File No. 333-51949
Filed under Rule 424(b)(3)
Golden American Life Insurance Company
Prospectus Supplement
July 7, 1998
to the
Prospectus dated May 12, 1998 for
Deferred Combination Variable and Fixed Annuity Contracts
(the "GoldenSelect/R/PREMIUM PLUS Prospectus"),
issued by Golden American Life Insurance Company
__________
On May 29, 1998, AMVESCAP PLC ("AMVESCAP") completed the
transaction to acquire several subsidiaries of the Liechtenstein
Global Trust, AG ("LGT"), which made up the LGT Asset Management
Division and included Chancellor LGT Asset Management, Inc.
("Chancellor"). In connection with the acquisition, Chancellor, the
portfolio manager of the Capital Appreciation Series of The GCG Trust
has been renamed INVESCO (NY), Inc. ("INVESCO"). AMVESCAP is an
independent investment company focused on institutional and retail
investment management. AMVESCAP and its affiliates have approximately
$192 billion under management. On April 29, 1998, at a special meeting
of the shareholders of the Capital Appreciation Series of The GCG
Trust, the shareholders approved the new portfolio management
agreement between The GCG Trust, Directed Services, Inc. and INVESCO.
The agreement became effective as of May 29, 1998.
This supplement should be retained with your GoldenSelect/R/
Prospectus.
G3306-AMV 7/7/98
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File No. 333-51949
Filed under Rule 424(b)(3)
GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is a stock company domiciled in
Wilmington, Delaware
DEFERRED COMBINATION VARIABLE AND
FIXED ANNUITY PROSPECTUS
GOLDENSELECT PREMIUM PLUS
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This prospectus describes group and individual deferred variable annuity
Contracts (the "Contract") offered by Golden American Life Insurance Company
("Golden American" "we" "our" or "us"). The Owner ("you" or "your") purchases
the Contract with an Initial Premium and is permitted to make additional premium
payments.
The Contract is funded by two accounts, Separate Account B ("Account B") and the
Fixed Account (collectively, the "Accounts").
Twenty-three Divisions of Account B are currently available under the Contract.
The investments available through the Divisions of Account B include mutual fund
portfolios (the "Series") of The GCG Trust (the "GCG Trust"), the Equi-Select
Series Trust (the "ESS Trust"), the Warburg Pincus Trust (the "WP Trust") and
the PIMCO Variable Insurance Trust (the "PIMCO Trust"). The investments
available through the Fixed Account include various Fixed Allocations which we
credit with fixed rates of interest for the Guarantee Periods you select. We
currently offer Guarantee Periods with durations of 1, 3, 5, 7 and 10 years. We
reserve the right at any time to increase or decrease the number of Guarantee
Periods offered. Not all Guarantee Periods may be available.
This prospectus describes the Contract and provides background information
regarding Account B and the Fixed Account. The prospectuses for the GCG Trust,
the ESS Trust, the WP Trust and the PIMCO Trust (individually, "a Trust," and
collectively, "the Trusts"), which must accompany this prospectus, provide
information regarding investment activities and policies of the Trusts.
You may allocate your premiums and Credits among the twenty-three Divisions and
the Fixed Allocations available under the Contract in any way you choose,
subject to certain restrictions. You may change the allocation of your
Accumulation Value during a Contract Year free of charge. We reserve the right,
however, to assess a charge for each allocation change after the twelfth
allocation change in a Contract Year.
Your Accumulation Value in Account B will vary in accordance with the investment
performance of the Divisions selected by you. Therefore, you bear the entire
investment risk for all amounts allocated to Account B. You also bear investment
risk with respect to surrenders, partial withdrawals, transfers and
annuitization from a Fixed Allocation prior to the end of the applicable
Guarantee Period. Such surrender, partial withdrawal, transfer or annuitization
may be subject to a Market Value Adjustment, which could have the effect of
either increasing or decreasing your Accumulation Value.
We will pay a death benefit to the Beneficiary if the Owner dies prior to the
Annuity Commencement Date or the Annuitant dies prior to the Annuity
Commencement Date when the Owner is other than an individual.
This prospectus describes your principal rights and limitations and sets forth
the information concerning the Accounts that investors should know before
investing. A Statement of Additional Information, dated May 12, 1998, about
Account B has been filed with the Securities and Exchange Commission ("SEC") and
is available without charge upon request. To obtain a copy of this document call
or write our Customer Service Center. The Table of Contents of the Statement of
Additional Information may be found on the last page of this prospectus. The
Statement of Additional Information is incorporated herein by reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
CONTRACTS AND UNDERLYING SERIES SHARES WHICH FUND THE CONTRACTS ARE NOT INSURED
BY THE FDIC OR ANY OTHER AGENCY. THEY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF
ANY BANK AND ARE NOT BANK GUARANTEED. THEY ARE SUBJECT TO MARKET FLUCTUATION,
REINVESTMENT RISK AND POSSIBLE LOSS OF PRINCIPAL INVESTED.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS NOT VALID
UNLESS ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR THE GCG TRUST, THE ESS TRUST,
THE WP TRUST AND THE PIMCO TRUST.
THE FIXED ACCOUNT AND ENHANCED DEATH BENEFITS MAY NOT BE AVAILABLE IN ALL
STATES. YOU MAY CONTACT OUR CUSTOMER SERVICE CENTER TO FIND OUT ABOUT STATE
AVAILABILITY.
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ISSUED BY: DISTRIBUTED BY: ADMINISTERED AT:
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Golden American Life Directed Services, Inc. Customer Service Center
Insurance Company Wilmington, Delaware 19801 Mailing Address: P.O. Box 8794
Wilmington, Delaware 19899-8794
1-800-366-0066
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PROSPECTUS DATED: MAY 12, 1998
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TABLE OF CONTENTS
PAGE
DEFINITION OF TERMS................................ 1
SUMMARY OF THE CONTRACT............................ 3
FEE TABLE.......................................... 5
CONDENSED FINANCIAL AND OTHER INFORMATION.......... 10
Index of Investment Experience................... 10
Financial Statements............................. 10
Performance Related Information.................. 10
INTRODUCTION....................................... 11
FACTS ABOUT THE COMPANY AND THE ACCOUNTS........... 11
Golden American.................................. 11
The Trusts....................................... 12
Separate Account B............................... 13
Account B Divisions.............................. 13
Changes Within Account B......................... 19
The Fixed Account................................ 20
FACTS ABOUT THE CONTRACT........................... 22
The Owner........................................ 22
The Annuitant.................................... 22
The Beneficiary.................................. 23
Change of Owner or Beneficiary................... 23
Availability of the Contract..................... 23
Types of Contracts............................... 23
Your Right to Select or Change Contract
Options......................................... 23
Premiums......................................... 24
Qualified Plans.................................. 24
Making Additional Premium Payments............... 24
Crediting Premium Payments....................... 24
Restrictions on Allocation of Premium Payments... 25
Your Right to Reallocate......................... 25
Dollar Cost Averaging............................ 26
What Happens if a Division is Not Available...... 26
Additional Credit to Premium..................... 26
Your Accumulation Value.......................... 27
Accumulation Value in Each Division.............. 27
Measurement of Investment
Experience...................................... 27
Cash Surrender Value............................. 28
Surrendering to Receive the Cash Surrender
Value........................................... 28
Partial Withdrawals.............................. 28
Automatic Rebalancing............................ 30
Proceeds Payable to the Beneficiary.............. 30
Death Benefit Options............................ 31
Reports to Owners................................ 32
When We Make Payments............................ 32
CHARGES AND FEES................................... 32
Charge Deduction Division........................ 33
Charges Deducted from the Accumulation Value..... 33
PAGE
Charges Deducted from the Divisions.............. 34
Trust Expenses................................... 35
CHOOSING YOUR ANNUITIZATION OPTIONS................ 35
Annuitization of Your Contract................... 35
Annuity Commencement Date Selection.............. 35
Frequency Selection.............................. 36
The Annuitization Options........................ 36
Payment When Named Person Dies................... 36
OTHER CONTRACT PROVISIONS.......................... 36
In Case of Errors in Application Information..... 36
Contract Changes -- Applicable Tax Law........... 37
Your Right to Cancel or Exchange Your Contract... 37
Other Contract Changes........................... 37
Group or Sponsored Arrangements.................. 37
Selling the Contract............................. 38
REGULATORY INFORMATION............................. 38
Voting Rights.................................... 38
State Regulation................................. 38
Legal Proceedings................................ 38
Legal Matters.................................... 39
Experts.......................................... 39
MORE INFORMATION ABOUT GOLDEN AMERICAN LIFE
INSURANCE COMPANY................................. 40
Selected Financial Data.......................... 40
Management's Discussion and Analysis of Financial
Condition and
Results of Operations........................... 40
Directors and Executive Officers................. 53
Compensation Tables and Other Information........ 54
FEDERAL TAX CONSIDERATIONS......................... 57
Introduction..................................... 57
Tax Status of Golden American.................... 57
Taxation on Non-qualified Annuities.............. 57
IRA Contracts and Other Qualified Retirement
Plans........................................... 60
Federal Income Tax Withholding................... 64
AUDITED FINANCIAL STATEMENTS OF GOLDEN AMERICAN
LIFE INSURANCE COMPANY............................ 65
STATEMENT OF ADDITIONAL INFORMATION................ 91
Table of Contents................................ 91
APPENDIX A......................................... A1
Market Value Adjustment Examples................. A1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
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DEFINITION OF TERMS
ACCOUNTS -- Separate Account B and the Fixed Account.
ACCUMULATION VALUE -- The total amount invested under the Contract. Initially,
this amount is equal to the premium paid plus any Credit. Thereafter, the
Accumulation Value will reflect the premiums paid, plus any Credit, investment
experience of the Divisions and interest credited to your Fixed Allocations,
charges deducted and any partial withdrawals.
ANNUAL RATCHET ENHANCED DEATH BENEFIT OPTION -- An enhanced death benefit option
that may be elected only at issue and only if the Owner or Annuitant (when the
Owner is other than an individual) is age 79 or younger. The enhanced death
benefit provided by this option is the highest Accumulation Value on any
Contract Anniversary on or prior to the Owner turning age 80, as adjusted for
additional premiums, credits and partial withdrawals. The death benefit may be
reduced for any Credit applied within 12 months prior to the date of death.
ANNUITANT -- The person designated by the Owner to be the measuring life in
determining Annuity Payments.
ANNUITY COMMENCEMENT DATE -- The date on which Annuity Payments begin.
ANNUITY OPTIONS -- Options the Owner selects that determine the form and amount
of Annuity Payments.
ANNUITY PAYMENT -- The periodic payment an Owner receives. It may be either a
fixed or a variable amount based on the Annuity Option chosen.
ATTAINED AGE -- The Issue Age of the Owner or Annuitant plus the number of full
years elapsed since the Contract Date.
BENEFICIARY -- The person designated to receive benefits in the case of the
death of the Owner or the Annuitant (when the Owner is other than an
individual).
BUSINESS DAY -- Any day the New York Stock Exchange ("NYSE") is open for
trading, exclusive of Federal holidays, or any day on which the SEC requires
that mutual funds, unit investment trusts or other investment portfolios be
valued.
CASH SURRENDER VALUE -- The amount the Owner receives upon surrender of the
Contract, including any Market Value Adjustment.
CHARGE DEDUCTION DIVISION -- The Division from which all charges are deducted if
so designated by you. The Charge Deduction Division currently is the Liquid
Asset Division.
CONTINGENT ANNUITANT -- The person designated by the Owner who, upon the
Annuitant's death prior to the Annuity Commencement Date, becomes the Annuitant.
CONTRACT -- The entire Contract consisting of the basic Contract and any riders
or endorsements.
CONTRACT ANNIVERSARY -- The anniversary of the Contract Date.
CONTRACT DATE -- The date on which we have received the Initial Premium and upon
which we begin determining the Contract values. It may or may not be the same as
the Issue Date. This date is used to determine Contract months, processing
dates, years and anniversaries.
CONTRACT PROCESSING DATES -- The days when we deduct certain charges from the
Accumulation Value. If the Contract Processing Date is not a Valuation Date, it
will be on the next succeeding Valuation Date. The Contract Processing Dates
will be once each year on the Contract Anniversary.
CONTRACT PROCESSING PERIOD -- The first Contract processing period begins with
the Contract Date and ends at the close of business on the first Contract
Processing Date. All subsequent Contract processing periods begin at the close
of business on the most recent Contract Processing Date and extend to the close
of business on the next Contract Processing Date. There is one Contract
processing period each year.
CONTRACT YEAR -- The period between Contract anniversaries.
CREDIT -- An amount added to the Contract's Accumulation Value at the time a
premium payment is made.
CUSTOMER SERVICE CENTER -- Where service is provided to you. The mailing address
and telephone number of the Customer Service Center are shown on the cover.
DIVISIONS -- The investment options available under Account B.
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ENDORSEMENTS -- An endorsement changes or adds provisions to the Contract.
EXPERIENCE FACTOR -- The factor which reflects the investment experience of the
portfolio in which a Division invests and also reflects the charges assessed
against the Division for a Valuation Period.
FIXED ACCOUNT -- An Account which contains all of our assets that support Owner
Fixed Allocations and any interest credited thereto.
FIXED ALLOCATION -- An amount allocated to the Fixed Account that is credited
with a Guaranteed Interest Rate for a specified Guarantee Period.
FREE LOOK PERIOD -- The period of time within which the Owner may examine the
Contract and return it for a refund.
GUARANTEED INTEREST RATE -- The effective annual interest rate which we will
credit for a specified Guarantee Period. The Guaranteed Interest Rate will never
be less than 3%.
GUARANTEE PERIOD -- The period of time for which a rate of interest is
guaranteed to be credited to a Fixed Allocation. We currently offer Guarantee
Periods with durations of 1, 3, 5, 7 and 10 years.
INDEX OF INVESTMENT EXPERIENCE -- The index that measures the performance of a
Division.
INITIAL PREMIUM -- The payment required to put a Contract into effect.
ISSUE AGE -- The Owner's or Annuitant's age on his or her last birthday on or
before the Contract Date.
ISSUE DATE -- The date the Contract is issued at our Customer Service Center.
MARKET VALUE ADJUSTMENT -- A positive or negative adjustment made to a Fixed
Allocation. It may apply to certain withdrawals and transfers, whether in whole
or in part, and annuitizations of all or part of a Fixed Allocation prior to the
end of a Guarantee Period.
MATURITY DATE -- The date on which a Guarantee Period matures.
OWNER -- The person who owns the Contract and is entitled to exercise all rights
under the Contract. This person's death also initiates payment of the death
benefit.
RIDER -- A rider amends the Contract, in certain instances adding benefits.
7% SOLUTION ENHANCED DEATH BENEFIT OPTION -- An enhanced death benefit option
that may be elected only at issue and only if the Owner or Annuitant (when the
Owner is other than an individual) is age 80 or younger. The enhanced death
benefit provided by this option is equal to premiums paid plus credits
accumulated at an annual rate of return of 7%, except those invested in the
Liquid Asset Division, Limited Maturity Bond Division, and the Fixed Account, as
adjusted for additional premiums, credits and partial withdrawals. Any Credit
applied within twelve months prior to the date of death may reduce the death
benefit. Each accumulated initial or additional premium payment, including any
credit and reduced by any partial withdrawals taken will continue to grow at 7%
until it reaches the maximum enhanced death benefit.
SPECIALLY DESIGNATED DIVISION -- The Division to which distributions from a
portfolio underlying a Division in which reinvestment is not available will be
allocated unless you specify otherwise. The Specially Designated Division
currently is the Liquid Asset Division.
STANDARD DEATH BENEFIT OPTION -- The death benefit option that you will receive
under the Contact unless one of the enhanced death benefit options is elected.
The death benefit provided by this option is equal to the greatest of (i)
Accumulation Value less an amount equal to all Credits applied within 12 months
prior to the date of the death; (ii) total premium payments less any partial
withdrawals; and (iii) Cash Surrender Value.
VALUATION DATE -- The day at the end of a Valuation Period when each Division is
valued.
VALUATION PERIOD -- Each business day together with any non-business days before
it.
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SUMMARY OF THE CONTRACT
This prospectus has been designed to provide you with information regarding the
Contract and the Accounts which fund the Contract. Information concerning the
Series underlying the Divisions of Account B is set forth in the Trusts'
prospectuses.
This summary is intended to provide only a very brief overview of the more
significant aspects of the Contract. Further detail is provided in this
prospectus and in the Contract. The Contract, together with any riders or
endorsements, constitutes the entire agreement between you and us and should be
retained.
This prospectus has been designed to provide you with the necessary information
to make a decision on purchasing the Contract. You have a choice of investments.
We do not promise that your Accumulation Value will increase. Depending on the
investment experience of the Divisions and interest credited to the Fixed
Allocations in which you are invested, your Accumulation Value, Cash Surrender
Value and death benefit may increase or decrease on any day. You bear the
investment risk.
DESCRIPTION OF THE CONTRACT
This Contract provides a 4% Credit to each Purchase Payment which increases the
Accumulation Value, except for certain circumstances. See Additional Credit to
Premium. The Contract is designed to establish retirement benefits for two types
of purchasers. The first type of purchaser is one who is eligible to participate
in, and purchases a Contract for use with, a "qualified plan." A qualified plan
is an individual retirement annuity ("IRA") or another annuity meeting the
requirements of section 408(b) or other sections of the Internal Revenue Code of
1986, as amended (the "Code"), an individual retirement annuity ("Roth IRA")
meeting the requirements of section 408A of the Code, or some other retirement
plan meeting the respective section of the Code. For a Contract funding a
qualified plan, distributions may be made to you to satisfy requirements imposed
by Federal tax law. The second type of purchaser is one who purchases a Contract
outside of a qualified plan ("non-qualified plan").
The Contract also offers a choice of Annuity Options to which you may apply all
or a portion of the Accumulation Value on the Annuity Commencement Date or the
Cash Surrender Value upon surrender of the Contract. See Choosing Your Annuity
Options.
AVAILABILITY
We can issue a Contract if both the Annuitant and the Owner are not older than
age 85 and accept additional premium payments until either the Annuitant or
Owner reaches the Attained Age of 85 for non-qualified plans (age 70 for
qualified plans, except for rollover contributions and contributions to a Roth
IRA). The minimum Initial Premium is $10,000 for a non-qualified plan and $1,500
for a qualified plan. We may change the minimum initial or additional premium
requirements for certain group or sponsored arrangements. See Other Contract
Provisions, Group or Sponsored Arrangements.
The minimum additional premium payment we will accept is $500 for a
non-qualified plan and $250 for a qualified plan. You must receive our prior
approval before making a premium payment that causes the Accumulation Value of
all annuities that you maintain with us to exceed $1,000,000.
The annual limits on contributions to IRAs and Roth IRAs are described under
Federal Tax Considerations.
THE DIVISIONS
Each of the twenty-three Divisions of Account B offered under this prospectus
invests in a mutual fund portfolio with its own distinct investment objectives
and policies. Each Division of Account B invests in a corresponding Series of
the GCG Trust, managed by Directed Services, Inc. ("DSI"), a corresponding
Series of the ESS Trust, also managed by DSI, a corresponding Series of the WP
Trust, managed by Warburg Pincus Asset Management, Inc. ("Warburg") or a
corresponding Series of the PIMCO Trust, managed by Pacific Investment
Management Company ("PIMCO"). From its inception through December 31, 1997, the
ESS Trust was managed by Equitable Investment Services, Inc. ("EISI"), an
affiliate of DSI. As of January 1, 1998, DSI assumed EISI's management
responsibilities to the ESS Trust. The GCG and ESS Trusts and DSI have retained
several portfolio managers to manage the assets of each Series of those Trusts.
See Facts About the Company and the Accounts, Account B Divisions.
HOW THE ACCUMULATION VALUE VARIES
The Accumulation Value in the Divisions varies each day based on investment
results. You bear the risk of poor investment performance and you receive the
benefits from favorable investment performance. The Accumula-
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tion Value also reflects premium payments, Credits, charges deducted and partial
withdrawals. See Facts About the Contract, Accumulation Value in Each Division.
THE FIXED ACCOUNT
The investments available through the Fixed Account include various Fixed
Allocations which we credit with fixed rates of interest for the Guarantee
Periods you select. We reset the interest rates for new Guarantee Periods
periodically based on our sole discretion. We may offer Guarantee Periods from
one to ten years. We currently offer Guarantee Periods with durations of 1, 3,
5, 7 and 10 years.
You bear investment risk with respect to surrenders, partial withdrawals,
transfers and annuitization from your Fixed Allocations. A surrender, partial
withdrawal, transfer or annuitization made prior to the end of a Guarantee
Period may be subject to a Market Value Adjustment, which could have the effect
of either increasing or decreasing your Accumulation Value. We will not apply a
Market Value Adjustment on a surrender, partial withdrawal, transfer or
annuitization made within 30 days prior to the Maturity Date of the applicable
Guarantee Period or certain transfers made in connection with the dollar cost
averaging program. Systematic withdrawals from a Fixed Allocation also are not
subject to a Market Value Adjustment.
MARKET VALUE ADJUSTMENT
We will apply a Market Value Adjustment, subject to certain exceptions, to a
surrender, partial withdrawal, transfer or annuitization from a Fixed Allocation
made prior to the end of a Guarantee Period. The Market Value Adjustment does
not apply to amounts invested in Account B.
SURRENDERING YOUR CONTRACT
You may surrender the Contract and receive its Cash Surrender Value at any time
while both the Annuitant and Owner are living and before the Annuity
Commencement Date. See Facts About the Contract, Cash Surrender Value and
Surrendering to Receive the Cash Surrender Value.
TAKING PARTIAL WITHDRAWALS
After the Free Look Period, prior to the Annuity Commencement Date and while the
Contract is in effect, you may take partial withdrawals from the Accumulation
Value of your Contract. You may elect in advance to take systematic partial
withdrawals on a monthly, quarterly, or annual basis. If you have an IRA
Contract or a Roth IRA Contract, you may elect IRA partial withdrawals on a
monthly, quarterly or annual basis.
Partial withdrawals are subject to certain restrictions as defined in this
prospectus, including a surrender charge and a Market Value Adjustment. Partial
withdrawals above a specified percentage of your Accumulation Value may be
subject to a surrender charge. See Facts About the Contract, Partial
Withdrawals.
DOLLAR COST AVERAGING
Under this program, you may choose to have a specified dollar amount transferred
from either the Limited Maturity Bond Division, Liquid Asset Division or a Fixed
Allocation with a one year Guarantee Period to the other Divisions of Account B
on a monthly basis with the objective of shielding your investment from short-
term price fluctuations. See Facts About the Contract, Dollar Cost Averaging.
YOUR RIGHT TO CANCEL THE CONTRACT
You may cancel your Contract within the Free Look Period which is a ten day
period of time beginning once you receive the Contract. For purposes of
administering our allocation and certain other administrative rules, we deem
this period to end 15 days after the Contract is mailed from our Customer
Service Center. Some states may require that we provide a longer free look
period. In some states we restrict the Initial Premium allocation during the
Free Look Period. See Other Contract Provisions, Your Right to Cancel or
Exchange Your Contract.
YOUR RIGHT TO CHANGE THE CONTRACT
The Contract may be changed to another annuity plan subject to our rules at the
time of the change. See Other Contract Provisions, Other Contract Changes.
DEATH BENEFIT OPTIONS
The Contract provides a death benefit to the beneficiary if the Owner dies prior
to the Annuity Commencement Date. Subject to our rules, there are three death
benefit options that may be available to you under the Contract: the Standard
Death Benefit Option; the 7% Solution Enhanced Death Benefit Option; and the
Annual
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Ratchet Enhanced Death Benefit Option. See Facts About the Contract, Death
Benefit Options. We may offer a reduced death benefit under certain group and
sponsored arrangements. See Other Contract Provisions, Group or Sponsored
Arrangements.
DEDUCTIONS FOR CHARGES AND FEES
We invest the entire amount of the initial and any additional premium payments
in the Divisions and the Fixed Allocations you select, subject to certain
restrictions we impose. See Facts About the Contract, Restrictions on Allocation
of Premium Payments. We then may deduct an annual Contract fee from your
Accumulation Value. See Other Contract Provisions, Charges and Fees. We may
reduce certain charges under group or sponsored arrangements. See Other Contract
Provisions, Group or Sponsored Arrangements. Unless you have elected the Charge
Deduction Division, charges are deducted proportionately from all Account B
Divisions in which you are invested. If there is no Accumulation Value in these
Divisions, charges will be deducted from your Fixed Allocations starting with
Guarantee Periods nearest their Maturity Dates until such charges have been
deducted.
FEDERAL INCOME TAXES
The ultimate effect of Federal income taxes on the amounts held under an annuity
Contract, on Annuity Payments and on the economic benefits to the Owner,
Annuitant or Beneficiary depends on Golden American's tax status and upon the
tax status of the individuals concerned. In general, an Owner is not taxed on
increases in value under an annuity Contract until some form of distribution is
made under it. There may be tax penalties if you make a withdrawal or surrender
the Contract before reaching age 59 1/2. See Federal Tax Considerations.
OTHER CONTRACTS
We offer other variable annuity contracts which also invest in many of the same
Series of the Trusts. These contracts may have different charges that could
affect contract performance, and may offer different benefits more suitable to
your needs. To obtain information about these contracts, contact your agent, or
call 1-800-366-0066.
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FEE TABLE
TRANSACTION EXPENSES(1)
Contingent Deferred Sales Charge(2) (imposed as a percentage of premium payments
withdrawn upon excess partial withdrawal or surrender):(3)
COMPLETE YEARS
ELAPSED SURRENDER
SINCE PREMIUM PAYMENT CHARGE
0 8%
1 8%
2 8%
3 8%
4 7%
5 6%
6 5%
7 3%
8 1%
9+ 0%
Excess Allocation Charge.............................. $0(4)
ANNUAL CONTRACT FEES:
Administrative Charge................................. $40
(Waived if the Accumulation Value equals or exceeds $100,000 at the end
of the Contract Year, or once the sum of premiums paid equals or exceeds
$100,000.)
SEPARATE ACCOUNT ANNUAL EXPENSES (percentage of assets in each Division):(5)
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ENHANCED DEATH BENEFIT
STANDARD -----------------------------
DEATH BENEFIT ANNUAL RATCHET 7% SOLUTION
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Mortality and Expense Risk Charge....................... 1.25% 1.40% 1.55%
Asset Based Administrative Charge....................... 0.15% 0.15% 0.15%
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Total Separate Account Expenses......................... 1.40% 1.55% 1.70%
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THE GCG TRUST ANNUAL EXPENSES (as a percentage of the average daily net assets
of a Series or on the combined average daily net assets of the indicated groups
of Series):
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MANAGEMENT OTHER TOTAL
SERIES AVAILABLE CURRENTLY FEES(6) EXPENSES(7) EXPENSES
- -------------------------- ---------- --------------- ---------------
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Multiple Allocation, Fully Managed,
Capital Appreciation, Rising Dividends,
All-Growth, Real Estate, Hard Assets, 0.98% 0.01% 0.99%
Value Equity, Strategic Equity, and
Small
Cap Series:
Growth Opportunities Series(8): 1.10% 0.01% 1.11%
Developing World Series: 1.75% 0.05% 1.80%
Limited Maturity Bond and Liquid Asset
Series: 0.60% 0.01% 0.61%
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OTHER EXPENSES(7) TOTAL EXPENSES
SERIES ADDED TO THE GCG TRUST AND MANAGEMENT AFTER EXPENSE AFTER EXPENSE
AVAILABLE AFTER TRUST CONSOLIDATION(9) FEES(6) REIMBURSEMENT(10) REIMBURSEMENT(10)
- -------------------------------------- ----------- ----------------- -----------------
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Mid-Cap Growth Series(11),(12): 0.96% 0.01% 0.97%
Research Series(11): 0.96% 0.00% 0.96%
Total Return Series(11): 0.96% 0.01% 0.97%
Growth & Income and Value + Growth
Series(8): 1.10% 0.01% 1.11%
Global Fixed Income Series(13): 1.60% 0.00% 1.60%
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THE ESS TRUST ANNUAL EXPENSES (prior to Trust Consolidation)
(as a percentage of the average daily net assets of a Series):
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SERIES FEES(6) OTHER EXPENSES TOTAL EXPENSES
- ------ ---------- --------------- ---------------
<S><C>
OTC Portfolio: 0.80% 0.19% 0.99%
Research Portfolio: 0.80% 0.16% 0.96%
Total Return Portfolio: 0.80% 0.17% 0.97%
Growth & Income Portfolio: 0.95% 0.17% 1.12%
Value + Growth Portfolio: 0.95% 0.25% 1.20%
International Fixed Income Portfolio: 0.85% 0.98% 1.83%
</TABLE>
THE WP TRUST ANNUAL EXPENSES (as a percentage of the average daily net assets of
a Series):
<TABLE>
<CAPTION>
OTHER TOTAL
EXPENSES EXPENSES
AFTER EXPENSE AFTER EXPENSE
SERIES FEES REIMBURSEMENTS(14) REIMBURSEMENTS
- ------ ---------- ------------------ --------------
<S><C>
International Equity Portfolio: 1.00% 0.36% 1.36%
</TABLE>
THE PIMCO TRUST ANNUAL EXPENSES (as a percentage of the average daily net assets
of a Series):
<TABLE>
<CAPTION>
OTHER
PORTFOLIO FEES EXPENSES(15) TOTAL EXPENSES
- --------- ---------- ---------------- --------------
<S><C>
PIMCO High Yield Bond Portfolio: 0.50% 0.25% 0.75%
PIMCO StocksPLUS Growth and Income
Portfolio: 0.40% 0.25% 0.65%
</TABLE>
6
<PAGE>
- ------------------------------
(1) A Market Value Adjustment, which may increase or decrease your Accumulation
Value, may apply to certain transactions. See Market Value Adjustment.
(2) We also deduct a charge for premium taxes (which can range from 0% to 3.5%
of premium) from your Accumulation Value upon surrender, excess partial
withdrawals or on the Annuity Commencement Date. See Premium Taxes.
(3) For purposes of calculating the surrender charge for the excess partial
withdrawal, (i) we treat premium payments as being withdrawn on a first-in
first-out basis, and (ii) amounts withdrawn which are not considered an
excess partial withdrawal are not treated as a withdrawal of any premium
payments. See Charges Deducted from the Accumulation Value, Surrender
Charge for Excess Partial Withdrawals.
(4) We reserve the right to impose a charge in the future at a maximum of $25
for each allocation change in excess of twelve per Contract Year. See
Excess Allocation Charge.
(5) See Facts About the Contract, Death Benefit Options, for a description of
the Contract's Standard and Enhanced Death Benefit Options.
(6) Management Fees decline as combined assets increase (see Account B
Divisions and the Trust prospectuses for details).
(7) Other Expenses generally consist of independent trustees fees and expenses
and certain expenses associated with investing in international markets.
Other Expenses are estimated for the Growth Opportunities and Developing
World Series, since as of December 31, 1997, these Series had not yet
commenced operations.
(8) After Trust Consolidation (see The Trusts, Proposed Trust Consolidation),
the assets of the Growth Opportunities, the Growth & Income and the Value
+ Growth Series will be combined to determine the actual fee payable to
Directed Services, Inc. ("DSI"), the manager of the GCG Trust.
(9) See Facts about the Company and the Contracts, The Trusts, Proposed Trust
Consolidation for more information.
(10) DSI has agreed voluntarily to reimburse expenses and waive management fees,
if necessary, to maintain total expenses at the levels shown for the
Research and the Global Fixed Income Series (formerly the International
Fixed Income Portfolio). This agreement will remain in place through
December 31, 1999, and after that time may be terminated at any time.
Without this agreement and based on current estimates, Total Expenses would
be 0.97%, and 1.65%, for the Research and the Global Fixed Income Series,
respectively.
(11) After Trust Consolidation (see The Trusts, Proposed Trust Consolidation),
the assets of the Research, the Total Return and the Mid-Cap Growth Series
will be combined to determine the actual fee payable to DSI.
(12) The OTC Portfolio prior to the Trust Consolidation.
(13) The Interanational Fixed Income Portfolio prior to the Trust Consolidation.
(14) Total Expenses are based on actual expenses for the fiscal year ended
December 31, 1997. Expenses for the Portfolio were reduced by 0.1% for the
fiscal year ended December 31, 1997 as a result of certain arrangements
that served to offset portions of the Portfolio's transfer agent expense.
After reflecting these arrangements, "Total Expenses (after fee waivers)"
for the Portfolio were 1.35% for the fiscal year ended December 31, 1997.
(15) Other Expenses are estimated for the PIMCO High Yield Bond and PIMCO
StocksPLUS Growth and Income Portfolios, since as of December 31, 1997,
these Series had not yet commenced operations.
7
<PAGE>
EXAMPLES:
The examples do not take into account any deduction for premium taxes. Premium
taxes currently range from 0% to 3.5% of premium payments. There may be
surrender charges if you choose to annuitize within the first five Contract
Years.
If at issue you elect the 7% Solution Enhanced Death Benefit Option and you
surrender your Contract at the end of the applicable time period, you would pay
the following expenses for each $1,000 of Initial Premium assuming a 5% annual
return on assets:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVISION ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S><C>
Multiple Allocation................................... $108.91 $168.67 $ 221.09 $319.65
Fully Managed......................................... $108.91 $168.67 $ 221.09 $319.65
Capital Appreciation.................................. $108.91 $168.67 $ 221.09 $319.65
Rising Dividends...................................... $108.91 $168.67 $ 221.09 $319.65
All-Growth............................................ $108.91 $168.67 $ 221.09 $319.65
Real Estate........................................... $108.91 $168.67 $ 221.09 $319.65
Hard Assets........................................... $108.91 $168.67 $ 221.09 $319.65
Value Equity.......................................... $108.91 $168.67 $ 221.09 $319.65
Strategic Equity...................................... $108.91 $168.67 $ 221.09 $319.65
Small Cap............................................. $108.91 $168.67 $ 221.09 $319.65
Growth Opportunities.................................. $110.16 $172.38 $ 227.23 $331.64
Developing World...................................... $117.29 $193.46 $ 261.81 $397.64
OTC................................................... $108.91 $168.67 $ 221.09 $319.65
Research.............................................. $108.60 $167.74 $ 219.55 $316.62
Total Return.......................................... $108.71 $168.05 $ 220.06 $317.63
Growth & Income....................................... $110.26 $172.69 $ 227.74 $332.63
Value + Growth........................................ $111.09 $175.16 $ 231.81 $340.54
International Fixed Income............................ $117.60 $194.36 $ 263.28 $400.40
International Equity.................................. $112.75 $180.07 $ 239.90 $356.13
High Yield Bond....................................... $106.42 $161.21 $ 208.69 $295.18
StocksPLUS Growth and Income.......................... $105.38 $158.08 $ 203.48 $284.80
Limited Maturity Bond................................. $104.96 $156.83 $ 201.39 $280.62
Liquid Asset.......................................... $104.96 $156.83 $ 201.39 $280.62
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVISION AFTER TRUST CONSOLIDATION ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S><C>
Mid-Cap Growth*....................................... $108.71 $168.05 $ 220.06 $317.63
Research.............................................. $108.60 $167.74 $ 219.55 $316.62
Total Return.......................................... $108.71 $168.05 $ 220.06 $317.63
Growth & Income....................................... $110.06 $172.07 $ 226.72 $330.65
Value + Growth........................................ $110.06 $172.07 $ 226.72 $330.65
Global Fixed Income**................................. $115.23 $187.39 $ 251.91 $379.02
</TABLE>
* The OTC Portfolio prior to the Trust Consolidation.
** The Interanational Fixed Income Portfolio prior to the Trust Consolidation.
8
<PAGE>
If at issue you elect the 7% Solution Enhanced Death Benefit Option and you do
not surrender your Contract or if you annuitize on the Annuity Commencement
Date, you would pay the following expenses for each $1,000 of initial premium
assuming a 5% annual return on assets:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVISION ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S><C>
Multiple Allocation................................... $28.91 $ 88.67 $ 151.09 $319.65
Fully Managed......................................... $28.91 $ 88.67 $ 151.09 $319.65
Capital Appreciation.................................. $28.91 $ 88.67 $ 151.09 $319.65
Rising Dividends...................................... $28.91 $ 88.67 $ 151.09 $319.65
All-Growth............................................ $28.91 $ 88.67 $ 151.09 $319.65
Real Estate........................................... $28.91 $ 88.67 $ 151.09 $319.65
Hard Assets........................................... $28.91 $ 88.67 $ 151.09 $319.65
Value Equity.......................................... $28.91 $ 88.67 $ 151.09 $319.65
Strategic Equity...................................... $28.91 $ 88.67 $ 151.09 $319.65
Small Cap............................................. $28.91 $ 88.67 $ 151.09 $319.65
Growth Opportunities.................................. $30.16 $ 92.38 $ 157.23 $331.64
Developing World...................................... $37.29 $113.46 $ 191.81 $397.64
OTC................................................... $28.91 $ 88.67 $ 151.09 $319.65
Research.............................................. $28.60 $ 87.74 $ 149.55 $316.62
Total Return.......................................... $28.71 $ 88.05 $ 150.06 $317.63
Growth & Income....................................... $30.26 $ 92.69 $ 157.74 $332.63
Value + Growth........................................ $31.09 $ 95.16 $ 161.81 $340.54
International Fixed Income............................ $37.60 $114.36 $ 193.28 $400.40
International Equity.................................. $32.75 $100.07 $ 169.90 $356.13
High Yield Bond....................................... $26.42 $ 81.21 $ 138.69 $295.18
StocksPLUS Growth and Income.......................... $25.38 $ 78.08 $ 133.48 $284.80
Limited Maturity Bond................................. $24.96 $ 76.83 $ 131.39 $280.62
Liquid Asset.......................................... $24.96 $ 76.83 $ 131.39 $280.62
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVISION AFTER TRUST CONSOLIDATION ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S><C>
Mid-Cap Growth*....................................... $28.71 $ 88.05 $ 150.06 $317.63
Research.............................................. $28.60 $ 87.74 $ 149.55 $316.62
Total Return.......................................... $28.71 $ 88.05 $ 150.06 $317.63
Growth & Income....................................... $30.06 $ 92.07 $ 156.72 $330.65
Value + Growth........................................ $30.06 $ 92.07 $ 156.72 $330.65
Global Fixed Income**................................. $35.23 $107.39 $ 181.91 $379.02
</TABLE>
* The OTC Portfolio prior to the Trust Consolidation.
