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PROFILE AND PROSPECTUS OF GOLDENSELECT VALUE
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Registration No. 333-66745
Filed under Rule 424(b)(3)
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| PROFILE AND PROSPECTUS FOR GOLDENSELECT VALUE
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| Fixed and Variable Annuity Contract, February 1, 2000
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| Golden American Life Insurance Company
| Separate Account B of Golden American Life Insurance Company
| ING VARIABLE ANNUITIES
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ING VARIABLE ANNUITIES
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
PROFILE OF
GOLDENSELECT VALUE
FIXED AND VARIABLE ANNUITY CONTRACT
FEBRUARY 1, 2000
This Profile is a summary of some of the more important points that you
should know and consider before purchasing the Contract. The Contract is
more fully described in the full prospectus which accompanies this Profile.
Please read the prospectus carefully.
1. THE ANNUITY CONTRACT
The Contract offered in this prospectus is a deferred combination variable and
fixed annuity contract between you and Golden American Life Insurance Company.
The Contract provides a means for you to invest on a tax-deferred basis in (i)
one or more of the 25 mutual fund investment portfolios through our Separate
Account B and/or (ii) in a fixed account of Golden American with guaranteed
interest periods. The 25 mutual fund portfolios are listed on page 3 below. We
currently offer guaranteed interest periods of 6 months, 1, 3, 5, 7 and 10
years in the fixed account. We set the interest rates in the fixed account
(which will never be less than 3%) periodically. We may credit a different
interest rate for each interest period. The interest you earn in the fixed
account as well as your principal is guaranteed by Golden American as long as
you do not take your money out before the maturity date for the applicable
interest period. If you withdraw your money from the fixed account more than 30
days before the applicable maturity date, we will apply a market value
adjustment. A market value adjustment could increase or decrease your contract
value and/or the amount you take out. Generally, the investment portfolios are
designed to offer a better return than the fixed account. However, this is NOT
guaranteed. You may not make any money, and you can even lose the money you
invest.
The Contract, like all deferred variable annuity contracts, has two phases: the
accumulation phase and the income phase. The accumulation phase is the period
between the contract date and the date on which you start receiving the annuity
payments under your Contract. The amounts you accumulate during the
accumulation phase will determine the amount of annuity payments you will
receive. The income phase begins on the annuity start date, which is the date
you start receiving regular annuity payments from your Contract.
You determine (1) the amount and frequency of premium payments, (2) the
investments, (3) transfers between investments, (4) the type of annuity to be
paid after the accumulation phase, (5) the beneficiary who will receive the
death benefits, and (6) the amount and frequency of withdrawals.
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Prospectus begins after
Page 6 of this Profile
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2. YOUR ANNUITY PAYMENTS (THE INCOME PHASE)
Annuity payments are the periodic payments you will begin receiving on the
annuity start date. You may choose one of the following annuity payment
options:
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| ANNUITY OPTIONS |
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| Option 1 Income for a Payments are made for a specified number of |
| fixed period years to you or your beneficiary. |
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| Option 2 Income for Payments are made for the rest of your life |
| life with a or longer for a specified period such as 10 |
| period or 20 years or until the total amount used to |
| certain buy this option has been repaid. This option |
| comes with an added guarantee that payments |
| will continue to your beneficiary for the |
| remainder of such period if you should die |
| during the period. |
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| Option 3 Joint life Payments are made for your life and the life |
| income of another person (usually your spouse). |
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| Option 4 Annuity plan Any other annuitization plan that we choose |
| to offer on the annuity start date. |
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Annuity payments under Options 1, 2 and 3 are fixed. Annuity payments under
Option 4 may be fixed or variable. If variable and subject to the Investment
Company Act of 1940, it will comply with requirements of such Act. Once you
elect an annuity option and begin to receive payments, it cannot be changed.
3. PURCHASE (BEGINNING OF THE ACCUMULATION PHASE)
You may purchase the Contract with an initial payment of $25,000 or more up to
and including age 85. You may make additional payments of $1,000 or more ($250
for a qualified Contract) at any time before you turn age 85 during the
accumulation phase. Under certain circumstances, we may waive the minimum
initial and additional premium payment requirement. Any initial or additional
premium payment that would cause the contract value of all annuities that you
maintain with us to exceed $1,000,000 requires our prior approval.
Who may purchase this Contract? The Contract may be purchased by individuals as
part of a personal retirement plan (a "non-qualified Contract"), or as a
Contract that qualifies for special tax treatment when purchased as either an
Individual Retirement Annuity (IRA) or in connection with a qualified
retirement plan (each a "qualified Contract").
The Contract is designed for people seeking long-term tax-deferred accumulation
of assets, generally for retirement or other long-term purposes. The
tax-deferred feature is more attractive to people in high federal and state tax
brackets. You should not buy this Contract if you are looking for a short-term
investment or if you cannot risk getting back less money than you put in.
4. THE INVESTMENT PORTFOLIOS
You can direct your money into (1) the fixed account with guaranteed interest
periods of 6 months, and 1, 3, 5, 7 and 10 years, and/or (2) into any one or
more of the following 25 mutual fund investment portfolios through our Separate
Account B. The investment portfolios are described in the prospectuses for the
GCG Trust, the PIMCO Variable Insurance Trust and the Warburg Pincus Trust.
Keep in mind that while an investment in the fixed account earns a fixed
interest rate, an investment in any investment portfolio, depending on market
conditions, may cause you to make or lose money. The investment portfolios
available under your Contract are:
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THE GCG TRUST
Liquid Asset Series Rising Dividends Series Capital Appreciation Series
Limited Maturity Bond Series Capital Growth Series Mid-Cap Growth Series
Global Fixed Income Series Growth Series Strategic Equity Series
Total Return Series Value Equity Series Small Cap Series
Fully Managed Series Research Series Real Estate Series
Equity Income Series Managed Global Series Hard Assets Series
Investors Series All Cap Series Developing World Series
Large Cap Value Series
THE PIMCO TRUST
PIMCO High Yield Bond Portfolio
PIMCO StocksPLUS Growth and Income Portfolio
THE WARBURG PINCUS TRUST
International Equity Portfolio
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5. EXPENSES
The Contract has insurance features and investment features, and there are
charges related to each. The Company currently does not deduct an annual
contract administrative charge but may in the future charge an annual contract
administrative fee of $30 or 2% of the contract value, whichever is less. We
also collect a mortality and expense risk charge and an asset-based
administrative charge. These 2 charges are deducted daily directly from the
amounts in the investment portfolios. The asset-based administrative charge is
0.15% annually. The annual rate of the mortality and expense risk charge is:
Mortality & Expense Risk Charge 0.75%
Asset-Based Administrative Charge 0.15%
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Total 0.90%
Each investment portfolio has charges for investment management fees and other
expenses. These charges, which vary by investment portfolio, currently range
from 0.59% to 1.83% annually (see following table) of the portfolio's average
daily net asset balance.
If you withdraw money from your Contract, or if you begin receiving annuity
payments, the Company may deduct a premium tax of 0%-3.5% to pay to your state.
We deduct a surrender charge if you surrender your Contract or withdraw an
amount exceeding the free withdrawal amount. The free withdrawal amount in any
contract year is the greater of (i) any earnings less previous withdrawals; or
(ii) 10% of premium payments paid within the last 7 years and not previously
withdrawn, less any previous withdrawals taken in the same contract year. The
following table shows the schedule of the surrender charge that will apply. The
surrender charge is a percent of each premium payment withdrawn.
COMPLETE YEARS ELAPSED 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7+
SINCE PREMIUM PAYMENT | | | | | | |
SURRENDER CHARGE 6% | 6% | 6% | 5% | 4% | 3% | 1% | 0%
The following table is designed to help you understand the Contract charges.
The "Total Annual Insurance Charges" column includes the mortality and expense
risk charge, the asset-based administrative charge, and reflects the annual
contract administrative charge as 0.04% (based on an average contract value of
$75,000). The "Total Annual Investment Portfolio Charges" column reflects the
portfolio charges for each portfolio and are based on actual expenses as of
December 31, 1998, except for (i) portfolios that commenced operations during
1998 where the charges have been estimated, and (ii) the newly formed
portfolios where the charges have been estimated. The column "Total Annual
Charges" reflects the sum of the previous two columns. The columns under the
heading "Examples" show you how much you would pay under the Contract for a
1-year period and for a 10-year period.
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As required by the Securities and Exchange Commission, the examples assume that
you invested $1,000 in a Contract that earns 5% annually and that you withdraw
your money at the end of Year 1 or at the end of Year 10. For Years 1 and 10,
the examples show the total annual charges assessed during that time. For these
examples, the premium tax is assumed to be 0%.
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EXAMPLES:
TOTAL ANNUAL --------------------
TOTAL CHARGES AT THE
TOTAL ANNUAL INVESTMENT TOTAL END OF:
INSURANCE PORTFOLIO ANNUAL
INVESTMENT PORTFOLIO CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
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THE GCG TRUST
Liquid Asset 0.94% 0.59% 1.53% $ 76 $ 182
Limited Maturity Bond 0.94% 0.60% 1.54% $ 76 $ 183
Global Fixed Income 0.94% 1.60% 2.54% $ 86 $ 288
Total Return 0.94% 0.97% 1.91% $ 79 $ 223
Fully Managed 0.94% 0.98% 1.92% $ 79 $ 224
Equity Income 0.94% 0.98% 1.92% $ 79 $ 224
Investors 0.94% 1.01% 1.95% $ 80 $ 227
Large Cap Value 0.94% 1.01% 1.95% $ 80 $ 227
Rising Dividends 0.94% 0.98% 1.92% $ 79 $ 224
Capital Growth 0.94% 1.08% 2.02% $ 81 $ 235
Growth 0.94% 1.09% 2.03% $ 81 $ 236
Value Equity 0.94% 0.98% 1.92% $ 79 $ 224
Research 0.94% 0.94% 1.88% $ 79 $ 220
Managed Global 0.94% 1.26% 2.20% $ 82 $ 253
All Cap 0.94% 1.01% 1.95% $ 80 $ 227
Capital Appreciation 0.94% 0.98% 1.92% $ 79 $ 224
Mid-Cap Growth 0.94% 0.95% 1.89% $ 79 $ 221
Strategic Equity 0.94% 0.99% 1.93% $ 80 $ 225
Small Cap 0.94% 0.99% 1.93% $ 80 $ 225
Real Estate 0.94% 0.99% 1.93% $ 80 $ 225
Hard Assets 0.94% 1.00% 1.94% $ 80 $ 226
Developing World 0.94% 1.83% 2.77% $ 88 $ 310
THE PIMCO TRUST
PIMCO High Yield Bond 0.94% 0.75% 1.69% $ 77 $ 200
PIMCO StocksPLUS
Growth and Income 0.94% 0.65% 1.59% $ 76 $ 189
THE WARBURG PINCUS
TRUST
International Equity 0.94% 1.33% 2.27% $ 83 $ 261
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For the newly formed portfolios, the charges have been estimated. The "Total
Annual Investment Portfolio Charges" column above reflects current expense
reimbursements for applicable investment portfolios. The 1 Year examples above
include a 6% surrender charge. For more detailed information, see "Fees and
Expenses" in the prospectus for the Contract.
6. TAXES
Under a qualified Contract, your premiums are generally pre-tax contributions
and accumulate on a tax-deferred basis. Premiums and earnings are generally
taxed as income when you make a withdrawal or begin receiving annuity payments,
presumably when you are in a lower tax bracket.
Under a non-qualified Contract, premiums are paid with after-tax dollars, and
any earnings will accumulate tax-deferred. You will be taxed on these earnings,
but not on premiums, when you withdraw them from the Contract.
For owners of most qualified Contracts, when you reach age 701/2 (or, in some
cases, retire), you will be required by federal tax laws to begin receiving
payments from your annuity or risk paying a penalty tax. In those cases, we can
calculate and pay you the minimum required distribution amounts at your
request.
If you are younger than 591/2 when you take money out, in most cases, you will
be charged a 10% federal penalty tax on the taxable earnings withdrawn.
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7. WITHDRAWALS
You can withdraw your money at any time during the accumulation phase. You may
elect in advance to take systematic withdrawals which are described on page 6.
Withdrawals above the free withdrawal amount may be subject to a surrender
charge. We will apply a market value adjustment if you withdraw your money from
the fixed account more than 30 days before the applicable maturity date. Income
taxes and a penalty tax may apply to amounts withdrawn.
8. PERFORMANCE
The value of your Contract will fluctuate depending on the investment
performance of the portfolio(s) you choose. Since this is a new Contract, there
is no actual performance history to illustrate. Actual performance information
will be shown in an updated prospectus. Please keep in mind that past or
hypothetical performance is not a guarantee of future results.
9. DEATH BENEFIT
The death benefit is payable when the first of the following persons dies: the
contract owner, joint owner, or annuitant (if a contract owner is not an
individual). Assuming you are the contract owner, if you die during the
accumulation phase, your beneficiary will receive a death benefit unless the
beneficiary is your surviving spouse and elects to continue the Contract. The
death benefit paid depends on the death benefit you have chosen. The death
benefit value is calculated at the close of the business day on which we
receive due proof of death at our Customer Service Center. If your beneficiary
elects to delay receipt of the death benefit until a date after the time of
your death, the amount of the benefit payable in the future may be affected. If
you die after the annuity start date and you are the annuitant, your
beneficiary will receive the death benefit under the annuity option then in
effect.
The death benefit may be subject to certain mandatory distribution rules
required by federal tax law.
