37,637,393
====================================================================
Liabilities
Payable to First Variable Life Insurance Company $ 63,967 $ 35,129 $ -- $ -- $ --
Contract owners' equity
Annuity contracts in payment period 214,189 180,828 24,453 8,908 --
Variable annuity contract owners' equity 198,471,446 8,634,595 41,187,219 19,818,991 37,637,393
--------------------------------------------------------------------
Total contract owners' equity $198,685,635 8,815,423 41,211,672 19,827,899 37,637,393
Total liabilities and contract owners' equity $198,749,602 $8,850,552 $41,211,672 $19,827,899 $37,637,393
====================================================================
</TABLE>
<TABLE>
<CAPTION>
U.S. Small
Matrix Government World Growth & Cap
Equity Bond Equity Income Growth
Division Division Division Division Division
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Investments in Variable Investors Series Trust
at net asset value (cost $187,047,144) $19,566,570 $13,063,728 $21,249,698 $24,822,360 $12,508,865
Investments in Federated Prime Money Fund II
at net asset value (cost $8,850,552) -- -- -- -- --
Receivable from First Variable Life Insurance
Company 7,055 -- -- 3,810 --
----------------------------------------------------------------
Total assets $19,573,625 $13,063,728 $21,249,698 $24,826,170 $12,508,865
================================================================
Liabilities
Payable to First Variable Life Insurance Company $ -- $ 7,417 $ 17,207 $ -- $ 4,214
Contract owners' equity
Annuity contracts in payment period -- -- -- -- --
Variable annnuity contract owners' equity 19,573,625 13,056,311 21,232,491 24,876,170 12,504,651
----------------------------------------------------------------
Total contract owners' equity 19,573,625 13,056,311 21,232,491 24,826,170 12,504,651
----------------------------------------------------------------
Total liabilities and contract owners' equity $19,573,625 $13,063,728 $21,249,698 $24,826,170 $12,508,865
================================================================
</TABLE>
See accompanying notes.
<PAGE>
First Variable Life Insurance Company -
First Variable Annuity Fund E
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Federated High
Prime Income Multiple
Money Growth Bond Strategies
Total Fund II Division Division Division
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $13,238,943 $497,442 $ 4,629,122 $1,559,125 $2,335,245
Expenses:
Fees paid to First Variable Life Insurance Company
--Risk and administrative charges 2,495,826 129,264 470,454 257,253 446,776
-------------------------------------------------------------------------
Net investment income (loss) 10,743,117 368,178 4,158,668 1,301,872 1,888,469
Realized and unrealized gain (loss) on investments:
Realized gain (loss) on Variable Investors
Series Trust shares redeemed 14,293,220 -- 7,112,929 533,356 4,599,401
Net unrealized appreciation (depreciation)
on investments during the year (456,962) -- (1,318,859) (1,484,495) 1,734,525
-------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 13,836,258 -- 5,794,070 (951,139) 6,333,926
-------------------------------------------------------------------------
Net increase (decrease) in contract owners'
equity resulting from operations $24,579,375 $368,178 $ 9,952,738 $ 350,733 $8,222,395
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
U.S. Small
Matrix Government World Growth & Cap
Equity Bond Equity Income Growth
Division Division Division Division Division
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $1,015,411 $744,765 $1,731,526 $ 726,307 $ --
Expenses:
Fees paid to First Variable Life Insurance Company
--Risk and administrative charges 223,848 129,155 306,594 343,087 189,395
-----------------------------------------------------------------------
Net investment income (loss) 791,563 615,610 1,424,932 383,220 (189,395)
Realized and unrealized gain (loss) on investments:
Realized gain (loss) on Variable Investors
Series Trust shares redeemed 872,436 258,304 (384,016) 2,072,741 (771,931)
Net unrealized appreciation (depreciation)
on investments during the year 1,260,326 (344,581) (62,724) (808,198) 567,044
-----------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 2,132,762 (86,277) (446,740) 1,264,543 (204,887)
-----------------------------------------------------------------------
Net increase (decrease) in contract owners'
equity resulting from operations $2,924,325 $529,333 $ 978,192 $1,647,763 $(394,282)
=======================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statements of Changes in Contract Owners' Equity
Periods ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Federated Cash
Prime Money Management
Total Fund II Division
1998 1997 1998 1997/(1)/ 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Net investment income $ 10,743,117 $ 13,847,091 $ 368,178 $ 414,356 $ --
Realized gain on Variable Investors
Series Trust shares redeemed 14,293,220 8,899,088 -- -- --
Net unrealized appreciation (depreciation)
on investments during the period (456,962) (1,368,372) -- -- --
---------------------------------------------------------------------
Net increase in contract owners' equity
resulting from operations 24,579,375 21,377,807 368,178 414,356 --
From contract owner transactions
Net proceeds from sale or transfer of
accumulation units 45,778,240 29,757,747 8,682,394 12,489,583 (6,961,706)
Cost of accumulation units terminated and
exchanged (41,929,218) (18,690,446) (9,536,847) 3,567,112 --
---------------------------------------------------------------------
Increase (decrease) in contract owners' equity
from contract owner transactions 3,849,022 11,067,301 (854,453) 8,922,471 (6,961,706)
---------------------------------------------------------------------
Increase (decrease) in contract owners' equity 28,428,397 32,445,108 (486,275) 9,336,827 (6,961,706)
Contract owners' equity at beginning of period 170,321,205 137,876,097 9,336,827 -- 6,961,706
---------------------------------------------------------------------
Contract owners' equity at end of period $198,749,602 $170,321,205 $ 8,850,552 $ 9,336,827 $ --
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
Growth High Income
Division Bond Division
1998 1997 1998 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
Operations
Net investment income $ 4,158,668 $ 2,248,848 $ 1,301,872 $ $879,975
Realized gain on Variable Investors
Series Trust shares redeemed 7,112,929 3,302,662 533,356 472,791
Net unrealized appreciation (depreciation)
on investments during the period (1,318,859) 219,193 (1,484,495) 222,004
----------------------------------------------------
Net increase in contract owners' equity
resulting from operations 9,952,738 5,770,703 350,733 1,574,770
From contract owner transactions
Net proceeds from sale or transfer of
accumulation units 4,781,700 4,963,450 5,374,821 2,901,716
Cost of accumulation units terminated and
exchanged (5,858,088) (4,311,406) (2,355,028) 82,682
----------------------------------------------------
Increase (decrease) in contract owners' equity
from contract owner transactions (1,076,388) 652,044 3,019,793 2,984,398
----------------------------------------------------
Increase (decrease) in contract owners' equity 8,876,350 6,422,747 3,370,526 4,559,168
Contract owners' equity at beginning of period 32,335,322 25,912,575 16,457,373 11,898,205
----------------------------------------------------
Contract owners' equity at end of period $41,211,672 $32,335,322 $19,827,899 $16,457,373
====================================================