** The Interanational Fixed Income Portfolio prior to the Trust Consolidation.
The purpose of the Fee Table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly. For purposes of
computing the annual per Contract administrative charge, the dollar amounts
shown in the examples are based on an Initial Premium of $65,000.
The examples reflect the election at issue of the 7% Solution Enhanced Death
Benefit Option. If the Standard Death Benefit Option or the Annual Ratchet
Enhanced Death Benefit Option is elected, the actual expenses incurred will be
less than those represented in the Examples.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, SUBJECT TO
THE GUARANTEES UNDER THE CONTRACT.
9
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL AND OTHER INFORMATION
INDEX OF INVESTMENT EXPERIENCE
The following table gives the index of investment experience for each Division
of Account B available under the Contract for each death benefit option.
Information for the Growth Opportunities, Developing World, High Yield Bond and
StocksPLUS Growth and Income Divisions is not available because they had not
commenced operations as of December 31, 1997. The Divisions became available on
October 1, 1997, and started with the index of investment experience as shown
below, except for the Growth Opportunities and Developing World Divisions which
became available for investment on February 19, 1998 and the High Yield Bond and
StocksPLUS Growth and Income Divisions which became available for investment on
May 1, 1998. The index of investment experience is equal to the value of a unit
for each Division of the Accounts. The total investment value of each Division
as of the end of 1997 is shown in the right hand columns.
<TABLE>
<CAPTION>
TOTAL INVESTMENT VALUE
-------------------------------
INDEX OF INVESTMENT EXPERIENCE IN THOUSANDS
----------------------------------------------------------------- -------------------------------
ANNUAL 7%
DIVISION STANDARD ANNUAL RATCHET 7% SOLUTION STANDARD RATCHET SOLUTION
- --------------------------- ------------------- ------------------- ------------------- -------- ------- --------
10/1/97 12/31/97 10/1/97 12/31/97 10/1/97 12/31/97 12/31/97 12/31/97 12/31/97
------- -------- ------- -------- ------- -------- -------- ------- --------
<S><C>
Multiple Allocation........ $ 20.55 $20.55 $ 20.29 $20.28 $ 19.99 $19.97 $ 542 $ 269 $ 699
Fully Managed.............. $ 19.49 $19.66 $ 19.24 $19.40 $ 18.96 $19.11 $ 725 $ 552 $2,064
Capital
Appreciation............. $ 21.95 $22.05 $ 21.78 $21.87 $ 21.57 $21.65 $ 267 $ 449 $1,449
Rising Dividends........... $ 19.30 $20.09 $ 19.19 $19.96 $ 19.05 $19.81 $1,105 $ 686 $3,360
All-Growth................. $ 15.42 $14.28 $ 15.22 $14.09 $ 15.00 $13.88 $ 725 $ 551 $ 563
Real Estate................ $ 25.25 $25.48 $ 24.92 $25.14 $ 24.56 $24.76 $ 272 $ 204 $1,102
Hard Assets................ $ 24.00 $20.57 $ 23.68 $20.29 $ 23.34 $19.99 $ 88 $ 98 $ 213
Value Equity............... $ 18.85 $18.28 $ 18.78 $18.20 $ 18.67 $18.09 $ 517 $ 737 $2,117
Strategic Equity........... $ 14.14 $14.31 $ 14.10 $14.26 $ 14.04 $14.20 $ 188 $ 229 $ 704
Small Cap.................. $ 13.85 $12.88 $ 13.82 $12.84 $ 13.78 $12.81 $ 754 $ 259 $1,280
OTC........................ $ 18.94 $18.52 $ 18.88 $18.45 $ 18.79 $18.36 $ 666 $ 253 $ 885
Research................... $ 19.33 $18.87 $ 19.24 $18.77 $ 19.15 $18.67 $1,106 $ 561 $2,892
Total Return............... $ 15.82 $16.10 $ 15.75 $16.02 $ 15.68 $15.94 $ 874 $ 415 $2,354
Growth & Income............ $ 15.99 $15.41 $ 15.95 $15.36 $ 15.92 $15.32 $1,569 $2,472 $3,772
Value + Growth............. $ 15.18 $13.03 $ 15.14 $12.99 $ 15.10 $12.96 $1,274 $ 447 $2,938
Limited Maturity
Bond..................... $ 15.72 $15.91 $ 15.52 $15.70 $ 15.29 $15.47 $ 268 $ 159 $ 195
Liquid Asset............... $ 13.71 $13.83 $ 13.53 $13.65 $ 13.33 $13.44 $1,818 $ 846 $4,009
International Fixed
Income................... $ 11.99 $11.87 $ 11.93 $11.81 $ 11.87 $11.75 $ 41 $ 4 $ 76
International
Equity................... $ 11.57 $ 9.90 $ 11.62 $ 9.95 $ 11.60 $ 9.92 $ 381 $ 359 $ 724
</TABLE>
FINANCIAL STATEMENTS
The audited financial statements of Separate Account B for the years ended
December 31, 1997 and 1996 (as well as the auditors' report thereon) appear in
the Statement of Additional Information. The audited financial statements of
Golden American prepared in accordance with generally accepted accounting
principles for the years ended December 31, 1997 and 1996 (as well as the
auditors' report thereon) are contained in the Prospectus.
PERFORMANCE RELATED INFORMATION
Performance information for the Divisions of Account B, including the yields,
standard annual total returns and other nonstandard measures of performance
may appear in reports and promotional literature to current or prospective
Owners. Such performance data will be computed, or accompanied by performance
data computed, in accordance with standards defined by the SEC.
10
<PAGE>
Current yield for the Liquid Asset Division will be based on income received by
a hypothetical investment over a given 7-day period (less expenses accrued
during the period), and then "annualized" (i.e., assuming that the 7-day yield
would be received for 52 weeks, stated in terms of an annual percentage return
on the investment). "Effective yield" for the Liquid Asset Division is
calculated in a manner similar to that used to calculate yield, but when
annualized, the income earned by the investment is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of earnings.
For the remaining Divisions, quotations of yield will be based on all investment
income per unit (Accumulation Value divided by the index of investment
experience, see Facts About the Contract, Measurement of Investment Experience,
Index of Investment Experience and Unit Value) earned during a given 30-day
period, less expenses accrued during the period ("net investment income").
Quotations of average annual total return for any Division 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 Division), and will reflect the deduction of the
applicable surrender charge, the administrative charge and the applicable
mortality and expense risk charge. See Charges and Fees. Quotations of total
return may simultaneously be shown for other periods that do not take into
account certain contractual charges, such as the surrender charge.
Performance information for a Division may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, or other indices measuring performance of a pertinent
group of securities so that investors may compare a Division's results with
those of a group of securities widely regarded by investors as representative of
the securities markets in general; (ii) other variable annuity separate accounts
or other investment products tracked by Lipper Analytical Services, a widely
used independent research firm which ranks mutual funds and other investment
companies by overall performance, investment objectives, and assets, or tracked
by other ratings services, including VARDS, companies, publications, or persons
who rank separate accounts or other investment products on overall performance
or other criteria; and (iii) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment in the Contract. Unmanaged
indices may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses. Performance
information for any Division reflects only the performance of a hypothetical
Contract under which the Accumulation Value is allocated to a Division during a
particular time period on which the calculations are based. Performance
information should be considered in light of the investment objectives and
policies, characteristics and quality of the portfolio of the Series of the
respective Trust in which the Division invests and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future. For a description of the methods used to
determine yield and total return for the Divisions, see the Statement of
Additional Information. Reports and promotional literature may also contain
other information including the ranking of any Division derived from rankings of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by rating services, companies, publications, or
other persons who rank separate accounts or other investment products on overall
performance or other criteria.
- --------------------------------------------------------------------------------
INTRODUCTION
THE FOLLOWING INFORMATION DESCRIBES THE CONTRACT AND THE ACCOUNTS WHICH FUND THE
CONTRACT, ACCOUNT B AND THE FIXED ACCOUNT. ACCOUNT B INVESTS IN MUTUAL FUND
PORTFOLIOS OF THE TRUSTS. THE FIXED ACCOUNT CONTAINS ALL OF THE ASSETS THAT
SUPPORT OWNER FIXED ALLOCATIONS WHICH WE CREDIT WITH GUARANTEED INTEREST RATES
FOR THE GUARANTEE PERIODS YOU SELECT.
- --------------------------------------------------------------------------------
FACTS ABOUT THE COMPANY AND THE ACCOUNTS
GOLDEN AMERICAN
Golden American Life Insurance Company ("Golden American" or the "Company") is a
stock life insurance company organized under the laws of the State of Delaware
and is a wholly owned subsidiary of Equitable of Iowa Companies, Inc.
("Equitable of Iowa") which, in turn, is a wholly owned subsidiary of ING Groep,
N.V. ("ING"). Prior to December 30, 1993, Golden American was a Minnesota
corporation. Prior to August 13, 1996, Golden American was a wholly owned
indirect subsidiary of Bankers Trust Company. We are authorized to do business
in all States, except New York, and the District of Columbia. In May 1996, we
established a subsidiary, First Golden American Life Insurance Company of New
York, which is authorized to do business in New York. We offer variable
annuities and variable life insurance. Administrative services for the Contract
are provided at our Customer Service Center, the address is shown on the cover.
11
<PAGE>
Equitable of Iowa is the holding company for Equitable Life Insurance Company of
Iowa, USG Annuity & Life Company, Locust Street Securities, Inc., Equitable
American Insurance Company, Equitable of Iowa Securities Network, Inc., Directed
Services, Inc. ("DSI"), and Golden American. On October 24, 1997, ING acquired
all interest in Equitable of Iowa and its subsidiaries including Golden
American. ING, based in the Netherlands, is a global financial services holding
company with over $307.6 billion in assets. Equitable of Iowa and another ING
affiliate own ING Investment Management, LLC, who assumed EISI's portfolio
management responsibilities for the GCG Trust and the ESS Trust as of January 1,
1998.
THE TRUSTS
The GCG Trust is an open-end management investment company, more commonly called
a mutual fund. The GCG Trust's shares may also be available to certain separate
accounts funding variable life insurance policies offered by Golden American.
This is called "mixed funding."
The GCG Trust may also sell its shares to separate accounts of other insurance
companies, both affiliated and not affiliated with Golden American. This is
called "shared funding." After the GCG Trust receives the requisite order from
the SEC, shares of the GCG Trust may also be sold to certain qualified pension
and retirement plans.
The ESS Trust is also an open-end management investment company. Currently, the
ESS Trust's shares are not available to separate accounts of other insurance
companies other than insurance companies affiliated with Equitable of Iowa such
as Golden American.
The WP Trust is also an open-end management investment company. The WP Trust's
shares are available to separate accounts of life insurance companies including
that of Golden American and Equitable Life Insurance Company of Iowa and to
certain qualified pension and retirement plans.
The PIMCO Trust is also an open-end management investment company. The Series of
the PIMCO Trust were designated to be used as investment vehicles by separate
accounts of insurance companies, including Golden American, for both variable
annuity contracts and variable life insurance policies and by qualified pension
and retirement plans.
Golden American does not anticipate any inherent difficulties arising from the\
mixed and/or shared funding or sales to pension or retirement plans by the GCG
Trust, the WP Trust, or the PIMCO Trust. However, there is a possibility that,
due to differences in the tax treatment or other considerations, the interests
of Contractowners of various contracts participating in the Trusts may conflict.
The Board of Trustees of the GCG Trust, the WP Trust and the PIMCO Trust, DSI
Warburg, PIMCO and any other insurance companies participating in the Trusts
are required to monitor events to identify any material conflicts that arise
from the use of the GCG Trust, the WP Trust and/or the PIMCO Trust for mixed
and/or shared funding between various policy owners and pension and retirement
plans. In the event of a material conflict, Golden American will take the
necessary steps, including removing the Separate Account from that Trust, to
resolve the matter. See the GCG Trust, WP Trust and PIMCO Trust prospectuses
for more information.
You will find complete information about the Trusts, including the risks
associated with each Series, in the accompanying Trusts' prospectuses. You
should read them carefully in conjunction with this prospectus before investing.
Additional copies of the Trusts' prospectuses may be obtained by contacting our
Customer Service Center.
PROPOSED TRUST CONSOLIDATION. In an effort to consolidate the operations of
the GCG Trust and the ESS Trust ("Trust Consolidation"), the affiliated
insurance companies of Equitable of Iowa, including Golden American, filed an
application with the SEC requesting permission via an order to substitute shares
of each Series of the ESS Trust with shares of similar Series of the GCG Trust
(the "Substitution"). The Substitution of shares will reduce operating expenses
and create larger economies of scale from which a further reduction of expenses
is anticipated. Contractholders will benefit directly from any reduction of
Trust expenses. CONTRACTHOLDERS WILL NOT BEAR ANY EXPENSE ASSOCIATED WITH THE
SUBSTITUTION.
ESS TRUST REPLACED PORTFOLIO GCG TRUST SUBSTITUTE SERIES
---------------------------- ---------------------------
OTC Portfolio Mid-Cap Growth Series
Research Portfolio Research Series
Total Return Portfolio Total Return Series
Growth & Income Portfolio Growth & Income Series
Value + Growth Portfolio Value + Growth Series
International Fixed Income Portfolio Global Fixed Income Series
12
<PAGE>
Upon obtaining the requested order for substitution from the SEC, and subject to
any required prior approval by applicable insurance authorities, the Companies
will effect the Substitution by simultaneously placing an order for each
Division to redeem the shares of the Series of the ESS Trust and an order for
each Division to purchase shares of the designated respective Series of the GCG
Trust. After the Trust Consolidation has occurred, Customer Service will send
affected contractholders a notice within five days.
SEPARATE ACCOUNT B
All obligations under the Contract are general obligations of Golden American.
Account B is a separate investment account used to support our variable annuity
Contracts and for other purposes as permitted by applicable laws and
regulations. The assets of Account B are kept separate from our general account
and any other separate accounts we may have. We may offer other variable annuity
Contracts investing in Account B which are not discussed in this prospectus.
Account B may also invest in other series which are not available to the
Contract described in this prospectus.
We own all the assets in Account B. Income and realized and unrealized gains or
losses from assets in the account are credited to or charged against that
account without regard to other income, gains or losses in our other investment
accounts. As required, the assets in Account B are at least equal to the
reserves and other liabilities of that account. These assets may not be charged
with liabilities from any other business we conduct.
They may, however, be subject to liabilities arising from Divisions whose assets
are attributable to other variable annuity Contracts supported by Account B. If
the assets exceed the required reserves and other liabilities, we may transfer
the excess to our general account.
Account B was established on July 14, 1988 to invest in mutual funds, unit
investment trusts or other investment portfolios which we determine to be
suitable for the Contract's purposes. Account B is treated as a unit investment
trust under Federal securities laws. It is registered with the SEC under the
Investment Company Act of 1940 (the "1940 Act") as an investment company and
meets the definition of a separate account under the Federal securities laws. It
is governed by the laws of Delaware, our state of domicile, and may also be
governed by the laws of other states in which we do business. Registration with
the SEC does not involve any supervision by the SEC of the management or
investment policies or practices of Account B.
ACCOUNT B DIVISIONS
Account B is divided into Divisions. Currently, each Division of Account B
offered under this prospectus invests in a portfolio of the GCG Trust, the ESS
Trust, the WP Trust or the PIMCO Trust. DSI serves as the Manager to each Series
of the GCG Trust and the ESS Trust, Warburg serves as the investment adviser to
the WP Trust, and PIMCO serves as Adviser to each Series of the PIMCO Trust. See
the Trusts' prospectuses for details. The GCG Trust, the ESS Trust and DSI have
retained several portfolio managers to manage the assets of the respective
Series as indicated below. There may be restrictions on the amount of the
allocation to certain Divisions based on state laws and regulations. The
investment objectives of the various Series in the Trusts are described below.
There is no guarantee that any portfolio or Series will meet its investment
objectives. Meeting objectives depends on various factors, including, in certain
cases, how well the portfolio managers anticipate changing economic and market
conditions. Account B also has other Divisions investing in other series which
are not available to the Contract described in this prospectus.
DSI and PIMCO provide the overall business management and administrative
services necessary for the Series' operation and provide or procure the services
and information necessary to the proper conduct of the business of the Series.
See the Trusts' prospectuses for details.
DSI and PIMCO are responsible for providing or procuring, at their own expense,
the services reasonably necessary for the ordinary operation of the Series of
the GCG and PIMCO Trusts. The ESS Trust pays its own expenses. DSI and PIMCO do
not bear the expense of brokerage fees and other transactional expenses for
securities or other assets (which are generally considered part of the cost for
assets), taxes (if any) paid by a Series of the GCG Trust or the PIMCO Trust,
interest on borrowing, fees and expenses of the independent trustees, and
extraordinary expenses, such as litigation or indemnification expenses. See the
GCG and PIMCO Trusts prospectuses for details.
The GCG and the ESS Trusts each pay DSI for its services a fee, payable monthly,
based on the annual rates of the average daily net assets of the respective
Series shown in the tables below. DSI and EISI (and not the Trusts) pay each
portfolio manager a monthly fee for managing the assets of the respective
Series. The WP Trust pays Warburg a fee for managing the International Equity
Portfolio of the WP Trust.
13
<PAGE>
THE GCG TRUST
<TABLE>
<CAPTION>
SERIES AVAILABLE CURRENTLY FEES (based on combined assets of the indicated groups of Series)
- --------------------------------------------------- -------------------------------------------------------------------
<S><C>
Multiple Allocation, Fully Managed, Capital 1.00% of first $750 million;
Appreciation, Rising Dividends, All-Growth, Real 0.95% of next $1.250 billion;
Estate, Hard Assets, Value Equity, Strategic 0.90% of next $1.5 billion; and
Equity, and Small Cap Series: 0.85% of amount in excess of $3.5 billion
Growth Opportunities Series(1): 1.10% of first $250 million;
1.05% of next $400 million;
1.00% of next $450 million; and
0.95% of amount in excess of $1.1 billion
Developing World Series: 1.75% of average daily net assets
Limited Maturity Bond and 0.60% of first $200 million;
Liquid Asset Series: 0.55% of next $300 million; and
0.50% of amount in excess of $500 million
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
(1) After Trust Consolidation, the assets of the Growth Opportunity, the Growth
& Income and the Value + Growth Series will be combined for the purposes of
determining fees.
<TABLE>
<CAPTION>
SERIES AVAILABLE WITH TRUST CONSOLIDATION FEES (based on combined assets of the indicated groups of Series)
- --------------------------------------------------- -------------------------------------------------------------------
<S><C>
Growth & Income and Value + Growth Series(1): 1.10% of first $250 million in combined assets of these Series;
1.05% of next $400 million;
1.00% of next $450 million; and
0.95% of amount in excess of $1.1 billion
Mid-Cap Growth, Total Return, 1.00% of first $250 million in combined assets of these Series;
and Research Series: 0.95% of next $400 million;
0.90% of next $450 million; and
0.85% of amount in excess of $1.1 billion
Global Fixed Income Series: 1.60%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
(1) After Trust Consolidation, the assets of the Growth Opportunity, the Growth
& Income and the Value + Growth Series will be combined for the purposes of
determining fees.
THE ESS TRUST
<TABLE>
<CAPTION>
SERIES FEES
- --------------------------------------------------- -------------------------------------------------------------------
<S><C>
OTC, Research, and Total Return Portfolios: 0.80% of first $300 million;
0.55% of amount in excess of $300 million
Growth & Income Portfolio: 0.95% of first $200 million;
0.75% of amount in excess of $200 million
Value + Growth Portfolio: 0.95% of first $500 million;
0.75% of amount in excess of $500 million
International Fixed Income Portfolio: 0.85% of first $200 million;
0.75% of next $300 million;
0.60% of next $500 million;
0.55% of next $1.0 billion;
0.40% of amount in excess of $2.0 billion
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
The PIMCO Trust pays PIMCO an advisory fee (see the table following) and an
administrative fee of 0.25%, each payable monthly, based on the average daily
net assets of each of the Series for managing the assets of the Series and
for administering the Trust.
<TABLE>
<S><C>
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE WP TRUST
<TABLE>
<CAPTION>
SERIES FEES
- --------------------------------------------------- -------------------------------------------------------------------
<S><C>
International Equity Portfolio: 1.00% of average daily net assets
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE PIMCO TRUST:
<TABLE>
<CAPTION>
SERIES ADVISORY FEE
- --------------------------------------------------- -------------------------------------------------------------------
<S><C>
PIMCO High Yield Bond Portfolio: 0.50%
PIMCO StocksPLUS Growth and Income Portfolio: 0.40%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following Divisions invest in designated Series of the GCG Trust.
MULTIPLE ALLOCATION DIVISION
MULTIPLE ALLOCATION SERIES
OBJECTIVE -- The highest total return, consisting of capital appreciation and
current income, consistent with the preservation of capital and elimination of
unnecessary risk.
INVESTMENTS -- Investment in equity and debt securities and the use of certain
sophisticated investment strategies and techniques.
PORTFOLIO MANAGER -- Zweig Advisors Inc.
FULLY MANAGED DIVISION
FULLY MANAGED SERIES
OBJECTIVE -- High total investment return over the long term, consistent with
the preservation of capital and prudent investment risk.
INVESTMENTS -- Pursues an active asset allocation strategy whereby investments
are allocated, based upon an evaluation of economic and market trends and the
anticipated relative total return available, among three asset classes -- debt
securities, equity securities and money market instruments.
PORTFOLIO MANAGER -- T. Rowe Price Associates, Inc.
CAPITAL APPRECIATION DIVISION
CAPITAL APPRECIATION SERIES
OBJECTIVE -- Long-term capital growth.
INVESTMENTS -- Invests in common stocks and preferred stock that will be
allocated among various categories of stocks referred to as "components" which
consist of the following: (i) The Growth Component -- Securities that the
portfolio manager believes have the following characteristics: stability and
quality of earnings and positive earnings momentum; dominant competitive
positions; and demonstrate above-average growth rates as compared to published
S&P 500 earnings projections; and (ii) The Value Component-Securities that the
portfolio manager regards as fundamentally undervalued, i.e., securities selling
at a discount to asset value and securities with a relatively low price/earnings
ratio. The securities eligible for this component may include real estate
stocks, such as securities of publicly owned companies that, in the portfolio
manager's judgment, offer an optimum combination of current dividend yield,
expected dividend growth, and discount to current real estate value.
PORTFOLIO MANAGER -- Chancellor LGT Asset Management, Inc.
15
<PAGE>
RISING DIVIDENDS DIVISION
RISING DIVIDENDS SERIES
OBJECTIVE -- Capital appreciation, with dividend income as a secondary
objective.
INVESTMENTS -- Investment in equity securities of high quality companies that
meet the following four criteria: consistent dividend increases; substantial
dividend increases; reinvested profits; and an under-leveraged balance sheet.
PORTFOLIO MANAGER -- Kayne Anderson Investment Management, LLC.
ALL-GROWTH DIVISION
ALL-GROWTH SERIES
OBJECTIVE -- Capital appreciation.
INVESTMENTS -- Investment in securities selected for their long-term growth
prospects.
PORTFOLIO MANAGER -- Pilgrim, Baxter & Associates, Ltd.
REAL ESTATE DIVISION
REAL ESTATE SERIES
OBJECTIVE -- Capital appreciation, with current income as a secondary objective.
INVESTMENTS -- Investment in publicly traded equity securities of companies in
the real estate industry listed on national exchanges or on the National
Association of Securities Dealers Automated Quotation System.
PORTFOLIO MANAGER -- EII Realty Securities, Inc.
HARD ASSETS DIVISION
HARD ASSETS SERIES
OBJECTIVE -- Long-term capital appreciation.
INVESTMENTS -- Investment in equity and debt securities of companies engaged in
the exploration, development, production, management, and distribution of hard
assets.
PORTFOLIO MANAGER -- Van Eck Associates Corporation
VALUE EQUITY DIVISION
VALUE EQUITY SERIES
OBJECTIVE -- Capital appreciation with a secondary objective of dividend income.
INVESTMENTS -- Investment primarily in equity securities of U.S. and foreign
issuers which, when purchased, meet quantitative standards believed by the
Portfolio Manager to indicate above average financial soundness and high
intrinsic value relative to price.
PORTFOLIO MANAGER -- Eagle Asset Management, Inc.
STRATEGIC EQUITY DIVISION
STRATEGIC EQUITY SERIES
OBJECTIVE -- Long-term capital appreciation.
INVESTMENTS -- Investment primarily in equity securities based on various equity
market timing techniques. The amount of the Series' assets allocated to equities
shall vary from time to time to seek positive investment performance from
advancing equity markets and to reduce exposure to equities when risk/reward
characteristics are believed to be less attractive.
PORTFOLIO MANAGER -- Zweig Advisors Inc.
SMALL CAP DIVISION
SMALL CAP SERIES
OBJECTIVE -- Long-term capital appreciation.
INVESTMENTS -- Investment primarily in equity securities of companies that, at
the time of purchase, have a total market capitalization -- present market value
per share multiplied by the total number of shares outstanding -- within the
range of companies included in the Russell 2000 Growth Index.
PORTFOLIO MANAGER -- Fred Alger Management, Inc.
GROWTH OPPORTUNITIES DIVISION
GROWTH OPPORTUNITIES SERIES
OBJECTIVE -- Capital appreciation.
16
<PAGE>
INVESTMENTS -- Investment primarily in equity securities of domestic companies
emphasizing companies with market capitalizations of $1 billion or more.
PORTFOLIO MANAGER -- Montgomery Asset Management, LLC
DEVELOPING WORLD DIVISION
DEVELOPING WORLD SERIES
OBJECTIVE -- Capital appreciation.
INVESTMENTS -- Investment primarily in equity securities of companies in
countries having economies and markets generally considered to be emerging or
developing.
PORTFOLIO MANAGER -- Montgomery Asset Management, LLC
LIMITED MATURITY BOND DIVISION
LIMITED MATURITY BOND SERIES
OBJECTIVE -- Highest current income consistent with low risk to principal and
liquidity. Also seeks to enhance its total return through capital appreciation
when market factors indicate that capital appreciation may be available without
significant risk to principal.
INVESTMENTS -- Investment primarily in a diversified portfolio of limited
maturity debt securities. No individual security will at the time of purchase
have a remaining maturity longer than seven years and the dollar-weighted
average maturity of the Series will not exceed five years.
PORTFOLIO MANAGER -- ING Investment Management, LLC
LIQUID ASSET DIVISION
LIQUID ASSET SERIES
OBJECTIVE -- High level of current income consistent with the preservation of
capital and liquidity.
INVESTMENTS -- Obligations of the U.S. Government and its agencies and
instrumentalities; bank obligations; commercial paper and short-term corporate
debt securities.
TERM -- All issues maturing in less than one year.
PORTFOLIO MANAGER -- ING Investment Management, LLC
The following Divisions invest in designated Series of the ESS Trust. After
Trust Consolidation, they will invest in designated Series of the GCG Trust.
OTC DIVISION (At the time of Trust Consolidation, the OTC Division will be
renamed the Mid-Cap Growth Division, and it will then invest in
the Mid-Cap Growth Series of the GCG Trust.)
OTC PORTFOLIO
OBJECTIVE -- Long-term growth of capital.
INVESTMENTS -- Investment primarily in securities of companies that are traded
principally on the over-the-counter (OTC) market.
PORTFOLIO MANAGER -- Massachusetts Financial Services Company
After Trust Consolidation: MID-CAP GROWTH DIVISION
MID-CAP GROWTH SERIES OF THE GCG TRUST
OBJECTIVE -- Long-term growth of capital.
INVESTMENTS -- Investment primarily in equity
securities with medium market capitalization.
PORTFOLIO MANAGER -- Massachusetts Financial Services
Company
RESEARCH DIVISION
RESEARCH PORTFOLIO
OBJECTIVE -- Long term growth of capital and future income.
INVESTMENTS -- Investment primarily in common stocks or securities convertible
into common stocks of companies believed to possess better than average
prospects for long-term growth.
PORTFOLIO MANAGER -- Massachusetts Financial Services Company
After Trust Consolidation: RESEARCH DIVISION
RESEARCH SERIES OF THE GCG TRUST
OBJECTIVE -- Long-term growth of capital and future
income.
17
<PAGE>
INVESTMENTS -- Investment primarily in common stocks
or securities convertible into common stocks of
companies believed to possess better than average
prospects for long-term growth.
PORTFOLIO MANAGER -- Massachusetts Financial Services
Company
TOTAL RETURN DIVISION
TOTAL RETURN PORTFOLIO
OBJECTIVE -- Above-average income consistent with prudent employment of capital.
INVESTMENTS -- Investment primarily in equity securities.
PORTFOLIO MANAGER -- Massachusetts Financial Services Company
After Trust Consolidation: TOTAL RETURN DIVISION
TOTAL RETURN SERIES OF THE GCG TRUST
OBJECTIVE -- Above-average income consistent with
prudent employment of capital.
INVESTMENTS -- Investment primarily in equity
securities.
PORTFOLIO MANAGER -- Massachusetts Financial Services
Company
GROWTH & INCOME DIVISION
GROWTH & INCOME PORTFOLIO
OBJECTIVE -- Long-term total return.
INVESTMENTS -- Investment primarily in equity and debt securities, focusing on
small- and mid-cap companies that offer potential appreciation, current income,
or both.
PORTFOLIO MANAGER -- Robertson, Stephens & Company Investment Management, L.P.
After Trust Consolidation: GROWTH & INCOME DIVISION
GROWTH & INCOME SERIES OF THE GCG TRUST
OBJECTIVE -- Long-term total return.
INVESTMENTS -- Investment primarily in equity and
debt securities, focusing on small- and mid-cap
companies that offer potential appreciation, current
income, or both.
PORTFOLIO MANAGER -- Robertson, Stephens & Company
Investment Management, L.P.
VALUE + GROWTH DIVISION
VALUE + GROWTH PORTFOLIO
OBJECTIVE -- Capital appreciation.
INVESTMENTS -- Investment primarily in mid-cap growth companies with favorable
relationships between price/earnings ratios and growth rates. Mid-cap companies
are those with market capitalizations ranging from $750 million to approximately
$2 billion.
PORTFOLIO MANAGER -- Robertson, Stephens & Company Investment Management, L.P.
After Trust Consolidation: VALUE + GROWTH DIVISION
VALUE + GROWTH SERIES OF THE GCG TRUST
OBJECTIVE -- Capital appreciation.
INVESTMENTS -- Investment primarily in mid-cap growth
companies with favorable relationships between
price/earnings ratios and growth rates. Mid-cap
companies are those with market capitalizations
ranging from $750 million to approximately $2.0
billion.
PORTFOLIO MANAGER -- Robertson, Stephens & Company
Investment Management, L.P.
INTERNATIONAL FIXED INCOME DIVISION (At the time of Trust Consolidation, the
International Fixed Income Division will be
renamed the Global Fixed Income Division,
and it will then invest in the Global Fixed
Income Series of the GCG Trust.)
INTERNATIONAL FIXED INCOME PORTFOLIO
OBJECTIVE -- High total return.
18
<PAGE>
INVESTMENTS -- Investment in both foreign and domestic debt securities and
related foreign currency transactions. The total return will be sought through a
combination of current income, capital gains and gains in currency positions.
PORTFOLIO MANAGER -- Baring International Investment Limited
After Trust Consolidation: GLOBAL FIXED INCOME DIVISION
GLOBAL FIXED INCOME SERIES OF THE GCG TRUST
OBJECTIVE -- High Total Return.
INVESTMENTS -- Investment primarily in both domestic
and foreign debt securities and related foreign
currency transactions. The total return will be
sought through a combination of current income,
capital gains and gains in currency positions.
PORTFOLIO MANAGER -- Baring International Investment
Limited
The following Division invests in the designated Series of the WP Trust.
INTERNATIONAL EQUITY DIVISION
INTERNATIONAL EQUITY PORTFOLIO
OBJECTIVE -- Long-term capital appreciation.
INVESTMENTS -- Investment primarily in a broadly diversified portfolio of equity
securities of companies that have their principal business activities and
interests outside of the United States.
PORTFOLIO MANAGER -- Warburg Pincus Asset Management, Inc.
The following Divisions invest in designated Series of the PIMCO Trust.
HIGH YIELD BOND DIVISION
PIMCO HIGH YIELD BOND PORTFOLIO
OBJECTIVE -- Maximize total return.
INVESTMENTS -- Invests in at least 65% of its assets in a diversified portfolio
of junk bonds rated at least B by Moody's Investor Services, Inc. or Standard &
Poor's Rating Services, a Division of the McGraw Hill Cos., Inc., or, if
unrated, determined by the Adviser to be of comparable quality.
PORTFOLIO MANAGER -- PIMCO
STOCKSPLUS GROWTH AND INCOME DIVISION
PIMCO STOCKSPLUS GROWTH AND INCOME PORTFOLIO
OBJECTIVE -- Total return that exceeds the total return of the S&P 500.
INVESTMENTS -- Invests in common stocks, options, futures, options on futures
and swaps consistent with its portfolio management strategy to attempt to equal
or exceed the performance of the S&P 500.
PORTFOLIO MANAGER -- PIMCO
CHANGES WITHIN ACCOUNT B
We may from time to time make additional Divisions available. These Divisions
will invest in investment portfolios we find suitable for the Contract. We also
have the right to eliminate investment Divisions from Account B, to combine two
or more Divisions, or to substitute a new portfolio for the portfolio in which a
Division invests. A substitution may become necessary if, in our judgment, a
portfolio no longer suits the purposes of the Contract. This may happen due to a
change in laws or regulations, or a change in a portfolio's investment
objectives or restrictions, or because the portfolio is no longer available for
investment, or for some other reason. In addition, we reserve the right to
transfer assets of Account B, which we determine to be associated with the class
of Contracts to which your Contract belongs, to another account. If necessary,
we will get prior approval from the insurance department of our state of
domicile before making such a substitution or transfer. We will also get any
required approval from the SEC and any other required approvals before making
such a substitution or transfer. We will notify you as soon as practicable of
any proposed changes.
When permitted by law, we reserve the right to:
(1) deregister Account B under the 1940 Act;
(2) operate Account B as a management company under the 1940 Act if it is
operating as a unit investment trust;
19
<PAGE>
(3) operate Account B as a unit investment trust under the 1940 Act if it is
operating as a managed separate account;
(4) restrict or eliminate any voting rights as to Account B; and
(5) combine Account B with other accounts.
THE FIXED ACCOUNT
Premium payments and Credits may be allocated to the Fixed Account at the time
of the Initial Premium payment or as subsequently made. Note certain
restrictions may apply; see Crediting Premium Payments. In addition, all or part
of your Accumulation Value may be transferred to the Fixed Account. Assets
supporting amounts allocated to the Fixed Account are available to fund the
claims of all classes of our customers, Owners and other creditors. Interests
under your Contract relating to the Fixed Account are registered under the
Securities Act of 1933 but the Fixed Account is not registered under the 1940
Act.
SELECTING A GUARANTEE PERIOD. You may select one or more Fixed Allocations with
specified Guarantee Periods for investment. We currently offer Guarantee Periods
with durations of 1, 3, 5, 7 and 10 years. We reserve the right at any time to
decrease or increase the number of Guarantee Periods offered. Not all Guarantee
Periods may be available for new allocations. Each Fixed Allocation will have a
Maturity Date corresponding to the last day of the calendar month of the
applicable Guarantee Period.
Your Accumulation Value in the Fixed Account equals the sum of your Fixed
Allocations, plus Credits, plus the interest credited thereto, as adjusted for
any partial withdrawals, reallocations or other charges we may impose. Your
Fixed Allocation will be credited with the Guaranteed Interest Rate in effect on
the date we receive and accept your premium or reallocation of Accumulation
Value. The Guaranteed Interest Rate will be credited daily to yield the quoted
Guaranteed Interest Rate.
GUARANTEED INTEREST RATES. Each Guarantee Period will have an interest rate
that is guaranteed. We do not have a specific formula for establishing the
Guaranteed Interest Rates for the different Guarantee Periods. The determination
made will be influenced by, but not necessarily correspond to, interest rates
available on fixed income investments which we may acquire with the amounts we
receive as premium payments or reallocations of Accumulation Value under the
Contracts. These amounts will be invested primarily in investment-grade fixed
income securities including: securities issued by the United States Government
or its agencies or instrumentalities, which issues may or may not be guaranteed
by the United States Government; debt securities that have an investment grade
rating, at the time of purchase, within the four highest grades assigned by
Moody's Investor Services, Inc. (Aaa, Aa, A or Baa), Standard & Poor's Ratings
Group (AAA, AA, A or BBB) or any other nationally recognized rating service;
mortgage-backed securities collateralized by the Federal Home Loan Mortgage
Association, the Federal National Mortgage Association or the Government
National Mortgage Association, or that have an investment grade rating at the
time of purchase within the four highest grades described above; other debt
investments; commercial paper; and cash or cash equivalents. You will have no
direct or indirect interest in these investments. We will also consider other
factors in determining the Guaranteed Interest Rates, including regulatory and
tax requirements, sales commissions and administrative expenses borne by us,
general economic trends and competitive factors. We cannot predict or guarantee
the level of future interest rates. However, no Fixed Allocation will ever have
a Guaranteed Interest Rate of less than 3% per year.
We may offer interest rate specials from time to time during which times the
interest rates declared for new premiums are higher than the base rate supported
by current investment yields. Renewal rates for such rate specials will be
derived from the base rate not the special rates initially declared. Such rate
specials are offered at our discretion and only if you have a Fixed Allocation.
While the foregoing generally describes our investment strategy with respect to
the Fixed Account, we are not obligated to invest according to any particular
strategy, except as may be required by Delaware and other state insurance laws.