Under the death benefit, if you die before the annuity start date, your
beneficiary will receive the greatest of:
1) the contract value;
2) the total premium payments made under the Contract after subtracting
any withdrawals; or
3) the cash surrender value.
Note: The amount of the death benefit could be reduced by premium taxes owed
and withdrawals not previously deducted.
10. OTHER INFORMATION
FREE LOOK. If you cancel the Contract within 10 days after you receive it,
you will receive a refund of the adjusted contract value. We determine your
contract value at the close of business on the day we receive your written
refund request. For purposes of the refund during the free look period, (i) we
adjust your contract value for any market value adjustment (if you have
invested in the fixed account), and (ii) then we include a refund of any
charges deducted from your contract value. Because of the market risks
associated with investing in the portfolios and the potential positive or
negative effect of the market value adjustment, the contract value returned may
be greater or less than the premium payment you paid. Some states require us to
return to you the amount of the paid premium (rather than the contract value in
which case you will not be subject to investment risk during the free look
period. Also, in some states, you may be entitled to a longer free look period.
TRANSFERS AMONG INVESTMENT PORTFOLIOS AND THE FIXED ACCOUNT. You can make
transfers among your investment portfolios and your investment in the fixed
account as frequently as you wish without any current tax implications. The
minimum amount for a transfer is $100. There is currently no charge for
transfers, and we do not limit the number of transfers. The Company may, in the
future, charge a $25 fee for any transfer after the twelfth transfer in a
contract year or limit the number of transfers allowed. Keep
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in mind that if you transfer or otherwise withdraw your money from the fixed
account more than 30 days before the applicable maturity date, we will apply a
market value adjustment. A market value adjustment could increase or decrease
your contract value and/or the amount you transfer or withdraw.
NO PROBATE. In most cases, when you die, the person you choose as your
beneficiary will receive the death benefit without going through probate. See
"Federal Tax Considerations-Taxation of Death Benefit Proceeds" in the
prospectus for the Contract.
ADDITIONAL FEATURES. This Contract has other features you may be
interested in. These include:
Dollar Cost Averaging. This is a program that allows you to invest a fixed
amount of money in the investment portfolios each month. It may give you a
lower average cost per unit over time than a single one-time purchase. Dollar
cost averaging requires regular investments regardless of fluctuating price
levels, and does not guarantee profits or prevent losses in a declining market.
This option is currently available only if you have $1,200 or more in the
Limited Maturity Bond or the Liquid Asset investment portfolios or in the fixed
account with either a 6-month or 1-year guaranteed interest period. Transfers
from the fixed account under this program will not be subject to a market value
adjustment.
Systematic Withdrawals. During the accumulation phase, you can arrange to
have money sent to you at regular intervals throughout the year. Within limits
these withdrawals will not result in any surrender charge. Withdrawals from
your money in the fixed account under this program are not subject to a market
value adjustment. Of course, any applicable income and penalty taxes will apply
on amounts withdrawn.
Automatic Rebalancing. If your contract value is $10,000 or more, you may
elect to have the Company automatically readjust the money between your
investment portfolios periodically to keep the blend you select. Investments in
the fixed account are not eligible for automatic rebalancing.
11. INQUIRIES
If you need more information after reading this prospectus, please contact us
at:
CUSTOMER SERVICE CENTER
P.O. BOX 2700
WEST CHESTER, PA 19380
(800) 366-0066
or your registered representative.
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
FEBRUARY 1, 2000
DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY PROSPECTUS
GOLDENSELECT VALUE
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This prospectus describes GoldenSelect Value, a group and individual deferred
variable annuity contract (the "Contract") offered by Golden American Life
Insurance Company (the "Company," "we" or "our"). The Contract is available in
connection with certain retirement plans that qualify for special federal
income tax treatment ("qualified Contracts") as well as those that do not
qualify for such treatment ("non-qualified Contracts").
The Contract provides a means for you to invest your premium payments in one or
more of 25 mutual fund investment portfolios. You may also allocate premium
payments to our Fixed Account with guaranteed interest periods. Your contract
value will vary daily to reflect the investment performance of the investment
portfolio(s) you select and any interest credited to your allocations in the
Fixed Account. The investment portfolios available under your Contract and the
portfolio managers are:
A I M CAPITAL MANAGEMENT, INC.
Strategic Equity Series
Capital Appreciation Series
ALLIANCE CAPITAL MANAGEMENT L. P.
Capital Growth Series
BARING INTERNATIONAL INVESTMENT LIMITED
(AN AFFILIATE)
Developing World Series
Global Fixed Income Series
Hard Assets Series
CAPITAL GUARDIAN TRUST COMPANY
Large Cap Value Series
Managed Global Series
Small Cap Series
EAGLE ASSET MANAGEMENT, INC.
Value Equity Series
EII REALTY SECURITIES, INC.
Real Estate Series
ING INVESTMENT MANAGEMENT, LLC
(AN AFFILIATE)
Limited Maturity Bond Series
Liquid Asset Series
JANUS CAPITAL CORPORATION
Growth Series
KAYNE ANDERSON INVESTMENT MANAGEMENT, LLC
Rising Dividends Series
MASSACHUSETTS FINANCIAL SERVICES COMPANY
Mid-Cap Growth Series
Research Series
Total Return Series
SALOMON BROTHERS ASSET MANAGEMENT, INC.
All Cap Series
Investors Series
T. ROWE PRICE ASSOCIATES, INC.
Equity Income Series
Fully Managed Series
PACIFIC INVESTMENT MANAGEMENT COMPANY
PIMCO High Yield Bond Portfolio
PIMCO StocksPLUS Growth and
Income Portfolio
CREDIT SUISSE ASSET MANAGEMENT, LLC
International Equity Portfolio
The above mutual fund investment portfolios are purchased and held by
corresponding divisions of our Separate Account B. We refer to the divisions as
"subaccounts" and the money you place in the Fixed Account's guaranteed
interest periods as "Fixed Interest Allocations" in this prospectus.
We will credit your Fixed Interest Allocation(s) with a fixed rate of interest.
We set the interest rates periodically. We will not set the interest rate to be
less than a minimum annual rate of 3%. You may choose guaranteed interest
periods of 6 months, and 1, 3, 5, 7 and 10 years. The interest earned on your
money as well as your principal is guaranteed as long as you hold them until
the maturity date. If you take your money out from a Fixed Interest Allocation
more than 30 days before the applicable maturity date, we will apply a market
value adjustment ("Market Value Adjustment"). A Market Value Adjustment could
increase or decrease your contract value and/or the amount you take out. You
bear the risk that you may receive less than your principal if we take a Market
Value Adjustment. For Contracts sold in some states, not all Fixed Interest
Allocations or subaccounts are available. You have a right to return a Contract
within 10 days after you receive it for a refund of the adjusted contract value
(which may be more or less than the premium payments you paid), or if required
by your state, the original amount of your premium payment. Longer free look
periods apply in some states and in certain situations.
This prospectus provides information that you should know before investing and
should be kept for future reference. A Statement of Additional Information,
dated February 1, 2000, has been filed with the Securities and Exchange
Commission. It is available without charge upon request. To obtain a copy of
this document, write to our Customer Service Center at P.O. Box 2700, West
Chester, Pennsylvania 19380 or call (800) 366-0066, or access the SEC's website
(http://www.sec.gov). The table of contents of the Statement of Additional
Information ("SAI") is on the last page of this prospectus and the SAI is made
part of this prospectus by reference.
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE SUBACCOUNTS THROUGH THE GCG TRUST OR THE PIMCO TRUST OR
THE WARBURG PINCUS TRUST IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED
BY ANY BANK OR BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE GCG TRUST,
THE PIMCO TRUST AND THE WARBURG PINCUS TRUST.
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TABLE OF CONTENTS
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Index of Special Terms ................................................. 1
Fees and Expenses ...................................................... 2
Performance Information ................................................ 6
Accumulation Unit ................................................... 6
Net Investment Factor ............................................... 6
Financial Statements ................................................ 7
Performance Information ............................................. 7
Golden American Life Insurance Company ................................. 8
The Trusts ............................................................. 8
Golden American Separate Account B ..................................... 9
The Investment Portfolios .............................................. 9
Investment Objectives ............................................... 9
Investment Management Fees .......................................... 11
The Fixed Interest Allocation .......................................... 12
Selecting a Guaranteed Interest Period .............................. 12
Guaranteed Interest Rates ........................................... 12
Transfers from a Fixed Interest Allocation .......................... 13
Withdrawals from a Fixed Interest Allocation ........................ 13
Market Value Adjustment ............................................. 14
The Annuity Contract ................................................... 14
Contract Date and Contract Year ..................................... 15
Annuity Start Date .................................................. 15
Contract Owner ...................................................... 15
Annuitant ........................................................... 15
Beneficiary ......................................................... 16
Purchase and Availability of the Contract ........................... 16
Crediting of Premium Payments ....................................... 16
Contract Value ...................................................... 17
Cash Surrender Value ................................................ 18
Surrendering to Receive the Cash Surrender Value .................... 18
Addition, Deletion or Substitution of Subaccounts and Other Changes . 18
The Fixed Account ................................................... 18
Other Contracts ..................................................... 18
Other Important Provisions .......................................... 19
Withdrawals ............................................................ 19
Regular Withdrawals ................................................. 19
Systematic Withdrawals .............................................. 19
IRA Withdrawals ..................................................... 20
Transfers Among Your Investments ....................................... 21
Dollar Cost Averaging ............................................... 21
Automatic Rebalancing ............................................... 22
Death Benefit .......................................................... 23
Death Benefit During the Accumulation Phase ......................... 23
Death Benefit During the Income Phase ............................... 23
Charges and Fees ....................................................... 23
Charge Deduction Subaccount ......................................... 23
Charges Deducted from the Contract Value ............................ 23
Surrender Charge ................................................... 23
Waiver of Surrender Charge for Extended Medical Care ............... 24
Free Withdrawal Amount ............................................. 24
Surrender Charge for Excess Withdrawals ............................ 24
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TABLE OF CONTENTS (CONTINUED)
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Premium Taxes ............................................................ 24
Administrative Charge .................................................... 24
Transfer Charge .......................................................... 24
Charges Deducted from the Subaccounts ..................................... 25
Mortality and Expense Risk Charge ........................................ 25
Asset-Based Administrative Charge ........................................ 25
Trust Expenses ............................................................ 25
The Annuity Options .......................................................... 25
Annuitization of Your Contract ............................................ 25
Selecting the Annuity Start Date .......................................... 26
Frequency of Annuity Payments ............................................. 26
The Annuity Options ....................................................... 26
Income for a Fixed Period ................................................ 26
Income for Life with a Period Certain .................................... 26
Joint Life Income ........................................................ 26
Annuity Plan ............................................................. 27
Payment When Named Person Dies ............................................ 27
Other Contract Provisions .................................................... 27
Reports to Contract Owners ................................................ 27
Suspension of Payments .................................................... 27
In Case of Errors in Your Application ..................................... 27
Assigning the Contract as Collateral ...................................... 27
Contract Changes-Applicable Tax Law ....................................... 28
Free Look ................................................................. 28
Group or Sponsored Arrangements ........................................... 28
Selling the Contract ...................................................... 28
Other Information ............................................................ 29
Voting Rights ............................................................. 29
State Regulation .......................................................... 29
Legal Proceedings ......................................................... 29
Legal Matters ............................................................. 29
Experts ................................................................... 30
Federal Tax Considerations ................................................... 30
More Information About Golden American ....................................... 35
Unaudited Financial Statements of Golden American Life Insurance Company ..... 58
Financial Statements of Golden American Life Insurance Company ............... 66
Statement of Additional Information
Table of Contents ......................................................... 94
Appendix A
Market Value Adjustment Examples .......................................... A1
Appendix B
Surrender Charge for Excess Withdrawals Example ........................... B1
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INDEX OF SPECIAL TERMS
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The following special terms are used throughout this prospectus. Refer to the
page(s) listed for an explanation of each term:
Special Term Page
Accumulation Unit 6
Annuitant 15
Annuity Start Date 15
Cash Surrender Value 18
Contract Date 15
Contract Owner 15
Contract Value 17
Contract Year 15
Fixed Interest Allocation 12
Free Withdrawal Amount 24
Market Value Adjustment 14
Net Investment Factor 6
Death Benefit 23
The following terms as used in this prospectus have the same or substituted
meanings as the corresponding terms currently used in the Contract:
Term Used in This Prospectus Corresponding Term Used in the Contract
Accumulation Unit Value Index of Investment Experience
Annuity Start Date Annuity Commencement Date
Contract Owner Owner or Certificate Owner
Contract Value Accumulation Value
Transfer Charge Excess Allocation Charge
Fixed Interest Allocation Fixed Allocation
Free Look Period Right to Examine Period
Guaranteed Interest Period Guarantee Period
Subaccount(s) Division(s)
Net Investment Factor Experience Factor
Regular Withdrawals Conventional Partial Withdrawals
Withdrawals Partial Withdrawals
1
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[Shaded Section Header]
- --------------------------------------------------------------------------
FEES AND EXPENSES
- --------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES*
Surrender Charge:
COMPLETE YEARS ELAPSED 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7+
SINCE PREMIUM PAYMENT | | | | | | |
SURRENDER CHARGE 6% | 6% | 6% | 5% | 4% | 3% | 1% | 0%
Transfer Charge...................................................None**
* If you invested in a Fixed Interest Allocation, a Market Value
Adjustment may apply to certain transactions. This may increase or
decrease your contract value and/or your transfer or surrender amount.