</TABLE>
/(1)/ From commencement of operations, January 2, 1997
<PAGE>
First Variable Life Insurance Company -
First Variable Annuity Fund E
Statements of Changes in Contract Owners' Equity (continued)
Periods ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Multiple Strategies Matrix Equity
Division Division
1998 1997 1998 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) $ 1,888,469 $ 2,132,586 $ 791,563 $ 2,884,776
Realized gain (loss) on Variable Investors Series
Trust shares redeemed 4,599,401 2,381,747 872,436 686,314
Net unrealized appreciation (depreciation) on
investments during the period 1,734,525 635,135 1,260,326 (1,296,817)
-------------------------------------------------------
Net increase (decrease) in contract owners' equity
resulting from operations 8,222,395 5,149,468 2,924,325 2,274,273
From contract owner transactions
Net proceeds from sale or transfer of accumulation
units 3,898,136 3,127,507 5,265,161 1,033,568
Cost of accumulation units terminated and exchanged (5,723,614) (4,191,961) (1,852,605) (2,700,078)
-------------------------------------------------------
Increase (decrease) in contract owners' equity
from contract owner transactions (1,825,478) (1,064,454) 3,412,556 (1,666,510)
-------------------------------------------------------
Increase (decrease) in contract owners' equity 6,396,917 4,085,014 6,336,881 607,763
Contract owners' equity at beginning of period 31,240,476 27,155,462 13,236,744 12,628,981
-------------------------------------------------------
Contract owners' equity at end of period $37,637,393 $31,240,476 $19,573,625 $13,236,744
=======================================================
</TABLE>
<TABLE>
<CAPTION>
U.S. Government Bond World Equity
Division Division
1998 1997 1998 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) $ 615,610 $ 396,715 $ 1,424,932 $ 3,089,382
Realized gain (loss) on Variable Investors Series
Trust shares redeemed 258,304 15,441 (384,016) 978,969
Net unrealized appreciation (depreciation) on
investments during the period (344,581) 115,355 (62,724) (2,246,616)
-------------------------------------------------------
Net increase (decrease) in contract owners' equity
resulting from operations 529,333 527,511 978,192 1,821,735
From contract owner transactions
Net proceeds from sale or transfer of accumulation
units 5,939,476 664,812 1,306,839 2,087,308
Cost of accumulation units terminated and exchanged (1,173,648) (1,034,432) (3,800,525) (2,919,066)
-------------------------------------------------------
Increase (decrease) in contract owners' equity
from contract owner transactions 4,765,828 (369,620) (2,493,686) (831,758)
-------------------------------------------------------
Increase (decrease) in contract owners' equity 5,295,161 157,891 (1,515,494) 989,977
Contract owners' equity at beginning of period 7,768,567 7,610,676 22,765,192 21,775,215
-------------------------------------------------------
Contract owners' equity at end of period $ 13,063,728 $ 7,768,567 $21,249,698 $22,765,192
=======================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Growth & Income Small Cap Growth
Division Division
1998 1997 1998 1997
<S> <C> <C> <C> <C>
-----------------------------------------------------
Operations
Net investment income (loss) $ 383,220 $ 1,443,555 $ (189,395) $ 356,898
Realized gain (loss) on Variable Investors Series
Trust shares redeemed 2,072,741 585,338 (771,931) 475,826
Net unrealized appreciation (depreciation) on
investments during the period (808,198) 1,514,112 567,044 (530,738)
-----------------------------------------------------
Net increase (decrease) in contract owners' equity
resulting from operations 1,647,763 3,543,005 (394,282) 301,986
From contract owner transactions
Net proceeds from sale or transfer of accumulation
units 9,202,472 4,199,159 1,327,241 5,252,350
Cost of accumulation units terminated and exchanged (5,983,494) 1,942,466 (5,645,369) (1,991,539)
-----------------------------------------------------
Increase (decrease) in contract owners' equity
from contract owner transactions 3,218,978 6,141,625 (4,318,128) 3,260,811
-----------------------------------------------------
Increase (decrease) in contract owners' equity 4,866,741 9,684,630 (4,712,410) 3,562,797
Contract owners' equity at beginning of period 19,959,429 10,274,799 17,221,275 13,658,478
-----------------------------------------------------
Contract owners' equity at end of period $24,826,170 $19,959,429 $12,508,865 $17,221,275
=====================================================
</TABLE>
See accompanying notes.
<PAGE>
First Variable Life Insurance Company --
First Variable Annuity Fund E
Notes to Financial Statements
Year ended December 31, 1998
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). Eight of the nine investment divisions of the Fund are invested
solely in the shares of the eight 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. The remaining
investment division, formerly the Cash Management Division of the Trust, is
invested in the Federated Prime Money Fund II (Federated), a portfolio of
Federated Insurance Series Trust, an open end management investment company.
First Variable Life liquidated its investment in the Cash Management Division on
January 2, 1997. 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.
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 and Federated are stated at the net asset
value, which approximates fair value, per share of the respective portfolios of
the Trust and Federated. Investment transactions are accounted for on the date
the shares are purchased
6
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
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 and Federated are reinvested in additional shares of the Trust and
Federated and are recorded as income by the Fund on the ex-dividend date.
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 and Federated at December 31, 1998:
<TABLE>
<CAPTION>
Number of Net Asset
Shares Cost Value
--------------------------------------------------
<S> <C> <C> <C>
Federated Prime Money Fund II 8,850,552 $ 8,850,552 $ 8,850,552
Growth Portfolio 1,005,002 40,004,973 41,208,914
High Income Bond Portfolio 2,163,305 21,120,533 19,827,645
Multiple Strategies Portfolio 2,194,916 35,267,861 37,628,235
Matrix Equity Portfolio 1,196,507 18,875,447 19,566,570
U.S. Government Bond Portfolio 1,265,595 13,602,096 13,063,728
World Equity Portfolio 1,560,352 22,421,844 21,249,698
Growth & Income Portfolio 1,560,895 23,936,783 24,822,360
Small Cap Growth Portfolio 828,870 11,817,607 12,508,865
--------------------------------
Totals $195,897,696 $198,726,567
================================
</TABLE>
7
<PAGE>
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
4. Variable Annuity Contract Owners' Equity
Variable annuity contract owners' equity at December 31, 1998, consists of the
following:
<TABLE>
<CAPTION>
Accumulation Accumulation
Units Unit Value Equity
-------------------------------------------------
<S> <C> <C> <C>
Vista l and Vista 2 policies
Federated Prime Money Fund II Division 147,317 16.005010 $ 2,357,814
Growth Division 135,414 43.675995 5,914,343
High Income Bond Division 50,106 26.118041 1,308,674
Multiple Strategies Division 208,688 37.168910 7,756,722
Matrix Equity Division 64,747 37.650817 2,437,782
U.S. Government Bond Division 116,243 21.812200 2,535,508
World Equity Division 131,597 20.319037 2,673,919
Growth & Income Division 26,886 17.485140 470,102
Small Cap Growth Division 40,864 15.505965 633,629
------------