TRANSFERS FROM A FIXED ALLOCATION. You may transfer your Accumulation Value
from a Fixed Allocation to one or more new Fixed Allocations with new Guarantee
Periods of any length offered by us or to the Divisions of Account B. Unless you
specify in writing the Fixed Allocations from which such transfers will be made,
we will transfer amounts from the Fixed Allocations starting with the Guarantee
Period nearest its Maturity Date, until we have honored your transfer request.
20
<PAGE>
Transfers from a Fixed Allocation made within 30 days prior to the Maturity Date
of the applicable Guarantee Period or pursuant to the dollar cost averaging
program will not be subject to a Market Value Adjustment. All other transfers
from your Fixed Allocations will be subject to a Market Value Adjustment. The
minimum amount that can be transferred to or from any Fixed Allocation is $100.
If a transfer request would reduce the Accumulation Value remaining in your
Fixed Allocation to less than $100, we will treat such transfer request as a
request to transfer the entire Accumulation Value in such Fixed Allocation.
At the end of a Fixed Allocation's Guarantee Period, you may transfer amounts in
that Fixed Allocation to the Divisions and one or more new Fixed Allocations
with Guarantee Periods of any length then offered by us. You may not, however,
transfer amounts to any Fixed Allocation with a Guarantee Period that extends
beyond your Annuity Commencement Date.
At least 30 calendar days prior to a Maturity Date of any of your Fixed
Allocations, or earlier if required by state law, we will send you a notice of
the Guarantee Periods then available. Prior to the Maturity Date of your Fixed
Allocations you must notify us as to which Division or new Guarantee Period you
have selected. If timely instructions are not received, we will transfer your
Accumulation Value in the maturing Fixed Allocation to a Fixed Allocation with a
Guarantee Period equal in length to the expiring Guarantee Period. If such
Guarantee Period is not available or extends beyond your Annuity Commencement
Date, we will transfer your Accumulation Value in the maturing Fixed Allocation
to the next shortest Guarantee Period which does not extend beyond the Annuity
Commencement Date. If no such Guarantee Period is available, we will transfer
your Accumulation Value to the Specially Designated Division.
PARTIAL WITHDRAWALS FROM A FIXED ALLOCATION. Prior to the Annuity Commencement
Date and while your Contract is in effect, you may take partial withdrawals from
the Accumulation Value in a Fixed Allocation by sending satisfactory notice to
our Customer Service Center. You may make systematic withdrawals of interest
earnings only from a Fixed Allocation under our Systematic Partial Withdrawal
Option. (See, Partial Withdrawals, Systematic Partial Withdrawal Option.)
Systematic withdrawals from a Fixed Allocation are not permitted if such Fixed
Allocation participates in the dollar cost averaging program. Withdrawals from a
Fixed Allocation taken within 30 days prior to the Maturity Date and systematic
withdrawals are not subject to a Market Value Adjustment; however, a surrender
charge may be imposed. Withdrawals may have federal income tax consequences,
including a 10% penalty tax. See Surrender Charge, Surrender Charge for Excess
Partial Withdrawals and Federal Tax Considerations.
If you specify a Fixed Allocation from which your partial withdrawal will be
made, we will assess the partial withdrawal against that Fixed Allocation. If
you do not specify the investment option from which the partial withdrawal will
be taken, we will not assess your partial withdrawal against any Fixed
Allocations unless the partial withdrawal exceeds the Accumulation Value in the
Divisions of Account B. If there is no Accumulation Value in those Divisions,
partial withdrawals will be deducted from your Fixed Allocations starting with
the Guarantee Periods nearest their Maturity Dates until we have honored your
request.
MARKET VALUE ADJUSTMENT. We will apply a Market Value Adjustment, determined by
application of the formula described below, in the following circumstances: (i)
whenever you make a withdrawal or transfer from a Fixed Allocation, other than
withdrawals or transfers made within 30 days prior to the Maturity Date of the
applicable Guarantee Period, systematic partial withdrawals, or pursuant to the
dollar cost averaging program; and (ii) on the Annuity Commencement Date with
respect to any Fixed Allocation having a Guarantee Period that does not end on
or within 30 days after the Annuity Commencement Date.
The Market Value Adjustment is determined by multiplying the amount withdrawn,
transferred or annuitized by the following factor:
( 1+I )(N/365)
(---------) -1
(1+J+.0050)
Where "I" is the Index Rate for a Fixed Allocation as of the first day of the
applicable Guarantee Period; "J" is the Index Rate for new Fixed Allocations
with Guarantee Periods equal to the number of years (fractional years are
rounded up to the next full year except in Pennsylvania) remaining in the
Guarantee Period at the time of the withdrawal, transfer or annuitization; and
"N" is the remaining number of days in the Guarantee Period at the time of the
withdrawal, transfer or annuitization.
The Index Rate is the average of the Ask Yields for U.S. Treasury Strips as
reported by a national quoting service for the applicable maturity. The average
currently is based on the period from the 22nd day of the
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<PAGE>
calendar month two months prior to the calendar month of the Index Rate
determination to the 21st day of the calendar month immediately prior to the
month of determination. The applicable maturity is the maturity date for these
U.S. Treasury Strips on or next following the last day of the Guarantee Period.
If the Ask Yields are no longer available, the Index Rate will be determined
using a suitable replacement method approved where required.
We currently calculate the Index Rate once each calendar month. However, we
reserve the right to calculate the Index Rate more frequently than monthly, but
in no event will such Index Rate be based upon a period of less than 28 days.
The Market Value Adjustment may result in either an increase or decrease in the
Accumulation Value of your Fixed Allocation. If a full surrender, transfer or
annuitization from the Fixed Allocation has been requested, the balance of the
Market Value Adjustment will be added to or subtracted from the amount
surrendered, transferred or annuitized. If a partial withdrawal, transfer or
annuitization has been requested, the Market Value Adjustment will be calculated
on the total amount that must be withdrawn, transferred or annuitized in order
to provide the amount requested. If a negative Market Value Adjustment exceeds
the Accumulation Value in the Fixed Allocation, such transaction will be
considered a full surrender, transfer or annuitization. The Appendix contains
several examples which illustrate the application of the Market Value
Adjustment.
- --------------------------------------------------------------------------------
FACTS ABOUT THE CONTRACT
THE OWNER
You are the Owner. You are also the Annuitant unless another Annuitant is named
in the application or enrollment form. You have the rights and options described
in the Contract. One or more persons may own the Contract. If there are multiple
Owners named, the age of the oldest Owner shall determine the applicable death
benefit.
Death of an Owner activates the death benefit provision. In the case of a sole
Owner who dies prior to the Annuity Commencement Date, we will pay the
Beneficiary the death benefit when due. The sole Owner's estate will be the
Beneficiary if no Beneficiary designation is in effect, or if the designated
Beneficiary has predeceased the Owner. In the case of a joint Owner of the
Contract dying prior to the Annuity Commencement Date, we will designate the
surviving Owner(s) as the Beneficiary(ies). This supersedes any previous
Beneficiary designation.
In the case where the Owner is a trust and a beneficial Owner of the trust has
been designated, the beneficial Owner will be treated as the Owner of the
Contract solely for the purpose of determining the death benefit provisions. If
a beneficial Owner is changed or added after the Contract Date, this will be
treated as a change of Owner for purposes of determining the death benefit. See
Change of Owner or Beneficiary. If no beneficial Owner of the Trust has been
designated, the availability of enhanced death benefits will be determined by
the age of the Annuitant at issue.
THE ANNUITANT
The Annuitant is the person designated by the Owner to be the measuring life in
determining Annuity Payments. The Owner will receive the annuity benefits of the
Contract if the Annuitant is living on the Annuity Commencement Date. If the
Annuitant dies before the Annuity Commencement Date, and a contingent Annuitant
has been named, the contingent Annuitant becomes the Annuitant (unless the Owner
is not an individual, in which case the death benefit becomes payable). Once
named, the Annuitant may not be changed at any time.
If there is no contingent Annuitant when the Annuitant dies prior to the Annuity
Commencement Date, the Owner will become the Annuitant. The Owner may designate
a new Annuitant within 60 days of the death of the Annuitant.
If there is no contingent Annuitant when the Annuitant dies prior to the Annuity
Commencement Date and the Owner is not an individual, we will pay the
Beneficiary the death benefit then due. The Beneficiary will be as provided in
the Beneficiary designation then in effect. If no Beneficiary designation is in
effect, or if there is no designated Beneficiary living, the Owner will be the
Beneficiary. If the Annuitant was the sole Owner and there is no Beneficiary
designation, the Annuitant's estate will be the Beneficiary.
Regardless of whether a death benefit is payable, if the Annuitant dies and any
Owner is not an individual, such death will trigger application of the
distribution rules imposed by Federal tax law.
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THE BENEFICIARY
The Beneficiary is the person to whom we pay death benefit proceeds and who
becomes the successor Owner if the Owner dies prior to the Annuity Commencement
Date. We pay death benefit proceeds to the primary Beneficiary (unless there are
joint Owners, in which case death proceeds are payable to the surviving
Owner(s)). See Proceeds Payable to the Beneficiary.
If the Beneficiary dies before the Annuitant or Owner, the death benefit
proceeds are paid to the contingent Beneficiary, if any. If there is no
surviving Beneficiary, we pay the death benefit proceeds to the Owner's estate.
One or more persons may be named as Beneficiary or contingent Beneficiary. In
the case of more than one Beneficiary, unless otherwise specified, we will
assume any death benefit proceeds are to be paid in equal shares to the
surviving beneficiaries.
You have the right to change beneficiaries during the Annuitant's lifetime
unless you have designated an irrevocable Beneficiary. When an irrevocable
Beneficiary has been designated, you and the irrevocable Beneficiary may have to
act together to exercise certain rights and options under the Contract.
CHANGE OF OWNER OR BENEFICIARY
During the Annuitant's lifetime and while your Contract is in effect, you may
transfer ownership of the Contract (if purchased in connection with a
non-qualified plan) subject to our published rules at the time of the change. A
change in Ownership may affect the amount of the death benefit and the
guaranteed death benefit. You may also change the Beneficiary. To make either of
these changes, you must send us written notice of the change in a form
satisfactory to us. The change will take effect as of the day the notice is
signed. The change will not affect any payment made or action taken by us before
recording the change at our Customer Service Center. See Federal Tax
Considerations, Assignments, Pledges and Gratuitous Transfers.
AVAILABILITY OF THE CONTRACT
We can issue a Contract if both the Annuitant and the Owner are not older than
age 85.
TYPES OF CONTRACTS
QUALIFIED CONTRACTS. The Contract may be issued as an Individual Retirement
Annuity or in connection with an individual retirement account or other
qualified plan. In the latter cases, the Contract will be issued without an
Individual Retirement Annuity endorsement, and the rights of the participant
under the Contract will be affected by the terms and conditions of the
particular individual retirement trust or custodial account, and by provisions
of the Code and the regulations thereunder. For example, the individual
retirement trust or custodial account will impose minimum distribution rules,
which may require distributions to commence not later than April 1st of the
calendar year following the calendar year in which you attain age 70 1/2. For
both Individual Retirement Annuities and individual retirement accounts, the
minimum Initial Premium is $1,500. The annual limits on contributions to IRAs
and Roth IRAs are described under Federal Tax Consequences.
IF THE CONTRACT IS PURCHASED TO FUND A QUALIFIED PLAN OTHER THAN A ROTH IRA,
DISTRIBUTION MUST COMMENCE NOT LATER THAN APRIL 1ST OF THE CALENDAR YEAR
FOLLOWING THE CALENDAR YEAR IN WHICH YOU ATTAIN AGE 70 1/2. IF YOU OWN MORE THAN
ONE QUALIFIED PLAN, YOU SHOULD CONSULT YOUR TAX ADVISOR.
NON-QUALIFIED CONTRACTS. The Contract may fund any non-qualified plan.
Non-qualified Contracts do not qualify for any tax-favored treatment other than
the benefits provided for by annuities.
YOUR RIGHT TO SELECT OR CHANGE CONTRACT OPTIONS
Before the Annuity Commencement Date, you may change the Annuity Commencement
Date, frequency of Annuity Payments or the Annuity Option by sending a written
request to our Customer Service Center. The Annuitant may not be changed at any
time.
PREMIUMS
You purchase the Contract with an Initial Premium. After the end of the Free
Look Period, you may make additional premium payments. See Making Additional
Premium Payments. The minimum Initial Premium is $10,000 for a non-qualified
Contract and $1,500 for a qualified Contract.
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You must receive our prior approval before making a premium payment that causes
the Accumulation Value of all annuities that you maintain with us to exceed
$1,000,000. We may change the minimum initial or additional premium requirements
for certain group or sponsored arrangements. See Group or Sponsored
Arrangements.
QUALIFIED PLANS
For IRA Contracts, the annual premium on behalf of any individual Contract may
not exceed $2,000. Provided your spouse does not make a contribution to an IRA,
you may set up a spousal IRA even if your spouse has earned some compensation
during the year. The maximum deductible amount for a spousal IRA program is the
lesser of $2,250 or 100% of your compensation reduced by the contribution (if
any) made by you for the taxable year to your own IRA. However, no more than
$2,000 can go to either your or your spouse's IRA in any one year. For example,
$1,750 may go to your IRA and $500 to your spouse's IRA. These maximums are not
applicable if the premium is the result of a rollover from another qualified
plan.
For Roth IRA Contracts, the annual premium on behalf of any individual Contract,
together with the total amount of any contributions you have made to any
non-Roth IRAs (except for rollover contributions), may not exceed the lesser of
$2,000 or 100% of your compensation. Contributions to a Roth IRA are subject to
income limits. See IRA Contracts and Other Qualified Retirement Plans.
WHERE TO MAKE PAYMENTS. Remit premium payments to our Customer Service Center.
The address is shown on the cover. We will send you a confirmation notice.
MAKING ADDITIONAL PREMIUM PAYMENTS
You may make additional premium payments after the end of the Free Look Period.
We can accept additional premium payments until either the Annuitant or Owner
reaches the Attained Age of 85 under non-qualified plans. For qualified plans,
no contributions may be made to an IRA Contract other than a Roth IRA for the
taxable year in which you attain age 70 1/2 and thereafter (except for rollover
contributions). The minimum additional premium payment we will accept is $500
for a non-qualified plan and $250 for a qualified plan.
CREDITING PREMIUM PAYMENTS
The Initial Premium will be accepted or rejected within two business days of
receipt by us if accompanied by information sufficient to permit us to determine
if we are able to issue a Contract. We may retain an Initial Premium for up to
five business days while attempting to obtain information sufficient to enable
us to issue the Contract. If we are unable to do so within five business days,
the applicant or enrollee will be informed of the reasons for the delay and the
Initial Premium will be returned immediately unless the applicant or enrollee
consents to our retaining the Initial Premium until we have received the
information we require. Thereafter, all additional premiums will be accepted on
the day received.
In certain states we will also accept, by agreement with broker-dealers,
transmittal of initial and additional premium payments by wire order from the
broker-dealer to our Customer Service Center. Such transmittals must be
accompanied by a simultaneous telephone facsimile or other electronic data
transmission containing the essential information we require to open an account
and allocate the premium payment. Contact our Customer Service Center to find
out about state availability and broker-dealer requirements.
Upon our acceptance of premium payments received via wire order and accompanied
by sufficient electronically transmitted data, we will issue the Contract,
allocate the premium payment and Credit according to your instructions, and
invest the payment at the value next determined following receipt. See
Restrictions on Allocation of Premium Payments. Wire orders not accompanied by
sufficient data to enable us to accept the premium payment may be retained for
up to five business days while we attempt to obtain information sufficient to
enable us to issue the Contract. If we are unable to do so, our Customer Service
Center will inform the broker-dealer, on behalf of the applicant or enrollee, of
the reasons for the delay and return the premium payment immediately to the
broker-dealer for return to the applicant or enrollee, unless the applicant or
enrollee specifically consents to allow us to retain the premium payment until
our Customer Service Center receives the required information.
On the date we receive and accept your initial or additional premium payment:
(1) We allocate the Initial Premium and any Credit among the Divisions and Fixed
Allocations according to your instructions, subject to any restrictions. See
Restrictions on Allocation of Premium Payments. For additional premium
payments, the Accumulation Value will increase by the amount of the premium
and any Credit. If we do not receive instructions from you, the increase in
the Accumulation Value will be allo-
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cated among the Divisions in proportion to the amount of Accumulation Value
in each Division as of the date we receive and accept the additional premium
payment. If there is no Accumulation Value in the Divisions, the increase in
the Accumulation Value will be allocated to a Fixed Allocation with the
shortest Guarantee Period then available.
(2) For an Initial Premium, we calculate your applicable death benefit. When an
additional premium payment is made, we increase your applicable death
benefit in accordance with the death benefit option in effect for your
Contract.
Following receipt and acceptance of the wire order and accompanying data, and
investment of the premium payment, we will follow one of the two procedures set
forth below. The one we follow is determined by state availability and the
procedures of the broker-dealer which submitted the wire order.
(1) We will issue the Contract. However, until we have received and accepted a
properly completed application or enrollment form, we reserve the right to
rescind the Contract. If the form is not received within fifteen days of
receipt of the premium payment, we will refund the Accumulation Value
adjusted for any applicable Market Value Adjustment less any Credit plus any
charges we deducted, and the Contract will be voided. Some states require
that we return the premium paid. In these states, different rules will
apply.
(2) Based on the information provided, we will issue the Contract. We will mail
the Contract to you, together with an Application Acknowledgment Statement.
You must execute the Application Acknowledgment Statement and return it to
us at our Customer Service Center. Until we receive the executed Application
Acknowledgment Statement, neither you nor the broker-dealer may execute any
financial transactions with respect to the Contract unless such transactions
are appropriately requested in writing by you.
RESTRICTIONS ON ALLOCATION OF PREMIUM PAYMENTS
We may require that an Initial Premium plus Credit designated for a Division of
Account B or the Fixed Account be allocated to the Specially Designated Division
during the Free Look Period for Initial Premiums received from some states.
After the Free Look Period, if your Initial Premium plus Credit was allocated to
the Specially Designated Division, we will transfer the Accumulation Value to
the Divisions you previously selected based on the index of investment
experience next computed for each Division. See Facts About the Contract,
Measurement of Investment Experience, Index of Investment Experience and Unit
Value. Initial premiums designated for the Fixed Account will be allocated to a
Fixed Allocation with the Guarantee Period you have chosen; however, we reserve
the right to allocate to the Specially Designated Division for the Free Look
Period, then to your selected Fixed Allocations.
YOUR RIGHT TO REALLOCATE
You may reallocate your Accumulation Value among the Divisions and Fixed
Allocations at the end of the Free Look Period. We currently do not assess a
charge for allocation changes made during a Contract Year. We reserve the right,
however, to assess a $25 charge for each allocation change after the twelfth
allocation change in a Contract Year. We require that each reallocation of your
Accumulation Value equal at least $100 or, if less, your entire Accumulation
Value within a Division or Fixed Allocation. We reserve the right to limit, upon
notice, the maximum number of reallocations you may make within a Contract Year.
In addition, we reserve the right to defer the reallocation privilege at any
time we are unable to purchase or redeem shares of a Trust. We also reserve
the right to modify or terminate your right to reallocate your Accumulation
Value at any time in accordance with applicable law. Reallocations from the
Fixed Account are subject to the Market Value Adjustment unless taken as part of
the dollar cost averaging program or within 30 days prior to the Maturity Date
of the applicable Guarantee Period. To make a reallocation change, you must
provide us with satisfactory notice at our Customer Service Center. All
reallocation changes must be submitted by the earlier of 4:00 p.m. eastern time
or the close of the New York Stock Exchange.
We reserve the right to limit the number of reallocations of your Accumulation
Value among the Divisions and Fixed Allocations or refuse any reallocation
request if we believe that: (a) excessive trading by you or a specific
reallocation request may have a detrimental effect on unit values or the share
prices of the underlying Series; or (b) we are informed by a Trust that the
purchase or redemption of shares is to be restricted because of excessive
trading or a specific reallocation or group of reallocations is deemed to have a
detrimental effect on share prices of the respective Trust.
Where permitted by law, we may accept your authorization of third party
reallocation on your behalf, subject to our rules. We may suspend or cancel such
acceptance at any time. We will notify you of any such suspension or
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cancellation. We may restrict the Divisions and Fixed Allocations that will be
available to you for reallocations of premiums during any period in which you
authorize such third party to act on your behalf. We will give you prior
notification of any such restrictions. However, we will not enforce such
restrictions if we are provided evidence satisfactory to us that: (a) such third
party has been appointed by a court of competent jurisdiction to act on your
behalf; or (b) such third party has been appointed by you to act on your behalf
for all your financial affairs.
Some restrictions may apply based on the free look provisions of the state where
the Contract is issued. See Your Right to Cancel or Exchange Your Contract.
DOLLAR COST AVERAGING
If you have at least $1,200 of Accumulation Value in the Limited Maturity Bond
Division, the Liquid Asset Division or a Fixed Allocation with a one year
Guarantee Period, you may elect the dollar cost averaging program and have a
specified dollar amount transferred from those Divisions or such Fixed
Allocation on a monthly basis.
The main objective of dollar cost averaging is to attempt to shield your
investment from short-term price fluctuations. Since the same dollar amount is
transferred to other Divisions each month, more units are purchased in a
Division if the value per unit is low and less units are purchased if the value
per unit is high.
Therefore, a lower than average value per unit may be achieved over the long
term. This plan of investing allows investors to take advantage of market
fluctuations but does not assure a profit or protect against a loss in declining
markets.
Dollar cost averaging may be elected at issue or at a later date. The minimum
amount that may be transferred each month is $100. The maximum amount which may
be transferred is equal to your Accumulation Value in the Limited Maturity Bond
Division, the Liquid Asset Division or a Fixed Allocation with a one year
Guarantee Period when you elect the dollar cost averaging program, divided by
12.
The transfer date will be the same calendar day each month as the Contract Date.
The dollar amount will be allocated to the Divisions in which you are invested
in proportion to your Accumulation Value in each Division unless you specify
otherwise. If, on any transfer date, your Accumulation Value is equal to or less
than the amount you have elected to have transferred, the entire amount will be
transferred and the program will end. You may change the transfer amount once
each Contract Year, or cancel this program by sending satisfactory notice to our
Customer Service Center at least seven days before the next transfer date. Any
allocation under this program will not be included in determining if the excess
allocation charge will apply. We currently do not permit transfers under the
dollar cost averaging program from Fixed Allocations with other than one year
Guarantee Periods. Transfers from a Fixed Allocation under the dollar cost
averaging program will not be subject to a Market Value Adjustment. See, Market
Value Adjustment. A Fixed Allocation may not participate simultaneously in both
the dollar cost averaging program and the Systematic Partial Withdrawal Option.
WHAT HAPPENS IF A DIVISION IS NOT AVAILABLE
When a distribution is made from an investment portfolio supporting a Division
of Account B in which reinvestment is not available, we will allocate the
distribution, unless you specify otherwise, to the Specially Designated
Division.
Such a distribution can occur when (a) an investment portfolio matures, or (b) a
distribution from a portfolio or Division cannot be reinvested in the portfolio
or Division due to the unavailability of securities for acquisition. When an
investment portfolio matures, we will notify you in writing 30 days in advance
of that date. To elect an allocation of the distribution to other than the
Specially Designated Division, you must provide satisfactory notice to us at
least seven days prior to the date the portfolio matures. Such allocations are
not counted for purposes of the number of free allocation changes permitted.
When a distribution from a portfolio or Division cannot be reinvested in the
portfolio due to the unavailability of securities for acquisition, we will
notify you promptly after the allocation has occurred. If within 30 days you
allocate the Accumulation Value from the Specially Designated Division to other
Divisions or Fixed Allocations of your choice, such allocations will not be
included in determining if the excess allocation charge will apply.
ADDITIONAL CREDIT TO PREMIUM
A Credit will be added to each premium payment applied to the Accumulation
Value. The Credit will be applied pro rata to each Division or Fixed Allocation
in the same ratio as the premium payment is allocated. The Credit
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is equal to 4% of the premium payment applied to the Accumulation Value. In any
of the following circumstances, the Credit may not be payable:
(1) If you return your Contract within your Free Look Period, any Credit will be
deducted from the refund amount;
(2) If a death benefit becomes payable, any Credit based on any premium payment
received within one year prior to the date of death of the Owner or
Annuitant (when the Owner is other than an individual) may reduce the death
benefit payable; and
(3) If any surrender charge is waived under the Waiver of Surrender Charge
Rider: (i) the Accumulation Value will be reduced for all Credits applied
within one year prior to the date such surrender charges are waived; and
(ii) no Credit will be applied to any premium payment received after the
earliest date on which any surrender charges are waived.
Any gains or losses attributable to a Credit will not be considered part of any
credit deducted from any refund amount or death benefit.
YOUR ACCUMULATION VALUE
Your Accumulation Value is the sum of the amounts in each of the Divisions and
the Fixed Allocations in which you are invested, and is the amount available for
investment at any time. You select the Divisions and Fixed Allocations to which
to allocate your Accumulation Value. We adjust your Accumulation Value on each
Valuation Date to reflect the Divisions' investment performance and interest
credited to your Fixed Allocations, any additional premium payments and Credits
or partial withdrawals since the previous Valuation Date, and on each Contract
processing date to reflect any deduction of the annual Contract fee. Your
Accumulation Value is applied to your choice of an Annuity Option on the Annuity
Commencement Date subject to our published rules at such time. See Choosing an
Income Plan.
ACCUMULATION VALUE IN EACH DIVISION
ON THE CONTRACT DATE. On the Contract Date, your Accumulation Value is
allocated to each Division as you have specified, unless the Contract is issued
in a state that requires the return of premium payments during the Free Look
Period, in which case, the portion of your Initial Premium not allocated to a
Fixed Allocation, and any Credit thereon, will be allocated to the Specially
Designated Division during the Free Look Period. See Your Right to Cancel or
Exchange Your Contract.
ON EACH VALUATION DATE. At the end of each subsequent Valuation Period, the
amount of Accumulation Value in each Division will be calculated as follows:
(1) We take the Accumulation Value in the Division at the end of the preceding
Valuation Period.
(2) We multiply (1) by the Division's net rate of return for the current
Valuation Period.
(3) We add (1) and (2).
(4) We add to (3) any additional premium payments and Credits allocated to the
Division during the current Valuation Period.
(5) We add or subtract allocations to or from that Division during the current
Valuation Period.
(6) We subtract from (5) any partial withdrawals and any associated charges
allocated to that Division during the current Valuation Period.
(7) We subtract from (6) the amounts allocated to that Division for:
(a) any Contract fees; and
(b) any charge for premium taxes.
All amounts in (7) are allocated to each Division in the proportion that (6)
bears to the Accumulation Value in Account B, unless the Charge Deduction
Division has been specified. See Charges Deducted from the Accumulation Value.
MEASUREMENT OF INVESTMENT EXPERIENCE
INDEX OF INVESTMENT EXPERIENCE AND UNIT VALUE. The investment experience of a
Division is determined on each Valuation Date. We use an index to measure
changes in each Division's experience during a Valuation
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Period. We set the index at $10 when the first investments in a Division are
made, unless the underlying Series in which the Division invests has been
available under other contracts for some period of time. See Condensed Financial
Information, Index of Investment Experience, for the initial index value for
each Division when the Division became available under the Contract. The index
for a current Valuation Period equals the index for the preceding Valuation
Period multiplied by the experience factor for the current Valuation Period.
We may express the value of amounts allocated to the Divisions in terms of
units. We determine the number of units for a given amount on a Valuation Date
by dividing the dollar value of that amount by the index of investment
experience for that date. The index of investment experience is equal to the
value of a unit.
HOW WE DETERMINE THE EXPERIENCE FACTOR. For Divisions of Account B the
experience factor reflects the investment experience of the Series of the Trust
in which a Division invests as well as the charges assessed against the Division
for a Valuation Period. The factor is calculated as follows:
(1) We take the net asset value of the portfolio in which the Division invests
at the end of the current Valuation Period.
(2) We add to (1) the amount of any dividend or capital gains distribution
declared for the investment portfolio and reinvested in such portfolio
during the current Valuation Period. We subtract from that amount a charge
for our taxes, if any.
(3) We divide (2) by the net asset value of the portfolio at the end of the
preceding Valuation Period.
(4) We subtract the applicable daily mortality and expense risk charge from each
Division for each day in the Valuation Period.
(5) We subtract the daily asset based administrative charge from each Division
for each day in the Valuation Period.
Calculations for Divisions investing in a Series are made on a per share basis.
NET RATE OF RETURN FOR A DIVISION. The net rate of return for a Division during
a valuation period is the experience factor for that Valuation Period minus one.
CASH SURRENDER VALUE
Your Contract's Cash Surrender Value fluctuates daily with the investment
results of the Divisions, interest credited to Fixed Allocations and any Market
Value Adjustment. We do not guarantee any minimum Cash Surrender Value. On any
date before the Annuity Commencement Date while the Contract is in effect, the
Cash Surrender Value is calculated as follows:
(1) We take the Contract's Accumulation Value;
(2) We adjust (1) for any Market Value Adjustment;
(3) We deduct from (2) any surrender charge and any charge for premium taxes;
and
(4) We deduct from (3) any charges incurred but not yet deducted.
SURRENDERING TO RECEIVE THE CASH SURRENDER VALUE
The Contract may be surrendered by the Owner at any time while the Annuitant is
living and before the Annuity Commencement Date.
A surrender will be effective on the date your written request and the Contract
are received at our Customer Service Center. The Cash Surrender Value is
determined and all benefits under the Contract will then be terminated, as of
that date. For administrative purposes, we will reallocate your funds to the
Specially Designated Division prior to processing the surrender. This
reallocation will have no effect on the Cash Surrender Value. You may receive
the Cash Surrender Value in a single sum payment or apply it under one or more
Annuity Options. See The Annuity Options. We will usually pay the Cash Surrender
Value within seven days but we may delay payment. See When We Make Payments.
PARTIAL WITHDRAWALS
Prior to the Annuity Commencement Date, while the Annuitant is living and the
Contract is in effect, you may take partial withdrawals from the Accumulation
Value by sending satisfactory notice to our Customer Service Center. Unless you
specify otherwise, the amount of the withdrawal, including any surrender charge
and Market Value Adjustment, will be taken in proportion to the amount of
Accumulation Value in each Division in
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which you are invested. If there is no Accumulation Value in those Divisions,
partial withdrawals will be deducted from your Fixed Allocations starting with
the Guarantee Periods nearest their Maturity Dates until we have honored your
request.
There are three options available for selecting partial withdrawals, the
Conventional Partial Withdrawal Option, the Systematic Partial Withdrawal Option
and the IRA Partial Withdrawal Option. All three options are described below.
The maximum amount you may withdraw each Contract Year without incurring a
surrender charge is 10% of your Accumulation Value. See Surrender Charge for
Excess Partial Withdrawals. Partial withdrawals may not be repaid. A partial
withdrawal request for an amount in excess of 90% of the Cash Surrender Value
will be treated as a request to surrender the Contract.
CONVENTIONAL PARTIAL WITHDRAWAL OPTION. After the Free Look Period, you may
take conventional partial withdrawals. The minimum amount you may withdraw under
this option is $100. A conventional partial withdrawal from a Fixed Allocation
may be subject to a Market Value Adjustment.
SYSTEMATIC PARTIAL WITHDRAWAL OPTION. This option may be elected at the time
you apply for a Contract, or at a later date. This option may be elected to
commence in a Contract Year where a conventional partial withdrawal has been
taken. However, it may not be elected while the IRA Partial Withdrawal Option is
in effect.
You may choose to receive systematic partial withdrawals on a monthly,
quarterly, or annual basis from your Accumulation Value in the Divisions or the
Fixed Allocations. The commencement of payments under this option may not be
elected to start sooner than 28 days after the Contract Issue Date. You select
the date when the withdrawals will be made but no later than the 28th day of the
month. If no date is selected, the withdrawals will be made on the same calendar
day of each month as the Contract Date.
You may select a dollar amount or a percentage of the Accumulation Value from
the Divisions in which you are invested as the amount of your withdrawal subject
to the following maximums, but in no event can a payment be less than $100:
FREQUENCY MAXIMUM
--------- -------
Monthly 0.833%
Quarterly 2.50%
Annual 10.00%
If a dollar amount is selected and the amount to be systematically withdrawn
would exceed the applicable maximum percentage of your Accumulation Value on the
withdrawal date, the amount withdrawn will be reduced so that it equals such
percentage. For example, if a $500 monthly withdrawal was elected and on the
withdrawal date 0.833% of the Accumulation Value equaled $300, the withdrawal
amount would be reduced to $300. If a percentage is selected and the amount to
be systematically withdrawn based on that percentage would be less than the
minimum of $100, we would increase the amount to $100 provided it does not
exceed the maximum percentage. If it is below the maximum percentage we will
send the minimum. If it is above the maximum percentage we will send the amount
and then cancel the option. For example, if you selected 0.67% to be
systematically withdrawn on a monthly basis and that amount equaled $90, and
since $100 is less than 0.833% of the Accumulation Value, we would send $100. If
0.67% equaled $75, and since $100 is more than 0.833% of the Accumulation Value
we would send $75 and then cancel the option. In such a case, in order to
receive systematic partial withdrawals in the future, you would be required to
submit a new notice to our Customer Service Center.
Systematic Partial Withdrawals from Fixed Allocations are limited to interest
earnings during the prior month, quarter, or year, depending on the frequency
chosen. Systematic withdrawals are not subject to a Market Value Adjustment. A
Fixed Allocation, however, may not participate simultaneously in both the dollar
cost averaging program and the Systematic Partial Withdrawal Option.
You may change the amount or percentage of your withdrawal once each Contract
Year or cancel this option at any time by sending satisfactory notice to our
Customer Service Center at least seven days prior to the next scheduled
withdrawal date. However, you may not change the amount or percentage of your
withdrawals in any Contract Year during which you have previously taken a
conventional partial withdrawal.
IRA PARTIAL WITHDRAWAL OPTION. If you have an IRA Contract and will attain age
70 1/2 in the current calendar year, distributions may be made to you to satisfy
requirements imposed by Federal tax law. IRA partial withdrawals provide payout
of amounts required to be distributed by the Internal Revenue Service rules
gov-
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erning mandatory distributions under qualified plans. See Federal Tax
Considerations. We will send you a notice before your distributions commence,
and you may elect this option at that time, or at a later date. You may not
elect IRA partial withdrawals while the Systematic Partial Withdrawal Option is
in effect. If you do not elect the IRA Partial Withdrawal Option, and
distributions are required by Federal tax law, distributions adequate to satisfy
the requirements imposed by Federal tax law may be made. Thus, if the Systematic
Partial Withdrawal Option is in effect, distributions under that option must be
adequate to satisfy the mandatory distribution rules imposed by Federal tax law.
You may choose to receive IRA partial withdrawals on a monthly, quarterly or
annual frequency. You select the day of the month when the withdrawals will be
made, but it cannot be later than the 28th day of the month. If no date is
selected, the withdrawals will be made on the same calendar day of the month as
the Contract Date.
At your request, we will determine the amount that is required to be withdrawn
from your Contract each year based on the information you give us and various
choices you make. For information regarding the calculation and choices you have
to make, see the Statement of Additional Information. The minimum dollar amount
you can withdraw is $100. At the time we determine the required partial
withdrawal amount for a taxable year based on the frequency you select, if that
amount is less than $100, we will pay $100. At any time where the partial
withdrawal amount is greater than the Accumulation Value, we will cancel the
Contract and send you the amount of the Cash Surrender Value.
You may change the payment frequency of your withdrawals once each Contract Year
or cancel this option at any time by sending us satisfactory notice to our
Customer Service Center at least seven days prior to the next scheduled
withdrawal date.
An IRA partial withdrawal in excess of the amount allowed under the Systematic
Partial Withdrawal Option may be subject to a Market Value Adjustment.
PARTIAL WITHDRAWALS IN GENERAL. CONSULT YOUR TAX ADVISOR REGARDING THE TAX
CONSEQUENCES ASSOCIATED WITH TAKING PARTIAL WITHDRAWALS. A partial withdrawal
made before the taxpayer reaches age 59 1/2 may result in imposition of a tax
penalty of 10% of the taxable portion withdrawn. See Federal Tax Considerations
for more details.
AUTOMATIC REBALANCING
If you have at least $10,000 of Accumulation Value invested in the Divisions,
you may elect to participate in our automatic rebalancing program. Automatic
rebalancing provides you with an easy way to maintain the particular asset
allocation that you and your financial advisor have determined are most suitable
for your individual long-term investment goals. We do not charge a fee for
participating in our automatic rebalancing program.
Under the program you may elect to have all your allocations among the Divisions
rebalanced on a quarterly, semi-annual, or annual calendar basis. The minimum
size of an allocation to a Division must be in full percentage points.
Rebalancing does not affect any amounts that you have allocated to the Fixed
Account. The program may be used in conjunction with the systematic partial
withdrawal option only where such withdrawals are taken pro rata. Automatic
rebalancing is not available if you participate in dollar cost averaging.
Automatic rebalancing will not take place during the Free Look Period.
To participate in automatic rebalancing you must submit to our Customer Service
Center written notice in a form satisfactory to us. We will begin the program on
the last Valuation Date of the applicable calendar period in which we receive
the notice. You may cancel the program at any time. The program will
automatically terminate if you choose to reallocate your Accumulation Value
among the Divisions or if you make an additional premium payment or partial
withdrawal on other than a pro rata basis. Additional premium payments and
partial withdrawals effected on a pro rata basis will not cause the automatic
rebalancing program to terminate.
PROCEEDS PAYABLE TO THE BENEFICIARY
If the Owner or the Annuitant (when the Owner is other than an individual) dies
prior to the Annuity Commencement Date, we will pay the Beneficiary the death
benefit proceeds under the Contract. Such amount may be received in a single sum
or applied to any of the Annuity Options. See The Annuity Options. If we do not
receive a request to apply the death benefit proceeds to an Annuity Option, a
single sum distribution will be made. Any Credit based on any premium received
within one year prior to the date of death of the Owner or Annuitant (when the
Owner is other than an individual) may be deducted from the death benefit
proceeds payable. Any gains or losses attributable to a Credit will not be
considered part of any Credit deducted from any
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refund amount or death benefit. Any distributions from non-qualified Contracts
must comply with applicable Federal tax law distribution requirements.