** We may in the future charge $25 per transfer if you make more than 12
transfers in a contract year.
ANNUAL CONTRACT ADMINISTRATIVE CHARGE
Administrative Charge................................................$ 0
(We may in the future charge an annual contract administrative charge
of $30 or 2% of your contract value, whichever is less.)
SEPARATE ACCOUNT ANNUAL CHARGES***
Mortality and Expense Risk Charge ......... 0.75%
Asset-Based Administrative Charge ......... 0.15%
----
Total Separate Account Expenses ........... 0.90%
***As a percentage of average daily assets in each subaccount. The Separate
Account Annual Charges are deducted daily.
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THE GCG TRUST ANNUAL EXPENSES (as a percentage of the average daily net assets
of a portfolio):
OTHER TOTAL
EXPENSES(2) EXPENSES
MANAGEMENT AFTER EXPENSE AFTER EXPENSE
PORTFOLIO FEES(1) REIMBURSEMENT REIMBURSEMENT(3)
- ---------------------- ---------- ------------- ----------------
Liquid Asset 0.59% 0.00% 0.59%
Limited Maturity Bond 0.60% 0.00% 0.60%
Global Fixed Income 1.60% 0.00% 1.60%(3)
Total Return 0.94% 0.03% 0.97%(3)
Fully Managed 0.98% 0.00% 0.98%
Equity Income 0.98% 0.00% 0.98%
Investors 1.00% 0.01% 1.01%
Large Cap Value 1.00% 0.01% 1.01%
Rising Dividends 0.98% 0.00% 0.98%
Capital Growth 1.08% 0.00% 1.08%
Growth 1.08% 0.01% 1.09%
Value Equity 0.98% 0.00% 0.98%
Research 0.94% 0.00% 0.94%
Managed Global 1.25% 0.01% 1.26%
All Cap 1.00% 0.01% 1.01%
Capital Appreciation 0.98% 0.00% 0.98%
Mid-Cap Growth 0.94% 0.01% 0.95%
Strategic Equity 0.98% 0.01% 0.99%
Small Cap 0.98% 0.01% 0.99%
Real Estate 0.98% 0.01% 0.99%
Hard Assets 0.98% 0.02% 1.00%
Developing World 1.75% 0.08% 1.83%
(1) Fees decline as the total assets of one or more portfolios increase.
See the prospectus for the GCG Trust for more information.
(2) Other expenses generally consist of independent trustees fees and
certain expenses associated with investing in international markets. Other
expenses are based on actual expenses for the year ended December 31,
1998, except for portfolios that commenced operations in 1998 where the
charges have been estimated.
(3) Total expenses are based on actual expenses for the fiscal year ended
December 31, 1998. Directed Services, Inc. is currently reimbursing
expenses to maintain total expenses at 0.97% for the Total Return
portfolio and 1.60% for the Global Fixed Income portfolio as shown.
Without this reimbursement, and based on current estimates, total expenses
would be 0.98% for the Total Return portfolio and 1.74% for the Global
Fixed Income portfolio. This reimbursement agreement will remain in place
through August 14, 2000 after which it may be terminated at any time.
3
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THE PIMCO TRUST ANNUAL EXPENSES (as a percentage of the average daily net
assets of a portfolio):
OTHER TOTAL
EXPENSES EXPENSES
MANAGEMENT AFTER EXPENSE AFTER EXPENSE
PORTFOLIO FEES REIMBURSEMENT REIMBURSEMENT(1)
- -------------------------- ------------ --------------- -----------------
PIMCO High Yield Bond 0.50% 0.25%(2) 0.75%
PIMCO StocksPLUS Growth 0.40% 0.25% 0.65%
and Income
(1) PIMCO has agreed to waive some or all of its other expenses, subject to
potential future reimbursement, to the extent that total expenses for the
PIMCO High Yield Bond Portfolio and PIMCO StocksPLUS Growth and Income
portfolio would exceed 0.75% and 0.65%, respectively, due to payment by
the portfolios of their pro rata portion of Trustees' fees. Without this
agreement and, based on current estimates, total expenses would be 0.81%
for the PIMCO High Yield Bond portfolio and 0.72% for the PIMCO StocksPLUS
Growth and Income portfolio.
(2) Since the PIMCO High Yield Bond portfolio commenced operations on April
30, 1998, other expenses as shown have been annualized for the year ended
December 31, 1998.
THE WARBURG PINCUS TRUST ANNUAL EXPENSES (as a percentage of the average daily
net assets of the portfolio):
ADVISORY OTHER TOTAL
PORTFOLIO FEES EXPENSES EXPENSES(1)
- ----------------------- ---------- ---------- ------------
International Equity 1.00% 0.33% 1.33%
(1) Total expenses are based on actual expenses for the fiscal year ended
December 31, 1998.
The purpose of the foregoing tables is to help you understand the various costs
and expenses that you will bear directly and indirectly. See the prospectuses
of the GCG Trust, the PIMCO Trust and the Warburg Pincus Trust for additional
information on portfolio expenses.
Premium taxes (which currently range from 0% to 3.5% of premium payments) may
apply, but are not reflected in the tables above or in the examples below.
4
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Examples:
The following two examples are designed to show you the expenses you would pay
on a $1,000 investment that earns 5% annually. The examples reflect the
deduction of a mortality and expense risk charge, an asset-based administrative
charge, and in columns one and two of the examples, the annual contract
administrative charge of 0.04% of assets (based on an average contract value of
$75,000). Columns three and four of the examples show the expenses without the
annual contract administrative charge of 0.04%. We currently waive the 0.04%
annual contract administrative charge. Note that surrender charges may apply if
you choose to annuitize your Contract within the first 5 contract years, and
under certain circumstances, within the first 7 contract years. Thus, in the
event you annuitize your Contract under circumstances which require a surrender
charge, you should refer to Example 1 below which assumes applicable surrender
charges.
Example 1:
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses for each $1,000 invested:
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
WITHOUT ADMIN.
WITH ADMIN. CHARGE CHARGE
THE GCG TRUST 1 YEAR 3 YEARS 1 YEAR 3 YEARS
<S> <C> <C> <C> <C>
Liquid Asset .................. $ 76 $ 108 $ 75 $ 107
Limited Maturity Bond ......... $ 76 $ 109 $ 75 $ 107
Global Fixed Income ........... $ 86 $ 139 $ 85 $ 138
Total Return .................. $ 79 $ 120 $ 79 $ 119
Fully Managed ................. $ 79 $ 120 $ 79 $ 119
Equity Income ................. $ 79 $ 120 $ 79 $ 119
Investors ..................... $ 80 $ 121 $ 79 $ 120
Large Cap Value ............... $ 80 $ 121 $ 79 $ 120
Rising Dividends .............. $ 79 $ 120 $ 79 $ 119
Capital Growth ................ $ 81 $ 123 $ 80 $ 122
Growth ........................ $ 81 $ 124 $ 80 $ 122
Value Equity .................. $ 79 $ 120 $ 79 $ 119
Research ...................... $ 79 $ 119 $ 79 $ 118
Managed Global ................ $ 82 $ 129 $ 82 $ 128
All Cap ....................... $ 80 $ 121 $ 79 $ 120
Capital Appreciation .......... $ 79 $ 120 $ 79 $ 119
Mid-Cap Growth ................ $ 79 $ 119 $ 79 $ 118
Strategic Equity .............. $ 80 $ 121 $ 79 $ 119
Small Cap ..................... $ 80 $ 121 $ 79 $ 119
Real Estate ................... $ 80 $ 121 $ 79 $ 119
Hard Assets ................... $ 80 $ 121 $ 79 $ 120
Developing World .............. $ 88 $ 146 $ 88 $ 145
THE PIMCO TRUST
PIMCO High Yield Bond ......... $ 77 $ 113 $ 77 $ 112
PIMCO StocksPLUS Growth and
Income ....................... $ 76 $ 110 $ 76 $ 109
THE WARBURG PINCUS TRUST
International Equity .......... $ 83 $ 131 $ 83 $ 130
</TABLE>
5
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Example 2:
If you do not surrender your Contract or if you annuitize on the annuity start
date, you would pay the following expenses for each $1,000 invested:
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
WITHOUT ADMIN.
WITH ADMIN. CHARGE CHARGE
1 YEAR 3 YEARS 1 YEAR 3 YEARS
THE GCG TRUST -------- --------- -------- --------
<S> <C> <C> <C> <C>
Liquid Asset .................. $ 16 $ 48 $ 15 $ 47
Limited Maturity Bond ......... $ 16 $ 49 $ 15 $ 47
Global Fixed Income ........... $ 26 $ 79 $ 25 $ 78
Total Return .................. $ 19 $ 60 $ 19 $ 59
Fully Managed ................. $ 19 $ 60 $ 19 $ 59
Equity Income ................. $ 19 $ 60 $ 19 $ 59
Investors ..................... $ 20 $ 61 $ 19 $ 60
Large Cap Value ............... $ 20 $ 61 $ 19 $ 60
Rising Dividends .............. $ 19 $ 60 $ 19 $ 59
Capital Growth ................ $ 21 $ 63 $ 20 $ 62
Growth ........................ $ 21 $ 64 $ 20 $ 62
Value Equity .................. $ 19 $ 60 $ 19 $ 59
Research ...................... $ 19 $ 59 $ 19 $ 58
Managed Global ................ $ 22 $ 69 $ 22 $ 68
All Cap ....................... $ 20 $ 61 $ 19 $ 60
Capital Appreciation .......... $ 19 $ 60 $ 19 $ 59
Mid-Cap Growth ................ $ 19 $ 59 $ 19 $ 58
Strategic Equity .............. $ 20 $ 61 $ 19 $ 59
Small Cap ..................... $ 20 $ 61 $ 19 $ 59
Real Estate ................... $ 20 $ 61 $ 19 $ 59
Hard Assets ................... $ 20 $ 61 $ 19 $ 60
Developing World .............. $ 28 $ 86 $ 28 $ 85
THE PIMCO TRUST
PIMCO High Yield Bond ......... $ 17 $ 53 $ 17 $ 52
PIMCO StocksPLUS Growth and
Income ....................... $ 16 $ 50 $ 16 $ 49
THE WARBURG PINCUS TRUST
International Equity .......... $ 23 $ 71 $ 23 $ 70
</TABLE>
These examples should not be considered a representation of past or future
expenses. Actual expenses may be more or less than those shown subject to the
terms of your Contract.
[Shaded Section Header]
- --------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------
ACCUMULATION UNIT
We use accumulation units to calculate the value of a Contract. Each subaccount
of Separate Account B has its own accumulation unit value. The accumulation
units are valued each business day that the New York Stock Exchange is open for
trading. Their values may increase or decrease from day to day according to a
Net Investment Factor, which is primarily based on the investment performance
of the applicable investment portfolio. Shares in the investment portfolios are
valued at their net asset value.
THE NET INVESTMENT FACTOR
The Net Investment Factor is an index number which reflects certain charges
under the Contract and the investment performance of the subaccount. The Net
Investment Factor is calculated for each subaccount as follows:
1) We take the net asset value of the subaccount at the end of each
business day.
6
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2) We add to (1) the amount of any dividend or capital gains distribution
declared for the subaccount and reinvested in such subaccount. We
subtract from that amount a charge for our taxes, if any.
3) We divide (2) by the net asset value of the subaccount at the end of
the preceding business day.
4) We then subtract the applicable daily mortality and expense risk charge
and the daily asset-based administrative charge from the subaccount.
Calculations for the subaccounts are made on a per share basis.
CONDENSED FINANCIAL INFORMATION
Tables containing (i) the accumulation unit value history of each subaccount of
Golden American Separate Account B offered in this prospectus and (ii) the
total investment value history of each such subaccount are presented in
Appendix A -- Condensed Financial Information.
FINANCIAL STATEMENTS
The unaudited financial statements of Separate Account B for the nine months
ended September 30, 1999 and the audited financial statements of Separate
Account B for the years ended December 31, 1998 and 1997 are included in the
Statement of Additional Information. The unaudited condensed consolidated
financial statements of Golden American for the nine months ended September 30,
1999 and the audited consolidated financial statements of Golden American for
the years ended December 31, 1998, 1997 and 1996 are included in this
prospectus.
PERFORMANCE INFORMATION
From time to time, we may advertise or include in reports to contract owners
performance information for the subaccounts of Separate Account B, including
the average annual total return performance, yields and other nonstandard
measures of performance. Such performance data will be computed, or accompanied
by performance data computed, in accordance with standards defined by the SEC.
Except for the Liquid Asset subaccount, quotations of yield for the subaccounts
will be based on all investment income per unit (contract value divided by the
accumulation unit) earned during a given 30-day period, less expenses accrued
during such period. Information on standard total average annual return
performance will include average annual rates of total return for 1, 5 and 10
year periods, or lesser periods depending on how long Separate Account B has
been investing in the portfolio. We may show other total returns for periods
less than one year. Total return figures will be based on the actual historic
performance of the subaccounts of Separate Account B, assuming an investment at
the beginning of the period when the separate account first invested in the
portfolio. Withdrawal of the investment at the end of the period, adjusted to
reflect the deduction of all applicable portfolio and current contract charges.