Subtotal 26,088,493
Cap Five and Vista policies
Federated Prime Money Fund II
Division 369,800 12.909533 4,773,951
Growth Division 842,634 33.895612 28,561,591
High Income Bond Division 697,426 20.830072 14,527,430
Multiple Strategies Division 812,067 30.916582 25,106,329
Matrix Equity Division 495,732 28.672354 14,213,793
U.S. Government Bond Division 265,035 17.726046 4,698,021
World Equity Division 925,789 18.274482 16,918,317
Growth & Income Division 1,061,988 17.391289 18,469,338
Small Cap Growth Division 642,229 15.454384 9,925,250
------------
Subtotal 137,194,020
FPA 2 policies
Growth Division 21,151 49.191328 1,040,430
</TABLE>
8
<PAGE>
First Variable Life Insurance Company --
First Variable Annuity Fund E
Notes to Financial Statements (continued)
4. Variable Annuity Contract Owners' Equity (continued)
<TABLE>
<CAPTION>
Accumulation Accumulation
Units Unit Value Equity
------------------------------------------
<S> <C> <C> <C>
Cap No Load and Cap Six policies
Federated Prime Money Fund II
Division 135,376 11.101139 $ 1,502,830
Growth Division 282,153 20.098484 5,670,855
High Income Bond Division 306,492 12.995091 3,982,887
Multiple Strategies Division 264,274 18.065897 4,774,342
Matrix Equity Division 186,146 15.697602 2,922,050
U.S. Government Bond Division 490,078 11.881327 5,822,782
World Equity Division 129,010 12.714210 1,640,255
Growth & Income Division 358,265 16.431215 5,886,730
Small Cap Growth Division 157,939 12.319756 1,945,772
------------
Subtotal 34,148,503
------------
$198,471,446
============
</TABLE>
5. Purchases and Sales of Securities
Cost of purchases and proceeds from sales of Trust and Federated shares by the
Fund during the year ended December 31, 1998 are shown below:
<TABLE>
<CAPTION>
Purchases Sales
---------------------------
<S> <C> <C>
Federated Prime Money Fund II Portfolio $ 34,798,600 $ 35,718,708
Growth Portfolio 33,307,219 30,219,647
High Income Bond Portfolio 21,794,069 17,463,190
Multiple Strategies Portfolio 24,688,183 24,640,297
Matrix Equity Portfolio 15,007,396 10,807,665
U.S. Government Bond Portfolio 16,415,963 10,930,228
World Equity Portfolio 22,152,746 23,188,143
Growth & Income Portfolio 19,133,986 15,576,000
Small Cap Growth Portfolio 9,850,077 14,265,778
---------------------------
$197,148,239 $182,809,656
===========================
</TABLE>
9
<PAGE>
First Variable Life Insurance Company --
First Variable Annuity Fund E
Notes to Financial Statements (continued)
6. Expenses
As more fully disclosed in the prospectus, First Variable Life charges the Fund,
based on the value of the Fund, various charges. For FPA 2 policies, First
Variable Life charges at an annual rate of .6% for mortality risks, .15% for
distribution expense risks, and .40% for administrative expense risks. First
Variable Life charges the Fund, based on the value of the Fund, at an annual
rate of .75% for mortality expense risks, and .50% for administrative expense
risks, on Vista 1 and Vista 2 policies. First Variable Life charges the Fund,
based on the value of the Fund, at an annual rate of .85% for mortality risks,
.40% for expense risks, and .15% for administrative charges on Cap Five and
Vista policies. First Variable Life charges the Fund, based on the value of the
Fund, at an annual rate of .85% for mortality risks, .40% for expense risks, and
.25% for administrative charges on Cap No Load and Cap Six policies. Total
charges to the Fund for all the policy forms for the year ended December 31,
1998, was $2,495,826.
7. Diversification Requirements
Under the provisions of Section 817(h) of the Internal Revenue Code (the 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.
10
<PAGE>
First Variable Life Insurance Company --
First Variable Annuity Fund E
Notes to Financial Statements (continued)
9. Year 2000 Issues (unaudited)
Like other financial and business organizations around the world, First Variable
Life could be adversely affected if its computer systems and those of its
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. First Variable Life has completed an
assessment of the Year 2000 impact on its systems, procedures, customers, and
business processes and has begun converting critical data processing systems.
In addition, First Variable Life is gathering information about the Year 2000
compliance status of its significant service providers and will continue to
monitor their compliance. First Variable Life believes it has taken the
necessary steps to address the Year 2000 issue; however, there can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the Fund.
11
<PAGE>
Consolidated Financial Statements
First Variable Life Insurance Company
Years ended December 31, 1998, 1997, and 1996
with Report of Independent Auditors
<PAGE>
First Variable Life Insurance Company
Consolidated Financial Statements
Years ended December 31, 1998, 1997, and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................... 1
Consolidated Financial Statements
Consolidated Balance Sheets.............................................. 2
Consolidated Statements of Income........................................ 3
Consolidated Statements of Changes in Stockholder's Equity............... 4
Consolidated Statements of Cash Flows.................................... 5
Notes to Consolidated Financial Statements............................... 6
</TABLE>
<PAGE>
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, 1998 and 1997, and the
related consolidated statements of income, changes in stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
February 2, 1999
1
<PAGE>
First Variable Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities - Available-for-sale, at fair value
(amortized cost: 1998 - $245,795,000; 1997 - $274,439,000) $264,741,000 $294,961,000
Option contracts 2,279,000 1,057,000
Equity securities - Available-for-sale, at fair value
(cost: $684,000 in 1998 and 1997) 173,000 825,000
Policy loans 606,000 267,000
--------------------------------------
Total investments 267,799,000 297,110,000
Cash and cash equivalents 3,353,000 3,029,000
Accrued investment income 4,878,000 5,744,000
Deferred policy acquisition costs 10,481,000 7,520,000
Value of insurance in force acquired (Note 4) 15,089,000 16,939,000
Property and equipment, less allowances for depreciation of
$836,000 in 1998 and $773,000 in 1997 574,000 445,000
Goodwill, less accumulated amortization of $621,000
in 1998 and $475,000 in 1997 2,302,000 2,448,000
Other assets 659,000 732,000
Assets held in separate accounts 266,257,000 219,807,000
--------------------------------------
Total assets $571,392,000 $553,774,000
======================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for annuity and life products $206,069,000 $233,988,000
Unearned revenue reserve 278,000 282,000
Supplementary contracts without life contingencies 22,955,000 21,711,000
Deferred income tax liability (Note 5) 5,850,000 6,692,000
Due to affiliates 139,000
Other liabilities 2,149,000 2,837,000
Liabilities related to separate accounts 266,257,000 219,807,000
--------------------------------------
Total liabilities 503,697,000 485,317,000
Commitments and contingencies (Note 8)
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
Accumulated other comprehensive income 8,195,000 9,066,000
Retained earnings 3,896,000 3,787,000
--------------------------------------
Total stockholder's equity 67,695,000 68,457,000
--------------------------------------
Total liabilities and stockholder's equity $571,392,000 $553,774,000
======================================
</TABLE>
See accompanying notes.