DEATH BENEFIT OPTIONS
Subject to our rules, there are three death benefit options that may be elected
by you at issue under the Contract: the Standard Death Benefit Option; the 7%
Solution Enhanced Death Benefit Option; and the Annual Ratchet Enhanced Death
Benefit Option.
The 7% Solution Enhanced Death Benefit Option may only be elected at issue and
only if the Owner or Annuitant (when the Owner is other than an individual) is
age 80 or younger at issue. The 7% Solution Enhanced Death Benefit Option may
not be available where a Contract is held by joint Owners. The Annual Ratchet
Enhanced Death Benefit Option may only be elected at issue and only if the Owner
or Annuitant (when the Owner is other than an individual) is age 79 or younger
at issue.
If an enhanced death benefit is elected, the death benefit under the Contract is
equal to the greatest of: (i) the Accumulation Value less an amount equal to all
Credits applied within one year prior to the date of death; (ii) total premium
payments less any partial withdrawals; (iii) the Cash Surrender Value; and (iv)
the enhanced death benefit less an amount equal to all Credits applied within
one year prior to the date of death (see below).
We may offer a reduced death benefit under certain group and sponsored
arrangements. See Other Contract Provisions, Group or Sponsored Arrangements.
STANDARD DEATH BENEFIT OPTION. You will automatically receive the Standard
Death Benefit Option unless you elect one of the enhanced death benefits. The
Standard Death Benefit Option for the Contract is equal to the greatest of: (i)
your Accumulation Value less an amount equal to all Credits applied within one
year prior to the date of death; (ii) total premiums less any partial
withdrawals; and (iii) the Cash Surrender Value.
7% SOLUTION ENHANCED DEATH BENEFIT OPTION.
(1) We take the enhanced death benefit from the prior Valuation Date. On the
Contract Date, the enhanced death benefit is equal to the Initial Premium
plus any Credits.
(2) We calculate interest on (1) for the current Valuation Period at the
enhanced death benefit interest rate, which rate is an annual rate of 7%;
except that with respect to amounts in the Liquid Asset Division and Limited
Maturity Bond Division, the interest rate applied to such amounts will be
the respective net rate of return for such Divisions during the current
Valuation Period, if it is less than an annual rate of 7%; and except with
respect to amounts in a Fixed Allocation, the interest rate applied to such
amounts will be the interest credited to such Fixed Allocation during the
current Valuation Period, if it is less than an annual rate of 7%.
Each accumulated initial or additional premium payment and Credit reduced by
any partial withdrawals (including any associated Market Value Adjustment
and surrender charge incurred) allocated to such premium will continue to
grow at the enhanced death benefit interest rate until reaching the maximum
enhanced death benefit. Such maximum enhanced death benefit is equal to two
times the cumulative premiums paid plus two times the cumulative Credits
applied, less an adjustment to reflect partial withdrawals. Each partial
withdrawal reduces the maximum enhanced death benefit as follows: first, the
maximum enhanced death benefit is reduced by any partial withdrawal of
earnings; second, the maximum enhanced death benefit is reduced in
proportion to the reduction in the Accumulation Value for other partial
withdrawals of premium (in each case, including any associated market value
adjustment and surrender charge incurred). To the extent that partial
withdrawals in a contract year do not exceed 7% of cumulative premiums and
did not exceed 7% of cumulative premiums in any prior contract year, such
withdrawals will be treated as withdrawals of earnings for the purpose of
calculating the maximum enhanced death benefit. Once partial withdrawals in
any contract year exceed 7% of the cumulative premiums, partial withdrawals
will reduce the enhanced death benefit in proportion to the reduction in
Accumulation Value.
(3) We add (1) and (2).
(4) We add to (3) any additional premiums paid and any Credits applied during
the current Valuation Period.
(5) We subtract from (4) any partial withdrawals (including any Market Value
Adjustments and surrender charges incurred) made during the current
Valuation Period.
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ANNUAL RATCHET ENHANCED DEATH BENEFIT OPTION.
(1) We take the enhanced death benefit from the prior Valuation Date. On the
Contract Date, the enhanced death benefit is equal to the Initial Premium
plus any Credits.
(2) We add to (1) any additional premiums paid and any Credits applied since the
prior Valuation Date and subtract from (1) any partial withdrawals
(including any Market Value Adjustments and surrender charges incurred)
taken since the prior Valuation Date.
(3) On a Valuation Date that occurs on or prior to the Owner's Attained Age 80
which is also a Contract Anniversary, we set the enhanced death benefit
equal to the greater of (2) or the Accumulation Value as of such date.
On all other Valuation Dates, the enhanced death benefit is equal to (2).
HOW TO CLAIM PAYMENTS TO BENEFICIARY. We must receive due proof of the death of
the Owner or the Annuitant (if the Owner is other than an individual) (such as
an official death certificate) at our Customer Service Center before we will
make any payments to the Beneficiary. We will calculate the death benefit as of
the date we receive due proof of death. The Beneficiary should contact our
Customer Service Center for instructions.
REPORTS TO OWNERS. We will send you a report once each calendar quarter within
31 days after the end of each calendar quarter. The report will show the
Accumulation Value, the Cash Surrender Value, and the death benefit as of the
end of the calendar quarter. The report will also show the allocation of your
Accumulation Value as of such date and the amounts deducted from or added to the
Accumulation Value since the last report. The report will also include any other
information that may be currently required by the insurance supervisory official
of the jurisdiction in which the Contract is delivered.
We will also send you copies of any shareholder reports of the portfolios or
securities in which Account B invests, as well as any other reports, notices or
documents required by law to be furnished to Owners.
WHEN WE MAKE PAYMENTS
We will generally pay death benefit proceeds and the Cash Surrender Value within
seven days after our Customer Service Center receives all the information needed
to process the payment.
However, we may delay payment of amounts derived from the Divisions if it is not
practical for us to value or dispose of shares of Account B because:
(1) The NYSE is closed for trading;
(2) The SEC determines that a state of emergency exists;
(3) An order or pronouncement of the SEC permits a delay for the protection of
Owners; or,
(4) The check used to pay the premium has not cleared through the banking
system. This may take up to 15 days.
During such times, as to amounts allocated to the Divisions, we may delay:
(1) Determination and payment of any Cash Surrender Value;
(2) Determination and payment of any death benefit if death occurs before the
Annuity Commencement Date;
(3) Allocation changes of the Accumulation Value; or,
(4) Application under an Annuity Option of the Accumulation Value.
We reserve the right to delay payment of amounts from the Fixed Account for up
to six months.
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CHARGES AND FEES
We deduct the charges described below to cover our cost and expenses, services
provided and risks assumed under the Contracts. We incur certain costs and
expenses for the distribution and administration of the Contracts, for providing
the benefits payable thereunder and for bearing various risks thereunder. The
amount of a charge will not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge.
For example, the surrender charge collected may not fully cover all of the
distribution expenses incurred by us. In the event there are any profits from
fees and charges deducted under
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the Contract, including but not limited to mortality and expense risk charges,
such profits could be used to finance distribution of Contracts.
CHARGE DEDUCTION DIVISION
You may specify at issue if you wish to have all charges against the
Accumulation Value deducted from the Liquid Asset Division. We call this the
Charge Deduction Division Option, and within this context refer to the Liquid
Asset Division as the Charge Deduction Division. If you do not elect this
option, or if the amount of the charges is greater than the amount in the
Division, the charges will be deducted as discussed below. You may also choose
to elect or cancel this option while the Contract is in force by sending
satisfactory notice to our Customer Service Center.
CHARGES DEDUCTED FROM THE ACCUMULATION VALUE
We invest the entire amount of the initial and any additional premium payments
and Credits in the Divisions and the Fixed Allocations you select, subject to
certain restrictions. See Restrictions on Allocation of Premium Payments. We
then may deduct certain amounts from your Accumulation Value. We may reduce
certain fees and charges, including any surrender, administration, and mortality
and expense risk charges, under group or sponsored arrangements. See Group or
Sponsored Arrangements. Unless you have elected the Charge Deduction Division,
charges are deducted proportionately from all affected Divisions in which you
are invested. If there is no Accumulation Value in those Divisions, we will
deduct charges from your Fixed Allocations starting with the Guarantee Periods
nearest their Maturity Dates until such charges have been paid. The charges we
deduct are:
SURRENDER CHARGE. A contingent deferred sales charge ("Surrender Charge") is
imposed as a percentage of each premium payment if the Contract is surrendered
or an excess partial withdrawal is taken during the nine year period from the
date we receive and accept such premium payment. The percentage of premium
payments deducted at the time of surrender or excess partial withdrawal depends
upon the number of complete years that have elapsed since that premium payment
was made. We determine the surrender charge as a percentage of each premium
payment as follows:
COMPLETE YEARS
ELAPSED SURRENDER
SINCE PREMIUM PAYMENT CHARGE
--------------------- ----------
0 8%
1 8%
2 8%
3 8%
4 7%
5 6%
6 5%
7 3%
8 1%
9+ 0%
Subject to our rules and as described in the Contract, the surrender charge
arising from a surrender or excess partial withdrawal will be waived in the
following events:
(1) you begin receiving qualified extended medical care on or after the first
Contract anniversary for at least 45 days during any continuous 60-day
period, and your request for the surrender or withdrawal, together with all
required proof of such qualified extended medical care, must be received at
our Customer Service Center during the term of such care or within ninety
days after the last day upon which you received such care.
(2) you are first diagnosed by a qualifying medical professional, on or after
the first Contract Anniversary, as having a Qualifying Terminal Illness.
Written proof of terminal illness, satisfactory to us, must be received at
our Customer Service Center. We reserve the right to require an examination
by a physician of our choice.
See Additional Credit to Premium. See your Contract for more information. The
waiver of surrender charge may not be available in all states.
SURRENDER CHARGE FOR EXCESS PARTIAL WITHDRAWALS. There is considered to be an
excess partial withdrawal in any Contract Year in which the amount withdrawn
exceeds 10% of your Accumulation Value on the
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date of the withdrawal minus any amount withdrawn during that Contract Year.
Where you are receiving systematic partial withdrawals, any combination of
conventional partial withdrawals taken and any systematic partial withdrawals
expected to be received in a Contract Year will be considered in determining
the amount of the excess partial withdrawal. Such a withdrawal will be
considered a partial surrender of the Contract and we will impose a surrender
charge and any associated premium tax. See Facts About the Contract, The Fixed
Account, Market Value Adjustment. Such charges will be deducted from the
Accumulation Value in proportion to the Accumulation Value in each Division or
Fixed Allocation from which the excess partial withdrawal was taken. In
instances where the excess partial withdrawal equals the entire Accumulation
Value in each such Division or Fixed Allocation, charges will be deducted
proportionately from all other Divisions and Fixed Allocations in which you
are invested.
For purposes of calculating the surrender charge for the excess partial
withdrawal, (i) we treat premium payments as being withdrawn on a first-in
first-out basis, and (ii) amounts withdrawn which are not considered an excess
partial withdrawal are not treated as a withdrawal of any premium payments.
Although we treat premium payments as being withdrawn before earnings for
purposes of calculating the surrender charge for excess partial withdrawals, the
Federal income tax law treats earnings as withdrawn first. See Federal Tax
Considerations, Taxation of Non-Qualified Annuities.
For example, the following assumes an Initial Premium payment of $10,000 and
additional premium payments of $10,000 in each of the second and third Contract
Years, for total premium payments under the Contract of $30,000. It also assumes
a partial withdrawal at the beginning of the fifth Contract Year of 15% of the
Accumulation Value of $35,000.
In this example, $3,500 ($35,000 x .10) is the maximum partial withdrawal that
may be withdrawn during the Contract Year without the imposition of a surrender
charge. The total partial withdrawal would be $5,250 ($35,000 x .15). Therefore,
$1,750 ($5,250-$3,500) is considered an excess partial withdrawal of a part of
the Initial Premium payment of $10,000 and would be subject to a 7% surrender
charge of $122.50 ($1,750 x .07). This example does not take into account any
Market Value Adjustment or deduction of any premium taxes.
PREMIUM TAXES. We make a charge for state and local premium taxes in certain
states which can range from 0% to 3.5% of premium. The charge depends on the
Owner's state of residence. We reserve the right to change this amount to
conform with changes in the law or if the Owner changes state of residence.
Premium taxes are generally incurred on the Annuity Commencement Date and a
charge for such premium taxes is then deducted from your Accumulation Value on
such date. However, some jurisdictions impose a premium tax at the time that
initial and additional premiums are paid, regardless of the Annuity Commencement
Date. In those states we may initially defer collection of the amount of the
charge for premium taxes from your Accumulation Value and deduct it against
Accumulation Value on surrender of the Contract, excess partial withdrawals or
on the Annuity Commencement Date.
ADMINISTRATIVE CHARGE. The administrative charge is incurred at the beginning
of the Contract processing period and deducted at the end of each Contract
processing period. We deduct this charge when determining the Cash Surrender
Value payable if you surrender the Contract prior to the end of a Contract
processing period. If the Accumulation Value at the end of the Contract
processing period equals or exceeds $100,000 or the sum of the premiums paid
equals or exceeds $100,000, the charge is zero. Otherwise, the amount deducted
is $40 per Contract Year.
EXCESS ALLOCATION CHARGE. We currently do not assess a charge for allocation
changes made during a Contract Year. We reserve the right, however, to assess a
$25 charge for each allocation change after the twelfth allocation change in a
Contract Year. This amount represents the maximum we will charge. The charge
would be deducted from the Divisions and the Fixed Allocations from which each
such reallocation is made in proportion to the amount being transferred from
each such Division and Fixed Allocation unless you have chosen to use the Charge
Deduction Division. Any allocations or transfers due to the election of dollar
cost averaging and reallocation under the provision What Happens if a Division
is Not Available will not be included in determining if the excess allocation
charge should apply.
CHARGES DEDUCTED FROM THE DIVISIONS
MORTALITY AND EXPENSE RISK CHARGE. The amount of the mortality and expense risk
charge depends on the death benefit option that has been elected. If the
Standard Death Benefit Option is elected, the charge is equivalent, on an annual
basis, to 1.25% of the assets in each Division. The charge is deducted on each
Valuation Date at the rate of .003446% for each day in the Valuation Period. If
an enhanced death benefit is elected,
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the charge is equivalent, on an annual basis, to 1.40% for the Annual Ratchet
Death Benefit Option, or 1.55% for the 7% Solution Death Benefit Option, of the
assets in each Division. The charge is deducted on each Valuation Date at the
rate of .003863% or .004280%, respectively, for each day in the Valuation
Period.
ASSET BASED ADMINISTRATIVE CHARGE. We will deduct a daily charge from the
assets in each Division, to compensate us for a portion of the administrative
expenses under the Contract. The daily charge is at a rate of 0.000411%
(equivalent to an annual rate of 0.15%) on the assets in each Division.
TRUST EXPENSES
There are fees and charges deducted from each Series of the GCG Trust, the ESS
Trust, the WP Trust and the PIMCO Trust. Please read the respective Trust
prospectus for details.
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CHOOSING YOUR ANNUITIZATION OPTIONS
ANNUITIZATION OF YOUR CONTRACT
If the Annuitant and Owner are living on the Annuity Commencement Date, we will
begin making payments to the Owner under an income plan. We will make these
payments under the Annuity Option chosen. You may change an Annuity Option by
making a written request to us at least 30 days prior to the Annuity
Commencement Date of the Contract. The amount of the payments will be determined
by applying your Accumulation Value adjusted for any applicable Market Value
Adjustment on the Annuity Commencement Date in accordance with The Annuity
Options section below, subject to our published rules at such time. See When We
Make Payments.
You may also elect an Annuity Option on surrender of the Contract for its Cash
Surrender Value or you may choose one or more Annuity Options for the payment of
death benefit proceeds while it is in effect and before the Annuity Commencement
Date. If, at the time of the Owner's death or the Annuitant's death (if the
Owner is not an individual), no option has been chosen for paying death benefit
proceeds, the Beneficiary may choose an option within 60 days. In all events,
payments of death benefit proceeds must comply with the distribution
requirements of applicable Federal tax law.
The minimum monthly annuity income payment that we will make is $20. We may
require that a single sum payment be made if the Accumulation Value is less than
$2,000 or if the calculated monthly annuity income payment is less than $20.
For each option we will issue a separate written agreement putting the option
into effect. Before we pay any annuity benefits, we require the return of the
Contract. If your Contract has been lost, we will require that you complete and
return the applicable Contract form. Various factors will affect the level of
annuity benefits including the Annuity Option chosen, the applicable payment
rate used and the investment results of the Divisions and interest credited to
the Fixed Allocations in which the Accumulation Value has been invested.
Some annuity options may provide only for fixed payments. Fixed Annuity Payments
are regular payments, the amount of which is fixed and guaranteed by us. The
amount of the payments will depend only on the form and duration of payments
chosen, the age of the Annuitant or Beneficiary (and sex, where appropriate),
the total Accumulation Value applied to purchase the fixed option, and the
applicable payment rate.
Our approval is needed for any option where:
(1) The person named to receive payment is other than the Owner or Beneficiary;
(2) The person named is not a natural person, such as a corporation; or
(3) Any income payment would be less than the minimum annuity income payment
allowed.
ANNUITY COMMENCEMENT DATE SELECTION
You select the Annuity Commencement Date. You may select any date following the
fifth Contract Anniversary but before the Contract Processing Date in the month
following the Annuitant's 90th birthday, or 10 years from the contract date, if
later. If, on the Annuity Commencement Date, a Surrender Charge remains, the
elected Annuity Option must include a period certain of at least five years
duration. If you do not select a date, the Annuity Commencement Date will be in
the month following the Annuitant's 90th birthday, or 10 years from the contract
date, if later. If the Annuity Commencement 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. See Federal Tax
Considerations. For a Contract purchased in connection with a qualified plan
other than a Roth IRA, distribution must commence not later than April 1st of
the calendar year following the calendar year in which you attain age 70 1/2.
Consult your tax advisor.
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FREQUENCY SELECTION
You choose the frequency of the Annuity Payments. They may be monthly,
quarterly, semi-annually or annually. If we do not receive written notice from
you, the payments will be made monthly. There may be certain restrictions on
minimum payments that we will allow.
THE ANNUITIZATION OPTIONS
There are four options to choose from as shown below. Options 1 through 3 are
fixed and option 4 may be fixed or variable. For a fixed option, the
Accumulation Value in the Divisions is transferred to the general account.
OPTION 1. INCOME FOR A FIXED PERIOD. Payment is made in equal installments for
a fixed number of years based on the Accumulation Value as of the Annuity
Commencement Date. We guarantee that each monthly payment will be at least the
amount set forth in the Contract. Guaranteed amounts for annual, semi-annual and
quarterly payments are available upon request. Illustrations are available upon
request. If the Cash Surrender Value or Accumulation Value is applied under this
option, a 10% penalty tax may apply to the taxable portion of each income
payment until the Owner reaches age 59 1/2.
OPTION 2. INCOME FOR LIFE. Payment is made in equal monthly installments and
guaranteed for at least a period certain. The period certain can be 10 or 20
years. Other periods certain may be available on request. A refund certain may
be chosen instead. Under this arrangement, income is guaranteed until payments
equal the amount applied. If the person named lives beyond the guaranteed
period, payments continue until his or her death. We guarantee that each payment
will be at least the amount set forth in the Contract corresponding to the
person's age on his or her last birthday before the option's effective date.
Amounts for ages not shown in the Contract are available upon request.
OPTION 3. JOINT LIFE INCOME. This option is available if there are two persons
named to receive payments. At least one of the persons named must be either the
Owner or Beneficiary of the Contract. Monthly payments are guaranteed and are
made as long as at least one of the named persons is living. There is no minimum
number of payments. Monthly payment amounts are available upon request.
OPTION 4. ANNUITY PLAN. An amount can be used to buy any single premium annuity
we choose to offer as an annuitization option on the option's effective date.
PAYMENT WHEN NAMED PERSON DIES
When the person named to receive payment dies, we will pay any amounts still due
as provided by the option agreement. The amounts still due are determined as
follows:
(1) For option 1, or any remaining guaranteed payments under option 2, payments
will be continued. Under options 1 and 2, the discounted values of the
remaining guaranteed payments may be paid in a single sum. This means we
deduct the amount of the interest each remaining guaranteed payment would
have earned had it not been paid out early. The discount interest rate is
never less than 3% for option 1 and option 2 per year. We will, however,
base the discount interest rate on the interest rate used to calculate the
payments for options 1 and 2 if such payments were not based on the tables
in the Contract.
(2) For option 3, no amounts are payable after both named persons have died.
(3) For option 4, the annuity agreement will state the amount due, if any.
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OTHER CONTRACT PROVISIONS
IN CASE OF ERRORS IN APPLICATION INFORMATION
If an age or sex given in the application or enrollment form is misstated, the
amounts payable or benefits provided by the Contract shall be those that the
premium payment would have bought at the correct age or sex.
SENDING NOTICE TO US. Any written notices, inquiries or requests should be sent
to our Customer Service Center. Please include your name, your Contract number
and, if you are not the Annuitant, the name of the Annuitant.
ASSIGNING THE CONTRACT AS COLLATERAL. You may assign a non-qualified Contract
as collateral security for a loan or other obligation. This does not change the
Ownership. However, your rights and any Beneficiary's
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rights are subject to the terms of the assignment. See Assignments, Pledges and
Gratuitous Transfers. An assignment may have Federal tax consequences. See
Federal Tax Considerations.
You must give us satisfactory written notice at our Customer Service Center in
order to make or release an assignment. We are not responsible for the validity
of any assignment.
NON-PARTICIPATING. The Contract does not participate in the divisible surplus
of Golden American.
AUTHORITY TO MAKE AGREEMENTS. All agreements made by us must be signed by our
president or a vice president and by our secretary or an assistant secretary. No
other person, including an insurance agent or broker, can change any of the
Contract's terms, make any change to any of the Contract's terms, make any
agreements binding on us or extend the time for premium payments.
CONTRACT CHANGES -- APPLICABLE TAX LAW
We reserve the right to make changes in the Contract to the extent we deem it
necessary to continue to qualify the Contract as an annuity. Any such changes
will apply uniformly to all Contracts that are affected. You will be given
advance written notice of such changes.
YOUR RIGHT TO CANCEL OR EXCHANGE YOUR CONTRACT
CANCELLING YOUR CONTRACT. You may cancel your Contract within your Free Look
Period, which is ten days after you receive your Contract. For purposes of
administering our allocation and administrative rules, we deem this period to
expire 15 days after the Contract is mailed to you. Some states may require a
longer Free Look Period. If you decide to cancel, you may mail or deliver the
Contract to our Customer Service Center. We will refund the Accumulation Value
adjusted for any Market Value Adjustment less any Credit plus any charges we
deducted, and the Contract will be voided as of the date we receive the Contract
and your request. Any gains or losses attributable to a Credit will not be
considered part of any credit deducted from any refund amount or death benefit.
Some states require that we return the premium paid. In these states, we require
your premiums designated for investment in the Divisions of Account B be
allocated to the Specially Designated Division during the Free Look Period.
Premiums designated for the Fixed Account will be allocated to a Fixed
Allocation with the Guarantee Period you have chosen; however, we reserve the
right to require such premiums to allocate to the Specially Designated Division
during the Free Look Period. If you do not choose to exercise your right to
cancel during the Free Look Period, then at the end of the Free Look Period your
money will be invested in the Divisions chosen by you, based on the index of
investment experience next computed for each Division. See Facts About the
Contract, Measurement of Investment Experience, Index of Experience and Unit
Value.
EXCHANGING YOUR CONTRACT. For information regarding exchanges under Section
1035 of the Internal Revenue Code of 1986, as amended, see Federal Tax
Considerations.
OTHER CONTRACT CHANGES
You may change the Contract to another annuity plan subject to our rules at the
time of the change.
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may reduce any surrender,
administration, and mortality and expense risk charges. We may also change the
minimum initial and additional premium requirements, or offer a reduced death
benefit. Group arrangements include those in which a trustee or an employer, for
example, purchases Contracts covering a group of individuals on a group basis.
Sponsored arrangements include those in which an employer allows us to sell
Contracts to its employees on an individual basis.
Our costs for sales, administration, and mortality generally vary with the size
and stability of the group among other factors. We take all these factors into
account when reducing charges. To qualify for reduced charges, a group or
sponsored arrangement must meet certain requirements, including our requirements
for size and number of years in existence. Group or sponsored arrangements that
have been set up solely to buy Contracts or that have been in existence less
than six months will not qualify for reduced charges.
We may credit additional amounts to Contracts owned by persons who meet certain
criteria established by us, which may include employees of U.S. ING affiliates,
their spouses and their immediate family members, registered representatives
appointed with Golden American and their spouses, and Trustees of The GCG Trust
and their spouses. We will credit additional amounts to these Contracts if such
Contracts are purchased directly
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through Directed Services, Inc., and the contract owner will not be afforded the
benefit of services of any other broker-dealer nor will commissions be payable
to any broker-dealer in connection with such purchases. The additional amount
credited to these Contracts will equal the reduction in our costs that we
experience by not incurring brokerage commissions in selling the Contracts.
We will make these and any similar reductions and arrangements according to our
rules in effect when an application or enrollment form for a Contract is
approved. We may change these rules from time to time. Any variation in the
administrative charge will reflect differences in costs or services and will not
be unfairly discriminatory.
SELLING THE CONTRACT
DSI is principal underwriter and distributor of the Contract as well as for
other Contracts issued through Account B and other separate accounts of Golden
American. We pay DSI for acting as principal underwriter under a distribution
agreement. The offering of the Contract will be continuous.
DSI has entered into and will continue to enter into sales agreements with
broker-dealers to solicit for the sale of the Contract through registered
representatives who are licensed to sell securities and variable insurance
products including variable annuities. These agreements provide that
applications for Contracts may be solicited by registered representatives of the
broker-dealers appointed by Golden American to sell its variable life insurance
and variable annuities. These broker-dealers are registered with the SEC and are
members of the National Association of Securities Dealers, Inc. ("NASD"). The
registered representatives are authorized under applicable state regulations to
sell variable life insurance and variable annuities. The writing agent normally
will receive commissions the equivalent of up to 5.50% of any initial or
additional premium payments made. Certain sales agreements may provide for a
combination of a certain percentage of commission at the time of sale and an
annual trail commission (which when combined could exceed 5.50% of total premium
payments).
- --------------------------------------------------------------------------------
REGULATORY INFORMATION
VOTING RIGHTS
ACCOUNT B. We will vote the shares of a Trust owned by Account B according to
your instructions. However, if the Investment Company Act of 1940 or any related
regulations should change, or if interpretations of it or related regulations
should change, and we decide that we are permitted to vote the shares of a Trust
in our own right, we may decide to do so.
We determine the number of shares that you have in a Division by dividing the
Contract's Accumulation Value in that Division by the net asset value of one
share of the portfolio in which a Division invests. Fractional votes will be
counted. We will determine the number of shares you can instruct us to vote 180
days or less before a Trust's meeting. We will ask you for voting instructions
by mail at least 10 days before the meeting.
If we do not get your instructions in time, we will vote the shares in the same
proportion as the instructions received from all Contracts in that Division. We
will also vote shares we hold in Account B which are not attributable to Owners
in the same proportion.
STATE REGULATION
We are regulated and supervised by the Insurance Department of the State of
Delaware, which periodically examines our financial condition and operations. We
are also subject to the insurance laws and regulations of all jurisdictions
where we do business. The variable Contract offered by this prospectus has been
approved by the Insurance Department of the State of Delaware and by the
Insurance Departments of other jurisdictions. We are required to submit annual
statements of our operations, including financial statements, to the Insurance
Departments of the various jurisdictions in which we do business to determine
solvency and compliance with state insurance laws and regulations.
LEGAL PROCEEDINGS
The Company and its subsidiaries, like other insurance companies, are involved
in lawsuits, including class action lawsuits. In some class action and other
lawsuits involving insurers, substantial damages have been sought and/or
material settlement payments have been made. Although the outcome of any
litigation cannot be predicted with certainty, the Company believes that at the
present time, there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse impact on Separate Account B or the Company.
38
<PAGE>
LEGAL MATTERS
The legal validity of the Contract described in this prospectus has been passed
on by Myles R. Tashman, Esquire, Executive Vice President, General Counsel and
Secretary of Golden American. Sutherland, Asbill & Brennan LLP of Washington,
D.C. has provided advice on certain matters relating to Federal securities laws.
EXPERTS
The audited financial statements of Golden American Life Insurance Company and
Separate Account B appearing or incorporated by reference in the Statement of
Additional Information and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon appearing
or incorporated by reference in the Statement of Additional Information and in
the Registration Statement and are included or incorporated by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
39
<PAGE>
MORE INFORMATION ABOUT GOLDEN AMERICAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL DATA
The following selected financial data prepared in accordance with
generally accepted accounting principles ("GAAP") for Golden American
should be read in conjunction with the financial statements and notes
thereto included in this Prospectus.
On October 24, 1997, PFHI Holding, Inc. ("PFHI"), a Delaware
Corporation, acquired all of the outstanding capital stock of Equitable
of Iowa Companies ("Equitable of Iowa"), pursuant to a merger agreement
among Equitable of Iowa, PFHI and ING Groep, N.V. On August 13, 1996,
Equitable of Iowa acquired all of the outstanding capital stock of BT
Variable, Inc., the parent of Golden American. For GAAP financial
statement purposes, the merger was accounted for as a purchase
effective October 25, 1997 and the change in control of Golden American
through the acquisition of BT Variable, Inc. was accounted for as a
purchase acquisition effective August 14, 1996. As a result, the GAAP
financial data presented below for the period subsequent to October 24,
1997, are presented as the Post-Merger new basis of accounting, for the
period August 14, 1996 through October 24, 1997, are presented as the
Post-Acquisition basis of accounting, and for August 13, 1997 and prior
periods are presented as the Pre-Acquisition basis of accounting.
SELECTED GAAP BASIS FINANCIAL DATA
(IN THOUSANDS)
POST-MERGER POST-ACQUISITION
--------------|---------------- ---------------
FOR THE PERIOD| FOR THE PERIOD FOR THE PERIOD
OCTOBER 25, | JANUARY 1, AUGUST 14,
1997 THROUGH | 1997 THROUGH 1996 THROUGH
DECEMBER 31, | OCTOBER 24, DECEMBER 31,
1997 | 1997 1996
--------------|---------------- ---------------
|
Annuity and Interest |
Sensitive Life |
Product Charges ............. $ 3,834 | $18,288 $ 8,768
Net Income before |
Federal Income Tax .......... $ (279) | $ (608) $ 570
Net Income (Loss) ............ $ (425) | $ 729 $ 350
Total Assets ................. $ 2,445,835 | N/A $1,677,899
Total Liabilities ............ $ 2,218,522 | N/A $1,537,415
Total Stockholder's Equity ... $ 227,313 | N/A $ 140,484
PRE-ACQUISITION
-------------------------------------------------------
FOR THE PERIOD
JANUARY 1, 1996
THROUGH FOR THE FISCAL YEARS ENDED DECEMBER 31
------------------------------------------
AUGUST 13, 1996 1995 1994 1993 1992(a)
--------------- ------ ------ ------ --------
Annuity and
Interest
Sensitive Life
Product Charges ...... $12,259 $ 18,388 $ 17,519 $ 10,192 $ 694
Net Income before
Federal Income Tax ... $ 1,736 $ 3,364 $ 2,222 $ (1,793) $ (508)
Net Income (Loss) ...... $ 3,199 $ 3,364 $ 2,222 $ (1,793) $ (508)
Total Assets ........... N/A $1,203,057 $1,044,760 $886,155 $320,539
Total Liabilities ...... N/A $1,104,932 $ 955,254 $857,558 $306,197
Total Stockholder's
Equity ............... N/A $ 98,125 $ 89,506 $ 28,597 $ 14,342
(a) Results for 1992 are for the period September 30, 1992 (date of
acquisition) to December 31, 1992.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's
consolidated results of operations. In addition, some analysis and
information regarding financial condition and liquidity and capital
resources has also been provided. This analysis should be read in
conjunction with the consolidated financial statements and related
notes which appear elsewhere in this report. The Company reports
financial results on a consolidated basis. The consolidated financial
statements include the accounts of Golden American Life Insurance
Company ("Golden American") and its wholly owned subsidiary, First
Golden American Life Insurance Company of New York ("First Golden," and
collectively with Golden American, the "Company").
40
<PAGE>
BUSINESS ENVIRONMENT. The current business and regulatory environment
remains challenging for the insurance industry. The variable annuity
competitive environment is intense and is dominated by a number of
large variable product companies with strong distribution, name
recognition and wholesaling capabilities. Increasing competition from
traditional insurance carriers as well as banks and mutual fund
companies offer consumers many choices. However, overall demand for
variable products remains strong for several reasons including: strong
stock market performance over the last four years; relatively low
interest rates; an aging U. S. population that is increasingly
concerned about retirement and estate planning, as well as maintaining
their standard of living in retirement; and potential reductions in
government and employer-provided benefits at retirement as well as
lower public confidence in the adequacy of those benefits.
In 1995, Golden American experienced a significant decline in sales,
due to a number of factors. First, some portfolio managers performed
poorly in 1993 and 1994. Second, as more products came to market the
cost structure of the DVA product became less competitive. Third,
because no fixed interest rate options were available in 1994 during
the time of rising interest rates and flat or declining equity markets,
market share was lost. Consequently, the Company took steps to respond
to these business challenges. Several portfolio managers were replaced
and new funds were added to give contractholders more options. In
October of 1995, the Company introduced the Combination Deferred
Variable and Fixed Annuity (GoldenSelect DVA Plus) and the GoldenSelect
Genesis I and Genesis Flex life insurance products, and sales increased
substantially. In October of 1997, Golden American introduced three
new variable annuity products (GoldenSelect Access, GoldenSelect ES II
and GoldenSelect Premium Plus), which have already contributed
significantly to sales.
RESULTS OF OPERATIONS
MERGER. On October 23, 1997, Equitable of Iowa shareholders approved
the Agreement and Plan of Merger ("Merger Agreement") dated as of July
7, 1997, among Equitable of Iowa, PFHI Holdings, Inc. ("PFHI"), and ING
Groep, N.V. ("ING"). On October 24, 1997, PFHI, a Delaware
corporation, acquired all of the outstanding capital stock of Equitable
of Iowa pursuant to the Merger Agreement. PFHI is a wholly owned
subsidiary of ING, a global financial services holding company based in
The Netherlands. Equitable of Iowa, an Iowa corporation, in turn owned
all the outstanding capital stock of Equitable Life Insurance Company
of Iowa ("Equitable Life") and Golden American and their wholly owned
subsidiaries. Equitable of Iowa also owned all the outstanding capital
stock of Locust Street Securities, Inc., Equitable Investment Services,
Inc., Directed Services, Inc.("DSI"), Equitable of Iowa Companies
Capital Trust, Equitable of Iowa Companies Capital Trust II and
Equitable of Iowa Securities Network, Inc. In exchange for the
outstanding capital stock of Equitable of Iowa, ING paid total
consideration of approximately $2.1 billion in cash and stock plus the
assumption of approximately $400 million in debt according to the
Merger Agreement. As a result of the merger, Equitable of Iowa was
merged into PFHI which was simultaneously renamed Equitable of Iowa
Companies, Inc. ("EIC" or "Parent").
For financial statement purposes, the change in control of the Company
through the ING merger with EIC, was accounted for as a purchase
effective October 25, 1997. This merger resulted in a new basis of
accounting reflecting estimated fair values of assets and liabilities
at that date. As a result, the Company's financial statements for the
period subsequent to October 24, 1997, are presented on the Post-Merger
new basis of accounting.
The purchase price was allocated to the companies mentioned previously.
Goodwill of $1.4 billion was established for the excess of the merger
cost over the fair value of the assets and liabilities of EIC with
$151.1 million pushed down to the Company. The allocation of the
purchase price to the Company was $227.5 million. The cost of the
acquisition is preliminary as it relates to estimated expenses, and as
a result, the allocation of the purchase price to the Company may
change. Goodwill resulting from the merger is being amortized over 40
years on a straight-line basis. The carrying value will be reviewed
periodically for any indication of impairment in value.
CHANGE IN CONTROL - Acquisition. On August 13, 1996, Equitable of Iowa
acquired all of the outstanding capital stock of BT Variable, Inc. ("BT
Variable") and its wholly owned subsidiaries Golden American and DSI.
Subsequent to the acquisition, the BT Variable, Inc. name was changed
to EIC Variable, Inc. On April 30, 1997, EIC Variable, Inc. was
liquidated and its investments in Golden American and DSI were
transferred to Equitable of Iowa while the remainder of its net assets
were contributed to Golden American. On December 30, 1997, EIC
Variable, Inc. was dissolved.
For financial statement purposes, the change in control of Golden
American through the acquisition of BT Variable was accounted for as a
purchase acquisition effective August 14, 1996. This acquisition
resulted in a new basis of accounting reflecting estimated fair values
of assets and liabilities at that date. As a result, the Company's
41
<PAGE>
financial statements for the period August 14, 1996 through October 24,
1997, are presented on the Post-Acquisition basis of accouting, while
the financial statements for August 13, 1996 and prior periods are
presented on the Pre-Acquisition historical cost basis of accounting.
The purchase price was allocated to the three companies purchased - BT
Variable, DSI, and Golden American. Goodwill of $41.1 million was
established for the excess of the acquisition cost over the fair value
of the assets and liabilities and pushed down to Golden American. The
acquisition cost was preliminary with respect to the final settlement
of taxes with Bankers Trust Company and estimated expenses. At June 30,
1997, goodwill was increased by $1.8 million to adjust the value of a
receivable existing at that date. The allocation of the purchase price
to Golden American was approximately $139.9 million. Goodwill
resulting from the acquisition was being amortized over 25 years on a
straight-line basis.