We may also show rates of total return on amounts invested at the beginning of
the period with no withdrawal at the end of the period. Total return figures
which assume no withdrawals at the end of the period will reflect all recurring
charges, but will not reflect the surrender charge. Quotations of average
annual return for the Managed Global subaccount take into account the period
before September 3, 1996, during which it was maintained as a subaccount of
Golden American Separate Account D. In addition, we may present historic
performance data for the investment portfolios since their inception reduced by
some or all of the fees and charges under the Contract. Such adjusted historic
performance includes data that precedes the inception dates of the subaccounts
of Separate Account B. This data is designed to show the performance that would
have resulted if the Contract had been in existence before the separate account
began investing in the portfolios
Current yield for the Liquid Asset subaccount is based on income received by a
hypothetical investment over a given 7-day period, less expenses accrued, and
then "annualized" (i.e., assuming that the 7-day yield would be received for 52
weeks). We calculate "effective yield" for the Liquid Asset subaccount 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 thus be slightly higher than the "yield" because of the compounding effect
of earnings. We calculate quotations of yield for the remaining subaccounts on
all investment income per accumulation unit earned during a given 30-day
period, after subtracting fees and expenses accrued during the period, assuming
no surrender.
7
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We may compare performance information for a subaccount to: (i) the Standard &
Poor's 500 Stock Index, Dow Jones Industrial Average, Donoghue Money Market
Institutional Averages, or any other applicable market indices, (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), or any other rating service, and
(iii) the Consumer Price Index (measure for inflation) to determine the real
rate of return of an investment in the Contract. Our reports and promotional
literature may also contain other information including the ranking of any
subaccount based on rankings of variable annuity separate accounts or other
investment products tracked by Lipper Analytical Services or by similar rating
services.
Performance information reflects only the performance of a hypothetical
contract and should be considered in light of other factors, including the
investment objective of the investment portfolio and market conditions. Please
keep in mind that past performance is not a guarantee of future results.
[Shaded Section Header]
- --------------------------------------------------------------------------
GOLDEN AMERICAN LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------
Golden American Life Insurance Company is a Delaware stock life insurance
company, which was originally incorporated in Minnesota on January 2, 1973.
Golden American is a wholly owned subsidiary of Equitable of Iowa Companies,
Inc. ("Equitable of Iowa"). Equitable of Iowa is a wholly owned subsidiary of
ING Groep N.V. ("ING"), a global financial services holding company. Golden
American is authorized to sell insurance and annuities in all states, except
New York, and the District of Columbia. In May 1996, Golden American
established a subsidiary, First Golden American Life Insurance Company of New
York, which is authorized to sell annuities in New York and Delaware. Golden
American's consolidated financial statements appear in this prospectus.
Equitable of Iowa is the holding company for Golden American, Directed
Services, Inc., the investment manager of the GCG Trust and the distributor of
the Contracts, and other interests. Equitable of Iowa and another ING affiliate
own ING Investment Management, LLC, a portfolio manager of the GCG Trust. ING
also owns Baring International Investment Limited, another portfolio manager of
the GCG Trust.
Our principal office is located at 1475 Dunwoody Drive, West Chester,
Pennsylvania 19380.
[Shaded Section Header]
- --------------------------------------------------------------------------
THE TRUSTS
- --------------------------------------------------------------------------
The GCG Trust is a mutual fund whose shares are offered to separate accounts
funding variable annuity and variable life insurance policies offered by Golden
American and other affiliated insurance companies. The GCG Trust may also sell
its shares to separate accounts of insurance companies not affiliated with
Golden American. Pending SEC approval, shares of the GCG Trust may also be sold
to certain qualified pension and retirement plans. The address of the GCG Trust
is 1475 Dunwoody Drive, West Chester, PA 19380.
The PIMCO Trust is also a mutual fund whose shares are available to separate
accounts of insurance companies, including Golden American, for both variable
annuity contracts and variable life insurance policies and to qualified pension
and retirement plans. The address of the PIMCO Trust is 840 Newport Center
Drive, Suite 300, Newport Beach, CA 92660.
The Warburg Pincus Trust is also a mutual fund whose shares are available to
separate accounts of life insurance companies, including Golden American and
Equitable Life Insurance Company of Iowa, and to certain qualified and
retirement plans. The address of the Warburg Pincus Trust is 153 East 53rd
Street, New York, NY 10022.
In the event that, due to differences in tax treatment or other considerations,
the interests of contract owners of various contracts participating in the
Trusts conflict, we, the Boards of Trustees of the GCG Trust, the PIMCO Trust
and the Warburg Pincus Trust, Directed Services, Inc., Pacific Investment
Management Company, Credit Suisse Asset Management, LLC and any other insurance
companies participating in the Trusts will monitor events to identify and
resolve any material conflicts that may arise.
You will find complete information about the GCG Trust, the PIMCO Trust and the
Warburg Pincus Trust in the accompanying prospectus for each trust. You should
read them carefully before investing.
8
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[Shaded Section Header]
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GOLDEN AMERICAN SEPARATE ACCOUNT B
- --------------------------------------------------------------------------
Golden American Separate Account B ("Account B") was established as a separate
account of the Company on July 14, 1988. It is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940. Account B is a separate investment account used for our variable
annuity contracts. We own all the assets in Account B but such assets are kept
separate from our other accounts.
Account B is divided into subaccounts. Each subaccount invests exclusively in
shares of one investment portfolio of the GCG Trust, the PIMCO Trust or the
Warburg Pincus Trust. Each investment portfolio has its own distinct investment
objectives and policies. Income, gains and losses, realized or unrealized, of a
portfolio are credited to or charged against the corresponding subaccount of
Account B without regard to any other income, gains or losses of the Company.
Assets equal to the reserves and other contract liabilities with respect to
each are not chargeable with liabilities arising out of any other business of
the Company. They may, however, be subject to liabilities arising from
subaccounts whose assets we attribute to other variable annuity contracts
supported by Account B. If the assets in Account B exceed the required reserves
and other liabilities, we may transfer the excess to our general account. We
are obligated to pay all benefits and make all payments provided under the
Contracts.
We currently offer other variable annuity contracts that invest in Account B
but are not discussed in this prospectus. Account B may also invest in other
investment portfolios which are not available under your Contract.
[Shaded Section Header]
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THE INVESTMENT PORTFOLIOS
- --------------------------------------------------------------------------
During the accumulation phase, you may allocate your premium payments and
contract value to any of the investment portfolios listed in the section below.
You bear the entire investment risk for amounts you allocate to any investment
portfolio, and you may lose your principal.
INVESTMENT OBJECTIVES
The investment objective of each investment portfolio is set forth below. You
should understand that there is no guarantee that any portfolio 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. You can find more detailed information
about the investment portfolios in the prospectuses for the GCG Trust, the
PIMCO Trust and the Warburg Pincus Trust. You should read these prospectuses
before investing.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO INVESTMENT OBJECTIVE
- ----------------------- -----------------------------------------------------------------------------
<S> <C>
THE GCG TRUST
Liquid Asset Seeks high level of current income consistent with the preservation of
capital and liquidity.
Invests primarily in obligations of the U.S. Government and its agencies
and instrumentalities, bank obligations, commercial paper and short-term
corporate debt securities. All securities will mature in less than one year.
-----------------------------------------------------------------------------
Limited Maturity Bond Seeks highest current income consistent with low risk to principal and
liquidity. Also seeks to enhance its total return through capital
appreciation when market factors, such as falling interest rates and rising
bond prices, indicate that capital appreciation may be available without
significant risk to principal.
Invests primarily in diversified limited maturity debt securities with
average maturity dates of five years or shorter and in no cases more than
seven years.
-----------------------------------------------------------------------------
Global Fixed Income Seeks high total return.
Invests primarily in high-grade fixed income securities, both foreign and
domestic.
-----------------------------------------------------------------------------
</TABLE>
9
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<TABLE>
<CAPTION>
<S> <C>
Total Return Seeks above-average income (compared to a portfolio entirely invested in
equity securities) consistent with the prudent employment of capital.
Invests primarily in a combination of equity and fixed income securities.
-------------------------------------------------------------------------------
Fully Managed Seeks, over the long term, a high total investment return consistent with
the preservation of capital and with prudent investment risk.
Invests primarily in the common stocks of established companies believed
by the portfolio manager to have above-average potential for capital
growth.
-------------------------------------------------------------------------------
Equity Income Seeks substantial dividend income as well as long-term growth of capital.
Invests primarily in common stocks of well-established companies paying
above-average dividends.
-------------------------------------------------------------------------------
Investors Seeks long-term growth of capital. Current income is a secondary objective.
Invests primarily in equity securities of U.S. Companies and to a lesser
degree, debt securities.
-------------------------------------------------------------------------------
Large Cap Value Seeks long-term growth of capital and income.
Invests primarily in equity and equity-related securities of companies with
market capitalization greater than $1 billion.
-------------------------------------------------------------------------------
Rising Dividends Seeks capital appreciation. A secondary objective is dividend income.
Invests in equity securities that meet the following quality criteria: regular
dividend increases; 35% of earnings reinvested annually; and a credit
rating of "A" to "AAA".
-------------------------------------------------------------------------------
Capital Growth Seeks long-term total return.
Invests primarily in common stocks of companies where the potential for
change (earnings acceleration) is significant.
-------------------------------------------------------------------------------
Growth Seeks capital appreciation.
Invests primarily in common stocks of growth companies that have
favorable relationships between price/earnings ratios and growth rates in
sectors offering the potential for above-average returns.
-------------------------------------------------------------------------------
Value Equity Seeks capital appreciation. Dividend income is a secondary objective.
Invests primarily in common stocks of domestic and foreign issuers which
meet quantitative standards relating to financial soundness and high
intrinsic value relative to price.
-------------------------------------------------------------------------------
Research Seeks long-term growth of capital and future income.
Invests primarily in common stocks or securities convertible into common
stocks of companies believed to have better than average prospects for
long-term growth.
-------------------------------------------------------------------------------
Managed Global Seeks capital appreciation. Current income is only an incidental
consideration.
Invests primarily in common stocks traded in securities markets
throughout the world.
-------------------------------------------------------------------------------
All Cap Seeks capital appreciation through investment in secuities which the
portfolio manager believes have above-average capital appreciation
potential.
Invests primarily in equity securities of U.S. companies of any size.
-------------------------------------------------------------------------------
Capital Appreciation Seeks long-term capital growth.
Invests primarily in equity securities believed by the portfolio manager to
be undervalued.
-------------------------------------------------------------------------------
Mid-Cap Growth Seeks long-term growth of capital.
Invests primarily in equity securities of companies with medium market
capitalization which the portfolio manager believes have above-average
growth potential.
-------------------------------------------------------------------------------
Strategic Equity Seeks capital appreciation.
Invests primarily in common stocks of medium- and small-sized companies.
-------------------------------------------------------------------------------
</TABLE>
10
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<TABLE>
<CAPTION>
<S> <C>
Small Cap Seeks long-term capital appreciation.
Invests primarily in equity securities of companies that have a total
market capitalization within the range of companies in the Russell 2000
Growth Index or the Standard & Poor's Small-Cap 600 Index.
-------------------------------------------------------------------------------
Real Estate Seeks capital appreciation. Current income is a secondary objective.
Invests primarily in publicly-traded real estate equity securities.
-------------------------------------------------------------------------------
Hard Assets Seeks long-term capital appreciation.
Invests primarily in hard asset securities. Hard asset companies produce a
commodity which the portfolio manager is able to price on a daily or
weekly basis.
-------------------------------------------------------------------------------
Developing World Seeks capital appreciation.
Invests primarily in equity securities of companies in developing or
emerging countries.
-------------------------------------------------------------------------------
THE PIMCO TRUST
PIMCO High Yield Bond Seeks to maximize total return, consistent with preservation of capital and
prudent investment management.
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 or,
if unrated, determined by the portfolio manager to be of comparable
quality.
-------------------------------------------------------------------------------
PIMCO StocksPLUS Seeks to achieve a total return which exceeds the total return performance
Growth and Income of the S&P 500.
Invests primarily in common stocks, options, futures, options on futures
and swaps.
-------------------------------------------------------------------------------
THE WARBURG PINCUS TRUST
International Equity Seeks long-term appreciation.
Invests primarily in a broadly diversified portfolio of equity securities of
companies that have their principal business activities outside of the
United States.
-------------------------------------------------------------------------------
</TABLE>
INVESTMENT MANAGEMENT FEES
Directed Services, Inc. serves as the overall manager of the GCG Trust. The GCG
Trust pays Directed Services a monthly fee for its investment advisory and
management services. The monthly fee is based on the average daily net assets
of an investment portfolio, and in some cases, the combined total assets of
certain grouped portfolios. Directed Services provides or procures, at its own
expense, the services necessary for the operation of the portfolios. Directed
Services (and not the GCG Trust) pays each portfolio manager a monthly fee for
managing the assets of a portfolio. For a list of the portfolio managers, see
the front cover of this prospectus. Directed Services does not bear the expense
of brokerage fees and other transactional expenses for securities, taxes (if
any) paid by a portfolio, interest on borrowing, fees and expenses of the
independent trustees, and extraordinary expenses, such as litigation or
indemnification expenses.
Pacific Investment Management Company ("PIMCO") serves as investment advisor to
the PIMCO Trust. The PIMCO Trust pays PIMCO a monthly advisory fee and a
monthly administrative fee of 0.25% based on the average daily net assets of
each of the investment portfolios for managing the assets of the portfolios and
for administering the PIMCO Trust.