2
<PAGE>
First Variable Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Revenues:
Annuity and life product charges $ 4,026,000 $ 3,141,000 $ 2,408,000
Net investment income 22,295,000 22,597,000 23,458,000
Realized gains on investments 2,723,000 1,227,000 972,000
Other income 1,576,000 1,368,000 1,114,000
-----------------------------------------------
Total revenues 30,620,000 28,333,000 27,952,000
Benefits and expenses:
Annuity and life benefits 15,643,000 14,856,000 16,336,000
Underwriting, acquisition, and
insurance expenses 9,828,000 8,313,000 6,176,000
Amortization of value of insurance
in force acquired and deferred
policy acquisition costs 3,473,000 1,602,000 1,099,000
Management fee paid to parent 480,000 480,000 480,000
Other expenses 1,469,000 2,610,000 1,421,000
-----------------------------------------------
Total benefits and expenses 30,893,000 27,861,000 25,512,000
-----------------------------------------------
Income (loss) before income tax (273,000) 472,000 2,440,000
(benefit)
Income tax (benefit) (382,000) 153,000 836,000
-----------------------------------------------
Net income $ 109,000 $ 319,000 $ 1,604,000
===============================================
</TABLE>
See accompanying notes.
3
<PAGE>
First Variable Life Insurance Company
Consolidated Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
CAPITAL PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
STOCK CAPITAL INCOME EARNINGS EQUITY
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $2,500,000 $53,104,000 $13,189,000 $1,864,000 $70,657,000
Net income - - - 1,604,000 1,604,000
Net unrealized investment loss,
net of reclassification
adjustment - - (5,865,000) - (5,865,000)
-----------
Comprehensive loss (4,261,000)
-------------------------------------------------------------------------------------
Balance at December 31, 1996 2,500,000 53,104,000 7,324,000 3,468,000 66,396,000
Net income - - - 319,000 319,000
Net unrealized investment gain,
net of reclassification
adjustment - - 1,742,000 - 1,742,000
-----------
Comprehensive income 2,061,000
-------------------------------------------------------------------------------------
Balance at December 31, 1997 2,500,000 53,104,000 9,066,000 3,787,000 68,457,000
Net income - - - 109,000 109,000
Net unrealized investment loss,
net of reclassification adjustment
- - (871,000) - (871,000)
-----------
Comprehensive loss (762,000)
-------------------------------------------------------------------------------------
Balance at December 31, 1998 $2,500,000 $53,104,000 $ 8,195,000 $3,896,000 $67,695,000
=====================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
First Variable Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 109,000 $ 319,000 $ 1,604,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Adjustments related to interest-sensitive products:
Annuity benefits 15,643,000 14,856,000 16,336,000
Annuity product charges (4,022,000) (3,141,000) (2,408,000)
Realized gains on investments (2,723,000) (1,227,000) (972,000)
Policy acquisition costs deferred (3,665,000) (3,208,000) (2,800,000)
Amortization of deferred policy
acquisition costs 912,000 594,000 360,000
Provision for depreciation and other
amortization 2,154,000 937,000 524,000
Provision for income taxes (382,000) 153,000 836,000
Other 478,000 3,560,000 (1,949,000)
-------------------------------------------------
Net cash provided by operating activities 8,504,000 12,843,000 11,531,000
INVESTING ACTIVITIES
Sale, maturity, or repayment of fixed
maturity investments 61,253,000 24,657,000 21,770,000
Acquisition of fixed maturities (29,074,000) (19,142,000) (7,517,000)
Acquisition of option contracts (1,223,000) (963,000) (94,000)
Policy loans and other (840,000) (267,000) (193,000)
-------------------------------------------------
Net cash provided by investing 30,116,000 4,285,000 13,966,000
activities
FINANCING ACTIVITIES
Receipts from interest-sensitive products
credited to policyholder account balances 58,317,000 64,181,000 58,175,000
Return of policyholder account balances on
interest-sensitive products (96,613,000) (80,713,000) (86,824,000)
-------------------------------------------------
Net cash used in financing activities (38,296,000) (16,532,000) (28,649,000)
-------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 324,000 596,000 (3,152,000)
Cash and cash equivalents at beginning
of year 3,029,000 2,433,000 5,585,000
-------------------------------------------------
Cash and cash equivalents at end of year $ 3,353,000 $ 3,029,000 $ 2,433,000
=================================================
</TABLE>
See accompanying notes.
5
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1998
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 and variable universal life products through regional
wholesalers and insurance brokers.
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) are categorized as "available-for-sale," and
as a result, are reported at fair value, with unrealized gains and losses on
these securities included directly in accumulated other comprehensive income in
stockholder's equity, net of certain adjustments (see Note 3).
Option contracts are carried at unamortized premium paid for the contract
adjusted for increases in their intrinsic value from increases in the S&P 500
index.
Policy loans are carried at unpaid principal balances.
Premiums and discounts on investments are amortized or accreted using methods
which result in a constant yield over the securities' expected lives.
Amortization or accretion 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 designated as available for sale and are
reported at fair value. The change in unrealized gain and loss of equity
securities (net of related deferred income taxes, if any) is included directly
in accumulated other comprehensive income in stockholder's equity.
6
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (Continued
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 write-down 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.
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%.
For variable universal life insurance and investment products, 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.
7
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 indications 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 will
assess the fair value of the underlying business and reduce goodwill to an
amount that results in the book value of the underlying business approximating
fair value. The Company has not recorded any such write-downs of goodwill.
FUTURE POLICY BENEFITS
Future policy benefit reserves for annuity and variable universal life 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 3.0% to 7.0% in 1998, and 4.5% to 6.5% in 1997.
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 related asset or liability from period to
period.
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.
8
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for annuity and variable universal life 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 35%, 42%, and 68% of the direct business written (as measured by
premiums received) during the periods ended December 31, 1998, 1997, and 1996,
respectively, were written through three wholesalers. 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.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS), No. 130, Reporting Comprehensive Income. SFAS 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the new standard had no impact on the Company's net income
or stockholder's equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to the adoption were
reported separately in stockholder's equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.
9
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENDING ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivatives Instruments and for Hedging Activities. SFAS No. 133
requires all derivatives to be recorded on the balance sheet at fair value and
establishes "special accounting" for the following three different types of
hedges; hedges of changes in the fair value of assets, liabilities, or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
SFAS No. 133 is effective for years beginning after June 15, 1999, with earlier
adoption permitted. The Company has not determined the impact of adopting SFAS
No. 133.
RECLASSIFICATION
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the presentations made in the current years.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 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 sheets, 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 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.
10
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (Continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
Option Contracts: The fair values for option contracts are based on
settlement values, quoted market prices of comparable instruments, and fees
currently charged to enter into similar loans offered to borrowers with
similar credit ratings. Similar characteristics are aggregated for the
purposes of the calculations.
Equity Securities: The fair values for equity securities are based on quoted
market prices.
Policy Loans: The Company has not determined the fair values associated with
its policy loans, as management believes any differences between the
Company's carrying value and the fair values afforded these instruments are
immaterial to the Company's financial position and, accordingly, the cost to
provide such disclosure would exceed the benefit derived. At December 31,
1998 and 1997, the interest rate related to the outstanding policy loans is
5%.
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.