1997 COMPARED TO 1996
The following analysis combines Post-Merger and Post-Acquisition
activity for 1997 and Post-Acquisition and Pre-Acquisition activity for
1996 for comparison purposes. Such a comparison does not recognize the
impact of the purchase accounting and goodwill amortization except for
the periods after August 13, 1996.
PREMIUMS
<TABLE>
<CAPTION>
POST-MERGER COMBINED POST-ACQUISITION
__________________________________________________________
FOR THE PERIOD | FOR THE YEAR | FOR THE PERIOD
OCTOBER 25, 1997 | ENDED | JANUARY 1, 1997
THROUGH | DECEMBER 31, 1997 | THROUGH
DECEMBER 31, 1997 | COMBINED | OCTOBER 24, 1997
_________________________________________| __________________| _________________
(dOLLARS IN MILLIONS)
<S> <C> | <C> | <C>
Variable annuity | |
premiums: | |
Separate account $111.0 | $291.2 | $180.2
Fixed account 60.9 | 318.0 | 257.1
___________________| __________________| _________________
171.9 | 609.2 | 437.3
Variable life premiums 1.2 | 15.6 | 14.4
___________________| __________________| _________________
Total premiums $173.1 | $624.8 | $451.7
==========================================================
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION COMBINED PRE-ACQUISITION
__________________________________________________________
FOR THE PERIOD | FOR THE YEAR | FOR THE PERIOD
AUGUST 14, 1996 | ENDED | JANUARY 1, 1996
THROUGH | DECEMBER 31, 1996 | THROUGH
DECEMBER 31, 1996 | COMBINED | AUGUST 13, 1996
_________________________________________| __________________| _________________
(dOLLARS IN MILLIONS)
<S> <C> | <C> | <C>
Variable annuity | |
premiums: | |
Separate account $51.0 | $182.4 | $131.4
Fixed account 118.3 | 245.3 | 127.0
___________________| __________________| _________________
169.3 | 427.7 | 258.4
Variable life premiums 3.6 | 14.1 | 10.5
___________________| __________________| _________________
Total premiums $172.9 | $441.8 | $268.9
==========================================================
</TABLE>
Variable annuity separate account and variable life premiums increased
59.6% and 10.1%, respectively in 1997. During 1997, stock market
returns, a relatively low interest rate environment and flat yield
curve have made returns provided by variable annuities and mutual funds
more attractive than fixed rate products such as certificates of
deposits and fixed annuities. The fixed account portion of the
Company's variable annuity premiums increased 29.7% in 1997 due to the
Company's marketing emphasis on fixed rates during the second and third
quarters. Premiums, net of reinsurance, for variable products from six
significant broker/dealers for the year ended December 31, 1997,
totaled $445.3 million, or 71% of premiums ($298.0 million or 67% from
two significant broker/dealers for the year ended December 31, 1996).
<PAGE>
REVENUES
<TABLE>
<CAPTION>
POST-MERGER COMBINED POST-ACQUISITION
__________________________________________________________
FOR THE PERIOD | FOR THE YEAR| FOR THE PERIOD
OCTOBER 25, 1997 | ENDED| JANUARY 1, 1997
THROUGH | DECEMBER 31, 1997| THROUGH
DECEMBER 31, 1997 | COMBINED| OCTOBER 24, 1997
_________________________________________| _________________| __________________
(DOLLARS IN MILLIONS)
<S> <C> | <C> | <C>
Annuity and interest | |
sensitive life | |
product charges $3.8 | $22.1 | $18.3
Management fee revenue 0.5 | 2.8 | 2.3
Net investment income 5.1 | 26.8 | 21.7
Realized gains (losses) | |
on investments -- | 0.1 | 0.1
Other income 0.3 | 0.7 | 0.4
___________________| _________________| __________________
$9.7 | $52.5 | $42.8
==========================================================
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION COMBINED PRE-ACQUISITION
__________________________________________________________
FOR THE PERIOD | FOR THE YEAR| FOR THE PERIOD
AUGUST 14, 1996 | ENDED| JANUARY 1, 1996
THROUGH | DECEMBER 31, 1996| THROUGH
DECEMBER 31, 1996 | COMBINED| AUGUST 13, 1996
_________________________________________| _________________| __________________
(DOLLARS IN MILLIONS)
<S> <C> | <C> | <C>
Annuity and interest | |
sensitive life | |
product charges $8.8 | $21.0 | $12.2
Management fee revenue 0.9 | 2.3 | 1.4
Net investment income 5.8 | 10.8 | 5.0
Realized gains (losses) | |
on investments -- | (0.4)| (0.4)
Other income 0.5 | 0.6 | 0.1
___________________| _________________| __________________
$16.0 | $34.3 | $18.3
==========================================================
</TABLE>
Total revenues increased 53.3%, or $18.2 million, to $52.5 million in
1997. Annuity and interest sensitive life product charges increased
5.2%, or $1.1 million in 1997 due to additional fees earned from the
increasing block of business under management in the Separate Accounts
and an increase in the collection of surrender charges.
Golden American provides certain managerial and supervisory services to
DSI. This fee, calculated as a percentage of average assets in the
variable separate accounts, was $2.8 million for 1997 and $2.3 million
for 1996.
Net investment income increased 148.3%, or $16.0 million, to $26.8
million in 1997 from $10.8 million in 1996 due to growth in invested
assets. During 1997, the Company had net realized gains on the
disposal of investments, which were the result of voluntary sales, of
$0.1 million compared to net realized losses of $0.4 million in 1996.
43
<PAGE>
EXPENSES
<TABLE>
<CAPTION>
POST-MERGER COMBINED POST-ACQUISITION
_______________________________________________________
FOR THE PERIOD| FOR THE YEAR| FOR THE PERIOD
OCTOBER 25, 1997| ENDED| JANUARY 1, 1997
THROUGH| DECEMBER 31, 1997| THROUGH
DECEMBER 31, 1997| COMBINED| OCTOBER 24, 1997
_________________________________________| _________________| _________________
(DOLLARS IN MILLIONS)
<S> <C> | <C> | <C>
Insurance benefits | |
and expenses: | |
Annuity and interest | |
sensitive life benefits: | |
Interest credited to | |
account balances $7.4 | $26.7 | $19.3
Benefit claims incurred | |
in excess of account | |
balances -- | 0.1 | 0.1
Underwriting, acquisition | |
and insurance expenses: | |
Commissions 9.4 | 36.3 | 26.9
General expenses 3.4 | 17.3 | 13.9
Insurance taxes 0.5 | 2.3 | 1.8
Policy acquisition costs | |
deferred (13.7)| (42.7)| (29.0)
Amortization: | |
Deferred policy | |
acquisition costs 0.9 | 2.6 | 1.7
Present value of in | |
force acquired 0.9 | 6.1 | 5.2
Goodwill 0.6 | 2.0 | 1.4
_________________| _________________| _________________
$9.4 | $50.7 | $41.3
=======================================================
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION COMBINED PRE-ACQUISITION
_______________________________________________________
FOR THE PERIOD| FOR THE YEAR| FOR THE PERIOD
AUGUST 14, 1996| ENDED| JANUARY 1, 1996
THROUGH| DECEMBER 31, 1996| THROUGH
DECEMBER 31, 1996| COMBINED| AUGUST 13, 1996
_________________________________________| _________________| _________________
(DOLLARS IN MILLIONS)
<S> <C> | <C> | <C>
Insurance benefits | |
and expenses: | |
Annuity and interest | |
sensitive life benefits: | |
Interest credited to | |
account balances $5.7 | $10.1 | $4.4
Benefit claims incurred | |
in excess of account | |
balances 1.3 | 2.2 | 0.9
Underwriting, acquisition | |
and insurance expenses: | |
Commissions 9.9 | 26.5 | 16.6
General expenses 5.9 | 15.3 | 9.4
Insurance taxes 0.7 | 1.9 | 1.2
Policy acquisition costs | |
deferred (11.7)| (31.0)| (19.3)
Amortization: | |
Deferred policy | |
acquisition costs 0.2 | 2.6 | 2.4
Present value of in | |
force acquired 2.7 | 3.7 | 1.0
Goodwill 0.6 | 0.6 | --
_________________| _________________| _________________
$15.3 | $31.9 | $16.6
=======================================================
</TABLE>
Total insurance benefits and expenses increased 59.3%, or $18.8
million, in 1997 from $31.9 million in 1996. Interest credited to
account balances increased 164.4%, or $16.6 million, in 1997 as a
result of higher account balances associated with the Company's fixed
account option within its variable products.
Commissions increased 37.3%, or $9.8 million, in 1997 from $26.5
million in 1996. Insurance taxes increased 23.3%, or $0.4 million, in
1997 from $1.9 million in 1996. Increases and decreases in commissions
and insurance taxes are generally related to changes in the level of
variable product sales. Insurance taxes are also impacted by several
other factors which include an increase in FICA taxes primarily due to
bonuses and an increase in state licenses and fees. Most costs incurred
as the result of new sales have been deferred, thus having very little
impact on earnings.
44
<PAGE>
General expenses increased 12.6%, or $2.0 million, in 1997 from $15.3
million in 1996 due in part to certain expenses associated with the
merger occurring on October 24, 1997. In addition, the Company uses a
network of wholesalers to distribute its products and the salaries of
these wholesalers are included in general expenses. The portion of
these salaries and related expenses which vary with sales production
levels are deferred, thus having little impact on earnings. This
increase in general expenses was partially offset by reimbursements
received from Equitable Life, an affiliate, for certain advisory,
computer and other resources and services provided by Golden American.
Management expects general expenses to continue to increase in 1998 as
a result of the emphasis on expanding the salaried wholesaler
distribution network.
During the second quarter of 1997, present value of in force acquired
("PVIF") was unlocked by $2.3 million to reflect narrower current
spreads than the gross profit model assumed. The Company's deferred
policy acquisition costs ("DPAC"), previous balance of PVIF and
unearned revenue reserve, as of the merger date, were eliminated and an
asset of $44.3 million representing PVIF was established for all
policies in force at the merger date. The amortization of PVIF and
DPAC increased $2.4 million, or 37.1%, in 1997. Based on current
conditions and assumptions as to the impact of future events on
acquired policies in force, the expected approximate net amortization
for the next five years, relating to the PVIF as of December 31, 1997,
is $6.2 million in 1998, $6.0 million in 1999, $5.6 million in 2000,
$5.0 million in 2001 and $4.2 million in 2002. Certain expense
estimates inherent in the cost of the merger may change resulting in
changes of the allocation of the purchase price. If changes occur, the
impact could result in changes to PVIF and the related amortization and
deferred taxes. Actual amortization may vary based upon changes in
assumptions and experience. The elimination of the unearned revenue
reserve related to in force acquired at the merger/acquisition dates
will result in lower annuity and interest sensitive life product
charges compared to pre-merger/pre-acquisition levels.
Amortization of goodwill for the year ended December 31, 1997 totaled
$2.0 million compared to $0.6 million for the year ended December 31,
1996. Goodwill resulting from the merger is being amortized on a
straight-line basis over 40 years and is expected to total
approximately $3.8 million annually.
Interest expense on the $25 million surplus note issued December 1996
was $2.0 million for the year ended December 31, 1997. Interest on any
line of credit borrowings was charged at the rate of Equitable of
Iowa's monthly average aggregate cost of short-term funds plus 1.00%.
During 1997, the Company paid $0.6 million to Equitable of Iowa for
interest on the line of credit.
NET INCOME. Net income on a combined basis for 1997 was $0.3 million,
a decrease of $3.2 million, or 91.4%, from 1996.
1996 Compared to 1995
The following analysis combines the Post-Acquisition and
Pre-Acquisition activity for 1996 in order to compare the results to
1995. Such a comparison does not recognize the impact of the purchase
accounting and goodwill amortization except for the period after August
13, 1996.
PREMIUMS
<TABLE>
<CAPTION>
POST- |
ACQUISITION | COMBINED | PRE-ACQUISITION
--------------- | ------------ | ----------------------------
FOR THE PERIOD | FOR THE YEAR |
AUGUST 14, 1996 | ENDED | FOR THE PERIOD FOR THE YEAR
THROUGH | DECEMBER 31, | JANUARY 1,1996 ENDED
DECEMBER 31, | 1996 | THROUGH DECEMBER 31,
1996 | COMBINED | AUGUST 13, 1996 1995
--------------- | ------------ | --------------- ------------
| (DOLLARS IN | MILLIONS)
<S> <C> | <C> | <C> <C>
Variable annuity | |
premiums............... $169.3 | $427.6 | $258.4 $110.6
Variable life premiums.. 3.6 | 14.1 | 10.5 5.1
------ | -------- | ------ ------
Total premiums......... $172.9 | $441.7 | $268.9 $115.7
====== | ======== | ====== ======
</TABLE>
Variable annuity premiums increased 286.4%, or $317.0 million, in 1996,
and variable life premiums increased 176.2%, or $9.0 million, in 1996.
Strong stock market returns, a relatively low interest rate environment
and flat yield curve have made returns provided by variable annuities and
mutual funds more attractive than fixed rate products such as
certificates of deposits and fixed annuities. During 1995, the fund
offerings underlying Golden American's variable products were improved
and a fixed account option was added. These changes and the current
environment have contributed to the significant growth in the Company's
variable annuity premiums from 1995. Premiums, net of reinsurance, for
variable products from two significant sellers for the year ended
December 31, 1996, totaled $298.0 million, or 67% of premiums.
45
<PAGE>
REVENUES
<TABLE>
<CAPTION>
POST- |
ACQUISITION | COMBINED | PRE-ACQUISITION
--------------- | ------------ | ----------------------------
FOR THE PERIOD | FOR THE YEAR |
AUGUST 14, 1996 | ENDED | FOR THE PERIOD FOR THE YEAR
THROUGH | DECEMBER 31, | JANUARY 1, 1996 ENDED
DECEMBER 31, | 1996 | THROUGH DECEMBER 31,
1996 | COMBINED | AUGUST 13, 1996 1995
--------------- | ------------ | --------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Annuity and interest | |
sensitive life product | |
charges................ $ 8.8 | $21.0 | $12.2 $18.4
Management fee revenue.. 0.9 | 2.2 | 1.4 1.0
Net investment income... 5.8 | 10.8 | 5.0 2.8
Realized gains (losses) | |
on investments......... -- | (0.4) | (0.4) 0.3
Other income............ 0.5 | 0.6 | 0.1 0.1
----- | ----- | ---- ----
$16.0 | $34.3 | $18.3 $22.6
===== | ===== | ==== =====
</TABLE>
Total revenues increased 51.9%, or $11.7 million, to $34.3 million in
1996. Annuity and interest sensitive life product charges increased
14.4%, or $2.6 million in 1996. The increase is due to additional fees
earned from the increasing block of business under management in the
Separate Accounts and an increase in the collection of surrender
charges partially offset by a decrease in the revenue recognition of
net distribution fees.
Golden American provides certain managerial and supervisory services to
DSI. This fee, calculated as a percentage of average assets in the
variable separate accounts, was $2.3 million for 1996 and $1.0 million
for 1995.
Net investment income increased 282.7%, or $8.0 million, to $10.8
million in 1996 from $2.8 million in 1995. This increase resulted from
growth in invested assets. During 1996, the Company had realized losses
on the disposal of investments, which were the result of voluntary
sales, of $0.4 million compared to realized gains of $0.3 million in
1995.
EXPENSES
<TABLE>
<CAPTION>
POST- |
ACQUISITION | COMBINED | PRE-ACQUISITION
--------------- | ------------ | -----------------------------
FOR THE PERIOD | FOR THE YEAR | FOR THE PERIOD
AUGUST 14, 1996 | ENDED | JANUARY 1, 1996 FOR THE YEAR
THROUGH | DECEMBER 31, | THROUGH ENDED
DECEMBER 31, | 1996 | AUGUST 13, DECEMBER 31,
1996 | COMBINED | 1996 1995
--------------- | ------------ | --------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Insurance benefits and expenses: | |
Annuity and interest sensitive | |
life benefits: | |
Interest credited to account balances.... $ 5.7 | $ 10.0 | $ 4.4 $ 1.3
Benefit claims incurred in excess of | |
account balances....................... 1.3 | 2.2 | 0.9 1.8
Underwriting, acquisition, and insurance | |
expenses: | |
Commissions.............................. 9.9 | 26.4 | 16.5 8.0
General expenses......................... 5.9 | 15.3 | 9.4 12.7
Insurance taxes.......................... 0.7 | 1.9 | 1.2 0.9
Policy acquisition costs deferred........ (11.7) | (31.0) | (19.3) (9.8)
Amortization: | |
Deferred policy acquisition costs....... 0.2 | 2.7 | 2.4 2.7
Present value of in force acquired...... 2.7 | 3.7 | 1.0 1.6
Goodwill................................ 0.6 | 0.6 | -- --
------ | ------ | ------ -----
$ 15.3 | $ 31.8 | $ 16.5 $19.2
====== | ====== | ====== =====
</TABLE>
46
<PAGE>
Total insurance benefits and expenses increased 66.1%, or $12.7
million, in 1996 from $19.2 million in 1995. Interest credited to
account balances increased 663.6%, or $8.8 million, in 1996 as a result
of higher account balances associated with the Company's fixed account
option within its variable products. Benefit claims incurred in excess
of account balances increased 19.4%, or $0.4 million, in 1996 from $1.8
million in 1995.
Commissions increased 230.9%, or $18.4 million, in 1996 from $8.0
million in 1995. Insurance taxes increased 99.3%, or $0.9 million, in
1996 from $1.0 million in 1995. Increases and decreases in commissions
and insurance taxes are generally related to changes in the level of
variable product sales. Most costs incurred as the result of new sales
have been deferred, thus having very little impact on earnings.
General expenses increased 21.2%, or $2.7 million, in 1996 from $12.7
million in 1995. The Company uses a network of wholesalers to
distribute its products and the salaries of these wholesalers are
included in general expenses. The portion of these salaries and related
expenses which vary with sales production levels are deferred, thus
having little impact on earnings. Management expects general expenses
to continue to increase in 1997 as a result of the emphasis on
expanding the salaried wholesaler distribution network.
The Company's deferred policy acquisition costs ("DPAC"), previous
balance of present value of in force acquired ("PVIF") and unearned
revenue reserve, as of the purchase date, were eliminated and an asset
of $85.8 million representing the PVIF was established for all policies
in force at the acquisition date. The amortization of PVIF and DPAC
increased $2.1 million, or 49.6%, in 1996. Based on current conditions
and assumptions as to the impact of future events on acquired policies
in force, amortization of PVIF is expected to be approximately $9.7
million in 1997, $10.1 million in 1998, $9.2 million in 1999, $7.9
million in 2000 and $6.8 million in 2001. The elimination of the
unearned revenue reserve, related to in force acquired at the
acquisition date, will result in lower annuity and interest sensitive
life product charges compared to 1995 levels.
Amortization of goodwill during the period from the acquisition date to
December 31, 1996 totaled $0.6 million. Goodwill resulting from the
acquisition is being amortized on a straight-line basis over 25 years
and is expected to total $1.6 million annually.
NET INCOME. Net income on a combined basis for 1996 was $3.5 million,
an increase of $0.2 million, or 5.5%, from 1995.
FINANCIAL CONDITION
RATINGS. During 1997, the Company's ratings were upgraded by A.M. Best
from A to A+ and by Duff & Phelps from AA to AA+.
INVESTMENTS. The financial statement carrying value and amortized cost
basis of the Company's total investments each increased 65.1% in 1997.
All of the Company's investments, other than mortgage loans, are
carried at fair value in the Company's financial statements. As such,
growth in the carrying value of the Company's investment portfolio
included changes in unrealized appreciation and depreciation of fixed
maturity and equity securities as well as growth in the cost basis of
these securities. Growth in the cost basis of the Company's investment
portfolio resulted from the investment of premiums from the sale of the
Company's fixed account option and the effect of purchase accounting
establishing a new cost basis at market value at the merger date. The
Company manages the growth of its insurance operations in order to
maintain adequate capital ratios.
To support the fixed account option of the Company's variable insurance
products, cash flow was invested primarily in fixed maturity securities
and mortgage loans. At December 31, 1997, the Company's investment
portfolio at amortized cost was $519.6 million with a yield of 6.7% and
carrying value of $520.2 million.
Fixed Maturity Securities: At December 31, 1997, the Company had fixed
maturities with an amortized cost of $413.3 million and an estimated
fair value of $414.4 million. The individual securities in the
Company's fixed maturities portfolio (at amortized cost) include
investment grade securities ($368.0 million or 89.1%), which include
securities issued by the U.S. Government, its agencies and corporations
that are rated at least BBB- by Standard & Poor's Rating Services, a
Division of the McGraw Hill Cos., Inc. ("Standard & Poor's"), and below
investment grade securities ($41.4 million or 10.0%), which are
securities issued by corporations that are rated BB+ to B- by Standard
& Poor's. Securities not rated by Standard & Poor's had a National
Association of Insurance Commissioners ("NAIC") rating of 1, 3 or 4
($3.9 million or 0.9%).
47
<PAGE>
The Company classifies 100% of its securities as available for sale.
Net unrealized appreciation of fixed maturity securities of $1.1
million was comprised of gross appreciation of $1.4 million and gross
depreciation of $0.3 million. Net unrealized holding gains on these
securities, net of adjustments to DPAC, PVIF and deferred income taxes,
increased stockholder's equity by $0.6 million at December 31, 1997.
The Company began investing in below investment grade securities during
1996. At December 31, 1997, the amortized cost value of the Company's
total investment in below investment grade securities was $41.4
million, or 8.0%, of the Company's investment portfolio. The Company
intends to purchase additional below investment grade securities, but
it does not expect the percentage of its portfolio invested in such
securities to exceed 10% of its investment portfolio. At December 31,
1997, the yield at amortized cost on the Company's below investment
grade portfolio was 7.9% compared to 6.3% for the Company's investment
grade corporate bond portfolio. The Company estimates the fair value of
its below investment grade portfolio was $41.3 million, or 99.9% of
amortized cost value, at December 31, 1997.
Below investment grade securities have different characteristics than
investment grade corporate debt securities. Risk of loss upon default
by the borrower is significantly greater with respect to below
investment grade securities than with other corporate debt securities.
Below investment grade securities are generally unsecured and are often
subordinated to other creditors of the issuer. Also, issuers of below
investment grade securities usually have higher levels of debt and are
more sensitive to adverse economic conditions, such as recession or
increasing interest rates, than are issuers of investment grade
securities. The Company attempts to reduce the overall risk in its
below investment grade portfolio, as in all of its investments, through
careful credit analysis, strict investment policy guidelines, and
diversification by company and by industry.
The Company analyzes its investment portfolio, including below
investment grade securities, at least quarterly in order to determine
if its ability to realize its carrying value on any investment has been
impaired. For debt and equity securities, if impairment in value is
determined to be other than temporary (i.e. if it is probable the
Company will be unable to collect all amounts due according to the
contractual terms of the security), the cost basis of the impaired
security is written down to fair value, which becomes the security's
new cost basis. The amount of the write-down is included in earnings as
a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs
of securities in the Company's portfolio. Significant write-downs in
the carrying value of investments could materially adversely affect the
Company's net income in future periods.
In 1997, fixed maturity securities designated as available for sale
with a combined amortized cost of $49.3 million were called or repaid
by their issuers. In total, net pre-tax gains from sales, calls and
repayments of fixed maturity investments amounted to $0.2 million in
1997.
At December 31, 1997, no fixed maturity securities were deemed to have
impairments in value that are other than temporary. The Company's
fixed maturity investment portfolio had a combined yield at amortized
cost of 6.7% at December 31, 1997.
Equity Securities: At December 31, 1997, the Company owned equity
securities with a combined cost of $4.4 million and an estimated fair
value of $3.9 million. Gross unrealized depreciation of equity
securities totaled $0.5 million. Equity securities are comprised
primarily of the Company's investment in shares of the mutual funds
underlying the Company's registered separate accounts.
Mortgage Loans: Mortgage loans represent 16.4% of the Company's
investment portfolio at amoritized cost. Mortgages outstanding were
$85.1 million at December 31, 1997 with an estimated fair value of
$86.3 million. The Company's mortgage loan portfolio includes 50 loans
with an average size of $1.7 million and average seasoning of 1.1 years
if weighted by the number of loans, and 1.2 years if weighted by
mortgage loan carrying values. The Company's mortgage loans are
typically secured by occupied buildings in major metropolitan locations
and not speculative developments, and are diversified by type of
property and geographic location. At December 31, 1997, the yield on
the Company's mortgage loan portfolio was 7.4%.
At December 31, 1997, no mortgage loans were delinquent by 90 days or
more. The Company does not expect to incur material losses from its
mortgage loan portfolio. The Company's loan investment strategy is
consistent with other life insurance subsidiaries of its ultimate
parent, EIC. EIC has experienced a historically low default rate in
its mortgage loan portfolio and has been able to recover 95.9% of the
principal amount of problem mortgages resolved in the last three years.
48
<PAGE>
At December 31, 1997, the Company had no investments in default. The
Company estimates its total investment portfolio, excluding policy
loans, had a fair value approximately equal to 100.4% of its amortized
cost value for accounting purposes at December 31, 1997.
OTHER ASSETS. Accrued investment income increased $2.3 million during
1997 due to an increase in the overall size of the portfolio resulting
from the investment of premiums allocated to the fixed account option
of the Company's variable products.
DPAC represents certain deferred costs of acquiring new insurance
business, principally commissions and other expenses related to the
production of new business subsequent to the merger. The Company's
DPAC and previous balance of PVIF, were eliminated as of the merger and
acquisition dates, and an asset representing PVIF was established for
all policies in force at the merger and acquisition dates. PVIF is
amortized into income in proportion to the expected gross profits of
the in force acquired in a manner similar to DPAC amortization. At
December 31, 1997, the Company had DPAC and PVIF balances of $12.8
million and $43.2 million, respectively.
Goodwill totaling $151.1 million and $41.1 million as adjusted,
representing the excess of the acquisition cost over the fair value of
net assets acquired, was established at the merger and acquisition
dates, respectively. At June 30, 1997, goodwill was increased by $1.8
million to adjust the value of a receivable existing at the acquisition
date.
At December 31, 1997, the Company had $1.6 billion of separate account
assets compared to $1.2 billion at December 31, 1996. The increase in
separate account assets is due to growth in sales of the Company's
variable separate account products and market appreciation.
At December 31, 1997, the Company had total assets of $2.4 billion, an
increase of 45.8% over total assets at December 31, 1996.
LIABILITIES. In conjunction with the volume of variable insurance
sales, the Company's total liabilities increased $681.1 million, or
44.3%, during 1997 and totaled $2.2 billion at December 31, 1997.
Future policy benefits for annuity and interest sensitive life products
increased $220.0 million, or 77.1%, to $505.3 million reflecting
premium growth in the Company's fixed account option of its variable
products. Premium growth and market appreciation, net of redemptions,
also accounted for the $438.9 million, or 36.4%, increase in separate
account liabilities to $1.6 billion at December 31, 1997. As of the
merger and acquisition dates, the Company's existing unearned revenue
reserves were eliminated. This treatment corresponds with the
treatment of PVIF.
Golden American maintained a line of credit agreement with Equitable of
Iowa to facilitate the handling of unusual and/or unanticipated
short-term cash requirements. Under the agreement, which became
effective December 1, 1996 and expired on December 31, 1997, Golden
American could borrow up to $25 million. At December 31, 1997, $24.1
million was outstanding under this agreement. The outstanding balance
was repaid by a capital contribution.
On December 17, 1996, Golden American issued a $25 million, 8.25%
surplus note to Equitable of Iowa which matures on December 17, 2026.
Equity. Additional paid-in capital increased $87.6 million, or 63.8%
to $225.0 million at December 31, 1997 primarily due to the revaluation
of net assets as a result of the merger.
The effects of inflation and changing prices on the Company are not
material since insurance assets and liabilities are both primarily
monetary and remain in balance. An effect of inflation, which has been
low in recent years, is a decline in purchasing power when monetary
assets exceed monetary liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met by cash flow from
variable insurance premiums, investment income and maturities of fixed
maturity investments and mortgage loans. The Company primarily uses
funds for the payment of insurance benefits, commissions, operating
expenses and the purchase of new investments.
The Company's home office operations are currently housed in leased
locations in Wilmington, Delaware and New York, New York. The Company
intends to spend approximately $5.6 million on capital needs for 1998.
The Company intends to continue growing its operations. Future growth
in the Company's operations will require additional capital. The
Company believes it will be able to fund the capital required for
projected new business
49
<PAGE>
primarily with future capital contributions from its Parent. On
February 28, 1998, Golden American received a capital contribution
from EIC of $18.75 million.
The ability of Golden American to pay dividends to its Parent is
restricted because prior approval of insurance regulatory authorities
is required for payment of dividends to the stockholder which exceed an
annual limitation. During 1998, Golden American cannot pay dividends to
its Parent without prior approval of statutory authorities. The Company
has maintained adequate statutory capital and surplus and has not used
surplus relief or financial reinsurance, which have come under scrutiny
by many state insurance departments.
Under the provisions of the insurance laws of the State of New York,
First Golden cannot distribute any dividends to its stockholders unless
a notice of its intention to declare a dividend and amount of the
dividend has been filed not less than thirty days in advance of the
proposed declaration. The superintendent may disapprove the
distribution by giving written notice to First Golden within thirty
days after the filing should the superintendent find that the financial
condition of First Golden does not warrant the distribution.
The NAIC's risk-based capital requirements require insurance companies
to calculate and report information under a risk-based capital formula.
These requirements are intended to allow insurance regulators to
identify inadequately capitalized insurance companies based upon the
type and mixture of risks inherent in the Company's operations. The
formula includes components for asset risk, liability risk, interest
rate exposure and other factors. The Company has complied with the
NAIC's risk-based capital reporting requirements. Amounts reported
indicate that the Company has total adjusted capital well above all
required capital levels.
Year 2000 Project: Based on a study of its computer software and
hardware, the Company has determined its exposure to the Year 2000
change of the century date issue. Management believes the Company's
systems are or will be substantially compliant by Year 2000 and has
engaged external consultants to validate this assumption. Golden
American has spent approximately $2,000 in 1997 related to the external
consultants' analysis. The projected cost for the external consultants
analysis is approximately $130,000 to $170,000. The only system known
to be affected by this issue is a system maintained by an affiliate who
will incur the related costs to make the system compliant. To mitigate
the effect of outside influences and other dependencies relative to the
Year 2000, the Company will continue to contact significant customers,
suppliers and other third parties. To the extent these third parties
would be unable to transact business in the Year 2000 and thereafter,
the Company's operations could be adversely affected.
Surplus Note: On December 17, 1996, Golden American issued a surplus
note in the amount of $25 million to Equitable of Iowa. The note
matures on December 17, 2026 and will accrue interest of 8.25% per
annum until paid. The note and accrued interest thereon shall be
subordinate to payments due to policyholders, claimant and beneficiary
claims, as well as debts owed to all other classes of debtors of Golden
American. Any payment of principal made shall be subject to the prior
approval of the Delaware Insurance Commissioner. On December 17, 1996,
Golden American contributed the $25 million to First Golden acquiring
200,000 shares of common stock (100% of shares outstanding) of First
Golden.
Reciprocal Loan Agreement: Golden American maintains a reciprocal loan
agreement with ING America Insurance Holdings, Inc. ("ING America"), a
Delaware corporation and affiliate of EIC, to facilitate the handling
of unusual and/or unanticipated short-term cash requirements. Under
this agreement, which became effective January 1, 1998 and expires on
December 31, 2007, Golden American and ING America can borrow up to $65
million from one another.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING SATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the Company or any of its officers, directors or
employees is qualified by the fact that actual results of the Company
may differ materially from such statement due to the following
important factors, among other risks and uncertainties inherent in the
Company's business:
(1) Prevailing interest rate levels and stock market performance
which may affect the ability of the Company to sell its products,
the market value of the Company's investments and the lapse rate
of the Company's policies, notwithstanding product design features
intended to enhance persistency of the Company's products.
50
<PAGE>
(2) Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the Company's products.
(3) Changes in the regulation of financial services, including bank
sales and underwriting of insurance products, which may affect
the competitive environment for the Company's products.
(4) Increasing competition in the sale of the Company's products.
(5) Other factors affecting the performance of the Company, including,
but not limited to, potential market conduct claims, litigation,
insurance industry insolvencies, investment performance of the
underlying portfolios of the variable products, variable product
design and sales volume by significant sellers of the Company's
variable products.
OTHER INFORMATION
SEGMENT INFORMATION. During the period since the acquisition by
Bankers Trust, September 30, 1992 to date of this Prospectus, Golden
American's operations consisted of one business segment, the sale of
annuity and life insurance products. Golden American and its affiliate
DSI are party to in excess of 140 sales agreements with broker-dealers,
two of whom, Locust Street Securities, Inc. and Vestax Securities
Corporation, are affiliates of Golden American. Six broker-dealers,
including Locust Street Securities, Inc., sell a substantial portion of
its business.
REINSURANCE. Golden American reinsures its mortality risk associated
with the Contract's guaranteed death benefit with one or more
appropriately licensed insurance companies. Golden American also,
effective June 1, 1994, entered into a reinsurance agreement on a
modified coinsurance basis with an affiliate of a broker-dealer which
distributes Golden American's products with respect to 25% of the
business produced by that broker-dealer.
RESERVES. In accordance with the life insurance laws and regulations
under which Golden American operates, it is obligated to carry on its
books, as liabilities, actuarially determined reserves to meet its
obligations on outstanding Contracts. Reserves, based on valuation
mortality tables in general use in the United States, where applicable,
are computed to equal amounts which, together with interest on such
reserves computed annually at certain assumed rates, make adequate
provision according to presently accepted actuarial standards of
practice, for the anticipated cash flows required by the contractual
obligations and related expenses of Golden American.
COMPETITION. Golden American is engaged in a business that is highly
competitive because of the large number of stock and mutual life
insurance companies and other entities marketing insurance products
comparable to those of Golden American. There are approximately 2,350
stock, mutual and other types of insurers in the life insurance
business in the United States, a substantial number of which are
significantly larger than Golden American.
SERVICE AGREEMENTS. Beginning in 1994 and continuing until August 13,
1996, Bankers Trust (Delaware), a subsidiary of Bankers Trust New York
Corporation ("BT New York Corporation"), and Golden American became
parties to a service agreement pursuant to which Bankers Trust
(Delaware) agreed to provide certain accounting, actuarial, tax,
underwriting, sales, management and other services to Golden American.
Expenses incurred by Bankers Trust (Delaware) in relation to this
service agreement were reimbursed by Golden American on an allocated
cost basis. Charges billed to Golden American by Bankers Trust
(Delaware) pursuant to the service agreement for 1996 through its
termination as of August 13, 1996 and 1995 were $0.5 million and $0.8
million, respectively.
Pursuant to a service agreement between Golden American and Equitable
Life, Equitable Life provides certain administrative, financial and
other services to Golden American.
Golden American provides to DSI certain of its personnel to perform
management, administrative and clerical services and the use of certain
facilities. Golden American charges DSI for such expenses and all other
general and administrative costs, first on the basis of direct charges
when identifiable, and the remainder allocated based on the estimated
amount of time spent by Golden American's employees on behalf of DSI.
In the opinion of management, this method of cost allocation is
reasonable. In 1995, the service agreement between DSI and Golden
American was amended to provide for a management fee from DSI to Golden
American for managerial and supervisory services provided by Golden
American. This fee, calculated as a percentage of average assets in
51
<PAGE>
the variable separate accounts, was $2.8 million, $2.3 million and $1.0
million for the years of 1997, 1996 and 1995, respectively.
DISTRIBUTION AGREEMENT. Under a distribution agreement, DSI acts as
the principal underwriter (as defined in the Securities Act of 1933 and
the Investment Company Act of 1940, as amended) of the variable
insurance products issued by Golden American which as of December 31,
1997, are sold primarily through six broker/dealer institutions. For
the years 1997, 1996 and 1995, commissions paid by Golden American to
DSI aggregated $36.4 million, $27.1 million and $8.4 million,
respectively.
EMPLOYEES. Golden American, as a result of its Service Agreement with
Bankers Trust (Delaware) and EIC Variable, had very few direct
employees. Instead, various management services were provided by
Bankers Trust (Delaware), EIC Variable and Bankers Trust New York
Corporation, as described above under "Service Agreement." The cost of
these services were allocated to Golden American. Since August 14,
1996, Golden American has looked to Equitable of Iowa and its
affiliates for management services.
Certain officers of Golden American are also officers of DSI, and their
salaries are allocated among both companies. Certain officers of Golden
American are also officers of other Equitable of Iowa subsidiaries. See
"Directors and Executive Officers."
PROPERTIES. Golden American's principal office is located at 1001
Jefferson Street, Suite 400, Wilmington, Delaware 19801, where all of
Golden American's records are maintained. This office space is leased.
STATE REGULATION. Golden American is subject to the laws of the State
of Delaware governing insurance companies and to the regulations of the
Delaware Insurance Department (the "Insurance Department"). A detailed
financial statement in the prescribed form (the "Annual Statement") is
filed with the Insurance Department each year covering Golden
American's operations for the preceding year and its financial
condition as of the end of that year. Regulation by the Insurance
Department includes periodic examination to determine contract
liabilities and reserves so that the Insurance Deparmtent may certify
that these items are correct. Golden American's books and accounts are
subject to review by the Insurance Department at all times. A full
examination of Golden American's operations is conducted periodically
by the Insurance Department and under the auspices of the NAIC.
In addition, Golden American is subject to regulation under the
insurance laws of all jurisdictions in which it operates. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to various matters, including
licensing to transact business, overseeing trade practices, licensing
agents, approving contract forms, establishing reserve requirements,
fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the
form and content of required financial statements and regulating the
type and amounts of investments permitted. Golden American is required
to file the Annual Statement with supervisory agencies in each of the
jurisdictions in which it does business, and its operations and
accounts are subject to examination by these agencies at regular
intervals.