Credit Suisse Asset Management, LLC serves as the investment advisor of the
Warburg Pincus Trust. The Warburg Trust pays Credit Suisse Asset Management a
monthly advisory fee based on the average daily net assets of the investment
portfolio and also procures the services necessary for the operation of its
portfolios. The Warburg Trust pays monthly administrative fees to two
co-administrators for administrative services, one of which is an affiliate of
Credit Suisse Asset Management. The monthly administrative fee is based on the
portfolio's average daily net assets. Credit Suisse Asset Management does not
bear any portfolio expenses.
You can find more detailed information about each portfolio including its
management fees in the prospectus for each trust. You should read these
prospectuses before investing.
11
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[Shaded Section Header]
- --------------------------------------------------------------------------
THE FIXED INTEREST ALLOCATION
- --------------------------------------------------------------------------
You may allocate premium payments and transfer your contract value to the
guaranteed interest periods of our Fixed Account at any time during the
accumulation period. Every time you allocate money to the Fixed Account, we set
up a Fixed Interest Allocation for the guaranteed interest period you select.
We currently offer guaranteed interest periods of 6 months, 1, 3, 5, 7, and 10
years, although we may not offer all these periods in the future. You may
select one or more guaranteed interest periods at any one time. We will credit
your Fixed Interest Allocation with a guaranteed interest rate for the interest
period you select, so long as you do not withdraw money from that Fixed
Interest Allocation before the end of the guaranteed interest period. Each
guaranteed interest period ends on its maturity date which is the last day of
the month in which the interest period is scheduled to expire.
If you surrender, withdraw, transfer or annuitize your investment in a Fixed
Interest Allocation more than 30 days before the end of the guaranteed interest
period, we will apply a Market Value Adjustment to the transaction. A market
value adjustment could increase or decrease the amount you surrender, withdraw,
transfer or annuitize, depending on current interest rates at the time of the
transaction. You bear the risk that you may receive less than your principal if
we apply a Market Value Adjustment.
Assets supporting amounts allocated to the Fixed Account are available to fund
the claims of all classes of our customers, contract 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 GUARANTEED INTEREST PERIOD
You may select one or more Fixed Interest Allocations with specified guaranteed
interest periods. A guaranteed interest period is the period that a rate of
interest is guaranteed to be credited to your Fixed Interest Allocation. We may
at any time decrease or increase the number of guaranteed interest periods
offered. In addition, we may offer DCA Fixed Interest Allocations, which are
6-month and 1-year Fixed Interest Allocations available exclusively in
connection with our dollar cost averaging program. For more information on DCA
Fixed Interest Allocations, see "Transfers Among Your Investments -- Dollar
Cost Averaging."
Your contract value in the Fixed Account is the sum of your Fixed Interest
Allocations and the interest credited, as adjusted for any withdrawals
(including any Market Value Adjustment applied to such withdrawal), transfers
or other charges we may impose. Your Fixed Interest Allocation will be credited
with the guaranteed interest rate in effect for the guaranteed interest period
you selected when we receive and accept your premium or reallocation of
contract value. We will credit interest daily at a rate which yields the quoted
guaranteed interest rate.
GUARANTEED INTEREST RATES
Each Fixed Interest Allocation will have an interest rate that is guaranteed as
long as you do not take your money out until its maturity date. We do not have
a specific formula for establishing the guaranteed interest rates for the
different guaranteed interest periods. We determine guaranteed interest rates
at our sole discretion. To find out the current guaranteed interest rate for a
guaranteed interest period you are interested in, please contact our Customer
Service Center or your registered representative. The determination may be
influenced by the interest rates on fixed income investments in which we may
invest with the amounts we receive under the Contracts. We will invest these
amounts primarily in investment-grade fixed income securities (i.e., rated by
Standard & Poor's rating system to be suitable for prudent investors) although
we are not obligated to invest according to any particular strategy, except as
may be required by applicable law. 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 the level of future interest rates
but no Fixed Interest Allocation will ever have a guaranteed interest rate of
less than 3% per year.
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We may from time to time at our discretion offer interest rate specials for new
premiums that are higher than the current base interest rate then offered.
Renewal rates for such rate specials will be based on the base interest rate
and not on the special rates initially declared.
TRANSFERS FROM A FIXED INTEREST ALLOCATION
You may transfer your contract value in a Fixed Interest Allocation to one or
more new Fixed Interest Allocations with new guaranteed interest periods, or to
any of the subaccounts of Account B. We will transfer amounts from your Fixed
Interest Allocations starting with the guaranteed interest period nearest its
maturity date, until we have honored your transfer request.
The minimum amount that you can transfer to or from any Fixed Interest
Allocation is $100. If a transfer request would reduce the contract value
remaining in a Fixed Interest Allocation to less than $100, we will treat such
transfer request as a request to transfer the entire contract value in such
Fixed Interest Allocation. Transfers from a Fixed Interest Allocation may be
subject to a Market Value Adjustment. If you have a special Fixed Interest
Allocation that was offered exclusively with our dollar cost averaging program,
cancelling dollar cost averaging will cause a transfer of the entire contract
value in such Fixed Interest Allocation to the Liquid Asset subaccount, and
such a transfer will be subject to a Market Value Adjustment.
On the maturity date of a guaranteed interest period, you may transfer amounts
from the applicable Fixed Interest Allocation to the subaccounts and/or to new
Fixed Interest Allocations with guaranteed interest periods of any length we
are offering at that time. You may not, however, transfer amounts to any Fixed
Interest Allocation with a guaranteed interest period that extends beyond the
annuity start date.
At least 30 calendar days before a maturity date of any of your Fixed Interest
Allocations, or earlier if required by state law, we will send you a notice of
the guaranteed interest periods that are available. You must notify us which
subaccounts or new guaranteed interest periods you have selected before the
maturity date of your Fixed Interest Allocations. If we do not receive timely
instructions from you, we will transfer the contract value in the maturing
Fixed Interest Allocation to a new Fixed Interest Allocation with a guaranteed
interest period that is the same as the expiring guaranteed interest period. If
such guaranteed interest period is not available or would go beyond the annuity
start date, we will transfer your contract value in the maturing Fixed Interest
Allocation to the next shortest guaranteed interest period which does not go
beyond the annuity start date. If no such guaranteed interest period is
available, we will transfer the contract value to a subaccount specially
designated by the Company for such purpose. Currently we use the Liquid Asset
subaccount for such purpose.
WITHDRAWALS FROM A FIXED INTEREST ALLOCATION
During the accumulation phase, you may withdraw a portion of your contract
value in any Fixed Interest Allocation. You may make systematic withdrawals of
only the interest earned during the prior month, quarter or year, depending on
the frequency chosen, from a Fixed Interest Allocation under our systematic
withdrawal option. Systematic withdrawals from a Fixed Interest Allocation are
not permitted if such Fixed Interest Allocation is currently participating in
the dollar cost averaging program. A withdrawal from a Fixed Interest
Allocation may be subject to a Market Value Adjustment and, in some cases, a
surrender charge. Be aware that withdrawals may have federal income tax
consequences, including a 10% penalty tax, as well as state income tax
consequences.
If you tell us the Fixed Interest Allocation from which your withdrawal will be
made, we will assess the withdrawal against that Fixed Interest Allocation. If
you do not, we will assess your withdrawal against the subaccounts in which you
are invested, unless the withdrawal exceeds the contract value in the
subaccounts. If there is no contract value in those subaccounts, we will deduct
your withdrawal from your Fixed Interest Allocations starting with the
guaranteed interest periods nearest their maturity dates until we have honored
your request.
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MARKET VALUE ADJUSTMENT
A Market Value Adjustment may decrease, increase or have no effect on your
contract value.
We will apply a Market Value Adjustment (i) whenever you withdraw or transfer
money from a Fixed Interest Allocation (unless made within 30 days before the
maturity date of the applicable guaranteed interest period, or under the
systematic withdrawal or dollar cost averaging programs) and (ii) if on the
annuity start date a guaranteed interest period for any Fixed Interest
Allocation does not end on or within 30 days of the annuity start date.
We determine the Market Value Adjustment by multiplying the amount you
withdraw, transfer or apply to an income plan by the following factor:
( 1+I )N/365
(---------) -1
(1+J+.0050)
Where,
o "I" is the Index Rate for the affected Fixed Interest Allocation as of
the first day of its guaranteed interest period;
o "J" is equal to the following:
(1) If calculated for a Fixed Interest Allocation of 1 year or more,
then "J" is the Index Rate for a new Fixed Interest Allocation with
a guaranteed interest period equal to the time remaining (rounded
up to the next full year except in Pennsylvania) in the guaranteed
interest period;
(2) If calculated for a Fixed Interest Allocation of 6 months, then "J"
is the lesser of the Index Rate for a new Fixed Interest Allocation
with (i) a 6 month guaranteed interest period, or (ii) a 1 year
guaranteed interest period at the time of calculation; and
o "N" is the remaining number of days in the guaranteed interest period
at the time of calculation.
The Index Rate is the average of the Ask Yields for U.S. Treasury Strips as
quoted by a national quoting service for a period equal to the applicable
guaranteed interest period. The average currently is based on the period
starting from the 22nd day of the calendar month two months prior to the month
of the Index Rate determination and ending the 21st day of the calendar month
immediately before the month of determination. We currently calculate the Index
Rate once each calendar month but have the right to calculate it more
frequently. The Index Rate will always be based on a period of at least 28
days. If the Ask Yields are no longer available, we will determine the Index
Rate by using a suitable and approved, if required, replacement method.
A Market Value Adjustment may be positive, negative or result in no change. In
general, if interest rates are rising, you bear the risk that any Market Value
Adjustment will likely be negative and reduce your contract value. On the other
hand, if interest rates are falling, it is more likely that you will receive a
positive Market Value Adjustment that increases your contract value. In the
event of a full surrender, transfer or annuitization from a Fixed Interest
Allocation, we will add or subtract any Market Value Adjustment from the amount
surrendered, transferred or annuitized. In the event of a partial withdrawal,
transfer or annuitization, we will add or subtract any Market Value Adjustment
from the total amount withdrawn, transferred or annuitized in order to provide
the amount requested. If a negative Market Value Adjustment exceeds your
contract value in the Fixed Interest Allocation, we will consider your request
to be a full surrender, transfer or annuitization of the Fixed Interest
Allocation.
Several examples which illustrate how the Market Value Adjustment works are
included in Appendix A.
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THE ANNUITY CONTRACT
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The Contract described in this prospectus is a deferred combination variable
and fixed annuity contract. The Contract provides a means for you to invest in
one or more of the available mutual fund portfolios of the GCG Trust, the PIMCO
Trust and the Warburg Pincus Trust through Account B. It also provides a means
for you to invest in a Fixed Interest Allocation through the Fixed Account.
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CONTRACT DATE AND CONTRACT YEAR
The date the Contract became effective is the contract date. Each 12-month
period following the contract date is a contract year.
ANNUITY START DATE
The annuity start date is the date you start receiving annuity payments under
your Contract. The Contract, like all deferred variable annuity contracts, has
two phases: the accumulation phase and the income phase. The accumulation phase
is the period between the contract date and the annuity start date. The income
phase begins when you start receiving regular annuity payments from your
Contract on the annuity start date.
CONTRACT OWNER
You are the contract owner. You are also the annuitant unless another annuitant
is named in the application. 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 will determine the applicable death
benefit if such death benefit is available for multiple owners.
The death benefit becomes payable when you die. In the case of a sole contract
owner who dies before the income phase begins, we will pay the beneficiary the
death benefit then due. The sole contract owner's estate will be the
beneficiary if no beneficiary has been designated or the beneficiary has
predeceased the contract owner. In the case of a joint owner of the Contract
dying before the income phase begins, we will designate the surviving contract
owner as the beneficiary. This will override any previous beneficiary
designation.
If the contract owner is a trust and a beneficial owner of the trust has been
designated, the beneficial owner will be treated as the contract owner for
determining the death benefit. If a beneficial owner is changed or added after
the contract date, this will be treated as a change of contract owner for
determining the death benefit.
JOINT OWNER. For non-qualified Contracts only, joint owners may be named
in a written request before the Contract is in effect. Joint owners may
independently exercise transfers and other transactions allowed under the
Contract. All other rights of ownership must be exercised by both owners. Joint
owners own equal shares of any benefits accruing or payments made to them. All
rights of a joint owner end at death of that owner if the other joint owner
survives. The entire interest of the deceased joint owner in the Contract will
pass to the surviving joint owner. The age of the older owner will determine
the applicable death benefit if Enhanced Death Benefits are available for
multiple owners.
ANNUITANT
The annuitant is the person designated by you to be the measuring life in
determining annuity payments. The annuitant's age determines when the income
phase must begin and the amount of the annuity payments to be paid. You are the
annuitant unless you choose to name another person. The annuitant may not be
changed after the Contract is in effect.
The contract owner will receive the annuity benefits of the Contract if the
annuitant is living on the annuity start date. If the annuitant dies before the
annuity start date, and a contingent annuitant has been named, the contingent
annuitant becomes the annuitant (unless the contract owner is not an
individual, in which case the death benefit becomes payable).
If there is no contingent annuitant when the annuitant dies before the annuity
start date, the contract owner will become the annuitant. The contract 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 before the annuity
start date and the contract owner is not an individual, we will pay the
designated beneficiary the death benefit then due. If a beneficiary has not
been designated, or if there is no designated beneficiary living, the contract
owner will be the beneficiary. If the annuitant was the sole contract owner and
there is no beneficiary designation, the annuitant's estate will be the
beneficiary.
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Regardless of whether a death benefit is payable, if the annuitant dies and any
contract owner is not an individual, distribution rules under federal tax law
will apply. You should consult your tax advisor for more information if you are
not an individual.