Future Policy Benefits for Annuity and Life Products 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
Company is not required to and has not estimated fair value of its
liabilities under other contracts.
11
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (Continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 107 at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities -
Available-for-sale $264,741,000 $264,741,000 $294,961,000 $294,961,000
Option contracts 2,279,000 2,279,000 1,057,000 1,057,000
Equity securities 173,000 173,000 825,000 825,000
Policy loans 606,000 606,000 267,000 267,000
Cash and cash equivalents 3,353,000 3,353,000 3,029,000 3,029,000
Assets held in separate
accounts 266,257,000 266,257,000 219,807,000 219,807,000
LIABILITIES
Future policy benefits for
annuity and life products 206,069,000 206,069,000 233,988,000 233,988,000
Supplementary contracts
without life contingencies 22,955,000 22,955,000 21,711,000 21,711,000
Liabilities related to
separate accounts 266,257,000 266,257,000 219,807,000 219,807,000
</TABLE>
12
<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 fair value information on fixed
maturities (bonds) and equity securities (common stocks) at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Fixed maturities -
Available-for-sale:
United States Government and
agencies:
Mortgage and asset-backed
securities $ 996,000 $ 15,000 $ - $ 1,011,000
Other 20,025,000 1,717,000 9,000 21,733,000
State, municipal, and other
governments 3,987,000 252,000 - 4,239,000
Public utilities 59,463,000 7,622,000 7,000 67,078,000
Industrial and miscellaneous 161,324,000 10,041,000 685,000 170,680,000
-----------------------------------------------------------------------
Total fixed maturities -
Available-for-sale $245,795,000 $19,647,000 701,000 $ 264,741,000
=======================================================================
Equity securities $ 684,000 $ - $511,000 $ 173,000
=======================================================================
DECEMBER 31, 1997
Fixed maturities -
Available-for-sale:
United States Government and
agencies:
Mortgage and asset-backed
securities $ 24,133,000 $ 730,000 $283,000 $ 24,580,000
Other 23,546,000 1,391,000 138,000 24,799,000
State, municipal, and other
governments 3,991,000 250,000 - 4,241,000
Public utilities 69,972,000 8,299,000 303,000 77,968,000
Industrial and miscellaneous 152,797,000 10,758,000 182,000 163,373,000
-----------------------------------------------------------------------
Total fixed maturities -
Available-for-sale $274,439,000 $21,428,000 $906,000 $ 294,961,000
=======================================================================
Equity securities $ 684,000 $ 141,000 $ - $ 825,000
=======================================================================
</TABLE>
13
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and fair value of the Company's portfolio of fixed-maturity
securities at December 31, 1998, 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.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------------------------
<S> <C> <C>
Due in one year or less $ 19,051,000 $ 19,307,000
Due after one year through five years 106,314,000 113,217,000
Due after five years through ten years 37,572,000 38,992,000
Due after ten years 81,862,000 92,214,000
Mortgage and asset-backed securities 996,000 1,011,000
------------------------------
$245,795,000 $264,741,000
==============================
</TABLE>
The unrealized gain or loss on fixed-maturity and equity securities available-
for-sale is reported as accumulated other comprehensive income, 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 that are recorded as accumulated other comprehensive income
were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
Unrealized gain on fixed-maturity and equity
securities available-for-sale $18,435,000 $20,663,000
Adjustments for assumed changes in
amortization pattern of:
Deferred policy acquisition costs (1,572,000) (1,780,000)
Value of insurance in force acquired (4,446,000) (5,157,000)
Deferred income tax liability (4,222,000) (4,660,000)
-------------------------------
Net unrealized investment gains $ 8,195,000 $ 9,066,000
===============================
</TABLE>
14
<PAGE>
First Variable Life Insuance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
NET INVESTMENT INCOME
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Income from:
Fixed maturities $21,181,000 $22,183,000 $23,364,000
Cash and cash equivalents 155,000 225,000 288,000
Option contracts 1,118,000 408,000 -
Policy loans 37,000 - -
-----------------------------------------------
22,491,000 22,816,000 23,652,000
Less investment expenses (196,000) (219,000) (194,000)
-----------------------------------------------
Net investment income $22,295,000 $22,597,000 $23,458,000
===============================================
</TABLE>
REALIZED AND UNREALIZED GAINS AND LOSSES
Realized gains (losses) and the change in unrealized gain (loss) on investments
are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
REALIZED
Fixed maturities $ 2,723,000 $1,227,000 $ 972,000
===============================================
UNREALIZED
Fixed maturities $(1,576,000) $4,632,000 $(12,756,000)
Equity securities (652,000) 134,000 369,000
-----------------------------------------------
Unrealized gain (loss) on
investments $(2,228,000) $4,766,000 $(12,387,000)
===============================================
</TABLE>
15
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
A summary of the net unrealized gain (loss) recognized in other comprehensive
income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Realized gain on securities included
in net income $ 2,723,000 $ 1,227,000 $ 972,000
==============================================
Other comprehensive income:
Net unrealized gain (loss) arising
during the year, net of taxes of
$166,000, $2,020,000, and
($3,881,000), respectively $ 315,000 $ 3,970,000 $(7,534,000)
Reclassification adjustment, net of
taxes of $926,000, $416,000, and
$331,000, respectively (1,797,000) (811,000) (641,000)
----------------------------------------------
(1,482,000) 3,159,000 (8,175,000)
Adjustments:
Deferred policy acquisition costs,
net of taxes of $70,000 and
($195,000), respectively 138,000 (385,000) -
Value of insurance in force
acquired, net of taxes of
$238,000, ($525,000), and 473,000 (1,032,000) 2,310,000
$1,190,000, respectively
----------------------------------------------
611,000 (1,417,000) 2,310,000
----------------------------------------------
Net unrealized gain (loss)
recognized in other comprehensive income $ (871,000) $ 1,742,000 $(5,865,000)
==============================================
</TABLE>
An analysis of sales, maturities, and principal repayments of the Company's
fixed maturities portfolio for the years ended December 31, 1998, 1997, and 1996
is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED
COST GAINS LOSSES PROCEEDS
---------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Scheduled principal
repayments and calls $29,801,000 $ 909,000 $ 1,000 $30,709,000
Sales 28,729,000 1,861,000 46,000 30,544,000
---------------------------------------------------------
$58,530,000 $2,770,000 $47,000 $61,253,000
=========================================================
1997:
Scheduled principal
repayments and calls $11,636,000 $ 447,000 $ - $12,083,000
Sales 11,795,000 851,000 72,000 12,574,000
---------------------------------------------------------
$23,431,000 $1,298,000 $72,000 $24,657,000
=========================================================
</TABLE>
16
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED
COST GAINS LOSSES PROCEEDS
---------------------------------------------------
<S> <C> <C> <C> <C>
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
---------------------------------------------------
$20,798,000 $1,044,000 $72,000 $21,770,000
===================================================
</TABLE>
Income taxes during the years ended December 31, 1998, 1997, and 1996 include a
provision of $926,000, $416,000, and $331,000, respectively, for the tax effect
of realized gains.
OTHER
At December 31, 1998, fixed maturities with a carrying value of $8,894,000 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, 1998.