The NAIC has adopted several regulatory intitiatives designed to
improve the surveillance and financial analysis regarding the solvency
of insurance companies in general. These inititatives include the
development and implementation of a risk-based capital formula for
determining adequate levels of capital and surplus. Insurance
companies are required to calculate their risk-based capital in
accordance with this formula and to include the results in their Annual
Statement. It is anticipated that these standards will have no
significant effect upon Golden American. For additional information
about the Risk-Based Capital adequacy monitoring system and Golden
American, see "Manangement's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
In addition, many states regulate affiliated groups of insurers, such
as Golden American, and its affilaites, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior
notice or approval, depending on the size of the transfers and payments
in relation to the financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing
business therein can be assessed (up to prescribed limits) for contract
owner losses incurred by other insurance companies which have become
insol-
52
<PAGE>
vent. Most of these laws provide that an assessment may be
excused or deferred if it would threaten an insurer's own financial
strength. For information regarding Golden American's estimated
liability for future guaranty fund assessments, see Note 10 of Notes to
Financial Statements.
Although the federal government generally does not directly regulate
the business of insurance, federal initiatives often have an impact on
the business in a variety of ways. Certain insurance products of
Golden American are subject to various federal securities laws and
regulations. In addition, current and proposed federal measures which
may significantly affect the insurance business include regulation of
insurance company solvency, employee benefit regulation, removal of
barriers preventing banks from engaging in the insurance business, tax
law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative
desirability of various personal investment vehicles.
DIRECTORS AND EXECUTIVE OFFICERS
Name (Age) Position(s) with the Company
- ------------------------- ---------------------------------------------
Barnett Chernow (48) President and Director
Myles R. Tashman (55) Director, Executive Vice President, General
Counsel and Secretary
Susan B. Watson (31) Director, Senior Vice President and Chief
Financial Officer
Frederick S. Hubbell (47) Director and Chairman
Paul E. Larson (45) Director
Keith T. Glover (47) Executive Vice President
James R. McInnis (49) Executive Vice President
Dennis D. Hargens (55) Treasurer
David L. Jacobson (48) Senior Vice President and Assistant Secretary
Stephen J. Preston (40) Senior Vice President and Chief Actuary
William B. Lowe (33) Senior Vice President
Edward M. Syring, Jr. (59) Senior Vice President
Each director is elected to serve for one year or until the next annual
meeting of shareholders or until his or her successor is elected. Most
directors are directors of insurance company subsidiaries of Golden
American's parent, Equitable of Iowa. The principal positions of
Golden American's directors and senior executive officers for the past
five years are listed below:
Mr. Barnett Chernow became President and Director of Golden American
Life Insurance Company ("Golden American") and President of First
Golden American Life Insurance Company of New York ("First Golden") in
April, 1998. From 1993 to 1998, Mr Chernow served as Executive Vice
President of Golden American. He was elected to serve as Executive
Vice President and Director of First Golden in June, 1996. From 1977
through 1993, he held various positions with Reliance Insurance
Companies and was Senior Vice President and Chief Financial Officer of
United Pacific Life Insurance Company from 1984 through 1993.
Mr. Myles R. Tashman joined Golden American in August, 1994 as Senior
Vice President and was named Executive Vice President, General Counsel
and Secretary effective January 1, 1996. He was elected to serve as a
director of Golden American in January, 1998. From 1986 through 1993,
he was Senior Vice President and General Counsel of United Pacific Life
Insurance Company.
Ms. Susan B. Watson joined Equitable Life Insurance Company of Iowa in
1991 as an Assistant Vice President and Corporate Actuary and is
currently Senior Vice President and Chief Financial Officer for
Equitable of Iowa and many of its subsidiaries. She was elected to
serve as a director of Golden American in January, 1998.
Mr. Frederick S. Hubbell is a Director of Golden American since August,
1996 and Chairman since September, 1996. He also serves as a Director
and Chairman of First Golden, having been first appointed as a Director
in December, 1997 and as Chairman in April, 1998. He was appointed
General Manager of ING Financial Services International, North America,
in October, 1997 and General Manager, President and Chief Executive
Officer of ING US life and annuities companies in April 1998. Mr. Hubbell
served as Chairman, President and Chief Executive Officer of Equitable of
Iowa from 1991 until October, 1997. He also has served as Chairman and
President of Equitable Life Insurance Company of Iowa from 1987 until
October, 1997.
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Mr. Paul E. Larson joined Equitable of Iowa in 1977 and is currently
President of Equitable Life. He was elected to serve as a director of
Golden American in August, 1996. He also served as Executive Vice
President, CFO, and Assistant Secretary of Golden American from
December, 1996 through December, 1997.
Mr. Keith T. Glover became Executive Vice President of Golden American
Life Insurance Company ("Golden American") and First Golden American
Life Insurance Company of New York ("First Golden") in February, 1998.
From 1991 to 1998, Mr. Glover served as Executive Vice President of
several Golden American affiliates; from 1996 to 1998, Southland Life
Insurance Company; from 1995 to 1996, ING FSI North America; and from
1991 to 1994, Security Life of Denver. From 1994 to 1995, Mr. Glover
served as President of ING Insurance Services - ING American life,
another Golden American affiliate.
Mr. James R. McInnis joined Golden American in December, 1997 as
Executive Vice President. From 1982 through November, 1997, he was with
the Endeavor Group and was President upon leaving.
Mr. Dennis D. Hargens was elected Treasurer of Golden American in
December, 1996. He joined Equitable Life Insurance Company of Iowa in
1961 and is currently Treasurer and was elected Treasurer of USG
Annuity & Life Company in 1996.
Mr. David L. Jacobson joined Golden American in November, 1993 as
Senior Vice President and Assistant Secretary. From April, 1974 through
November, 1993, he held various positions with United Pacific Life
Insurance Company and was Vice President upon leaving.
Mr. Stephen J. Preston joined Golden American in December, 1993 as
Senior Vice President, Chief Actuary and Controller. He currently
serves as Senior Vice President and Chief Actuary. From September, 1993
through November, 1993, he was Senior Vice President and Actuary for
Mutual of America Insurance Company. From July, 1987 through August,
1993, he held various positions with United Pacific Life Insurance
Company and was Vice President and Actuary upon leaving.
Mr. William B. Lowe joined Equitable Life as Vice President, Sales &
Marketing in January, 1994. He became a Senior Vice President, Sales &
Marketing, of Golden American in August, 1997. He is also President of
Equitable of Iowa Securities Network, Inc. Prior to joining Equitable
Life, he was an Associate Vice President of Lincoln BenefitLife from
July, 1990 through December, 1993.
Mr. Edward Syring, Jr. joined Golden American in February as a Senior
Vice President, Sales & Marketing. Prior to joining Golden American, he
was with Putnam Mutual Funds form April, 1991 through February, 1995.
<PAGE>
COMPENSATION TABLES AND OTHER INFORMATION
The following sets forth information with respect to the Chief
Executive Officer of Golden American as well as the annual salary and
bonus for the next five highly compensated executive officers for the
fiscal year ended December 31, 1997. Certain executive officers of
Golden American are also officers of DSI. The salaries of such
individuals are allocated between Golden American and DSI. Executive
officers of Golden American are also officers of DSI. The salaries of
such individuals are allocated between Golden American and DSI pursuant
to an arrangement among these companies. Throughout 1995 and until
August 13, 1996, Terry L. Kendall served as a Managing Director at
Bankers Trust New York Corporation. Compensation amounts for Terry L.
Kendall which are reflected throughout these tables prior to August 14,
1996 were not charged to Golden American, but were instead absorbed by
Bankers Trust New York Corporation.
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EXECUTIVE COMPENSATION TABLE
The following table sets forth information with respect to the annual
salary and bonus for Golden American's Chief Executive Officer and the
five other most highly compensated executive officers for the fiscal
year ended December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------------------
RESTRICTED SECURITIES
NAME AND STOCK AWARDS UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (/1/) OPTIONS (/2/) OPTIONS COMPENSATION
- ------------------ ---- -------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Terry L. Kendall,...... 1997 $362,833 $ 80,365 $ 644,844 16,000 $ 10,000(/4/)
President and Chief 1996 $288,298 $400,000 $ 11,535(/5/)
Executive Officer(/3/) 1995 $250,000 $400,000 8,000 $ 6,706(/5/)
Paul R. Schlaack,..... 1997 $351,000 $249,185 $1,274,518 19,000 $ 15,000
Chairman, Director 1996 $327,875 $249,185 $ 245,875 19,000 $ 15,000
and Vice President 1995 $311,750 $165,890 $ 19,594 23,000 $ 9,000(/4/)
Paul E. Larson,....... 1997 $327,667 $128,540 $ 971,036 16,000 $ 15,000
Executive Vice 1996 $267,791 $128,540 $ 319,935 26,000 $ 15,000
President, Chief 1995 $242,833 $ 70,760 $ 73,396 20,000 $ 12,000(/4/)
Financial Officer
and Assistant Secretary
Barnett Chernow,....... 1997 $234,167 $ 31,859 $ 277,576 4,000 $ 5,000(/4/)
Executive Vice 1996 $207,526 $150,000 $ 7,755(/5/)
President 1995 $190,000 $165,000 $ 15,444(/5/)(/6/)
Edward C. Wilson,...... 1997 $ 80,383 $137,700 5,000
Executive Vice 1996 $190,582 $327,473
President
Myles R. Tashman,...... 1997 $181,417 $ 25,000 $ 165,512 5,000 $ 5,000(/4/)
Executive Vice 1996 $176,138 $ 90,000 $ 5,127(/5/)
President, General 1995 $160,000 $ 25,000
Counsel and Secretary
</TABLE>
________________
(1) The amount shown relates to bonuses paid in 1997, 1996 and 1995.
$50,000 of Mr. Wilson's bonus paid in 1996 represents a signing bonus.
(2) Restricted stock awards granted to executive officers vested on October
24, 1997 with the change in control of Equitable of Iowa.
(3) Awards comprised of qualified and non-qualified stock options. All
options were granted with an exercise price equal to the then fair
market value of the underlying stock. All options vested with the
change in Equitable of Iowa and were cashed out for the difference
between $68.00 and the exercise price.
(4) For 1997, this compensation includes payment to each named executive
as perquisite payments which are classified as taxable income and are
required to be applied to specific business expenses of the named
executive.
(5) Contributions were made by the Company on behalf of the employee
to PartnerShare, the deferred compensation plan sponsored by Bankers
Trust New York Corporation and its affiliates for the benefit of all
Bankers Trust employees, in February of the current year to employees
on record as of December 31 of the previous year, after the employee
completes one year of service with the company. This contribution
may be in the form of deferred compensation and/or a cash payment.
In 1996, Mr. Kendall received $9,000 of deferred compensation and
$2,535 of cash payment from the plan; Mr. Chernow received $6,000
of deferred compensation and $1,755 of cash payment from the plan;
Mr. Tashman received $4,000 of deferred compensation and $1,127 of
cash payment from the plan; Mr. Wilson was not eligible for
contributions to the Partnershare Plan in 1996. In 1995, Mr.
Kendall received $2,956 of deferred compensation and $3,750 of cash
payment from the plan; Mr. Chernow received $1,013 of deferred
compensation and $1,267 of cash payment from the plan; Mr. Wilson
and Mr. Tashman were not eligible for contributions to the
PartnerShare Plan in 1995.
(6) Amount shown for 1995 represents relocation expenses paid on behalf
of the employee.
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<PAGE>
Option Grants in Last Fiscal Year (1997)
On October 24, 1997, in conjunction with the acquisition of Equitable of
Iowa, all outstanding options vested and were cashed out for the
difference between $68.00 and the exercise price. The table below
represents the options granted in 1997.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION
UNDERLYING EMPLOYEES TERM (/4/)
OPTIONS IN FISCAL EXERCISE EXPIRATION -------------------
NAME GRANTED (/1/) YEAR PRICE (/2/) DATE (/3/) 5% 10%
- ---- ------------- ---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Terry L. Kendall........ 16,000 5.26 $47.875 2/12/2007 $481,733 $1,220,807
Pual R. Schlaack........ 19,000 6.25 $47.875 2/12/2007 $572,058 $1,449,708
Paul E. Larsen.......... 26,000 8.25 $47.875 2/12/2007 $782,817 $1,983,811
Barnett Chernow......... 4,000 1.32 $47.875 2/12/2007 $120,433 $ 305,202
Edward C. Wilson........ 5,000 1.64 $47.875 2/12/2007 $150,542 $ 381,502
Myles Tashman........... 5,000 1.64 $47.875 2/12/2007 $150,542 $ 381,502
</TABLE>
________________
(1) Stock options granted on February 12, 1997 by Equitable of Iowa
to the officers of Golden American had a five-year vesting period
with 20% exercisable after 3rd year, an additional 30% after 4th year,
and the final 50% after 5th year. The options vested with the change
of control of Equitable of Iowa.
(2) The exercise price was equal to the fair market value of the Common
Stock on the date of grant.
(3) Incentive Stock Options have a term of ten years. They are subject
to earlier termination in certain events related to termination of
employment.
(4) Total dollar gains based on indicated rates of appreciation of share
price over a ten-year term.
Directors of Golden American receive no additional compensation for serving
as a director.
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<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following discussion of the federal income tax treatment of the Contract is
not exhaustive, does not purport to cover all situations, and is not intended as
tax advice. The federal income tax treatment of the Contract is unclear in
certain circumstances, and a qualified tax adviser should always be consulted
with regard to the application of the tax law to individual circumstances. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Department regulations, and interpretations existing on the
date of this prospectus. These authorities, however, are subject to change by
Congress, the Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated with
the purchase of the contract. In addition, GOLDEN AMERICAN MAKES NO GUARANTEE
REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY CONTRACT OR OF
ANY TRANSACTION INVOLVING A CONTRACT.
TAX STATUS OF GOLDEN AMERICAN
Golden American is taxed as a life insurance company under the Code. Since the
operations of Account B are a part of, and are taxed with, the operations of
Golden American, Account B is not separately taxed as a "regulated investment
company" under the Code. Under existing federal income tax laws, investment
income and capital gains of Account B are not taxed to Golden American to the
extent they are applied to increase reserves under a contract. Golden American
does not anticipate that it will incur any federal income tax liability in
Account B attributable to contract obligations, and therefore Golden American
does not intend to make provision for any such taxes. If Golden American is
taxed on investment income or capital gains of Account B, then Golden
American may impose a charge against Account B, as appropriate, in order to make
provision for such taxes.
TAXATION OF NON-QUALIFIED ANNUITIES
TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing provisions of the Code,
except as described below, any increase in an owner's Accumulation Value is
generally not taxable to the owner until amounts are received from the Contract,
either in the form of annuity payments as contemplated by the Contract, or in
some other form of distribution. However, this rule allowing deferral applies
only if (1) the investments of Account B are "adequately diversified" in
accordance with Treasury Department regulations, (2) Golden American, rather
than the owner, is considered the owner of the assets of Account B for federal
income tax purposes, and (3) the owner is an individual (or is treated as owned
by an individual). In addition to the foregoing, if the Contract's Annuity
Commencement Date occurs at a time when the annuitant is at an advanced age,
such as over age 85, it is possible that the owner will be taxable currently on
the annual increase in the Accumulation Value.
Diversification Requirements. The Code and Treasury Department regulations
prescribe the manner in which the investments of a segregated asset account,
such as the Divisions of Account B, are to be "adequately diversified." If a
Division of Account B failed to comply with these diversification standards,
contracts based on that segregated asset account would not be treated as an
annuity contract for federal income tax purposes and the Owner would generally
be taxable currently on the income on the contract (as defined in the tax law)
beginning with the period of non-diversification. Golden American expects that
the Divisions of Account B will comply with the diversification requirements
prescribed by the Code and Treasury Department regulations.
Ownership Treatment. In certain circumstances, variable annuity contract owners
may be considered the owners, for federal income tax purposes, of the assets of
a segregated asset account, such as the Divisions of Account B, used to support
their contracts. In those circumstances, income and gains from the segregated
asset account would be includible in the contract owners' gross income. The
Internal Revenue Service (the "IRS") has stated in published rulings that a
variable contract owner will be considered the owner of the assets of a
segregated asset account if the owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. In
addition, the Treasury Department announced, in connection with the issuance of
regulations concerning investment diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor, rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts (of a segregated
57
<PAGE>
asset account) without being treated as owners of the underlying assets." As
of the date of this prospectus, no such guidance has been issued.
The ownership rights under the Contract are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that contract owners were not owners of the assets of a segregated asset
account. For example, the Owner of this Contract has the choice of more
investment options to which to allocate purchase payments and the Accumulation
Value, and may be able to transfer among investment options more frequently,
than in such rulings. These differences could result in the Owner being treated
as the owner of all or a portion of the assets of Account B. In addition, Golden
American does not know what standards will be set forth in the regulations or
rulings which the Treasury Department has stated it expects to issue. Golden
American therefore reserves the right to modify the Contract as necessary to
attempt to prevent Contract Owners from being considered the owners of the
assets of Account B. However, there is no assurance that such efforts would be
successful.
Frequently, if the IRS or the Treasury Department sets forth a new position
which is adverse to taxpayers, the position is applied on a prospective basis
only. Thus, if the IRS or the Treasury Department were to issue regulations or a
ruling which treated an Owner of this Contract as the owner of Account B, that
treatment might apply on a prospective basis. However, if the regulations or
ruling were not considered to set forth a new position, an owner might
retroactively be determined to be the owner of the assets of Account B.
Non-natural Owner. As a general rule, contracts held by "non-natural persons"
such as a corporation, trust or other similar entity, as opposed to a natural
person, are not treated as annuity contracts for federal tax purposes. The
income on such contracts (as defined in the tax law) is taxed as ordinary income
that is received or accrued by the Owner of the Contract during the taxable
year. There are several exceptions to this general rule for non-natural Owners.
First, contracts will generally be treated as held by a natural person if the
nominal Owner is a trust or other entity which holds the Contract as an agent
for a natural person. However, this special exception will not apply in the case
of any employer who is the nominal Owner of a contract under a non-qualified
deferred compensation arrangement for its employees.
In addition, exceptions to the general rule for non-natural Owners will apply
with respect to (1) Contracts acquired by an estate of a decedent by reason of
the death of the decedent, (2) certain Contracts issued in connection with
qualified retirement plans, including certain Roth IRA Contracts, (3) certain
Contracts purchased by employers upon the termination of certain qualified
retirement plans, (4) certain Contracts used in connection with structured
settlement agreements, and (5) Contracts purchased with a single purchase
payment when the annuity starting date (as defined in the tax law) is no later
than a year from purchase of the Contract and substantially equal periodic
payments are made, not less frequently than annually, during the annuity period.
The remainder of this discussion assumes that the Contract will be treated as an
annuity contract for federal income tax purposes.
TAXATION OF PARTIAL WITHDRAWALS AND SURRENDERS. In the case of a partial
withdrawal prior to the Annuity Commencement Date, amounts received generally
are includible in income to the extent the Owner's Accumulation Value
(determined without regard to any surrender charge, within the meaning of the
tax law) before the surrender exceeds his or her "investment in the contract."
In the case of a surrender of the Contract for the Cash Surrender Value, amounts
received are includible in income to the extent they exceed the "investment in
the contract." For these purposes, the investment in the Contract at any time
equals the total of the premium payments made under the Contract to that time
(to the extent such payments were neither deductible when made nor excludable
from income as, for example, in the case of certain contributions to IRAs and
other qualified retirement plans) less any amounts previously received from the
Contract which were not includible in income.
In the case of systematic partial withdrawals, the amount of each withdrawal
will generally be taxed in the same manner as a partial withdrawal made prior to
the Annuity Commencement Date, as described above. However, there is some
uncertainty regarding the tax treatment of systematic partial withdrawals, and
it is possible that additional amounts may be includible in income.
The Contract provides a death benefit that in certain circumstances may exceed
the greater of the premium payments and the Accumulation Value. As described
elsewhere in this prospectus, Golden American imposes certain charges with
respect to the death benefit. It is possible that some portion of those charges
could be treated for federal tax purposes as a partial withdrawal from the
Contract.
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<PAGE>
In certain circumstances, surrender charges may be waived because of the Owner's
need for extended medical care or because of the Owner's terminal illness.
Distributions made in respect of which surrender charges are waived are treated
as partial withdrawals or surrenders, as the case may be, for income tax
purposes.
TAXATION OF ANNUITY PAYMENTS. Normally, the portion of each annuity payment
taxable as ordinary income is equal to the excess of the payment over the
exclusion amount. In the case of fixed annuity payments, the exclusion amount is
the amount determined by multiplying (1) the fixed annuity payment by (2) the
ratio of the "investment in the contract" (defined above), adjusted for any
period certain or refund feature, allocated to the fixed annuity option to the
total expected amount of fixed annuity payments for the period of the Contract
(determined under Treasury Department regulations). In the case of variable
annuity payments, the exclusion amount for each variable annuity payment is a
specified dollar amount equal to the investment in the Contract allocated to the
variable annuity option when payments begin divided by the number of variable
payments expected to be made (determined by Treasury Department regulations).
Once the total amount of the investment in the Contract is excluded using these
formulas, annuity payments will be fully taxable. If annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the Contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant or beneficiary (depending upon the
circumstances).
TAXATION OF DEATH BENEFIT PROCEEDS. Prior to the Annuity Commencement Date,
amounts may be distributed from a Contract because of the death of an Owner or,
in certain circumstances, the death of the Annuitant. Such death benefit
proceeds are includible in income as follows: (1) if distributed in a lump sum,
they are taxed in the same manner as a surrender, as described above, or (2) if
distributed under an annuity option, they are taxed in the same manner as
annuity payments, as described above. After the Annuity Commencement Date, where
a guaranteed period exists under an annuity option and the Annuitant dies before
the end of that period, payments made to the Beneficiary for the remainder of
that period are includible in income as follows: (1) if received in a lump sum,
they are includible in income to the extent that they exceed the unrecovered
investment in the contract at that time, or (2) if distributed in accordance
with the existing annuity option selected, they are fully excludable from income
until the remaining investment in the contract is deemed to be recovered, and
all annuity payments thereafter are fully includible in income.
If certain amounts become payable in a lump sum from a Contract, such as the
death benefit, it is possible that such amounts might be viewed as
constructively received and thus subject to tax, even though not actually
received. A lump sum will not be constructively received if it is applied under
an annuity option within 60 days after the date on which it becomes payable.
(Any annuity option selected must comply with applicable minimum distribution
requirements imposed by the Code.)
ASSIGNMENTS, PLEDGES, AND GRATUITOUS TRANSFERS. Other than in the case of
Contracts issued as IRAs or in connection with certain other qualified
retirement plans (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) of any portion of the value of the
Contract is treated for federal income tax purposes as a partial withdrawal of
such amount or portion. The investment in the Contract is increased by the
amount includible as income with respect to such assignment or pledge, though it
is not affected by any other aspect of the assignment or pledge (including its
release). If an Owner transfers a Contract without adequate consideration to a
person other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner will be taxed on the difference between the cash surrender
value (within the meaning of the tax law) and the investment in the contract at
the time of transfer. In such case, the transferee's investment in the contract
will be increased to reflect the increase in the transferor's income.
SECTION 1035 EXCHANGES. Code section 1035 provides that no gain or loss is
recognized when an annuity contract is received in exchange for a life,
endowment, or annuity contract, provided that no cash or other property is
received in the exchange transaction. Special rules and procedures apply in
order for an exchange to meet the requirements of section 1035. Also, there are
additional tax considerations involved when the contracts are issued in
connection with qualified retirement plans. Prospective Owners of this Contract
should consult a tax advisor before entering into a section 1035 exchange (with
respect to non-qualified annuity contracts) or a trustee-to-trustee transfer or
rollover (with respect to qualified annuity contracts).
PENALTY TAX ON PREMATURE DISTRIBUTIONS. Where a contract has not been issued as
an IRA or in connection with another qualified retirement plan, there generally
is a 10% penalty tax on the taxable amount of any payment from the Contract un-
less the payment is: (a) received on or after the Owner reaches age 59 1/2; (b)
59
<PAGE>
attributable to the Owner's becoming disabled (as defined in the tax law);
(c) made on or after the death of the Owner or, if the Owner is not an
individual, on or after the death of the primary annuitant (as defined in the
tax law); (d) made as a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the Owner or
the joint lives (or joint life expectancies) of the Owner and a designated
beneficiary (as defined in the tax law), or (e) made under a Contract purchased
with a single purchase payment when the annuity starting date (as defined in the
tax law) is no later than a year from purchase of the Contract and substantially
equal periodic payments are made, not less frequently than annually, during the
annuity period.
In the case of systematic partial withdrawals, it is unclear whether such
withdrawals will qualify for exception (d) above. (For reporting purposes, we
currently treat such withdrawals as if they do not qualify for this exception).
In addition, if withdrawals are of interest amounts only, as is the case with
systematic partial withdrawals from a Fixed Allocation, exception (d) will not
apply.
AGGREGATION OF CONTRACTS. In certain circumstances, the amount of an annuity
payment, withdrawal or surrender from a Contract that is includible in income is
determined by combining some or all of the annuity contracts owned by an
individual not issued in connection with qualified retirement plans. For
example, if a person purchases two or more deferred annuity contracts from the
same insurance company (or its affiliates) during any calendar year, all such
contracts will be treated as one contract for purposes of determining whether
any payment not received as an annuity (including withdrawals and surrenders
prior to the Annuity Commencement Date) is includible in income. In addition, if
a person purchases a Contract offered by this prospectus and also purchases at
approximately the same time an immediate annuity, the IRS may treat the two
contracts as one contract. The effects of such aggregation are not clear,
however, it could affect the time when income is taxable and the amount which
might be subject to the 10% penalty tax described above.
IRA CONTRACTS AND OTHER QUALIFIED RETIREMENT PLANS
IN GENERAL. In addition to issuing the Contracts as non-qualified annuities,
Golden American also currently issues the Contracts as IRAs. (As indicated above
in this prospectus, IRAs are referred to as "qualified plans.") Golden American
may also issue the Contracts in connection with certain other types of qualified
retirement plans which receive favorable treatment under the Code. Numerous
special tax rules apply to the owners under IRAs and other qualified retirement
plans and to the contracts used in connection with such plans. These tax rules
vary according to the type of plan and the terms and conditions of the plan
itself. For example, for both surrenders and annuity payments under certain
contracts issued in connection with qualified retirement plans, there may be no
"investment in the contract" and the total amount received may be taxable. Also,
special rules apply to the time at which distributions must commence and the
form in which the distributions must be paid. Therefore, no attempt is made to
provide more than general information about the use of Contracts with the
various types of qualified retirement plans. A qualified tax advisor should be
consulted before purchase of a Contract in connection with a qualified
retirement plan.
When issued in connection with a qualified retirement plan, a Contract will be
amended as necessary to conform to the requirements of the plan. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under qualified retirement plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contract. In addition, Golden American is not bound by terms
and conditions of qualified retirement plans to the extent such terms and
conditions contradict the Contract, unless Golden American consents.
INDIVIDUAL RETIREMENT ANNUITIES. As indicated above, Golden American currently
issues the Contract as an IRA. If the Contract is used for this purpose, the
Owner must be the Annuitant.
Premium Payments. Both the premium payments that may be paid, and the tax
deduction that an individual may claim for such premium payments, are limited
under an IRA. In general, the premium payments that may be made for an IRA for
any year are limited to the lesser of $2,000 or 100% of the individual's earned
income for the year. Also, in the case of an individual who has less income than
his or her spouse, premium payments may be made by that individual into an IRA
to the extent of (1) $2,000, or (2) the sum of (i) the compensation includible
in the gross income of the individual's spouse for the taxable year and (ii) the
compensation includible in the gross income of the individual's spouse for the
taxable year reduced by the amount allowed as a deduction for IRA contributions
to such spouse. An excise tax is imposed on IRA contributions that exceed the
law's limits.
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The deductible amount of the premium payments made for an IRA for any taxable
year (including a contract for a noncompensated spouse) is limited to the amount
of premium payments that may be paid for the contract for that year, or a lesser
amount where the individual or his or her spouse is an active participant in
certain qualified retirement plans. For a single person who is an active
participant in a qualified retirement plan (including a qualified pension,
profit-sharing, or annuity plan, a simplified employee pension plan, or a
"section 403(b)" annuity plan, as discussed below) and who has adjusted gross
income in excess of $40,000 may not deduct premium payments, and such a person
with adjusted gross income between $30,000 and $40,000 may deduct only a portion
of such payments. Also, married persons who file a joint return, one of whom is
an active participant in a qualified retirement plan, and who have adjusted
gross income in excess of $60,000 may not deduct premium payments, and those
with adjusted gross income between $50,000 and $60,000 may deduct only a portion
of such payments. Married persons filing separately may not deduct premium
payments if either the taxpayer or the taxpayer's spouse is an active
participant in a qualified retirement plan.
In applying these and other rules applicable to an IRA, all individual
retirement accounts and IRAs owned by an individual are treated as one contract,
and all amounts distributed during any taxable year are treated as one
distribution.
Tax Deferral During Accumulation Period. Until distributions are made from an
IRA, increases in the Accumulation Value of the Contract are not taxed.
IRAs and individual retirement accounts (that may invest in this contract)
generally may not invest in life insurance contracts, but an annuity contract
that is issued as an IRA (or that is purchased by an individual retirement
account) may provide a death benefit that equals the greater of the premiums
paid and the contract's cash value. The Contract provides a death benefit that
in certain circumstances may exceed the greater of the premium payments and the
Accumulation Value. It is possible that an enhanced death benefit could be
viewed as violating the prohibition on investment in life insurance contracts,
with the result that the Contract would not be viewed as satisfying the
requirements of an IRA and would not be a permissible investment for an
individual retirement account.
Taxation Of Distributions And Rollovers. If all premium payments made to an IRA
were deductible, all amounts distributed from the Contract are included in the
recipient's income when distributed. However, if nondeductible premium payments
were made to an IRA (within the limits allowed by the tax laws), a portion of
each distribution from the Contract typically is includible in income when it is
distributed. In such a case, any amount distributed as an annuity payment or in
a lump sum upon death or surrender is taxed as described above in connection
with such a distribution from a non-qualified contract, treating as the
investment in the contract the sum of the nondeductible premium payments at the
end of the taxable year in which the distribution commences or is made (less any
amounts previously distributed that were excluded from income). Also, in such a
case, any amount distributed upon a partial withdrawal is partially includible
in income. The includible amount is the excess of the distribution over the
exclusion amount, which in turn generally equals the distribution multiplied by
the ratio of the investment in the Contract to the Accumulation Value.
In any event, subject to the direct rollover and mandatory withholding
requirements (discussed below), amounts may be "rolled over" from certain
qualified retirement plans to an IRA (or from one IRA or individual retirement
account to an IRA) without incurring current income tax if certain conditions
are met. Only certain types of distributions to eligible individuals from
qualified retirement plans, individual retirement accounts, and IRAs may be
rolled over.
Penalty Taxes. Subject to certain exceptions, a penalty tax is imposed on
distributions from an IRA equal to 10% of the amount of the distribution
includible in income. (Amounts rolled over from an IRA generally are excludable
from income.) The exceptions provide, however, that this penalty tax does not
apply to distributions made to the Owner (1) on or after age 59 1/2, (2) on or
after death or because of disability (as defined in the tax law), or (3) as part
of a series of substantially equal periodic payments over the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies) of the
Owner and his or her beneficiary (as defined in the tax law). In addition to the
foregoing, failure to comply with a minimum distribution requirement will result
in the imposition of a penalty tax of 50% of the amount by which a minimum
required distribution exceeds the actual distribution from an IRA. Under this
requirement, distributions of minimum amounts from an IRA as specified in the
tax law must generally commence by April 1 of the calendar year following the
calendar year in which the Owner attains age 70 1/2.
OTHER TYPES OF QUALIFIED RETIREMENT PLANS. The following sections describe tax
considerations of Contracts used in connection with various types of qualified
retirement plans other than IRAs. Golden American
61
<PAGE>
does not currently offer all of the types of qualified retirement plans des-
cribed and may not offer them in the future. Prospective purchasers of Contracts
for use in connection with such qualified retirement plans should therefore
contact Golden American's Customer Service Center to ascertain the availability
of the Contract for qualified retirement plans at any given time.
Simplified Employee Pensions (SEP-IRAs). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met. Under
these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the
treatment of the Contract's enhanced death benefit for purposes of certain tax
rules governing IRAs (which would include SEP-IRAs). Employers intending to use
the contract in connection with such plans should seek competent advice.
SIMPLE IRAs. Section 408(p) of the Code permits certain small employers to
establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by both
employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may be
eligible, and the time when distributions may commence. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the proper
characterization of the Contract's enhanced death benefit for purposes of
certain tax rules governing IRAs (which would include SIMPLE IRAs). Employers
intending to use the Contract in connection with a SIMPLE retirement account
should seek competent advice.
Roth Individual Retirement Annuity (Roth IRA). Golden American currently issues
the Contract as a Roth IRA. If the contract is used for this purpose, the Owner
must be the Annuitant.
Premium Payments. All premium payments to a Roth IRA are limited and are
non-deductible. In general, premium payments to a Roth IRA in a taxable year are
limited to the lesser of $2,000 or 100% of an individual's earned income less
any contributions made to other IRAs, including both Roth and non-Roth IRAs, but
excluding any rollover contributions to IRAs. Subject to coordinated IRA
contribution limits, contributions to a Roth IRA for an individual and a spouse
cannot exceed $4,000 or 100% of the individual's and spouse's earned income, if
less. The maximum contribution can be made if either of the following applies:
(a) for joint tax filers, their adjusted gross income is $150,000 or less, or
(b) for individual tax filers, their adjusted gross income is $95,000 or less.
For amounts over these adjusted gross incomes, the contribution limit is reduced
as follows: (a) for a joint tax filer, the maximum is reduced by 20% of the
excess adjusted gross income over $150,000 (no contributions over $160,000); (b)
for an individual tax filer, the maximum is reduced by 13.3% of the excess
adjusted gross income over $95,000 (no contributions over $110,000).
Conversions of Non-Roth IRA to a Roth IRA. A Roth IRA may be purchased with
amounts received as a qualified rollover ("Rollover Roth IRA") if the following
conditions are met: (a) when a rollover is from a non-Roth IRA, the taxpayer
must not be a married individual filing separately and the taxpayer's adjusted
gross income must not exceed $100,000; (b) rollovers must be made within 60 days
of receipt of the taxpayer; (c) minimum distributions from a non-Roth IRA cannot
be contributed to a Rollover Roth IRA; (d) an asset received in a distribution
may be sold and the proceeds put in a Rollover Roth IRA; (e) all or part of a
non-Roth IRA may be contributed to a Rollover Roth IRA except an inherited IRA
or a SIMPLE IRA; (f) a rollover contribution must be designated in writing as
such by the Owner at the time the rollover is made. Any distribution from a non-
Roth IRA made within 60 days to a Roth IRA is taxable in the year of the
distribution. For rollovers or conversions completed in 1998, taxable income due
to the distribution may be included evenly over 1998-2001 tax years.
Rollovers From a Roth IRA to a Roth IRA. A rollover from a Roth IRA to a Roth
IRA may be accomplished if the following conditions are met: (a) the rollover
must be a direct rollover for the five year holding period of the original Roth
IRA to be preserved; (b) the rollover may be made for all or a portion of the
Roth IRA; (c) a rollover contribution must be designated as such in writing at
the time the rollover is made.
Taxation of Roth IRA Distributions. A distribution from a Roth IRA is not
subject to income tax or to the additional 10% penalty tax on premature
distributions if it is a "qualified distribution." A qualified distribution is
any payment or distribution from a Roth IRA which is made: (a) following the
end of the fifth taxable period (year) after a contribution or rollover is made
to a Roth IRA, and (b) on or after the Owner attains age 59 1/2, or made to a
beneficiary on or after the Owner's death, or as a result of the Owner becoming
disabled, or qualified first-time home buyer distribution (subject to a $10,000
lifetime limit). Distributions not meeting these definitions are "non-qualified
distributions." Non-qualified distributions are treated as being made from
contribu-
62
<PAGE>
tions to a Roth IRA to the extent the distribution, when added to all
previous distributions from a Roth IRA, does not exceed the sum of contributions
to a Roth IRA. A non-qualified distribution in excess of the sum of
contributions is subject to ordinary income tax in the year a distribution is
made. Such taxable distribution is also subject to a 10% penalty tax unless the
distribution is made under certain limited circumstances.
Roth IRAs are not subject to required distributions at age 70 1/2.
Corporate and Self-Employed ("H.R. 10" OR "Keogh") Pension and Profit-Sharing
Plans. Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of tax-favored retirement plans for employees. The
Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly
referred to as "H.R. 10" or "Keogh," permits self-employed individuals also to
establish such tax-favored retirement plans for themselves and their employees.
Such retirement plans may permit the purchase of the Contract in order to
provide benefits under the plans. The Contract provides a death benefit that in
certain circumstances may exceed the greater of the premium payments and the
Accumulation Value. It is possible that such death benefit could be
characterized as an incidental death benefit. There are limitations on the
amount of incidental benefits that may be provided under pension and profit
sharing plans. In addition, the provision of such benefits may result in
currently taxable income to participants. Employers intending to use the
Contract in connection with such plans should seek competent advice.
Section 403(b) Annuity Contracts. Section 403(b) of the Code permits public
school employees, employees of certain types of charitable, educational and
scientific organizations exempt from tax under section 501(c)(3) of the Code,
and employees of certain types of State educational organizations specified in
section 170(b)(l)(A)(ii), to have their employers purchase annuity contracts for
them and, subject to certain limitations, to exclude the amount of premium
payments from gross income for federal income tax purposes. Purchasers of the
contracts for use as a "Section 403(b) Annuity Contract" should seek competent
advice as to eligibility, limitations on permissible amounts of premium payments
and other tax consequences associated with such contracts. In particular,
purchasers and their advisors should consider that this Contract provides a
death benefit that in certain circumstances may exceed the greater of the
premium payments and the Accumulation Value. It is possible that such death
benefit could be characterized as an incidental death benefit. If the death
benefit were so characterized, this could result in currently taxable income to
employees. In addition, there are limitations on the amount of incidental death
benefits that may be provided under a Section 403(b) Annuity Contract. Even if
the death benefit under the contract were characterized as an incidental death
benefit, it is unlikely to violate those limits unless the purchaser also
purchases a life insurance contract as part of his or her Section 403(b) Annuity
Contract.