BENEFICIARY
The beneficiary is named by you in a written request. The beneficiary is the
person who receives any death benefit proceeds and who becomes the successor
contract owner if the contract owner (or the annuitant if the contract owner is
other than an individual) dies before the annuity start date. We pay death
benefits to the primary beneficiary (unless there are joint owners, in which
case death proceeds are payable to the surviving owner(s)).
If the beneficiary dies before the annuitant or the contract 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 contract
owner's estate.
One or more persons may be a beneficiary or contingent beneficiary. In the case
of more than one beneficiary, 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 some of the rights and options under the Contract.
CHANGE OF CONTRACT OWNER OR BENEFICIARY. During the annuitant's lifetime,
you may transfer ownership of a non-qualified Contract. A change in ownership
may affect the amount of the death benefit and the guaranteed death benefit.
You may also change the beneficiary. All requests for changes must be in
writing and submitted to our Customer Service Center in good order. The change
will be effective as of the day you sign the request. The change will not
affect any payment made or action taken by us before recording the change.
PURCHASE AND AVAILABILITY OF THE CONTRACT
We will issue a Contract only if both the annuitant and the contract owner are
not older than age 85.
The initial premium payment must be $25,000 or more. You may make additional
payments of at least $1,000 or more at any time after the free look period
before you turn age 85. Under certain circumstances, we may waive the minimum
premium payment requirement. We may also change the minimum initial or
additional premium requirements for certain group or sponsored arrangements.
Any initial or additional premium payment that would cause the contract value
of all annuities that you maintain with us to exceed $1,000,000 requires our
prior approval.
CREDITING OF PREMIUM PAYMENTS
We will process your initial premium within 2 business days after receipt, if
the application and all information necessary for processing the Contract are
complete. Subsequent premium payments will be processed within 1 business day
if all information necessary is received. In certain states we also accept
initial and additional premium payments by wire order. Wire transmittals must
be accompanied by sufficient electronically transmitted data. We may retain
your initial premium payment for up to 5 business days while attempting to
complete an incomplete application. If the application cannot be completed
within this period, we will inform you of the reasons for the delay. We will
also return the premium payment immediately unless you direct us to hold the
premium payment until the application is completed. For initial premium
payments, the payment will be credited at the accumulation unit value next
determined after receipt of your premium payment and the completed application.
Once the completed application is received, we will allocate the payment to the
subaccount and/or Fixed Interest Allocation specified by you within 2 business
days. We will make inquiry to discover any missing information related to
subsequent payments. For any subsequent premium payments, the payment will be
credited at the accumulation unit value next determined after receipt of your
premium payment and instructions.
Once we allocate your premium payment to the subaccounts selected by you, we
convert the premium payment into accumulation units. We divide the amount of
the premium payment allocated to a particular
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subaccount by the value of an accumulation unit for the subaccount to determine
the number of accumulation units of the subaccount to be held in Account B with
respect to your Contract. The net investment results of each subaccount vary
with its investment performance.
If your premium payment was transmitted by wire order from your broker- dealer,
we will follow one of the following two procedures after we receive and accept
the wire order and investment instructions. The procedure we follow depends on
state availability and the procedures of your broker-dealer.
(1) If either your state or broker-dealer do not permit us to issue a
Contract without an application, we reserve the right to rescind the
Contract if we do not receive and accept a properly completed application
or enrollment form within 5 days of the premium payment. If we do not
receive the application or form within 5 days of the premium payment, we
will refund the contract value plus any charges we deducted, and the
Contract will be voided. Some states require that we return the premium
paid, in which case we will comply.
(2) If your state and broker-dealer allow us to issue a Contract without an
application, we will issue and mail the Contract to you, together with an
Application Acknowledgement Statement for your execution. Until our
Customer Service Center receives the executed Application Acknowledgement
Statement, neither you nor the broker-dealer may execute any financial
transactions on your Contract unless they are requested in writing by
you. We may require additional information before complying with your
request (e.g., signature guarantee).
In some states, we may require that an initial premium designated for a
subaccount of Account B or the Fixed Account be allocated to a subaccount
specially designated by the Company (currently, the Liquid Asset subaccount)
during the free look period. After the free look period, we will convert your
contract value (your initial premium plus any earnings less any expenses) into
accumulation units of the subaccounts you previously selected. The accumulation
units will be allocated based on the accumulation unit value next computed for
each subaccount. Initial premiums designated for Fixed Interest Allocations
will be allocated to a Fixed Interest Allocation with the guaranteed interest
period you have chosen; however, in the future we may allocate the premiums to
the specially designated subaccount during the free look period.
CONTRACT VALUE
We determine your contract value on a daily basis beginning on the contract
date. Your contract value is the sum of (a) the contract value in the Fixed
Interest Allocations, and (b) the contract value in each subaccount in which
you are invested.
CONTRACT VALUE IN FIXED INTEREST ALLOCATIONS. The contract value in your
Fixed Interest Allocation is the sum of premium payments allocated to the Fixed
Interest Allocation under the Contract, plus contract value transferred to the
Fixed Interest Allocation, plus credited interest, minus any transfers and
withdrawals from the Fixed Interest Allocation (including any Market Value
Adjustment applied to such withdrawal), contract fees (including, in some
cases, fees for optional benefit riders), and premium taxes.
CONTRACT VALUE IN THE SUBACCOUNTS. On the contract date, the contract
value in the subaccount in which you are invested is equal to the initial
premium paid and designated to be allocated to the subaccount. On the contract
date, we allocate your contract value to each subaccount and/or a Fixed
Interest Allocation specified by you, 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
Interest Allocation may be allocated to a subaccount specially designated by
the Company during the free look period for this purpose (currently, the Liquid
Asset subaccount).
On each business day after the contract date, we calculate the amount of
contract value in each subaccount as follows:
(1) We take the contract value in the subaccount at the end of the
preceding business day.
(2) We multiply (1) by the subaccount's Net Investment Factor since the
preceding business day.
(3) We add (1) and (2).
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(4) We add to (3) any additional premium payments, and then add or subtract
any transfers to or from that subaccount.
(5) We subtract from (4) any withdrawals and any related charges, and then
subtract any contract fees (including any rider charges) and premium
taxes.
CASH SURRENDER VALUE
The cash surrender value is the amount you receive when you surrender the
Contract. The cash surrender value will fluctuate daily based on the investment
results of the subaccounts in which you are invested, and interest credited to
Fixed Interest Allocations and any Market Value Adjustment. We do not guarantee
any minimum cash surrender value. On any date during the accumulation phase, we
calculate the cash surrender value as follows: we start with your contract
value, then we adjust for any Market Value Adjustment, then we deduct any
surrender charge, any charge for premium taxes, and any other charges incurred
but not yet deducted.
SURRENDERING TO RECEIVE THE CASH SURRENDER VALUE
You may surrender the Contract at any time while the annuitant is living and
before the annuity start date. A surrender will be effective on the date your
written request and the Contract are received at our Customer Service Center.
We will determine and pay the cash surrender value at the price next determined
after receipt of all paperwork required in order for us to process your
surrender. Once paid, all benefits under the Contract will be terminated. For
administrative purposes, we will transfer your money to a specially designated
subaccount (currently the Liquid Asset subaccount) prior to processing the
surrender. This transfer will have no effect on your cash surrender value. You
may receive the cash surrender value in a single sum payment or apply it under
one or more annuity options. We will usually pay the cash surrender value
within 7 days.
Consult your tax advisor regarding the tax consequences associated with
surrendering your Contract. A surrender made before you reach age 591/2 may
result in a 10% tax penalty. See "Federal Tax Considerations" for more details.
ADDITION, DELETION OR SUBSTITUTION OF SUBACCOUNTS AND OTHER CHANGES
We may make additional subaccounts available to you under the Contract. These
subaccounts will invest in investment portfolios we find suitable for your
Contract.
We may amend the Contract to conform to applicable laws or governmental
regulations. If we feel that investment in any of the investment portfolios has
become inappropriate to the purposes of the Contract, we may, with approval of
the SEC (and any other regulatory agency, if required) substitute another
portfolio for existing and future investments. If you have elected the dollar
cost averaging, systematic withdrawals, or automatic rebalancing programs or if
you have other outstanding instructions, and we substitute a portfolio subject
to those instructions, we will execute your instructions using the substituted
portfolio, unless you request otherwise.
We also reserve the right to: (i) deregister Account B under the 1940 Act; (ii)
operate Account B as a management company under the 1940 Act if it is operating
as a unit investment trust; (iii) operate Account B as a unit investment trust
under the 1940 Act if it is operating as a managed separate account; (iv)
restrict or eliminate any voting rights as to Account B; and (v) combine
Account B with other accounts. We will, of course, provide you with written
notice before any of these changes are effected.
THE FIXED ACCOUNT
The Fixed Account is a segregated asset account which contains the assets that
support a contract owner's Fixed Interest Allocations. See "The Fixed Interest
Allocations" for more information.
OTHER CONTRACTS
We offer other variable annuity contracts that also invest in the same
investment portfolios of the Trusts. These contracts have different charges
that could effect their performance, and may offer different benefits more
suitable to your needs. To obtain more information about these other contracts,
contact our Customer Service Center or your registered representative.
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OTHER IMPORTANT PROVISIONS
See "Withdrawals," "Transfers Among Your Investments," "Death Benefit Choices,"
"Charges and Fees," "The Annuity Options" and "Other Contract Provisions" in
this prospectus for information on other important provisions in your Contract.
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WITHDRAWALS
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Any time during the accumulation phase and before the death of the annuitant,
you may withdraw all or part of your money. Keep in mind that if you request a
withdrawal for more than 90% of the cash surrender value, we will treat it as a
request to surrender the Contract. If any single withdrawal or the sum of
withdrawals exceeds the Free Withdrawal Amount, you will incur a surrender
charge. The Free Withdrawal Amount in any contract year is the greater of (i)
any earnings less previous free withdrawals, or (ii) 10% of premium payments
paid within the past 7 years not previously withdrawn, less any previous free
withdrawals taken in the same contract year.
You need to submit to us a written request specifying the Fixed Interest
Allocations or subaccounts from which amounts are to be withdrawn, otherwise
the withdrawal will be made on a pro rata basis from all of the subaccounts in
which you are invested. If there is not enough contract value in the
subaccounts, we will deduct the balance of the withdrawal from your Fixed
Interest Allocations starting with the guaranteed interest periods nearest
their maturity dates until we have honored your request. We will apply a Market
Value Adjustment to any withdrawal from your Fixed Interest Allocation taken
more than 30 days before its maturity date. Definitive guidance on the proper
federal tax treatment of the Market Value Adjustment has not been issued. You
may want to discuss the potential tax consequences of a Market Value Adjustment
with your tax adviser. We will determine the contract value as of the close of
business on the day we receive your withdrawal request at our Customer Service
Center. The contract value may be more or less than the premium payments made.
For administrative purposes, we will transfer your money to a specially
designated subaccount (currently, the Liquid Asset subaccount) prior to
processing the withdrawal. This transfer will not effect the withdrawal amount
you receive.
We offer the following three withdrawal options:
REGULAR WITHDRAWALS
After the free look period, you may make regular withdrawals. Each withdrawal
must be a minimum of $100. We will apply a Market Value Adjustment to any
regular withdrawals from a Fixed Interest Allocation taken more than 30 days
before its maturity date.
SYSTEMATIC WITHDRAWALS
You may choose to receive automatic systematic withdrawal payments (1) from the
contract value in the subaccounts in which you are invested, or (2) from the
interest earned in your Fixed Interest Allocations. Systematic withdrawals may
be taken monthly, quarterly or annually. You decide when you would like
systematic payments to start as long as it starts at least 28 days after your
contract date. You also select the date on which the systematic withdrawals
will be made, but this date cannot be later than the 28th day of the month. If
you have elected to receive systematic withdrawals but have not chosen a date,
we will make the withdrawals on the same calendar day of each month as your
contract date. If your contract date is after the 28th, your systematic
withdrawal will be made on the 28th day of each month.
Each systematic withdrawal amount must be a minimum of $100. The amount of your
systematic withdrawal can either be (1) a fixed dollar amount, or (2) an amount
based on a percentage of the premiums not previously withdrawn from the
subaccounts in which you are invested. Both forms of systematic withdrawals are
subject to the following maximum, which is calculated on each withdrawal date:
MAXIMUM PERCENTAGE
FREQUENCY OF CONTRACT VALUE
Monthly 0.833%
Quarterly 2.50%
Annually 10.00%
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If your systematic withdrawal is a fixed dollar amount and the amount to be
withdrawn would exceed the applicable maximum percentage of your contract value
on any withdrawal date, we will automatically reduce the amount withdrawn so
that it equals such percentage. Thus, your fixed dollar systematic withdrawals
will never exceed the maximum percentage. If you want fixed dollar systematic
withdrawals to exceed the maximum percentage and are willing to incur
associated surrender charges, consider the Fixed Dollar Systematic Withdrawal
Feature which you may add to your regular systematic withdrawal program.
If your systematic withdrawal is based on a percentage of the premiums not
previously withdrawn from the subaccounts in which you are invested and the
amount to be withdrawn based on that percentage would be less than $100, we
will automatically increase the amount to $100 as long as it does not exceed
the maximum percentage. If the systematic withdrawal would exceed the maximum
percentage, we will send the amount, and then automatically cancel your
systematic withdrawal option.