The Company has acquired call option contracts relating to its equity-indexed
annuity product to hedge increases in the S&P 500 index. The options are
purchased concurrently with the issuance of these annuity contracts and expire,
if not utilized, at the end of the annuities' term. The Company pays, at the
beginning of the option contract, a premium for transferring the risk of
unfavorable changes in the S&P 500 index. The carrying value of the option
contracts is based upon the unamortized premium paid for the contract adjusted
for increases in its intrinsic value from increases in the S&P 500 index. The
carrying value of these contracts was $2,279,000 and $1,057,000 at December 31,
1998 and 1997, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company's investment in public utility bonds at December 31, 1998 represents
25% of total investments and 12% 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.
17
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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 years ended December 31, 1998, 1997, and
1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Excluding impact on net
unrealized investment gains and
losses:
Balance at beginning of year $22,096,000 $23,094,000 $23,833,000
Accretion of interest during
the year 1,457,000 1,582,000 1,642,000
Amortization of asset (4,018,000) (2,580,000) (2,381,000)
-----------------------------------------------
Balance prior to impact of net
unrealized investment gains and
losses 19,535,000 22,096,000 23,094,000
Impact of net unrealized
investment gains and losses (4,446,000) (5,157,000) (3,600,000)
-----------------------------------------------
Balance at end of year $15,089,000 $16,939,000 $19,494,000
===============================================
</TABLE>
During the year ended December 31, 1998, the amortization of value of insurance
in force acquired was increased by $1,600,000 due to gains realized on
securities sold supporting the acquired block of business. Amortization of the
value of insurance in force acquired for the next five years ending December 31
is expected to be as follows: 1999 - $1,242,000; 2000 - $1,380,000; 2001 -
$1,329,000; 2002 - $1,281,000; and 2003 - $1,231,000.
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 on 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.
18
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
Income tax expense (benefit) is included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Income tax (benefit) expense in
consolidated statements of income
on income before income tax (benefit) $(382,000) $ 153,000 $ 836,000
-------------------------------------------
(382,000) 153,000 836,000
Tax (benefit) expense in
consolidated statements of changes
in stockholder's equity:
Amounts attributable to change in
accumulated other comprehensive
income during year - Deferred (438,000) 887,000 (3,022,000)
-------------------------------------------
$(820,000) $1,040,000 $(2,186,000)
===========================================
</TABLE>
The effective tax rate on income (loss) before income tax (benefit) is different
from the prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Income (loss) before income tax (benefit) $(273,000) $472,000 $ 2,440,000
==========================================
Income tax (benefit) at federal
statutory rate (34%) $ (93,000) $160,000 $ 830,000
Tax effect (decrease) of:
Other (289,000) (7,000) 6,000
------------------------------------------
Income tax (benefit) expense $(382,000) $153,000 $ 836,000
==========================================
</TABLE>
19
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $ 2,342,000 $ 1,969,000
Operating loss carryforwards 2,406,000 2,590,000
Other 163,000 124,000
------------------------------
4,911,000 4,683,000
Deferred tax liabilities:
Investments (5,031,000) (5,946,000)
Deferred policy acquisition costs (3,247,000) (2,523,000)
Value of insurance in force acquired (2,090,000) (2,533,000)
Other (393,000) (373,000)
------------------------------
(10,761,000) (11,375,000)
------------------------------
Deferred income tax liability $ (5,850,000) $ (6,692,000)
==============================
</TABLE>
The Company has federal net operating loss carryforwards reportable on its
federal tax return aggregating $7,076,000 at December 31, 1998 which expire from
2009 to 2012.
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 Code). The Company records its required contributions as pension
expense related to these plans. There were no material contributions to the plan
during the years ended December 31, 1998, 1997, or 1996.
20
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
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 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 $10,000 in 1998) 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 $77,000, $37,000, and $27,000 for the
years ended December 31, 1998, 1997, and 1996, 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
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 1999,
this annual limitation aggregates $3,045,000; 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 ($37,000,000 at
December 31, 1998) 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.
Net loss for the Company, as determined in accordance with statutory accounting
practices, was $2,466,000, $1,240,000, and $1,507,000 for the years ended
December 31, 1998, 1997, and 1996, respectively. Total statutory capital and
surplus was $30,451,000 at December 31, 1998 and $33,556,000 at December 31,
1997.
21
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
The Company leases its home office space and certain other equipment under
operating leases which expire through 2001. During 1998, the Company moved to
its current location and subleased its previous office space. Rent received
under the sublease agreement is netted against rent expense in 1998. During the
years ended December 31, 1998, 1997, and 1996, rent expense totaled $361,000,
$228,000, and $206,000, respectively. At December 31, 1998, minimum rental
payments due under all noncancelable operating leases, including the lease
agreement on the Company's previous office space with initial terms of one year
or more are:
Year ending December 31:
1999 $ 673,000
2000 689,000
2001 328,000
2002 6,000
Thereafter 3,000
----------
$1,699,000
==========
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, 1998 and 1997, the Company has not accrued for guaranty fund
assessments based on its historical experience and information available from
those making guaranty fund assessments. During 1997, the American Institute of
Certified Public Accountants issued Statement of Position 97-3 (SOP 97-3),
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," that will require, beginning in 1999, the accrual of guaranty fund
assessments. The Company has not determined the impact of adopting SOP 97-3.
22
<PAGE>
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. RELATED PARTY TRANSACTIONS
The Company has a management agreement with ILoNA to provide for certain
management services. Amounts paid by the Company pursuant to this agreement were
$480,000 in both 1998 and 1997. In addition, an expense allocation agreement was
entered into with Interstate Assurance Company, a subsidiary of ILoNA, to
provide for certain administrative functions. Amounts paid during 1998 and 1997
by the Company pursuant to this agreement were $506,000 and $504,000,
respectively.
10. RELOCATION OF COMPANY
In December 1997, management decided to relocate the operations of the Company
from Boston to Illinois. As a result, at December 31, 1997, the Company accrued
a liability of $1,200,000, which relates to benefits for involuntarily
terminated employees, and certain other costs, including office and other lease
cancellations and write-down of furniture and equipment. The relocation was
substantially completed in June 1998.
11. YEAR 2000 ISSUES (UNAUDITED)
Like other financial and business organizations around the world, the Company
could be adversely affected if its computer systems and those of its service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. The Company has completed an assessment of
the Year 2000 impact on its systems, procedures, customers, and business
processes and has begun converting critical data processing systems. In
addition, the Company is gathering information about the Year 2000 compliance
status of its significant service providers and will continue to monitor their
compliance.
23
<PAGE>
FIRST VARIABLE ANNUITY FUND E
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of First Variable Annuity Fund E and First Variable
Life Insurance Company -- to be filed by amendment.