Section 403(b) Annuity Contracts contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after 1988 on amounts attributable to salary reduction contributions
(and earnings on those contributions) held as of the last year beginning before
January 1, 1989. These amounts can be paid only if the employee has reached age
59 1/2, separated from service, died, become disabled (within the meaning of the
tax law), or in the case of hardship. Amounts permitted to be distributed in the
event of hardship are limited to actual contributions; earnings thereon cannot
be distributed on account of hardship. (These limitations on withdrawals do not
apply to the extent Golden American is directed to transfer some or all of the
Accumulation Value as a tax-free direct transfer to the issue of another Section
403(b) Annuity Contract or into a section 403(b)(7) custodial account subject to
withdrawal restrictions which are at least as stringent.)
Eligible Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations. Section 457 of the Code permits employees of state
and local governments and tax-exempt organizations to defer a portion of their
compensation without paying current federal income taxes. The employees must be
participants in an eligible deferred compensation plan. Generally, a Contract
purchased by a state or local government or a tax-exempt organization will not
be treated as an annuity contract for federal income tax purposes. Those who
intend to use the contracts in connection with such plans should seek competent
advice.
DIRECT ROLLOVERS AND FEDERAL INCOME TAX WITHHOLDING FOR "ELIGIBLE ROLLOVER
DISTRIBUTIONS." In the case of an annuity contract used in connection with a
pension, profit-sharing, or annuity plan qualified under sections 401(a) or
403(a) of the Code, or that is a Section 403(b) Annuity Contract, any "eligible
rollover distribution" from the contract will be subject to direct rollover and
mandatory withholding requirements. An eligible rollover distribution generally
is the taxable portion of any distribution from a qualified pension plan
under section 401(a) of the Code, qualified annuity plan under Section 403(a) of
the Code, or Section 403(b) Annuity or custodial account, excluding certain
amounts (such as minimum distributions required under sec-
63
<PAGE>
tion 401(a)(9) of the Code and distributions which are part of a "series of
substantially equal periodic payments" made for the life (or life expectancy) of
the employee, or for the joint lives (or joint life expectancies) of the
employee and the employee's designated beneficiary (within the meaning of the
tax law), or for a specified period of 10 years or more).
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, the taxpayer cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply to
that portion of the eligible rollover distribution which, instead of receiving,
the taxpayer elects to have directly transferred to certain eligible retirement
plans (such as to this Contract when issued as an IRA).
If this Contract is issued in connection with a pension, profit-sharing, or
annuity plan qualified under sections 401(a) or 403(a) of the Code, or is a
Section 403(b) Annuity Contract, then, prior to receiving an eligible rollover
distribution, the owner will receive a notice (from the plan administrator or
Golden American) explaining generally the direct rollover and mandatory
withholding requirements and how to avoid the 20% withholding by electing a
direct transfer.
FEDERAL INCOME TAX WITHHOLDING
Golden American will withhold and remit to the federal government a part of the
taxable portion of each distribution made under the Contract unless the
distributee notifies Golden American at or before the time of the distribution
that he or she elects not to have any amounts withheld. In certain
circumstances, Golden American may be required to withhold tax, as explained
above. The withholding rates applicable to the taxable portion of periodic
annuity payments (other than eligible rollover distributions) are the same as
the withholding rates generally applicable to payments of wages. In addition,
the withholding rate applicable to the taxable portion of non-periodic payments
(including surrenders prior to the Annuity Commencement Date) is 10%. Regardless
of whether you elect to have federal income tax withheld, you are still liable
for payment of federal income tax on the taxable portion of the payment. As
discussed above, the withholding rate applicable to eligible rollover
distributions is 20%.
64
<PAGE>
______________________________________________________________________________
FINANCIAL STATEMENTS OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
For the year ended December 31, 1997
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Golden American Life Insurance Company
We have audited the accompanying consolidated balance sheets of Golden
American Life Insurance Company as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholder's equity,
and cash flows for the periods from October 25, 1997 through December 31,
1997, January 1, 1997 through October 24, 1997, August 14, 1996 through
December 31, 1996, and January 1, 1996 through August 13, 1996, and the year
ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Golden American Life Insurance Company at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for the
periods from October 25, 1997 through December 31, 1997, January 1, 1997
through October 24, 1997, August 14, 1996 through December 31, 1996, and
January 1, 1996 through August 13, 1996, and the year ended December 31,
1995, in conformity with generally accepted accounting principles.
s/Ernst & Young LLP
Des Moines, Iowa
February 12, 1998
65
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
______________________________________
December 31, 1997 | December 31, 1996
___________________| _________________
<S> <C> | <C>
ASSETS |
|
Investments: |
Fixed maturities, available for sale, |
at fair value (cost: 1997 - $413,288; |
1996 - $275,153) $414,401 | $275,563
Equity securities, at fair value |
(cost: 1997 - $4,437; 1996 - $36) 3,904 | 33
Mortgage loans on real estate 85,093 | 31,459
Policy loans 8,832 | 4,634
Short-term investments 14,460 | 12,631
___________________| _________________
Total investments 526,690 | 324,320
|
Cash and cash equivalents 21,039 | 5,839
|
Due from affiliates 827 | --
|
Accrued investment income 6,423 | 4,139
|
Deferred policy acquisition costs 12,752 | 11,468
|
Present value of in force acquired 43,174 | 83,051
|
Current income taxes recoverable 272 | --
|
Deferred income tax asset 36,230 | --
|
Property and equipment, less allowances |
for depreciation of $97 in 1997 and |
$63 in 1996 1,567 | 699
|
Goodwill, less accumulated amortization |
of $630 in 1997 and $589 in 1996 150,497 | 38,665
|
Other assets 195 | 2,471
|
Separate account assets 1,646,169 | 1,207,247
___________________| _________________
Total assets $2,445,835 | $1,677,899
===================| =================
</TABLE>
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
______________________________________
December 31, 1997 | December 31, 1996
___________________| _________________
<S> <C> | <C>
LIABILITIES AND STOCKHOLDER'S EQUITY |
|
Policy liabilities and accruals: |
Future policy benefits: |
Annuity and interest sensitive life |
products $505,304 | $285,287
Unearned revenue reserve 1,189 | 2,063
Other policy claims and benefits 10 | --
___________________| _________________
506,503 | 287,350
|
Deferred income tax liability -- | 365
Line of credit with affiliate 24,059 | --
Surplus note 25,000 | 25,000
Due to affiliates 80 | 1,504
Other liabilities 16,711 | 15,949
Separate account liabilities 1,646,169 | 1,207,247
___________________| _________________
2,218,522 | 1,537,415
|
Commitments and contingencies |
|
Stockholder's equity: |
Common stock, par value $10 per share, |
authorized, issued and outstanding |
250,000 shares 2,500 | 2,500
Additional paid-in capital 224,997 | 137,372
Unrealized appreciation (depreciation) |
of securities at fair value 241 | 262
Retained earnings (deficit) (425)| 350
___________________| _________________
Total stockholder's equity 227,313 | 140,484
___________________| _________________
Total liabilities and stockholder's |
equity $2,445,835 | $1,677,899
===================| =================
</TABLE>
See accompanying notes.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
___________________________________
For the period | For the period
October 25, 1997 | January 1, 1997
through | through
December 31, 1997 |October 24, 1997
__________________|________________
|
<S> <C> | <C>
Revenues: |
Annuity and interest sensitive life |
product charges $3,834 | $18,288
Management fee revenue 508 | 2,262
Net investment income 5,127 | 21,656
Realized gains (losses) on investments 15 | 151
Other income 236 | 426
__________________|________________
9,720 | 42,783
|
|
Insurance benefits and expenses: |
Annuity and interest sensitive life benefits: |
Interest credited to account balances 7,413 | 19,276
Benefit claims incurred in excess of |
account balances -- | 125
Underwriting, acquisition and insurance |
expenses: |
Commissions 9,437 | 26,818
General expenses 3,350 | 13,907
Insurance taxes 450 | 1,889
Policy acquisition costs deferred (13,678)| (29,003)
Amortization: |
Deferred policy acquisition costs 892 | 1,674
Present value of in force acquired 948 | 5,225
Goodwill 630 | 1,398
__________________|________________
9,442 | 41,309
|
Interest expense 557 | 2,082
__________________|________________
9,999 | 43,391
__________________|________________
Income (loss) before income taxes (279)| (608)
|
Income taxes 146 | (1,337)
__________________|________________
|
Net income (loss) ($425)| $729
==================|================
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
____________________________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
__________________| ________________
|
<S> <C> | <C>
Revenues: |
Annuity and interest sensitive life |
product charges $8,768 | $12,259
Management fee revenue 877 | 1,390
Net investment income 5,795 | 4,990
Realized gains (losses) on investments 42 | (420)
Other income 486 | 70
__________________| ________________
15,968 | 18,289
|
|
Insurance benefits and expenses: |
Annuity and interest sensitive life benefits: |
Interest credited to account balances 5,741 | 4,355
Benefit claims incurred in excess of |
account balances 1,262 | 915
Underwriting, acquisition and insurance |
expenses: |
Commissions 9,866 | 16,549
General expenses 5,906 | 9,422
Insurance taxes 672 | 1,225
Policy acquisition costs deferred (11,712)| (19,300)
Amortization: |
Deferred policy acquisition costs 244 | 2,436
Present value of in force acquired 2,745 | 951
Goodwill 589 | --
__________________| ________________
15,313 | 16,553
|
Interest expense 85 | --
__________________| ________________
15,398 | 16,553
__________________| ________________
Income (loss) before income taxes 570 | 1,736
|
Income taxes 220 | (1,463)
__________________| ________________
|
Net income (loss) $350 | $3,199
==================| ================
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
__________________
For the year ended
December 31, 1995
__________________
<S> <C>
Revenues:
Annuity and interest sensitive life
product charges $18,388
Management fee revenue 987
Net investment income 2,818
Realized gains (losses) on investments 297
Other income 63
__________________
22,553
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances 1,322
Benefit claims incurred in excess of
account balances 1,824
Underwriting, acquisition and insurance
expenses:
Commissions 7,983
General expenses 12,650
Insurance taxes 952
Policy acquisition costs deferred (9,804)
Amortization:
Deferred policy acquisition costs 2,710
Present value of in force acquired 1,552
Goodwill --
__________________
19,189
Interest expense --
__________________
19,189
__________________
Income (loss) before income taxes 3,364
Income taxes --
__________________
Net income (loss) $3,364
==================
</TABLE>
See accompanying notes.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
PRE-ACQUISITION
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 $2,500 $50,000 $37,086 ($1) ($79) $89,506
Contribution of
capital -- -- 7,944 -- -- 7,944
Net income -- -- -- -- 3,364 3,364
Preferred stock
dividends -- -- -- -- (3,348) (3,348)
Unrealized apprecia-
tion of securities
at fair value -- -- -- 659 -- 659
__________________________________________________________
Balance at
December 31, 1995 2,500 50,000 45,030 658 (63) 98,125
Net income -- -- -- -- 3,199 3,199
Preferred stock
dividends -- -- -- -- (719) (719)
Unrealized deprecia-
tion of securities
at fair value -- -- -- (1,175) -- (1,175)
__________________________________________________________
Balance at
August 13, 1996 $2,500 $50,000 $45,030 ($517) $2,417 $99,430
==========================================================
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at
August 14, 1996 $2,500 $50,000 $87,372 -- -- $139,872
Contribution of
preferred stock
to additional
paid-in capital -- (50,000) 50,000 -- -- --
Net income -- -- -- -- $350 350
Unrealized apprecia-
tion of securities
at fair value -- -- -- $262 -- 262
__________________________________________________________
Balance at
December 31, 1996 2,500 -- 137,372 262 350 140,484
Contribution of
capital -- -- 1,121 -- -- 1,121
Net income -- -- -- -- 729 729
Unrealized apprecia-
tion of securities
at fair value -- -- -- 1,543 -- 1,543
__________________________________________________________
Balance at
October 24, 1997 $2,500 -- $138,493 $1,805 $1,079 $143,877
==========================================================
POST-MERGER
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
Balance at
October 25, 1997 $2,500 -- $224,997 -- -- $227,497
Net loss -- -- -- -- ($425) (425)
Unrealized apprecia-
tion of securities
at fair value -- -- -- $241 -- 241
__________________________________________________________
Balance at
December 31, 1997 $2,500 -- $224,997 $241 ($425) $227,313
==========================================================
</TABLE>
See accompanying notes.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
________________________________________
For the period | For the period
October 25, 1997 | January 1, 1997
through | through
December 31, 1997 | October 24, 1997
___________________| ___________________
<S> <C> | <C>
OPERATING ACTIVITIES |
Net income (loss) ($425)| $729
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) |
operations: |
Adjustments related to annuity and |
interest sensitive life products: |
Change in annuity and interest |
sensitive life product reserves 7,361 | 19,177
Change in unearned revenues 1,189 | 3,292
Decrease (increase) in accrued |
investment income 1,205 | (3,489)
Policy acquisition costs deferred (13,678)| (29,003)
Amortization of deferred policy |
acquisition costs 892 | 1,674
Amortization of present value of in |
force acquired 948 | 5,225
Change in other assets, other |
liabilities and accrued income taxes 4,205 | (8,944)
Provision for depreciation and |
amortization 1,299 | 3,203
Provision for deferred income taxes 146 | 316
Realized (gains) losses on investments (15)| (151)
___________________| ___________________
Net cash provided by (used in) |
operating activities 3,127 | (7,971)
|
INVESTING ACTIVITIES |
Sale, maturity or repayment of |
investments: |
Fixed maturities - available for sale 9,871 | 39,622
Mortgage loans on real estate 1,644 | 5,828
Short-term investments - net -- | 11,415
___________________| ___________________
11,515 | 56,865
Acquisition of investments: |
Fixed maturities - available for sale (29,596)| (155,173)
Equity securities (1)| (4,865)
Mortgage loans on real estate (14,209)| (44,481)
Policy loans - net (328)| (3,870)
Short-term investments - net (13,244)| --
___________________| ___________________
(57,378)| (208,389)
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
________________________________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
___________________| ___________________
<S> <C> | <C>
OPERATING ACTIVITIES |
Net income (loss) $350 | $3,199
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) |
operations: |
Adjustments related to annuity and |
interest sensitive life products: |
Change in annuity and interest |
sensitive life product reserves 5,106 | 4,472
Change in unearned revenues 2,063 | 2,084
Decrease (increase) in accrued |
investment income (877)| (2,494)
Policy acquisition costs deferred (11,712)| (19,300)
Amortization of deferred policy |
acquisition costs 244 | 2,436
Amortization of present value of in |
force acquired 2,745 | 951
Change in other assets, other |
liabilities and accrued income taxes (96)| 4,672
Provision for depreciation and |
amortization 1,242 | 703
Provision for deferred income taxes 220 | (1,463)
Realized (gains) losses on investments (42)| 420
___________________| ___________________
Net cash provided by (used in) |
operating activities (757)| (4,320)
|
|
INVESTING ACTIVITIES |
Sale, maturity or repayment of |
investments: |
Fixed maturities - available for sale 47,453 | 55,091
Mortgage loans on real estate 40 | --
Short-term investments - net 2,629 | 354
___________________| ___________________
50,122 | 55,445
Acquisition of investments: |
Fixed maturities - available for sale (147,170)| (184,589)
Equity securities (5)| --
Mortgage loans on real estate (31,499)| --
Policy loans - net (637)| (1,977)
Short-term investments - net -- | --
___________________| ___________________
(179,311)| (186,566)
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
PRE-ACQUISITION
_________________
For the year
ended
December 31, 1995
_________________
<S> <C>
OPERATING ACTIVITIES
Net income (loss) $3,364
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operations:
Adjustments related to annuity and
interest sensitive life products:
Change in annuity and interest
sensitive life product reserves 4,664
Change in unearned revenues 4,949
Decrease (increase) in accrued
investment income (676)
Policy acquisition costs deferred (9,804)
Amortization of deferred policy
acquisition costs 2,710
Amortization of present value of in
force acquired 1,552
Change in other assets, other
liabilities and accrued income taxes 4,686
Provision for depreciation and
amortization (142)
Provision for deferred income taxes --
Realized (gains) losses on investments (297)
_________________
Net cash provided by (used in)
operating activities 11,006
INVESTING ACTIVITIES
Sale, maturity or repayment of
investments:
Fixed maturities - available for sale 24,026
Mortgage loans on real estate --
Short-term investments - net --
_________________
24,026
Acquisition of investments:
Fixed maturities - available for sale (61,723)
Equity securities (10)
Mortgage loans on real estate --
Policy loans - net (1,508)
Short-term investments - net (1,681)
_________________
(64,922)
</TABLE>
See accompanying notes.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS -(CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
________________________________________
For the period | For the period
October 25, 1997 | January 1, 1997
through | through
December 31, 1997 | October 24, 1997
___________________| ___________________
<S> <C> | <C>
Funds held in escrow pursuant to |
an Exchange Agreement -- | --
Purchase of property and equipment ($252)| ($875)
___________________| ___________________
Net cash used in investing activities (46,115)| (152,399)
|
FINANCING ACTIVITIES |
Proceeds from issuance of surplus note -- | --
Proceeds from line of credit borrowings 10,119 | 97,124
Repayment of line of credit borrowings (2,207)| (80,977)
Receipts from annuity and interest |
sensitive life policies credited |
to policyholder account balances 62,306 | 261,549
Return of policyholder account balances |
on annuity and interest sensitive |
life policies (6,350)| (13,931)
Net reallocations to Separate |
Accounts (17,017)| (93,069)
Contributions of capital by Parent -- | 1,011
Dividends paid on preferred stock -- | --
___________________| ___________________
Net cash provided by financing |
activities 46,851 | 171,707
___________________| ___________________
Increase (decrease) in cash and |
cash equivalents 3,863 | 11,337
|
Cash and cash equivalents at |
beginning of period 17,176 | 5,839
___________________| ___________________
Cash and cash equivalents at end |
of period $21,039 | $17,176
===================| ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $295 $1,912
Income taxes -- 283
Non-cash financing activities:
Contribution of property, plant and equipment
from EIC Variable, Inc. net of $353 of
accumulated depreciation -- 110
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
_____________________________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
__________________| _________________
<S> <C> | <C>
INVESTING ACTIVITIES - CONTINUED |
Funds held in escrow pursuant to |
an Exchange Agreement -- | --
Purchase of property and equipment ($137)| --
__________________| _________________
Net cash used in investing activities (129,326)| ($131,121)
|
FINANCING ACTIVITIES |
Proceeds from issuance of surplus note 25,000 | --
Proceeds from line of credit borrowings -- | --
Repayment of line of credit borrowings -- | --
Receipts from annuity and interest |
sensitive life policies credited |
to policyholder account balances 116,819 | 149,750
Return of policyholder account balances |
on annuity and interest sensitive |
life policies (3,315)| (2,695)
Net reallocations to Separate |
Accounts (10,237)| (8,286)
Contributions of capital by Parent -- | --
Dividends paid on preferred stock -- | (719)
__________________| _________________
Net cash provided by financing |
activities 128,267 | 138,050
__________________| _________________
Increase (decrease) in cash and |
cash equivalents (1,816)| 2,609
|
Cash and cash equivalents at |
beginning of period 7,655 | 5,046
__________________| _________________
Cash and cash equivalents at end |
of period $5,839 | $7,655
==================| =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest -- --
Income taxes -- --
Non-cash financing activities:
Contribution of property, plant and equipment
from EIC Variable, Inc. net of $353 of
accumulated depreciation -- --
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
PRE-ACQUISITION
_________________
For the year
ended
December 31, 1995
_________________
<S> <C>
INVESTING ACTIVITIES - CONTINUED
Funds held in escrow pursuant to
an Exchange Agreement ($1,242)
Purchase of property and equipment --
_________________
Net cash used in investing activities (42,138)
FINANCING ACTIVITIES
Proceeds from issuance of surplus note --
Proceeds from line of credit borrowings --
Repayment of line of credit borrowings --
Receipts from annuity and interest
sensitive life policies credited
to policyholder account balances 29,501
Return of policyholder account balances
on annuity and interest sensitive
life policies (1,543)
Net reallocations to Separate
Accounts --
Contributions of capital by Parent 7,944
Dividends paid on preferred stock (3,348)
_________________
Net cash provided by financing
activities 32,554
_________________
Increase (decrease) in cash and
cash equivalents 1,422
Cash and cash equivalents at
beginning of period 3,624
_________________
Cash and cash equivalents at end
of period $5,046
=================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest --
Income taxes --
Non-cash financing activities:
Contribution of property, plant and equipment
from EIC Variable, Inc. net of $353 of
accumulated depreciation --
</TABLE>
See accompanying notes.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include Golden American Life Insurance
Company ("Golden American") and its wholly owned subsidiary, First Golden
American Life Insurance Company of New York ("First Golden," and with Golden
American collectively, the "Company"). All significant intercompany accounts
and transactions have been eliminated.
ORGANIZATION
Golden American, a wholly owned subsidiary of Equitable of Iowa Companies,
Inc., offers variable insurance products and is licensed as a life insurance
company in the District of Columbia and all states except New York. On January
2, 1997 and December 23, 1997, First Golden became licensed to sell insurance
products in New York and Delaware, respectively. The Company's products are
marketed by broker/dealers, financial institutions and insurance agents. The
Company's primary customers are individuals and families.
On October 24, 1997, PFHI Holding, Inc. ("PFHI"), a Delaware corporation,
acquired all of the outstanding capital stock of Equitable of Iowa Companies
("Equitable"), pursuant to the terms of the Agreement and Plan of Merger
("Merger Agreement") among Equitable, PFHI, and ING Groep N.V. ("ING"). PFHI
is a wholly owned subsidiary of ING, a global financial services holding
company based in The Netherlands. As a result of the merger, Equitable was
merged into PFHI which was simultaneously renamed Equitable of Iowa Companies,
Inc. ("EIC" or the "Parent"), a Delaware corporation. See Note 5 for
additional information regarding the merger.
On August 13, 1996, Equitable acquired all of the outstanding capital stock of
EIC Variable, Inc. (formerly known as BT Variable, Inc.) and its wholly owned
subsidiaries, Golden American and Directed Services, Inc. ("DSI") from
Whitewood Properties Corporation ("Whitewood") pursuant to the terms of a
Stock Purchase Agreement between Equitable and Whitewood (the "Purchase
Agreement"). On April 30, 1997, EIC Variable, Inc. was liquidated and its
investments in Golden American and DSI were transferred to Equitable, while
the remainder of its net assets were contributed to Golden American. On
December 30, 1997, EIC Variable, Inc. was dissolved. See Note 6 for additional
information regarding the acquisition.
For financial statement purposes, the merger was accounted for as a purchase
effective October 25, 1997 and the change in control of Golden American through
the acquisition of BT Variable was accounted for as a purchase effective August
14, 1996. The merger and acquisition resulted in new bases of accounting
reflecting estimated fair values of assets and liabilities at their respective
dates. As a result, the Company's financial statements for the period
subsequent to October 24, 1997, are presented on the Post-Merger new basis of
accounting, for the period August 14, 1996 through October 24, 1997, are
presented on the Post-Acquisition basis of accounting, and for August 13, 1996
and prior periods are presented on the Pre-Acquisition basis of accounting.
INVESTMENTS
FIXED MATURITIES: Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
requires fixed maturity securities to be designated as either "available for
sale," "held for investment" or "trading." Sales of fixed maturities
designated as "available for sale" are not restricted by SFAS No. 115.
Available for sale securities are reported at fair value and unrealized gains
and losses on these securities are included directly in stockholder's
equity, after adjustment for related changes in deferred policy acquisition
costs ("DPAC"), present value of in force acquired ("PVIF"), policy reserves
and deferred income
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
taxes. At December 31, 1997 and 1996, all of the Company's
fixed maturity securities are designated as available for sale although the
Company is not precluded from designating fixed maturity securities as held for
investment or trading at some future date.
Securities determined to have a decline in value that is other than temporary
are written down to estimated fair value which becomes the security's new cost
basis by a charge to realized losses in the Company's Statement of Income.
Premiums and discounts are amortized/accrued utilizing the scientific interest
method which results in a constant yield over the security's expected life.
Amortization/accrual of premiums and discounts on mortgage-backed securities
incorporates a prepayment assumption to estimate the securities' expected
lives.
EQUITY SECURITIES: Equity securities are reported at estimated fair value if
readily marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income taxes, if any) is
included directly in stockholder's equity. Equity securities determined to
have a decline in value that is other than temporary are written down to
estimated fair value which becomes the security's new cost basis by a charge
to realized losses in the Company's Statement of Income.
MORTGAGE LOANS: Mortgage loans on real estate are reported at cost adjusted
for amortization of premiums and accrual of discounts. If the value of any
mortgage loan is determined to be impaired (i.e., when it is probable the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement), the carrying value of the mortgage loan is
reduced to the present value of expected future cash flows from the loan,
discounted at the loan's effective interest rate, or to the loan's observable
market price, or the fair value of the underlying collateral. The carrying
value of impaired loans is reduced by the establishment of a valuation
allowance which is adjusted at each reporting date for significant changes in
the calculated value of the loan. Changes in this valuation allowance are
charged or credited to income.
OTHER INVESTMENTS: Policy loans are reported at unpaid principal. Short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts.
FAIR VALUES: Estimated fair values, as reported herein, of publicly traded
fixed maturity securities are as reported by an independent pricing service.
Fair values of conventional mortgage-backed securities not actively traded
in a liquid market are estimated using a third party pricing system. This
pricing system uses a matrix calculation assuming a spread over U.S. Treasury
bonds based upon the expected average lives of the securities. Fair values
of private placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S.
Treasury bonds. Estimated fair values of equity securities which consists of
the Company's investment in its registered separate accounts are based upon
the quoted fair value of the securities comprising the individual portfolios
underlying the separate accounts. Realized gains and losses are determined on
the basis of specific identification and average cost methods for manager
initiated and issuer initiated disposals, respectively.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company considers
all demand deposits and interest-bearing accounts not related to the investment
function to be cash equivalents. All interest-bearing accounts classified as
cash equivalents have original maturities of three months or less.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally commissions and
other expenses related to the production of new business, have been deferred.
Acquisition costs for variable annuity and variable life products are being
amortized generally in proportion to the present value (using the assumed
crediting rate) of expected future gross profits. This amortization is
"unlocked" when the Company revises its estimate of current or future gross
profits to be realized from a group of products. DPAC is adjusted to reflect
the pro forma impact of unrealized gains and losses on fixed maturity
securities the Company has designated as "available for sale" under SFAS No.
115.
PRESENT VALUE OF IN FORCE ACQUIRED
As a result of the merger and the acquisition, a portion of the acquisition
cost related to each transaction was allocated to the right to receive
future cash flows from existing insurance contracts. This allocated cost
represents the PVIF which reflects the value of those purchased policies
calculated by discounting actuarially determined expected future cash flows
at the discount rate determined by the purchaser. Amortization of PVIF is
charged to expense in proportion to expected gross profits. This
amortization is "unlocked" when the Company revises its estimate of current
or future gross profits to be realized from the insurance contracts acquired.
PVIF is adjusted to reflect the pro forma impact of unrealized gains (losses)
on available for sale fixed maturities. See Notes 5 and 6 for additional
information on PVIF resulting from the merger and acquisition.
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements, office
furniture and equipment and capitalized computer software and are not
considered to be significant to the Company's overall operations. Property
and equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily on the basis of the straight-line
method over the estimated useful lives of the assets.
GOODWILL
Goodwill was established as a result of the merger discussed previously and is
being amortized over 40 years on a straight-line basis. Goodwill established
as a result of the acquisition discussed above was being amortized over 25
years on a straight-line basis. See Notes 5 and 6 for additional information
on the merger and acquisition.
FUTURE POLICY BENEFITS
Future policy benefits for fixed interest divisions of the variable products
are established utilizing the retrospective deposit accounting method. Policy
reserves represent the premiums received plus accumulated interest, less
mortality and administration charges. Interest credited to these policies
ranged from 3.30% to 8.25% during 1997. The unearned revenue reserve
represents unearned distribution fees discussed below. These distribution
fees have been deferred and are amortized over the life of the contract in
proportion to its expected gross profits.
SEPARATE ACCOUNTS
Assets and liabilities of the separate accounts reported in the accompanying
balance sheets represent funds that are separately administered principally
for variable annuity and variable life contracts. Contractholders, rather than
the Company, bear the investment risk for variable products. At the direction
of the Contractholders, the separate accounts invest the premiums from the
sale of variable annuity and variable life products in shares of specified
mutual funds. The assets and liabilities of the separate accounts are clearly
identified and segregated from other assets and liabilities of the Company.
The portion of the separate account assets applicable to variable annuity and
variable life contracts cannot be charged with liabilities arising out of any
other business the Company may conduct.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
Variable separate account assets carried at fair value of the underlying
investments generally represent Contractholder investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable annuity and variable life contracts invested in the
separate accounts. Net investment income and realized and unrealized capital
gains and losses related to separate account assets are not reflected in the
accompanying Statements of Income.
Product charges recorded by the Company from variable annuity and variable
life products consist of charges applicable to each contract for mortality and
expense risk, cost of insurance, contract administration and surrender charges.
In addition, some variable annuity and all variable life contracts provide for
a distribution fee collected for a limited number of years after each premium
deposit. Revenue recognition of collected distribution fees is amortized over
the life of the contract in proportion to its expected gross profits. The
balance of unrecognized revenue related to the distribution fees is reported
as an unearned revenue reserve.
DEFERRED INCOME TAXES
Deferred 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 tax assets or
liabilities are adjusted to reflect the pro forma impact of unrealized gains
and losses on equity securities and fixed maturity securities the Company has
designated as available for sale under SFAS No. 115. Changes in deferred tax
assets or liabilities resulting from this SFAS No. 115 adjustment are charged
or credited directly to stockholder's equity. Deferred income tax expenses
or credits reflected in the Company's Statement of Income are based on the
changes in the deferred tax asset or liability from period to period
(excluding the SFAS No. 115 adjustment).
DIVIDEND RESTRICTIONS
The Company's ability to pay dividends to its parent is restricted because
prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limitation. During 1998,
Golden American cannot pay dividends to its parent without prior approval of
statutory authorities. The Company has maintained adequate statutory capital
and surplus and has not used surplus relief or financial reinsurance, which
have come under scrutiny by many state insurance departments.
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholders unless a notice of
its intention to declare a dividend and amount of the dividend has been filed
not less than thirty days in advance of the proposed declaration. The
superintendent may disapprove the distribution by giving written notice to
First Golden within thirty days after the filing should the superintendent
find that the financial condition of First Golden does not warrant the
distribution.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and present value of in force acquired, (4) fair values of
assets and liabilities recorded as a result of merger and acquisition
transactions, (5) asset valuation
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
allowances, (6) guaranty fund assessment
accruals, (7) deferred tax benefits (liabilities) and (8) estimates for
commitments and contingencies including legal matters, if a liability is
anticipated and can be reasonably estimated. Estimates and assumptions
regarding all of the preceding are inherently subject to change and are
reassessed periodically. Changes in estimates and assumptions could
materially impact the financial statements.
2. BASIS OF FINANCIAL REPORTING
The financial statements of the Company differ from related statutory-basis
financial statements principally as follows: (1) acquisition costs of
acquiring new business are deferred and amortized over the life of the
policies rather than charged to operations as incurred; (2) an asset
representing the present value of future cash flows from insurance
contracts acquired was established as a result of the merger/acquisition and
is amortized and charged to expense; (3) future policy benefit reserves for
the fixed interest divisions of the variable products are based on full
account values, rather than the greater of cash surrender value or amounts
derived from discounting methodologies utilizing statutory interest rates;
(4) reserves are reported before reduction for reserve credits related to
reinsurance ceded and a receivable is established, net of an allowance for
uncollectible amounts, for these credits rather than presented net of these
credits; (5) fixed maturity investments are designated as "available for
sale" and valued at fair value with unrealized appreciation/depreciation,
net of adjustments to deferred income taxes (if applicable), present value of
in force acquired and deferred policy acquisition costs, credited/charged
directly to stockholder's equity rather than valued at amortized cost;
(6) the carrying value of fixed maturity securities is reduced to fair value
by a charge to realized losses in the Statement of Income when declines in
carrying value are judged to be other than temporary, rather than through the
establishment of a formula-determined statutory investment reserve (carried as
a liability), changes in which are charged directly to surplus; (7) deferred
income taxes are provided for the difference between the financial statement
and income tax bases of assets and liabilities; (8) net realized gains or
losses attributed to changes in the level of interest rates in the market are
recognized when the sale is completed rather than deferred and amortized over
the remaining life of the fixed maturity security; (9) a liability is
established for anticipated guaranty fund assessments, net of related
anticipated premium tax credits, rather than capitalized when assessed and
amortized in accordance with procedures permitted by insurance regulatory
authorities; (10) revenues for variable annuity and variable life products
consist of policy charges for the cost of insurance, policy administration
charges, amortization of policy initiation fees and surrender charges assessed
rather than premiums received; (11) the financial statements of Golden
American's wholly owned subsidiary are consolidated rather than recorded at the
equity in net assets; (12) surplus notes are reported as liabilities rather
than as surplus; and (13) assets and liabilities are restated to fair values
when a change in ownership occurs, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
Net loss for Golden American as determined in accordance with statutory
accounting practices was $428,000 in 1997, $9,188,000 in 1996 and $4,117,000
in 1995. Total statutory capital and surplus was $76,914,000 at December 31,
1997 and $80,430,000 at December 31, 1996.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
3. INVESTMENT OPERATIONS
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
________________________________________________________
For the period| For the period For the period
October 25, 1997| January 1, 1997 August 14, 1996
through| through through
December 31, 1997| October 24, 1997 December 31, 1996
__________________| ____________________________________
(Dollars in thousands)
<S> <C> | <C> <C>
Fixed maturities $4,443 | $18,488 $5,083
Equity securities 3 | -- 103
Mortgage loans on real |
estate 879 | 3,070 203
Policy loans 59 | 482 78
Short-term investments 129 | 443 441
Other, net (154)| 24 2
Funds held in escrow -- | -- --
__________________| ____________________________________
Gross investment income 5,359 | 22,507 5,910
Less investment expenses (232)| (851) (115)
__________________| ____________________________________
Net investment income $5,127 | $21,656 $5,795
==================| ====================================
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
_____________________________________
For the period |
January 1, 1996 | For the year
through | ended
August 13, 1996 | December 31, 1995
__________________| _________________
(Dollars in thousands)
<S> <C> | <C>
Fixed maturities $4,507 | $1,610
Equity securities -- | --
Mortgage loans on real |
estate -- | --
Policy loans 73 | 56
Short-term investments 341 | 899
Other, net 22 | 148
Funds held in escrow 145 | 166
__________________| _________________
Gross investment income 5,088 | 2,879
Less investment expenses (98)| (61)
__________________| _________________
Net investment income $4,990 | $2,818
==================| =================
</TABLE>
Realized gains (losses) on investments are as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
________________________________________________________
For the period| For the period For the period
October 25, 1997| January 1, 1997 August 14, 1996
through| through through
December 31, 1997| October 24, 1997 December 31, 1996
__________________| ____________________________________
(Dollars in thousands)
<S> <C> | <C> <C>
Fixed maturities, |
available for sale $25 | $151 $42
Mortgage loans (10)| -- --
__________________| ____________________________________
Realized gains (losses) |
on investments $15 | $151 $42
========================================================
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
_____________________________________
For the period |
January 1, 1996 | For the year
through | ended
August 13, 1996 | December 31, 1995
__________________| _________________
(Dollars in thousands)
<S> <C> | <C>
Fixed maturities, |
available for sale ($420)| $297
Mortgage loans -- | --
__________________| _________________
Realized gains (losses) |
on investments ($420)| $297
=====================================
</TABLE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
The change in unrealized appreciation (depreciation) on securities at
fair value is as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
________________________________________________________
For the period | For the period For the period
October 25, 1997 | January 1, 1997 August 14, 1996
through | through through
December 31, | October 24, December 31,
1997 | 1997 1996
__________________| ____________________________________
(Dollars in thousands)
<S> <C> | <C> <C>
Fixed maturities: |
Available for sale $1,113 | $4,607 $410
Held for investment -- | -- --
Equity securities (533)| (465) (3)
__________________| ____________________________________
Unrealized appreciation |
(depreciation) of |
securities $580 | $4,142 $407
========================================================
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
_____________________________________
For the period |
January 1, 1996 | For the year
through | ended
August 13, 1996 | December 31, 1995
__________________| _________________
(Dollars in thousands)
<S> <C> | <C>
Fixed maturities: |
Available for sale ($2,087)| $958
Held for investment -- | 90
Equity securities 1 | 3
__________________| _________________
Unrealized appreciation |
(depreciation) of |
securities ($2,086)| $1,051
=====================================
</TABLE>
At December 31, 1997 and December 31, 1996, amortized cost, gross unrealized
gains and losses and estimated fair values of fixed maturity securities, all
of which are designated as available for sale, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_______________________________________________
(Dollars in thousands)
December 31, 1997 POST-MERGER
______________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $62,988 $155 ($10) $63,133
Other 5,705 5 (1) 5,709
Foreign governments 2,062 -- (9) 2,053
Public utilities 25,899 49 (4) 25,944
Investment grade corporate 219,526 926 (32) 220,420
Below investment grade
corporate 41,355 186 (210) 41,331
Mortgage-backed securities 55,753 78 (20) 55,811
_______________________________________________
Total $413,288 $1,399 ($286) $414,401
===============================================
December 31, 1996 POST-ACQUISITION
______________________________________________________________________________
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $70,902 $122 ($247) $70,777
Other 3,082 2 (4) 3,080
Public utilities 35,893 193 (38) 36,048
Investment grade corporate 134,487 586 (466) 134,607
Below investment grade
corporate 25,921 249 (56) 26,114
Mortgage-backed securities 4,868 69 -- 4,937
_______________________________________________
Total $275,153 $1,221 ($811) $275,563
===============================================
</TABLE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
At December 31, 1997, net unrealized investment gains on fixed maturities
designated as available for sale totaled $1,113,000. This appreciation caused
an increase to stockholder's equity of $587,000 at December 31, 1997 (net of
deferred income taxes of $316,000, an adjustment of $35,000 to DPAC and PVIF
of $175,000). Short-term investments with maturities of 30 days or less have
been excluded from the above schedules. Amortized cost approximates fair value
for these securities.