Systematic withdrawals from Fixed Interest Allocations are limited to interest
earnings during the prior month, quarter, or year, depending on the frequency
you chose. Systematic withdrawals are not subject to a Market Value Adjustment,
unless you have added the Fixed Dollar Systematic Withdrawal Feature discussed
below and the payments exceed interest earnings. Systematic withdrawals from
Fixed Interest Allocations under the Fixed Dollar Systematic Withdrawal Feature
are available only in connection with Section 72(q) or 72(t) distributions. A
Fixed Interest Allocation may not participate in both the systematic withdrawal
option and the dollar cost averaging program at the same time.
You may change the amount or percentage of your systematic withdrawal once each
contract year or cancel this option at any time by sending satisfactory notice
to our Customer Service Center at least 7 days before the next scheduled
withdrawal date. The systematic withdrawal option may commence in a contract
year where a regular withdrawal has been taken but you may not change the
amount or percentage of your withdrawals in any contract year during which you
have previously taken a regular withdrawal. You may not elect the systematic
withdrawal option if you are taking IRA withdrawals.
FIXED DOLLAR SYSTEMATIC WITHDRAWAL FEATURE. You may add the Fixed Dollar
Systematic Withdrawal Feature to your regular fixed dollar systematic
withdrawal program. This feature allows you to receive a systematic withdrawal
in a fixed dollar amount regardless of any surrender charges or Market Value
Adjustments. Systematic withdrawals from Fixed Interest Allocations under the
Fixed Dollar Systematic Withdrawal Feature are available only in connection
with Section 72(q) or 72(t) distributions. You choose the amount of the fixed
systematic withdrawals, which may total up to an annual maximum of 10% of your
premium payments not previously withdrawn as determined on the day we receive
your election of this feature. The maximum limit will not be recalculated when
you make additional premium payments, unless you instruct us to do us. We will
assess a surrender charge on the withdrawal date if the withdrawal exceeds the
maximum limit as calculated on the withdrawal date. We will assess a Market
Value Adjustment on the withdrawal date if the withdrawal from a Fixed Interest
Allocation exceeds your interest earnings on the withdrawal date. We will apply
the surrender charge and any Market Value Adjustment directly to your contract
value (rather than to the systematic withdrawal) so that the amount of each
systematic withdrawal remains fixed.
Flat dollar systematic withdrawals which are intended to satisfy the
requirements of Section 72(q) or 72(t) of the Tax Code may exceed the maximum.
Such withdrawals are subject to surrender charges and Market Value Adjustment
when they exceed the applicable free withdrawal amount.
IRA WITHDRAWALS
If you have a non-Roth IRA Contract and will be at least age 701/2 during the
current calendar year, you may elect to have distributions made to you to
satisfy requirements imposed by Federal tax law. IRA withdrawals provide payout
of amounts required to be distributed by the Internal Revenue Service rules
governing mandatory distributions under qualified plans. We will send you a
notice before your distributions commence. You may elect to take IRA
withdrawals at that time, or at a later date. You may not elect IRA withdrawals
and participate in systematic withdrawals at the same time. If you do not elect
to take IRA withdrawals, and distributions are required by Federal tax law,
distributions adequate to satisfy the requirements imposed by Federal tax law
may be made. Thus, if you are participating in systematic withdrawals,
distributions under that option must be adequate to satisfy the mandatory
distribution rules imposed by federal tax law.
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You may choose to receive IRA withdrawals on a monthly, quarterly or annual
basis. Under this option, you may elect payments to start as early as 28 days
after the contract date. 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, we will make the withdrawals on the same calendar day of the month
as the contract date.
You may request that we calculate for you 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. When we determine the required IRA
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 IRA
withdrawal amount is greater than the contract value, we will cancel the
Contract and send you the amount of the cash surrender value.
You may change the payment frequency of your IRA withdrawals once each contract
year or cancel this option at any time by sending us satisfactory notice to our
Customer Service Center at least 7 days before the next scheduled withdrawal
date.
An IRA withdrawal in excess of the amount allowed under systematic withdrawals
will be subject to a Market Value Adjustment.
CONSULT YOUR TAX ADVISOR REGARDING THE TAX CONSEQUENCES ASSOCIATED WITH
TAKING WITHDRAWALS. You are responsible for determining that withdrawals comply
with applicable law. A withdrawal made before the taxpayer reaches age 591/2
may result in a 10% penalty tax. See "Federal Tax Considerations" for more
details.
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TRANSFERS AMONG YOUR INVESTMENTS
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You may transfer your contract value among the subaccounts in which you are
invested and your Fixed Interest Allocations at the end of the free look period
until the annuity start date. We currently do not charge you for transfers made
during a contract year, but reserve the right to charge $25 for each transfer
after the twelfth transfer in a contract year. We also reserve the right to
limit the number of transfers you may make and may otherwise modify or
terminate transfer privileges if required by our business judgement or in
accordance with applicable law. We will apply a Market Value Adjustment to
transfers from a Fixed Interest Allocation taken more than 30 days before its
maturity date, unless the transfer is made under the dollar cost averaging
program.
Transfers will be based on values at the end of the business day in which the
transfer request is received at our Customer Service Center.
The minimum amount that you may transfer is $100 or, if less, your entire
contract value held in a subaccount or a Fixed Interest Allocation.
To make a transfer, you must notify our Customer Service Center and all other
administrative requirements must be met. Any transfer request received after
4:00 p.m. eastern time or the close of the New York Stock Exchange will be
effected on the next business day. Account B and the Company will not be liable
for following instructions communicated by telephone that we reasonably believe
to be genuine. We require personal identifying information to process a request
for transfer made over the telephone.
DOLLAR COST AVERAGING
You may elect to participate in our dollar cost averaging program if you have
at least $1,200 of contract value in the (i) Limited Maturity Bond subaccount
or the Liquid Asset subaccount, or (ii) a Fixed Interest Allocation with either
a 6-month or a 1-year guaranteed interest period. These subaccounts or Fixed
Interest Allocations serve as the source accounts from which we will, on a
monthly basis, automatically transfer a set dollar amount of money to other
subaccounts selected by you. We also may offer DCA Fixed Interest Allocations,
which are 6-month and 1-year Fixed Interest Allocations available exclusively
for use with the dollar cost averaging program. The DCA Fixed Interest
Allocations require a minimum premium payment of $1,200 directed into a DCA
Fixed Interest Allocation.
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The dollar cost averaging program is designed to lessen the impact of market
fluctuation on your investment. Since we transfer the same dollar amount to
other subaccounts each month, more units of a subaccount are purchased if the
value of its unit is low and less units are purchased if the value of its unit
is high. Therefore, a lower than average value per unit may be achieved over
the long term. However, we cannot guarantee this. When you elect the dollar
cost averaging program, you are continuously investing in securities regardless
of fluctuating price levels. You should consider your tolerance for investing
through periods of fluctuating price levels.
Unless you have a DCA Fixed Interest Allocation, you elect the dollar amount
you want transferred under this program. Each monthly transfer must be at least
$100. If your source account is the Limited Maturity Bond subaccount, the
Liquid Asset subaccount or a 1-year Fixed Interest Allocation, the maximum
amount that can be transferred each month is your contract value in such source
account divided by 12. If your source account is a 6-month Fixed Interest
Allocation, the maximum amount that can be transferred each month is your
contract value in such source account divided by 6. You may change the transfer
amount once each contract year. If you have a DCA Fixed Interest Allocation,
there is no minimum or maximum transfer amount; we will transfer all your money
allocated to that source account into the subaccount(s) in equal payments over
the selected 6-month or 1-year period. The last payment will include earnings
accrued over the course of the selected period.
Transfers from a Fixed Interest Allocation or a DCA Fixed Interest Allocation
under the dollar cost averaging program are not subject to a Market Value
Adjustment. However, if you terminate the dollar cost averaging program for a
DCA Fixed Interest Allocation and there is money remaining in the DCA Fixed
Interest Allocation, we will transfer the remaining money to the Liquid Asset
subaccount. Such transfer will trigger a Market Value Adjustment if the
transfer is made more than 30 days before the maturity date of the DCA Fixed
Interest Allocation.
If you do not specify the subaccounts to which the dollar amount of the source
account is to be transferred, we will transfer the money to the subaccounts in
which you are invested on a proportional basis. The transfer date is the same
day each month as your contract date. If, on any transfer date, your contract
value in a source account is equal or less than the amount you have elected to
have transferred, the entire amount will be transferred and the program will
end. You may terminate the dollar cost averaging program at any time by sending
satisfactory notice to our Customer Service Center at least 7 days before the
next transfer date. A Fixed Interest Allocation or DCA Fixed Interest
Allocation may not participate in the dollar cost averaging program and in
systematic withdrawals at the same time.
We may in the future offer additional subaccounts or withdraw any subaccount or
Fixed Interest Allocation to or from the dollar cost averaging program, stop
offering DCA Fixed Interest Allocations or otherwise modify, suspend or
terminate this program. Of course, such change will not affect any dollar cost
averaging programs in operation at the time.
AUTOMATIC REBALANCING
If you have at least $10,000 of contract value invested in the subaccounts of
Account B, you may elect to have your investments in the subaccounts
automatically rebalanced. We will transfer funds under your Contract on a
quarterly, semi-annual, or annual calendar basis among the subaccounts to
maintain the investment blend of your selected subaccounts. The minimum size of
any allocation 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 withdrawal option only if 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 send satisfactory notice to our
Customer Service Center. We will begin the program on the last business day of
the 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
contract value among the subaccounts 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.
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DEATH BENEFIT
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DEATH BENEFIT DURING THE ACCUMULATION PHASE
During the accumulation phase, a death benefit is payable when either the
annuitant (when a contract owner is not an individual), the contract owner or
the first of joint owners dies. Assuming you are the contract owner, your
beneficiary will receive a death benefit unless the beneficiary is your
surviving spouse and elects to continue the Contract. The death benefit value
is calculated at the close of the business day on which we receive written
notice and due proof of death, as well as any required paperwork, at our
Customer Service Center. If your beneficiary elects to delay receipt of the
death benefit until a date after the time of death, the amount of the benefit
payable in the future may be affected. The proceeds may be received in a single
sum or applied to any of the annuity options. If we do not receive a request to
apply the death benefit proceeds to an annuity option, we will make a single
sum distribution. We will generally pay death benefit proceeds within 7 days
after our Customer Service Center has received sufficient information to make
the payment.
The Death Benefit under the Contract is the greatest of (i) your contract
value; (ii) total premium payments less any withdrawals; and (iii) the cash
surrender value.
DEATH BENEFIT DURING THE INCOME PHASE
If any contract owner or the annuitant dies after the annuity start date, we
will pay the beneficiary any certain benefit remaining under the annuity in
effect at the time.
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CHARGES AND FEES
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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 distributing and administrating the Contracts, for paying the
benefits payable under the Contracts and for bearing various risks associated
with the Contracts. The amount of a charge will not always correspond to the
actual costs associated. For example, the surrender charge collected may not
fully cover all of the distribution expenses incurred by us with the service or
benefits provided. In the event there are any profits from fees and charges
deducted under the Contract, we may use such profits to finance the
distribution of contracts.
CHARGE DEDUCTION SUBACCOUNT
You may elect to have all charges against your contract value deducted directly
from a single subaccount designated by the Company. Currently we use the Liquid
Asset subaccount for this purpose. If you do not elect this option, or if the
amount of the charges is greater than the amount in the designated subaccount,
the charges will be deducted as discussed below. You may cancel this option at
any time by sending satisfactory notice to our Customer Service Center.
Charges Deducted from the Contract Value
We deduct the following charges from your contract value:
SURRENDER CHARGE. We will deduct a contingent deferred sales charge (a
"surrender charge") if you surrender your Contract or if you take a withdrawal
in excess of the Free Withdrawal Amount during the 7-year period from the date
we receive and accept a premium payment. The surrender charge is based on a
percentage of each premium payment withdrawn. This charge is intended to cover
sales expenses that we have incurred. We may in the future reduce or waive the
surrender charge in certain situations and will never charge more than the
maximum surrender charges. The percentage of premium payments deducted at the
time of surrender or excess withdrawal depends on 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 withdrawn as follows:
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COMPLETE YEARS ELAPSED 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7+
SINCE PREMIUM PAYMENT | | | | | | |
SURRENDER CHARGE 6% | 6% | 6% | 5% | 4% | 3% | 1% | 0%
WAIVER OF SURRENDER CHARGE FOR EXTENDED MEDICAL CARE. We will waive the
surrender charge in most states in the following events: (i) you begin
receiving qualified extended medical care on or after the first contract
anniversary for at least 45 days during a 60-day period and your request for
the surrender or withdrawal, together with all required documentation is
received at our Customer Service Center during the term of your care or within
90 days after the last day of your care; or (ii) you are first diagnosed by a
qualifying medical professional, on or after the first contract anniversary, as
having a qualifying terminal illness. We have the right to require an
examination by a physician of our choice. If we require such an examination, we
will pay for it. You are required to send us satisfactory written proof of
illness. See your Contract for more information. The waiver of surrender charge
may not be available in all states.
FREE WITHDRAWAL AMOUNT. The Free Withdrawal Amount in any contract year is
the greater of (i) any earnings less previous free withdrawals or (ii) 10% of
premium payments paid within the past 7 years and not previously withdrawn,
less any previous free withdrawals taken in the same contract year.