<TABLE>
<CAPTION>
(b) Exhibits
--------
<S> <C>
1. Resolution of Board of Directors for the Company authorizing the
establishment of the Separate Account (1)
2. Not Applicable
3(a). Form of Principal Underwriter's Agreement (2)
(b). Form of Broker-Dealer Agreement (2)
(c). Specimen Broker-Dealer Supervisory and Selling Agreement (3)
4(a). Individual Flexible Purchase Payment Deferred Variable Annuity
Contract (4)
(b). Individual Flexible Purchase Payment Deferred Variable Annuity
Rider (5)
5. Application for Variable Annuity (4)
6(a). Articles of Incorporation of First Variable Life Insurance Company
(1)
(b) By-laws of First Variable Life Insurance Company (2)
7. Not Applicable
8(a). Form of Fund Participation Agreement with Variable Investors Series
Trust (3)
(b). Form of Fund Participation Agreements with AIM Variable Insurance
Funds, Inc., et al; American Century Investment Management, Inc.; BT
Insurance Funds Trust, et al; Lord Abbett Series Fund, Inc., et al;
MFS Variable Insurance Trust, et al; and Templeton Variable Products
Series Fund, et al. (6)
9.(a) Consent of Counsel, First Variable Life Insurance Company (7)
(b) Consent of Blazzard, Grodd & Hasenauer, P.C. (7)
10. Consent of Ernst & Young LLP, Independent Auditors (5)
11. Not Applicable
12. Not Applicable
13. Calculation of Performance Information (5)
14. Not Applicable
15. Powers of Attorney (8) -- of the following individuals appointing
John M. Soukup or Arnold R. Bergman their attorney-in-fact to act
for them in their capacities as Directors of the Company or
otherwise, to do all things necessary to comply with the provisions
and intent of the Securities Act of 1933 and the Investment Company
Act of 1940 with respect to variable life insurance policies and
variable annuity contracts:
</TABLE>
Ronald M. Butkiewicz Shane W. Gleeson Philip R. O'Connor
Michael J. Corey Jeff S. Liebmann
Michael R. Ferrari Kenneth R. Meyer
----------------
(1) Incorporated by reference to the Registrant's Post-Effective Amendment No.
4 to the Form N-4 Registration Statement (Registration No. 33-86738) filed
electronically with the Securities and Exchange Commission on or about
April 27, 1998.
<PAGE>
(2) Incorporated by reference to the Pre-Effective Amendment No. 1 to the Form
S-6 Registration Statement of First Variable Life Insurance Company
Separate Account VL, filed electronically with the Securities and Exchange
Commission on November 15, 1996 (File No. 333-05053).
(3) Incorporated by reference to the Registrant's Form N-4 Registration
Statement (Registration No. 333-12197) filed electronically with the
Securities and Exchange Commission on September 14, 1996.
(4) Incorporated by reference to the Registrant's Post-Effective Amendment No.
2 to the Form N-4 Registration Statement (Registration No. 333-12197) filed
electronically with the Securities and Exchange Commission on April 27,
1998.
(5) Filed herewith.
(6) Incorporated by reference to the Registrant's Post-Effective Amendment No.
2 to the Form N-4 Registration Statement (Registration No. 333-12197) filed
electronically with the Securities and Exchange Commission on April 27,
1999.
(7) Incorporated by reference to the Registrant's Post-Effective Amendment No.
4 to the Form N-4 Registration Statement (Registration No. 33-86738) filed
electronically with the Securities and Exchange Commission on April 27,
1998.
(8) Incorporated by reference to the Post-Effective Amendment No. 1 to the Form
S-6 Registration Statement of First Variable Life Insurance Company
Separate Account VL, filed electronically with the Securities and Exchange
Commission on or about April 27, 1998 (Registration No. 333-19193).
ITEM 25. OFFICERS AND DIRECTORS OF DEPOSITOR
- -------- -----------------------------------
The following are the Directors and Executive Officers of First Variable Life
Insurance Company. Unless otherwise noted, our directors are located at 2211
York Road, Suite 202, Oak Brook, Illinois 60523 and all our executive officers
are located at 2122 York Road, Suite 300, Oak Brook, Illinois 60523.
Directors
Ronald M. Butkiewicz, Chairman.
Michael J. Corey - 401 East Host Drive. Lake Geneva, WI 53147.
Norman A. Fair
Michael R. Ferrari, 25th & University Ave., Des Moines, IA
Shane W. Gleeson
Jeff S. Liebmann, Esq., 1301 Avenue of the Americas
New York, NY 10019
Kenneth R. Meyer, Lincoln Capital Management Co., 200 South Wacker Dr., Suite
2100, Chicago, IL 60606
Philip R. O'Connor, President of NEV Midwest, LLC 111 West Washington, Suite
1247, Chicago, IL 60602
Clark Ramsey
Executive Officer & Director
John M. Soukup, President
Other Executive Officers
Steven J. Horn, Senior Vice President and Chief Operations Officer
Arnold R. Bergman, Vice President, General Counsel & Secretary
Thomas Gualdoni, Vice President, Sales
Martha Gross, Vice President, Administration
Christopher S. Harden, Vice President & Treasurer
Martin Sheerin, Vice President & Chief Actuary.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
- -------- -------------------------------------------------------------------
REGISTRANT.
- ----------
Incorporated by reference to Registrant's Post-Effective Amendment
No. 4 to the Form N-4 Registration Statement, filed electronically with the
Securities and Exchange Commission on or about April 27, 1999. (File Nos.
333-12197 and 811-4092).
ITEM 27. NUMBER OF CONTRACT OWNERS
- -------- -------------------------
As of March 31, 1999, there were 142 Owners of Qualified Contracts and 225
Owners of Non-Qualified Contracts.
<PAGE>
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 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. Unless otherwise
noted, FVCS directors and officers are located at 2122 York Road, Suite 300,
Oak Brook, Illinois 60523:
<TABLE>
<CAPTION>
Name and Principal Business Address Positions and Offices with Underwriter
- ----------------------------------- --------------------------------------
<S> <C>
Norman A. Fair Director
2211 York Road, Suite 202
Oak Brook, IL 60523
John M. Soukup President and Director
Arnold R. Bergman Secretary and Director
Thomas Gualdoni Vice President - Sales
Robert Miner Treasurer
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
- ---------- --------------------------------
Our Secretary and our Treasurer who are located at 2122 York Road, Oak Brook, IL
60523, 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.
ITEM 31. MANAGEMENT SERVICES
- -------- -------------------
Not Applicable.
ITEM 32. UNDERTAKINGS
- -------- ------------
1. 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.
2. 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.
3. 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.
<PAGE>
4. 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.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, assumed, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment to
the Registration Statement and has duly caused this Amendment to the
Registration Statement to be signed on its behalf in the City of Oak Brook, and
the State of Illinois, on this 27th day of April, 1999.
FIRST VARIABLE ANNUITY FUND E
(Registrant)
By: First Variable Life Insurance Company
(Depositor)
By: /s/John M. Soukup
--------------------------------
John M. Soukup
President
FIRST VARIABLE LIFE INSURANCE COMPANY
(Depositor)
By: /s/John M. Soukup
--------------------------------
John M. Soukup
ATTEST:
/s/Arnold R. Bergman
- ----------------------------
Arnold R. Bergman
Secretary
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 5 to the Registration Statement has been signed below by the
following persons in the capacities with First Variable Life Insurance Company,
on the 27th day of April, 1999.