Amortized cost and estimated fair value of fixed maturities designated as
available for sale, by contractual maturity, at December 31, 1997, 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>
POST-MERGER
_____________________________
Estimated
Amortized Fair
December 31, 1997 Cost Value
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due within one year $26,261 $26,239
Due after one year through five years 198,249 198,781
Due after five years through ten years 70,037 70,437
_____________ _____________
294,547 295,457
Mortgage-backed securities 118,741 118,944
_____________ _____________
Total $413,288 $414,401
============= =============
</TABLE>
An analysis of sales, maturities and principal repayments of the Company's
fixed maturities portfolio is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
For the period October 25,
1997 through
December 31, 1997:
Scheduled principal
repayments, calls and
tenders $6,708 $2 -- $6,710
Sales 3,138 23 -- 3,161
______________________________________________________
Total $9,846 $25 -- $9,871
======================================================
For the period January 1,
1997 through October 24,
1997:
Scheduled principal
repayments, calls and
tenders $25,419 -- -- $25,419
Sales 14,052 $153 ($2) 14,203
______________________________________________________
Total $39,471 $153 ($2) $39,622
======================================================
For the period August 14,
1996 through
December 31, 1996:
Scheduled principal
repayments, calls and
tenders $1,612 -- -- $1,612
Sales 45,799 $115 ($73) 45,841
______________________________________________________
Total $47,411 $115 ($73) $47,453
======================================================
For the period January 1,
1996 through August 13,
1996:
Scheduled principal
repayments, calls and
tenders $1,801 -- -- $1,801
Sales 53,710 $152 ($572) 53,290
______________________________________________________
Total $55,511 $152 ($572) $55,091
======================================================
Year ended December 31,
1995:
Scheduled principal
repayments, calls and
tenders $20,279 $305 ($16) $20,568
Sales 3,450 8 -- 3,458
______________________________________________________
Total $23,729 $313 ($16) $24,026
======================================================
</TABLE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
INVESTMENT VALUATION ANALYSIS: The Company analyzes its investment portfolio
at least quarterly in order to determine if the carrying value of any of its
investments has been impaired. The carrying value of debt and equity
securities is written down to fair value by a charge to realized losses when
an impairment in value appears to be other than temporary. During 1997 and
1996, no investments were identified as having an impairment other than
temporary.
INVESTMENTS ON DEPOSIT: At December 31, 1997 and 1996, affidavits of deposits
covering bonds with a par value of $6,605,000 were on deposit with regulatory
authorities pursuant to certain statutory requirements.
INVESTMENT DIVERSIFICATIONS: The Company's investment policies related to its
investment portfolio require diversification by asset type, company and
industry and set limits on the amount which can be invested in an individual
issuer. Such policies are at least as restrictive as those set forth by
regulatory authorities. The following percentages relate to holdings at
December 31, 1997 and December 31, 1996. Fixed maturity investments included
investments in basic industrials (30% in 1997 and 1996), financial companies
(24% in 1997, 18% in 1996), various government bonds and government or agency
mortgage-backed securities (17% in 1997 and 27% in 1996) and public utilities
(7% in 1997, 13% in 1996). Mortgage loans on real estate have been analyzed
by geographical location with concentrations by state identified as Utah (13%
in 1997, 4% in 1996), California (12% in 1997, 7% in 1996), and Georgia (11%
in 1997, 17% in 1996). There are no other concentrations of mortgage loans in
any state exceeding ten percent at December 31, 1997 and 1996. Mortgage loans
on real estate have also been analyzed by collateral type with significant
concentrations identified in office buildings (43% in 1997, 36% in 1996),
industrial buildings (33% in 1997, 31% in 1996), retail facilities (15% in
1997, 6% in 1996) and multi-family residential buildings (9% in 1997, 27% in
1996). Equity securities and investments accounted for by the equity method
are not significant to the Company's overall investment portfolio.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholder's equity at December 31, 1997.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of estimated fair value of all financial instruments,
including both assets and liabilities recognized and not recognized in a
Company's balance sheet, unless specifically exempted. SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments," requires additional disclosures about derivative financial
instruments. Most of the Company's investments, investment contracts and debt
fall within the standards' definition of a financial instrument. Fair values
for the Company's insurance contracts other than investment contracts are not
required to be disclosed. In cases where quoted market prices are not
available, estimated 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. Accounting, actuarial and regulatory bodies are continuing to study the
methodologies to be used in developing fair value information, particularly as
it relates to such things as liabilities for insurance contracts. Accordingly,
care should be exercised in deriving conclusions about the Company's business
or financial condition based on the information presented herein.
The Company closely monitors the composition and yield of its invested assets,
the duration and interest credited on insurance liabilities and resulting
interest spreads and timing of cash flows. These amounts are taken into
consideration in the Company's overall management of interest rate risk, which
attempts to minimize exposure to changing interest rates through the matching
of investment cash flows with amounts expected to be due under insurance
contracts. As discussed be-
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
low, the Company has used discount rates in its
determination of fair values for its liabilities which are consistent with
market yields for related assets. The use of the asset market yield is
consistent with management's opinion that the risks inherent in its asset and
liability portfolios are similar. This assumption, however, might not result
in values consistent with those obtained through an actuarial appraisal of the
Company's business or values that might arise in a negotiated transaction.
The following compares carrying values as shown for financial reporting
purposes with estimated fair values:
<TABLE>
<CAPTION>
December 31 1997 1996
_______________________________________________________________________________
(Dollars in thousands) |
Estimated | Estimated
Carrying Fair | Carrying Fair
Value Value | Value Value
___________ ___________| ___________ ___________
<S> <C> <C> | <C> <C>
ASSETS |
Fixed maturities, available |
for sale $414,401 $414,401 | $275,563 $275,563
Equity securities 3,904 3,904 | 33 33
Mortgage loans on real estate 85,093 86,348 | 31,459 30,979
Policy loans 8,832 8,832 | 4,634 4,634
Short-term investments 14,460 14,460 | 12,631 12,631
Cash and cash equivalents 21,039 21,039 | 5,839 5,839
Separate account assets 1,646,169 1,646,169 | 1,207,247 1,207,247
|
LIABILITIES |
Annuity products 493,181 431,859 | 280,076 253,012
Surplus note 25,000 28,837 | 25,000 28,878
Separate account liabilities 1,646,169 1,443,458 | 1,207,247 1,119,158
|
</TABLE>
The following methods and assumptions were used by the Company in estimating
fair values.
FIXED MATURITIES: Estimated fair values of publicly traded securities are as
reported by an independent pricing service. Estimated fair values of
conventional mortgage-backed securities not actively traded in a liquid market
are estimated using a third party pricing system. This pricing system uses a
matrix calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities.
EQUITY SECURITIES: Estimated fair values of equity securities, which consist
of the Company's investment in the portfolios underlying its separate accounts,
are based upon the quoted fair value of the individual securities comprising
the individual portfolios underlying the separate accounts. For equity
securities not actively traded, estimated fair values are based upon values of
issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE: Fair values are estimated by discounting
expected cash flows, using interest rates currently offered for similar
loans.
POLICY LOANS: Carrying values approximate the estimated fair value for
policy loans.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: Carrying values
reported in the Company's historical cost basis balance sheet approximate
estimated fair value for these instruments, due to their short-term nature.
SEPARATE ACCOUNT ASSETS: Separate account assets are based upon the quoted
fair values of the individual securities in the separate accounts.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
ANNUITY PRODUCTS: Estimated fair values of the Company's liabilities for
future policy benefits for the fixed interest division of the variable annuity
products and for supplemental contracts without life contingencies are based
upon discounted cash flow calculations. Cash flows of future policy benefits
are discounted using the market yield rate of the assets supporting these
liabilities.
SURPLUS NOTE: Estimated fair value of the Company's surplus note was based
upon discounted future cash flows using a discount rate approximating the
Company's return on invested assets.
SEPARATE ACCOUNT LIABILITIES: Separate account liabilities are reported at
full account value in the Company's historical cost balance sheet.
Estimated fair values of separate account liabilities are based upon
assumptions using an estimated long-term average market rate of return to
discount future cash flows. The reduction in fair values for separate
account liabilities reflect the present value of future revenue from product
charges, distribution fees or surrender charges.
5. MERGER
TRANSACTION: On October 23, 1997, Equitable shareholders approved the Merger
Agreement dated as of July 7, 1997, among Equitable, PFHI and ING. On October
24, 1997, PFHI, a Delaware corporation, acquired all of the outstanding
capital stock of Equitable pursuant to the Merger Agreement. PFHI is a wholly
owned subsidiary of ING, a global financial services holding company based in
The Netherlands. Equitable, an Iowa corporation, in turn, owned all the
outstanding capital stock of Equitable Life Insurance Company of Iowa
("Equitable Life") and Golden American and their wholly owned subsidiaries.
Equitable also owned all the outstanding capital stock of Locust Street
Securities, Inc. ("LSSI"), Equitable Investment Services, Inc., DSI, Equitable
of Iowa Companies Capital Trust, Equitable of Iowa Companies Capital Trust II
and Equitable of Iowa Securities Network, Inc. In exchange for the outstanding
capital stock of Equitable, ING paid total consideration of approximately $2.1
billion in cash and stock plus the assumption of approximately $400 million
in debt according to the Merger Agreement. As a result of the merger,
Equitable was merged into PFHI which was simultaneously renamed Equitable of
Iowa Companies, Inc. ("EIC" or the "Parent"), a Delaware corporation. All
costs of the merger, including expenses to terminate certain benefit plans,
were paid by the Parent.
ACCOUNTING TREATMENT: The merger was accounted for as a purchase resulting
in a new basis of accounting, reflecting estimated fair values for assets
and liabilities at October 24, 1997. The purchase price was allocated to EIC
and its subsidiaries. Goodwill was established for the excess of the merger
cost over the fair value of the net assets and pushed down to EIC and its
subsidiaries including Golden American and First Golden. The merger cost is
preliminary with respect to estimated expenses and, as a result, the PVIF and
related amortization and deferred taxes may change. The allocation of the
purchase price to the Company was approximately $227,497,000. The amount of
goodwill allocated to the Company relating to the merger was $151,127,000 at
the merger date and is being amortized over 40 years on a straight-line basis.
The carrying value of goodwill will be reviewed periodically for any
indication of impairment in value. The Company's DPAC, previous balance of
PVIF and unearned revenue reserve, as of the merger date, were eliminated
and an asset of $44,297,000 representing PVIF was established for all policies
in force at the merger date.
PRESENT VALUE OF IN FORCE ACQUIRED: As part of the merger, a portion of the
acquisition cost was allocated to the right to receive future cash flows from
insurance contracts existing with the Company at the date of merger. This
allocated cost represents the present value of in force acquired reflecting
the value of those purchased policies calculated by discounting the
actuarially determined expected future cash flow at the discount rate
determined by ING.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
An analysis of the PVIF asset is as follows:
<TABLE>
<CAPTION>
POST-MERGER
________________________
For the period
October 25, 1997
through
December 31, 1997
________________________
(Dollars in thousands)
<S> <C>
Beginning balance $44,297
Imputed interest 1,004
Amortization (1,952)
Adjustment for unrealized gains
on available for sale securities (175)
________________________
Ending balance $43,174
========================
</TABLE>
Interest is imputed on the unamortized balance of PVIF at a rate of 7.03% for
the period October 25, 1997 through December 31, 1997. The amortization of
PVIF net of imputed interest is charged to expense. PVIF is also adjusted for
the unrealized gains (losses) on available for sale securities; such changes
are included directly in stockholder's equity. Based on current conditions
and assumptions as to the impact of future events on acquired policies in
force, the expected approximate net amoritization for the next five years,
relating to the PVIF as of December 31, 1997, is $6,200,000 in 1998,
$6,000,000 in 1999, $5,600,000 in 2000, $5,000,000 in 2001 and $4,200,000 in
2002. Actual amortization may vary based upon final purchase price allocation
and changes in assumptions and experience.
6. ACQUISITION
TRANSACTION: On August 13, 1996, Equitable acquired all of the outstanding
capital stock of BT Variable from Whitewood, a wholly owned subsidiary of
Bankers Trust Company ("Bankers Trust"), pursuant to the terms of the
Purchase Agreement dated as of May 3, 1996 between Equitable and Whitewood.
In exchange for the outstanding capital stock of BT Variable, Equitable paid
the sum of $93,000,000 in cash to Whitewood in accordance with the terms of
the Purchase Agreement. Equitable also paid the sum of $51,000,000 in cash to
Bankers Trust to retire certain debt owed by BT Variable to Bankers Trust
pursuant to a revolving credit arrangement. Subsequent to the acquisition,
the BT Variable, Inc. name was changed to EIC Variable, Inc. At April 30,
1997, EIC Variable, Inc. was liquidated and its investments in Golden American
and DSI were transferred to Equitable, while the remainder of its net assets
were contributed to Golden American. On December 30, 1997, EIC Variable, Inc.
was dissolved.
ACCOUNTING TREATMENT: The acquisition was accounted for as a purchase
resulting in a new basis of accounting, which reflected estimated fair
values for assets and liabilities at August 13, 1996. The purchase price
was allocated to the three companies purchased - BT Variable, DSI and Golden
American. Goodwill was established for the excess of the acquisition cost
over the fair value of the net assets acquired and pushed down to Golden
American. The allocation of the purchase price to the Company was
approximately $139,872,000. The amount of goodwill relating to the
acquisition was $41,113,000 and was amortized over 25 years on a straight-line
basis until the October 24, 1997 merger with ING. The Company's DPAC, previous
balance of PVIF and unearned revenue reserve, as of the merger date, were
eliminated and an asset of $85,796,000 representing PVIF was established for
all policies in force at the acquisition date.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
PRESENT VALUE OF IN FORCE ACQUIRED: As part of the acquisition, a portion of
the acquisition cost was allocated to the right to receive future cash flows
from the insurance contracts existing with the Company at the date of
acquisition. This allocated cost represents the present value of in force
acquired reflecting the value of those purchased policies calculated by
discounting the actuarially determined expected future cash flows at the
discount rate determined by Equitable.
An analysis of the PVIF asset is as follows:
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
_________________________________________________
For the For the | For the
period period | period
January August | January For the
1, 1997 14, 1996 | 1, 1996 year
through through | through ended
October December | August December
24, 1997 31, 1996 | 13, 1996 31, 1995
_______________________| ________________________
(Dollars in thousands)
<S> <C> <C> | <C> <C>
Beginning balance $83,051 $85,796 | $6,057 $7,620
Imputed interest 5,138 2,465 | 273 548
Amortization (10,363) (5,210)| (1,224) (2,100)
Adjustment for unrealized |
gains (losses) on available |
for sale securities (373) -- | 11 (11)
_______________________| ________________________
Ending balance $77,453 $83,051 | $5,117 $6,057
=================================================
</TABLE>
Pre-Acquisition PVIF represents the remaining value assigned to in force
contracts when Bankers Trust purchased Golden American from Mutual Benefit
Life Insurance Company in Rehabilitation ("Mutual Benefit") on September
30, 1992.
Interest was imputed on the unamortized balance of PVIF at rates of 7.70%
to 7.80% for the period August 14, 1996 through October 24, 1997. The
amortization of PVIF net of imputed interest was charged to expense. PVIF
was also adjusted for the unrealized gains (losses) on available for sale
securities; such changes were included directly in stockholder's equity.
7. INCOME TAXES
The Company will file a consolidated federal income tax return with its wholly
owned life insurance subsidiary. Under the Internal Revenue Code, a newly
acquired insurance company cannot file as part of its parent's consolidated
tax return for 5 years.
At December 31, 1997, Golden American has net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $8,697,000.
Approximately $5,094,000 and $3,603,000 of these NOL carryforwards are
available to offset future taxable income of the Company through the years 2011
and 2012, respectively.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
INCOME TAX EXPENSE
Income tax expense (benefit) included in the consolidated financial statements
is as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION PRE-ACQUISITION
_____________________________________________________________________
For the | For the For the | For the
period | period period | period
October 25, | January 1, August 14, | January 1,
1997 | 1997 1996 | 1996 For the
through | through through | through year ended
December 31, | October 24, December 31, | August 13, December 31,
1997 | 1997 1996 | 1996 1995
_____________| __________________________| __________________________
(Dollars in thousands)
<S> <C> | <C> <C> | <C> <C>
Current -- | $12 -- | -- --
Deferred $146 | (1,349) $220 | ($1,463) --
_____________| __________________________| __________________________
$146 | ($1,337) $220 | ($1,463) --
=====================================================================
</TABLE>
The effective tax rate on income (loss) before income taxes is different from
the prevailing federal income tax rate. A reconciliation of this difference
is as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the For the | For the
period | period period | period
October | January August | January
25, 1997 | 1, 1997 14, 1996 | 1, 1996 For the
through | through through | through year ended
December | October December | August December
31, 1997 | 24, 1997 31, 1996 | 13, 1996 31, 1995
___________| ____________________| ____________________
(Dollars in thousands)
<S> <C> | <C> <C> | <C> <C>
Income (loss) | |
before income taxes ($279)| ($608) $570 | $1,736 $3,364
===========| ====================| ====================
Income tax | |
(benefit) at federal | |
statutory rate ($98)| ($213) $200 | $607 $1,177
Tax effect (decrease) of: | |
Realization of NOL | |
carryforwards -- | -- -- | (1,214) --
Dividends received | |
deduction -- | -- -- | -- (350)
Goodwill amortization 220 | -- -- | -- --
Compensatory stock | |
option and restricted | |
stock expense -- | (1,011) -- | -- --
Other items 24 | (113) 20 | -- 17
Valuation allowance -- | -- -- | (856) (844)
___________| ____________________| ____________________
Income tax expense | |
(benefit) $146 | ($1,337) $220 | ($1,463) $--
=======================================================
</TABLE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
DEFERRED INCOME TAXES
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
___________________________________
December 31 1997 | 1996
____________________________________________________________ | ________________
(Dollars in thousands)
<S> <C> | <C>
Deferred tax assets: |
Future policy benefits $27,399 | $19,102
Deferred policy acquisition costs 4,558 | 1,985
Goodwill 17,620 | 5,918
Net operating loss carryforwards 3,044 | 1,653
Other 1,548 | 235
________________ | ________________
54,169 | 28,893
Deferred tax liabilities: |
Unrealized appreciation (depreciation) |
of securities at fair value (130) | (145)
Fixed maturity securities (1,665) | --
Present value of in force acquired (15,172) | (29,068)
Other (972) | (45)
________________ | ________________
(17,939) | (29,258)
________________ | ________________
Deferred income tax asset (liability) $36,230 | ($365)
===================================
</TABLE>
The Company is required to establish a "valuation allowance" for any portion
of the deferred tax assets that management believes will not be realized. In
the opinion of management, it is more likely than not that the Company will
realize the benefit of the deferred tax assets, and, therefore, no such
valuation allowance has been established.
8. RETIREMENT PLANS
DEFINED BENEFIT PLANS
In 1997, the Company was allocated their share of the pension liability
associated with their employees. The Company's employees are covered by the
employee retirement plan of an affiliate, Equitable Life. The benefits are
based on years of service and the employee's average annual compensation
during the last five years of employment. Further, Equitable Life sponsors a
defined contribution plan that is qualified under Internal Revenue Code Section
401(k). The Company's funding and accounting policies are consistent with the
funding requirements of Federal law and regulations.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheet:
<TABLE>
<CAPTION>
POST-MERGER
_______________________
December 31, 1997
_______________________
(Dollars in thousands)
<S> <C>
Accumulated benefit obligation $579
=======================
Plan assets at fair value, primarily bonds, common
stocks, mortgage loans and short-term investments --
Projected benefit obligation for service rendered to date $956
_______________________
Pension liability $956
=======================
</TABLE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
______________________________________
For the period | For the period
October 25, 1997 | January 1, 1997
through | through
December 31, 1997 | October 24, 1997
__________________| __________________
(Dollars in thousands)
<S> <C> | <C>
Service cost-benefits earned |
during the period $114 | $568
Interest cost on projected |
benefit obligation 10 | 15
Net amortization and deferral -- | 1
__________________| __________________
Net periodic pension cost $124 | $584
======================================
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
were 7.25% and 5.00%, respectively, at December 31, 1997. The average
expected long term rate of return on plan assets was 9.00% in 1997.
9. RELATED PARTY TRANSACTIONS
DSI acts as the principal underwriter (as defined in the Securities Act of
1933 and the Investment Company Act of 1940, as amended) of the variable
insurance products issued by the Company which as of December 31, 1997 are
sold primarily through six broker/dealer institutions. For the periods
October 25, 1997, through December 31, 1997 and January 1, 1997 through
October 24, 1997, the Company paid commissions to DSI totaling $9,931,000
and $26,419,000, respectively ($9,995,000 for the period August 14, 1996
through December 31, 1996 and $17,070,000 for the period January 1, 1996
through August 13, 1996). For the year ended December 31, 1995 commissions
paid by Golden American to DSI aggregated $8,440,000.
Golden American provides certain managerial and supervisory services to DSI.
Beginning in 1995, this fee was calculated as a percentage of average assets
in the variable separate accounts. For the periods October 25, 1997 through
December 31, 1997 and January 1, 1997 through October 24, 1997, the fee was
$508,000 and $2,262,000, respectively. For the periods August 14, 1996
through December 31, 1996 and January 1, 1996 through August 13, 1996 the
fee was $877,000 and $1,390,000, respectively. This fee was $987,000 for 1995.
The Company has a service agreement with Equitable Investment Services, Inc.
("EISI"), an affiliate, in which EISI provides investment management services.
Payments for these services totaled $200,000, $768,000 and $72,000 for the
periods October 25, 1997 through December 31, 1997, January 1, 1997 through
October 24, 1997 and August 14, 1996 through December 31, 1996, respectively.
Golden American has a guaranty agreement with Equitable Life. In consideration
of an annual fee, payable June 30, Equitable Life guarantees to Golden American
that it will make funds available, if needed, to Golden American to pay the
contractual claims made under the provisions of Golden American's life
insurance and annuity contracts. The agreement is not, and nothing contained
therein or done pursuant thereto by Equitable Life shall be deemed to
constitute, a direct or indirect guaranty by Equitable Life of the payment of
any debt or other obligation, indebtedness or liability, of any kind or
character whatsoever, of Golden American. The agreement does not guarantee the
value of the underlying assets held in separate accounts in which funds of
variable life insurance and variable annuity policies have been invested. The
calculation of the annual fee is based on risk based capital. As Golden
American's risk based capital level was above required amounts, no annual fee
was payable.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
Golden American provides certain advisory, computer and other resources and
services to Equitable Life. Revenues for these services which reduced general
expenses incurred by Golden American totaled $1,338,000 and $2,992,000 for
the periods October 25, 1997 through December 31, 1997 and January 1, 1997
through October 24, 1997, respectively. No services were provided by Golden
American in 1996.
The Company has a service agreement with Equitable Life in which Equitable Life
provides administrative and financial related services. For the period October
25, 1997 through December 31, 1997 and January 1, 1997 through October 24,
1997, the Company incurred expenses of $13,000 and $16,000, respectively,
under this agreement.
The Company had premiums, net of reinsurance, for variable products from six
significant broker/dealers for the year ended December 31, 1997, that
totaled $445,300,000, or 71% of premiums ($298,000,000 or 67% from two
significant broker/dealers for the year ended December 31, 1996). Included in
these amounts are premiums for 1997 of $26.2 million from LSSI, an affiliate.
SURPLUS NOTE: On December 17, 1996, Golden American issued an 8.25% surplus
note in the amount of $25,000,000 to Equitable. The note matures on December
17, 2026. The note and accrued interest thereon shall be subordinate to
payments due to policyholders, claimant and beneficiary claims, as well as
debts owed to all other classes of debtors of Golden American. Any payment of
principal made shall be subject to the prior approval of the Delaware Insurance
Commissioner. Golden American incurred interest totaling $344,000 and
$1,720,000 for the period October 25, 1997 through December 31, 1997 and
January 1, 1997 through October 24, 1997, respectively. On December 17, 1996,
Golden American contributed the $25,000,000 to First Golden acquiring 200,000
shares of common stock (100% of outstanding stock) of First Golden.
RECIPROCAL LOAN AGREEMENT: Golden American maintains a reciprocal loan
agreement with ING America Insurance Holdings, Inc. ("ING America"), a
Delaware corporation, and affiliate of EIC, to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Under this
agreement, which became effective January 1, 1998 and expires December 31,
2007, Golden American and ING America can borrow up to $65,000,000 from one
another. Interest on any Golden American borrowings is charged at the rate of
ING America's cost of funds for the interest period plus 0.15%. Interest
on any ING America borrowings is charged at a rate based on the prevailing
interest rate of U.S. commercial paper available for purchase with a similar
arrangement.
LINE OF CREDIT: Golden American maintained a line of credit agreement with
Equitable to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Under this agreement which became effective December 1, 1996
and expired December 31, 1997, Golden American could borrow up to $25,000,000.
Interest on any borrowings was charged at the rate of Equitable's monthly
average aggregate cost of short-term funds plus 1.00%. Under this agreement,
the Company incurred interest expense of $213,000 for the period October 25,
1997 through December 31, 1997, $362,000 for the period January 1, 1997 through
October 24, 1997, and $85,000 for the period August 14, 1996 through December
31, 1996. At December 31, 1997, $24,059,000 was outstanding under this
agreement. The outstanding balance was repaid by a capital contribution.
STOCKHOLDER'S EQUITY: On September 23, 1996, EIC Variable, Inc. contributed
$50,000,000 of Preferred Stock to the Company's additional paid-in capital.
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
10. COMMITMENTS AND CONTINGENCIES
CONTINGENT LIABILITY: In a transaction that closed on September 30, 1992,
Bankers Trust acquired from Mutual Benefit, in accordance with the terms of an
Exchange Agreement, all of the issued and outstanding capital stock of Golden
American and DSI and certain related assets for consideration with an
aggregate value of $13,200,000 and contributed them to BT Variable. The
transaction involved settlement of pre-existing claims of Bankers Trust
against Mutual Benefit. The ultimate value of these claims has not yet been
determined by the Superior Court of New Jersey and, prior to August 13, 1996,
was contingently supported by a $5,000,000 note payable from Golden American
and a $6,000,000 letter of credit from Bankers Trust. Bankers Trust had
estimated that the contingent liability due from Golden American amounted to
$439,000 at August 13, 1996. At August 13, 1996 the balance of the escrow
account established to fund the contingent liability was $4,293,000.
On August 13, 1996, Bankers Trust made a cash payment to Golden American in
an amount equal to the balance of the escrow account less the $439,000
contingent liability discussed above. In exchange, Golden American
irrevocably assigned to Bankers Trust all of Golden American's rights to
receive any amounts to be disbursed from the escrow account in accordance
with the terms of the Exchange Agreement. Bankers Trust also irrevocably
agreed to make all payments becoming due under the Golden American note and
to indemnify Golden American for any liability arising from the note.
REINSURANCE: At December 31, 1997, the Company had reinsurance treaties with
five unaffiliated reinsurers covering a significant portion of the mortality
risks under its variable contracts. The Company remains liable to the extent
its reinsurers do not meet their obligations under the reinsurance agreements.
Reinsurance in force for life mortality risks were $96,686,000 and $58,368,000
at December 31, 1997 and 1996. At December 31, 1997, the Company has a net
payable of $11,000 for reserve credits, reinsurance claims or other receivables
from these reinsurers comprised of $240,000 for claims recoverable from
reinsurers and a payable of $251,000 for reinsurance premiums. Included in the
accompanying financial statements are net considerations to reinsurers of
$326,000, $1,871,000, $875,000, $600,000 and $2,800,000 and net policy benefits
recoveries of $461,000, $1,021,000, $654,000, $1,267,000 and $3,500,000 for the
periods October 25, 1997 through December 31, 1997, January 1, 1997 through
October 24, 1997, August 14, 1996 through December 31, 1996, and January 1,
1996 through August 13, 1996 and the year ended 1995, respectively.
Effective June 1, 1994, Golden American entered into a modified coinsurance
agreement with an unaffiliated reinsurer. The accompanying financial
statements are presented net of the effects of the treaty which increased
income by $265,000, $335,000, $10,000 and $56,000 for the periods October
25, 1997 through December 31, 1997, January 1, 1997 through October 24, 1997,
August 14, 1996 through December 31, 1996 and January 1, 1996 through
August 13, 1996, respectively. In 1995, net income was reduced by $109,000.
GUARANTY FUND ASSESSMENTS: Assessments are 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 insurers. In
some states, these assessments can be partially recovered through a reduction
in future premium taxes. The Company cannot predict whether and to what
extent legislative initiatives may affect the right to offset. Based upon
information currently available from the National Organization of Life and
Health Insurance Guaranty Associations (NOLHGA), the Company believes that
it is probable these insolvencies will result in future assessments which
could be material to the Company's financial statements if the Company's
reserve is not sufficient. The Company regularly reviews its reserve for
these insolvencies and updates its reserve based upon the Company's
interpretation of information from the NOLHGA annual report. The associated
cost for a particular insurance company can vary significantly based upon
its fixed account premium volume by line of business and
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
state premium levels
as well as its potential for premium tax offset. Accordingly, the Company
accrued and charged to expense an additional $141,000 for the period October
25, 1997 through December 31, 1997, $446,000 for the period January 1, 1997
through October 24, 1997, $291,000 for the period August 14, 1996 through
December 31, 1996 and $480,000 for the period January 1, 1996 through August
13, 1996. At December 31, 1997, the Company has an undiscounted reserve of
$1,358,000 to cover estimated future assessments (net of related anticipated
premium tax credits) and has established an asset totaling $238,000 for
assessments paid which may be recoverable through future premium tax offsets.
The Company believes this reserve is sufficient to cover expected future
insurance guaranty fund assessments, based upon previous premiums, and known
insolvencies at this time.
LITIGATION: In the ordinary course of business, the Company is engaged in
litigation, none of which management believes is material.
VULNERABILITY FROM CONCENTRATIONS: The Company has various concentrations in
its investment portfolio (see Note 3 for further information). The Company's
asset growth, net investment income and cash flow are primarily generated from
the sale of variable products and associated future policy benefits and
separate account liabilities. A significant portion of the Company's sales is
generated by six broker/dealers. Substantial changes in tax laws that would
make these products less attractive to consumers, extreme fluctuations in
interest rates or stock market returns which may result in higher lapse
experience than assumed, could cause a severe impact to the Company's
financial condition.
OTHER COMMITMENTS: At December 31, 1997, outstanding commitments to fund
mortgage loans on real estate totaled $1,825,000.
YEAR 2000 (UNAUDITED): Based on a study of its computer software and
hardware, the Company has determined its exposure to the Year 2000 change of
the century date issue. Management believes the Company's systems are or
will be substantially compliant by Year 2000 and has engaged external
consultants to validate this assumption. Golden American has spent
approximately $2,000 in 1997 related to the external consultants' analysis.
The projected cost to the Company for the external consultants' analysis is
approximately $130,000 to $170,000. The only system known to be affected by
this issue is a system maintained by an affiliate who will incur the related
costs to make the system compliant. To mitigate the effect of outside
influences and other dependencies relative to the Year 2000, the Company will
be contacting significant customers, suppliers and other third parties. To
the extent these third parties would be unable to transact business in the
Year 2000 and thereafter, the Company's operations could be adversely affected.
<PAGE>
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90
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- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
ITEM PAGE
Introduction.......................................................... 1
Description of Golden American Life Insurance Company................. 1
Safekeeping of Assets................................................. 1
The Administrator..................................................... 1
Independent Auditors.................................................. 2
Distribution of Contracts............................................. 2
Performance Information............................................... 3
IRA Partial Withdrawal Option......................................... 9
Other Information..................................................... 9
Financial Statements of Separate Account B............................ 10
Appendix -- Description of Bond Ratings............................... A-1
- --------------------------------------------------------------------------------
PLEASE TEAR OFF, COMPLETE AND RETURN THE FORM BELOW TO ORDER A FREE STATEMENT OF
ADDITIONAL INFORMATION FOR THE CONTRACTS OFFERED UNDER THE PROSPECTUS. ADDRESS
THE FORM TO OUR CUSTOMER SERVICE CENTER; THE ADDRESS IS SHOWN ON THE COVER.
...............................................................................
PLEASE SEND ME A FREE COPY OF THE STATEMENT OF ADDITIONAL INFORMATION FOR
SEPARATE ACCOUNT B
PLEASE PRINT OR TYPE:
__________________________________________________
NAME
__________________________________________________
SOCIAL SECURITY NUMBER
__________________________________________________
STREET ADDRESS
__________________________________________________
CITY, STATE, ZIP
G3760 PREMIUM PLUS SAI (5/98)
...............................................................................
91
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<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT EXAMPLES
EXAMPLE #1: FULL SURRENDER -- EXAMPLE OF A NEGATIVE MARKET VALUE
ADJUSTMENT
Assume $100,000 was allocated to a Fixed Allocation with a
Guarantee Period of ten years, a Guaranteed Interest Rate of 7.50%,
an initial Index Rate ("I") of 7.00%; that a full surrender is
requested three years into the Guarantee Period; that the then Index
Rate for a seven year Guarantee Period ("J") is 8.0%; and that no
prior transfers or partial withdrawals affecting this Fixed
Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. The Accumulation Value of the Fixed Allocation on the date of
surrender is $124,230
( $100,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
3. Market Value Adjustment = $124,230 X
(( 1.07 / 1.0850 ) ^ ( 2,555 / 365 ) - 1 ) = $11,535
Therefore, the amount paid to you on full surrender ignoring any
surrender charge is $112,695
( $124,230 - $11,535 ).
EXAMPLE #2: FULL SURRENDER -- EXAMPLE OF A POSITIVE MARKET VALUE
ADJUSTMENT
Assume $100,000 was allocated to a Fixed Allocation with a
Guarantee Period of ten years, a Guaranteed Interest Rate of 7.5%,
an initial Index Rate ("I") of 7.00%; that a full surrender is
requested three years into the Guarantee Period; that the then Index
Rate for a seven year Guarantee Period ("J") is 6.0%; and that no
prior transfers or partial withdrawals affecting this Fixed
Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. The Accumulation Value of the Fixed Allocation on the date of
surrender is $124,230
( $100,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
3. Market Value Adjustment = $124,230 X
(( 1.07 / 1.0650 ) ^ ( 2,555 / 365 ) - 1 ) = $4,141
Therefore, the amount paid to you on full surrender
ignoring any surrender charge is $128,371
( $124,230 + $4,141 ).
EXAMPLE #3: PARTIAL WITHDRAWAL -- EXAMPLE OF A NEGATIVE MARKET VALUE
ADJUSTMENT
Assume $200,000 was allocated to a Fixed Allocation with a
Guarantee Period of ten years, a Guaranteed Interest Rate of 7.5%,
an initial Index Rate ("I") of 7.00%; that a partial withdrawal of
$112,695 is requested three years into the Guarantee period; that
the then Index Rate ("J") for a seven year Guarantee Period is 8.0%;
and that no prior transfers or partial withdrawals affecting this
Fixed Allocation have been made.
First calculate the amount that must be withdrawn from the Fixed
Allocation to provide the amount requested.
1. The Accumulation Value of the Fixed Allocation on the date of
withdrawal is $248,459
( $200,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
3. Amount that must be withdrawn =
(( $112,695 / ( 1.07 / 1.0850 ) ^ ( 2,555 / 365 )) = $124,230
Then calculate the Market Value Adjustment on that amount.
4. Market Value Adjustment = $124,230 X
(( 1.07 / 1.0850 ) ^ ( 2,555 / 365 ) - 1 ) = $11,535
Therefore, the amount of the partial withdrawal paid to you is
$112,695, as requested. The Fixed Allocation will be reduced by the
amount of the partial withdrawal, $112,695, and also reduced by the
Market Value Adjustment of $11,535, for a total reduction in the
Fixed Allocation of $124,230.
A1
<PAGE>
EXAMPLE #4: PARTIAL WITHDRAWAL -- EXAMPLE OF A POSITIVE MARKET VALUE
ADJUSTMENT
Assume $200,000 was allocated to a Fixed Allocation with a
Guarantee Period of ten years, a Guaranteed Interest Rate of 7.5%,
an initial Index Rate of 7.0%; that a partial withdrawal of $128,371
requested three years into the Guarantee Period; that the then Index
Rate ("J") for a seven year Guarantee Period is 6.0%; and that no
prior transfers or partial withdrawals affecting this Fixed
Allocation have been made.
First calculate the amount that must be withdrawn from the Fixed
Allocation to provide the amount requested.
1. The Accumulation Value of Fixed Allocation on the date of
surrender is $248,459
( $200,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
3. Amount that must be withdrawn =
(( $128,371 / ( 1.07 / 1.0650 ) ^ ( 2,555 / 365 )) = $124,230
Then calculate the Market Value Adjustment on that amount.
4. Market Value Adjustment = $124,230 X
(( 1.07 / 1.0650 ) ^ ( 2,555 / 365 ) - 1 ) = $4,141
Therefore, the amount of the partial withdrawal paid to you is
$128,371, as requested. The Fixed Allocation will be reduced by the
amount of the partial withdrawal, $130,500, but increased by the
Market Value Adjustment of $4,141, for a total reduction in the
Fixed Allocation of $124,230.
A2
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is stock company
domiciled In Wilmington, Delaware
G3760 PREMIUM PLUS 5/98