PRINCIPAL EXECUTIVE OFFICER
/s/John M. Soukup
- ----------------------------------
John M. Soukup
President
PRINCIPAL ACCOUNTING OFFICER
/s/Christopher S. Harden
- ----------------------------------
Christopher S. Harden
Vice President & Treasurer
DIRECTORS
/s/Ronald M. Butkiewicz /s/Jeff S. Liebmann
- ----------------------- -------------------
Ronald M. Butkiewicz Jeff S. Liebmann*
/s/Michael J. Corey /s/Kenneth R. Meyer
- ------------------- -------------------
Michael J. Corey* Kenneth R. Meyer*
/s/Norman A. Fair /s/Philip R. O'Connor
- --------------------- ---------------------
Norman A. Fair Philip R. O'Connor*
/s/Michael R. Ferrari /s/Clark A. Ramsey
- --------------------- ---------------------
Michael R. Ferrari* Clark A. Ramsey
/s/Shane W. Gleeson /s/John M. Soukup
- ------------------- -----------------
Shane W. Gleeson John M. Soukup
*By:
--------------------
Arnold R. Bergman
Attorney-in-Fact
<PAGE>
Exhibit 10
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our reports dated February 2, 1999 with respect to the
consolidated financial statements financial statements of First Variable Life
Insurance Company and March 18, 1999 with respect to the financial statements of
First Variable Life Insurance Company--First Variable Annuity Fund E, in Post-
Effective Amendment No. 4 to the Registration Statement (Form N-4 No. 333-12197)
and related Prospectus of First Variable Life Insurance Company.
/s/ Ernst & Young LLP
--------------------------------
ERNST & YOUNG LLP
Chicago, Illinois
April 27, 1999
<PAGE>
EX-99.B13.
Calculation of Performance Information
<PAGE>
<TABLE>
<CAPTION>
Prime Money Fund II Capital No Load Fund E Yield Calculations as of 04/22/99
Seven Day Yield
<S> <C> <C> <C> <C> <C>
12/31/98 Unit Price 11.101139 (A)
12/24/98 Unit Price 11.094632 (B)
Difference 0.006507 (C)
Base Return (C) / (B) 0.000586500
Annualized Base Return = (C) / (B) * 365/7 = 3.06%
Effective Yield = (1+Base Return) * (365/7) -1 = 3.10%
Total Return on Capital No Load Portfolios over respective periods
Formula P = (1+T) * N = ERV T = ((ERV/P) *1/N) -1
Policy Issue Fee 0
Ann Contract Mnt Chg 30.00
Time Since Start 3.17
Time Since Start 3.17 (Small Cap & Growth & Income Portfolio's)
Surrender Charge 1 0
Surrender Charge 2 0
Surrender Charge 3 0
Surrender Charge 4 0
Surrender Charge 5 0
Surrender Charge 6 0
SMALL CAP GROWTH SMALL CAP GROWTH
ONE YEAR START OF PORTFOLIO
Unit Price EOP 12.319756 Unit Price EOP 12.319756
Unit Price BOP 12.909255 Unit Price BOP 10.000000
Accum Value EOP 954.34 Accum Value EOP 1,231.98
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.03
Surrender Value 953.60 Surrender Value 1,228.95
Effective Yield -0.4.640% Effective Yield 6.726%
WORLD EQUITY WORLD EQUITY
ONE YEAR START OF PORTFOLIO
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Unit Price EOP 12.71421 Unit Price EOP 12.71421
Unit Price BOP 12.279325 Unit Price BOP 10.000000
Accum Value EOP 1,035.42 Accum Value EOP 1,271.42
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.04
Surrender Value 1,034.68 Surrender Value 1,268.38
Effective Yield 3.468% Effective Yield 7.788%
GROWTH GROWTH
ONE YEAR START OF PORTFOLIO
Unit Price EOP 20.098484 Unit Price EOP 20.098484
Unit Price BOP 15.306706 Unit Price BOP 10
Accum Value EOP 1,313.05 Accum Value EOP 2,009.85
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.05
Surrender Value 1,312.31 Surrender Value 2,006.80
Effective Yield 31.231% Effective Yield 24.575%
MATRIX EQUITY MATRIX EQUITY
ONE YEAR START OF PORTFOLIO
Unit Price EOP 15.697602 Unit Price EOP 15.697602
Unit Price BOP 13.156746 Unit Price BOP 10.000000
19.31%
Accum Value EOP 1,193.12 Accum Value EOP 1,569.76
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.04
Surrender Value 1,192.38 Surrender Value 1,566.72
Effective Yield 19.238% Effective Yield 15.216%
GROWTH & INCOME GROWTH & INCOME
ONE YEAR
Unit Price EOP 16.431215 Unit Price EOP 16.431215
Unit Price BOP 14835436 Unit Price BOP 10.000000
10.76%
Accum Value EOP 1,107.57 Accum Value EOP 1,643.12
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.04
Surrender Value 1,106.83 Surrender Value 1,640.08
Effective Yield 10.683% Effective Yield 16.908%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MULTIPLE STRATEGIES MULTIPLE STRATEGIES
ONE YEAR START OF PORTFOLIO
Unit Price EOP 18.065897 Unit Price EOP 18.065897
Unit Price BOP 14.199632 Unit Price BOP 10.000000
27.23%
Accum Value EOP 1,272.28 Accum Value EOP 1,806.59
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.04
Surrender Value 1,271.54 Surrender Value 1,803.55
Effective Yield 27.154% Effective Yield 20.448%
HIGH INCOME BOND HIGH INCOME BOND
ONE YEAR START OF PORTFOLIO
Unit Price EOP 12.995091 Unit Price EOP 12.995091
Unit Price BOP 12.802021 Unit Price BOP 10.000000
1.51%
Accum Value EOP 1,015.08 Accum Value EOP 1,299.51
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.04
Surrender Value 1,014.34 Surrender Value 1,296.47
Effective Yield 1.434% Effective Yield 8.544%
U.S. GOVERNMENT BOND U.S. GOVERNMENT BOND
ONE YEAR START OF PORTFOLIO
Unit Price EOP 11.881327 Unit Price EOP 11.881327
Unit Price BOP 11.189067 Unit Price BOP 10.000000
6.19%
Accum Value EOP 1,061.87 Accum Value EOP 1,188.13
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.05
Surrender Value 1,061.13 Surrender Value 1,185.08
Effective Yield 6.113% Effective Yield 5.503%
PRIME MONEY FUND II PRIME MONEY FUND II
ONE YEAR START OF PORTFOLIO
Unit Price EOP 11.10114 Unit Price EOP 11.101139
Unit Price BOP 10.736713 Unit Price BOP 10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
3.39%
Accum Value EOP 1,033.94 Accum Value EOP 1,110.11
Surrender Charge - Surrender Charge -
Ann Contract Charge 0.74 Ann Contract Charge 3.05
Surrender Value 1,033.20 Surrender Value 1,107.06
Effective Yield 3.320% Effective Yield 3.261%
</TABLE>