SURRENDER CHARGE FOR EXCESS WITHDRAWALS. We will deduct a surrender charge
for excess withdrawals. We consider a withdrawal to be an "excess withdrawal"
when the amount you withdraw in any contract year exceeds the Free Withdrawal
Amount. Where you are receiving systematic withdrawals, any combination of
regular withdrawals taken and any systematic withdrawals expected to be
received in a contract year will be included in determining the amount of the
excess 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. We will deduct such charges from the contract value in proportion to the
contract value in each subaccount or Fixed Interest Allocation from which the
excess withdrawal was taken. In instances where the excess withdrawal equals
the entire contract value in such subaccounts or Fixed Interest Allocations, we
will deduct charges proportionately from all other subaccounts and Fixed
Interest Allocations in which you are invested. Any withdrawal from a Fixed
Interest Allocation more than 30 days before its maturity date will trigger a
Market Value Adjustment.
For the purpose of calculating the surrender charge for an excess withdrawal:
a) we treat premiums as being withdrawn on a first-in, first-out basis; and b)
amounts withdrawn which are not considered an excess withdrawal are not
considered a withdrawal of any premium payments. We have included an example of
how this works in Appendix B. Although we treat premium payments as being
withdrawn before earnings for purpose of calculating the surrender charge for
excess withdrawals, the federal tax law treats earnings as withdrawn first.
PREMIUM TAXES. We may make a charge for state and local premium taxes
depending on your state of residence. The tax can range from 0% to 3.5% of the
premium payment. We have the right to change this amount to conform with
changes in the law or if you change your state of residence.
We deduct the premium tax from your contract value on the annuity start date.
However, some jurisdictions impose a premium tax at the time that initial and
additional premiums are paid, regardless of when the annuity payments begin. In
those states we may defer collection of the premium taxes from your contract
value and deduct it when you surrender the Contract, when you take an excess
withdrawal, or on the annuity start date.
ADMINISTRATIVE CHARGE. We currently do not charge an annual administrative
charge but may in the future deduct an annual administrative charge of $30 or
2% of the contract value, whichever is smaller. Such charge, if any, will be
made on each Contract anniversary, or if you surrender your Contract prior to a
Contract anniversary, at the time we determine the cash surrender value payable
to you. We deduct the charge proportionately from all subaccounts in which you
are invested. If there is no contract value in those subaccounts, we will
deduct the charge from your Fixed Interest Allocations starting with the
guarantee interest periods nearest their maturity dates until the charge has
been paid.
TRANSFER CHARGE. We currently do not deduct any charges for transfers made
during a contract year. We have the right, however, to assess up to $25 for
each transfer after the twelfth transfer in a contract year. If such a charge
is assessed, we would deduct the charge from the subaccounts and the
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Fixed Interest Allocations from which each such transfer is made in proportion
to the amount being transferred from each subaccount and Fixed Interest
Allocation, unless you have chosen to have all charges deducted from a single
subaccount. The charge will not apply to any transfers due to the election of
dollar cost averaging, automatic rebalancing and transfers we make to and from
any subaccount specially designated by the Company for such purpose.
CHARGES DEDUCTED FROM THE SUBACCOUNTS
MORTALITY AND EXPENSE RISK CHARGE. The mortality and expense risk charge
is deducted each business day. The amount of the mortality and expense risk
charge, on an annual basis, is equal to 0.75% of the assets you have in each
subaccount. The charge is deducted on each business day at the rate of .002063%
for each day since the previous business day.
ASSET-BASED ADMINISTRATIVE CHARGE. The amount of the asset-based
administrative charge, on an annual basis, is equal to 0.15% of the assets you
have in each subaccount. The charge is deducted on each business day at the
rate of .000411% for each day since the previous business day. This charge is
deducted daily from your assets in each subaccount.
TRUST EXPENSES
There are fees and charges deducted from each investment portfolio of the
Trusts. Please read the respective Trust prospectus for details.
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THE ANNUITY OPTIONS
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ANNUITIZATION OF YOUR CONTRACT
If the annuitant and contract owner are living on the annuity start date, we
will begin making payments to the contract owner under an income plan. We will
make these payments under the annuity option chosen. You may change annuity
option by making a written request to us at least 30 days before the annuity
start date. The amount of the payments will be determined by applying your
contract value adjusted for any applicable Market Value Adjustment on the
annuity start date in accordance with the annuity option you chose.
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 start
date. If, at the time of the contract owner's death or the annuitant's death
(if the contract owner is not an individual), no option has been chosen for
paying death benefit proceeds, the beneficiary may choose an annuity 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 contract value is less than
$2,000 or if the calculated monthly annuity income payment is less than $20.
For each annuity option we will issue a separate written agreement putting the
annuity option into effect. Before we pay any annuity benefits, we require the
return of your Contract. If your Contract has been lost, we will require that
you complete and return the applicable lost Contract form. Various factors will
affect the level of annuity benefits, such as the annuity option chosen, the
applicable payment rate used and the investment performance of the portfolios
and interest credited to the Fixed Interest Allocations.
Our current annuity options provide only for fixed payments. Fixed annuity
payments are regular payments, the amount of which is fixed and guaranteed by
us. Some fixed annuity options provide fixed payments either for a specified
period of time or for the life of the annuitant. The amount of life income
payments will depend on the form and duration of payments you chose, the age of
the annuitant or beneficiary (and gender, where appropriate) under applicable
law, the total contract value applied to purchase a Fixed Interest Allocation,
and the applicable payment rate.
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Our approval is needed for any option where:
(1) The person named to receive payment is other than the contract 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.
SELECTING THE ANNUITY START DATE
You select the annuity start date, which is the date on which the annuity
payments commence. The annuity start date must be at least 5 years from the
contract date but before the month immediately following the annuitant's 90th
birthday, or 10 years from the contract date, if later. If, on the annuity
start date, a surrender charge remains, the elected annuity option must include
a period certain of at least 5 years.
If you do not select an annuity start date, it will automatically begin in the
month following the annuitant's 90th birthday, or 10 years from the contract
date, if later.
If the annuity start 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" and the
Statement of Additional Information. For a Contract purchased in connection
with a qualified plan, other than a Roth IRA, distributions must commence not
later than April 1st of the calendar year following the calendar year in which
you attain age 701/2 or, in some cases, retire. Distributions may be made
through annuitization or withdrawals. You should consult your tax adviser for
tax advice.
FREQUENCY OF ANNUITY PAYMENTS
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, we will make the payments monthly. There may be certain restrictions on
minimum payments that we will allow.
THE ANNUITY OPTIONS
We offer the 4 annuity options shown below. Payments under Options 1, 2 and 3
are fixed. Payments under Option 4 may be fixed or variable. For a fixed
annuity option, the contract value in the subaccounts is transferred to the
Company's general account.
OPTION 1. INCOME FOR A FIXED PERIOD. Under this option, we make monthly
payments in equal installments for a fixed number of years based on the
contract value on the annuity start date. We guarantee that each monthly
payment will be at least the amount stated in your Contract. If you prefer, you
may request that payments be made in annual, semi-annual or quarterly
installments. We will provide you with illustrations if you ask for them. If
the cash surrender value or contract value is applied under this option, a 10%
penalty tax may apply to the taxable portion of each income payment until the
contract owner reaches age 591/2.
OPTION 2. INCOME FOR LIFE WITH A PERIOD CERTAIN. Payment is made for the
life of the annuitant in equal monthly installments and guaranteed for at least
a period certain such as 10 or 20 years. Other periods certain may be available
to you on request. You may choose a refund period 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
specified in the Contract corresponding to the person's age on his or her last
birthday before the annuity start date. Amounts for ages not shown in the
Contract are available if you ask for them.
OPTION 3. JOINT LIFE INCOME. This option is available when there are 2
persons named to determine annuity payments. At least one of the persons named
must be either the contract owner or beneficiary of the Contract. We guarantee
monthly payments will be 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 if you ask for them.
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OPTION 4. ANNUITY PLAN. The contract value can be applied to any other
annuitization plan that we choose to offer on the annuity start date. Annuity
payments under Option 4 may be fixed and variable. If variable and subject to
the Investment Company Act of 1940, it will comply with the requirements of
such Act.
PAYMENT WHEN NAMED PERSON DIES
When the person named to receive payment dies, we will pay any amounts still
due as provided in the annuity agreement between you and Golden American. The
amounts we will pay are determined as follows:
(1) For Option 1, or any remaining guaranteed payments under Option 2, we
will continue payments. 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 option agreement will state the amount we
will pay, if any.
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OTHER CONTRACT PROVISIONS
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REPORTS TO CONTRACT OWNERS
We will send you a quarterly report within 31 days after the end of each
calendar quarter. The report will show the contract value, cash surrender
value, and the death benefit as of the end of the calendar quarter. The report
will also show the allocation of your contract value and reflects the amounts
deducted from or added to the contract value since the last report. You have 30
days to notify our Customer Service Center of any errors or discrepancies
contained in the report or in any confirmation notices. We will also send you
copies of any shareholder reports of the investment portfolios in which Account
B invests, as well as any other reports, notices or documents we are required
by law to furnish to you.
SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of any payment
or determination of values on any business day (1) when the New York Stock
Exchange is closed; (2) when trading on the New York Stock Exchange is
restricted; (3) when an emergency exists as determined by the Securities and
Exchange Commission so that the sale of securities held in Account B may not
reasonably occur or so that the Company may not reasonably determine the value
of Account B's net assets; or (4) during any other period when the SEC so
permits for the protection of security holders. We have the right to delay
payment of amounts from a Fixed Interest Allocation for up to 6 months.
IN CASE OF ERRORS IN YOUR APPLICATION
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.
ASSIGNING THE CONTRACT AS COLLATERAL
You may assign a non-qualified Contract as collateral security for a loan but
you should understand that your rights and any beneficiary's rights may be
subject to the terms of the assignment. An assignment may have federal tax
consequences. 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.
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CONTRACT CHANGES--APPLICABLE TAX LAW
We have the right to make changes in the Contract to continue to qualify the
Contract as an annuity under applicable federal tax law. You will be given
advance notice of such changes.
FREE LOOK
You may cancel your Contract within your 10-day free look period. We deem the
free look period to expire 15 days after we mail the Contract to you. Some
states may require a longer free look period. To cancel, you need to send your
Contract to our Customer Service Center or to the agent from whom you purchased
it. We will refund the contract value. For purposes of the refund during the
free look period, (i) we adjust your contract value for any market value
adjustment (if you have invested in the fixed account), and (ii) then we
include a refund of any charges deducted from your contract value. Because of
the market risks associated with investing in the portfolios, the contract
value returned may be greater or less than the premium payment you paid. Some
states require us to return to you the amount of the paid premium (rather than
the contract value) in which case you will not be subject to investment risk
during the free look period. In these states, your premiums designated for
investment in the subaccounts will be allocated during the free look period to
a subaccount specially designated by the Company for this purpose (currently,
the Liquid Asset subaccount). We may, in our discretion, require that premiums
designated for investment in the subaccounts from all other states as well as
premiums designated for a Fixed Interest Allocation be allocated to the
specially designated subaccount during the free look period. Your Contract is
void as of the day we receive your Contract and cancellation request. We
determine your contract value at the close of business on the day we receive
your written request. If you keep your Contract after the free look period, we
will put your money in the subaccount(s) chosen by you, based on the
accumulation unit value next computed for each subaccount, and/or in the Fixed
Interest Allocation chosen by you.
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 an alternative or
reduced death benefit.
SELLING THE CONTRACT
Directed Services, Inc. is the 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 Directed Services for acting as
principal underwriter under a distribution agreement which in turn pays the
writing agent. The principal address of Directed Services is 1475 Dunwoody
Drive, West Chester, Pennsylvania 19380-1478.
Directed Services enters into sales agreements with broker-dealers to sell the
Contracts through registered representatives who are licensed to sell
securities and variable insurance products. These broker-dealers are registered
with the SEC and are members of the National Association of Securities Dealers,
Inc. Directed Services receives a maximum of 6.5% commission, and passes
through 100% of the commission to the broker-dealer whose registered
representative sold the contract:
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[Shaded Table Header]
-----------------------------------------------------------
| UNDERWRITER COMPENSATION |
-----------------------------------------------------------
| NAME OF | AMOUNT OF | OTHER |
| PRINCIPAL | COMMISSION TO BE | COMPENSATION |
| UNDERWRITER | PAID | Reimbursement of |
| | Maximum of 6.5% | any |
| Directed | of any initial | covered expenses |
| Services, Inc. | or additional | incurred |
| | premium payments | by registered |
| | except when | representatives |
| | combined | in |
| | with some annual | connection with |
| | trail | the distribution |
| | commissions. | of the |
| | | Contracts. |
-----------------------------------------------------------
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 6.5% of total premium payments).
[Shaded Section Header]
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OTHER INFORMATION
- --------------------------------------------------------------------------
VOTING RIGHTS
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 subaccount by dividing the
Contract's contract value in that subaccount by the net asset value of one
share of the portfolio in which a subaccount invests. We count fractional
votes. 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 receive your
instructions in time, we will vote the shares in the same proportion as the
instructions received from all contracts in that subaccount. We will also vote
shares we hold in Account B which are not attributable to contract owners in
the same proportion.
STATE REGULATION
We are regulated by the Insurance Department of the State of Delaware. 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 where required by those 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, like other insurance companies, may be 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. We believe that currently there are no
pending or threatened lawsuits that are reasonably likely to have a materially
adverse impact on the Company or Account B.
LEGAL MATTERS
The legal validity of the Contracts was 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.
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EXPERTS
The audited financial statements of Golden American Life Insurance Company and
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.
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FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------
The following summary provides a general description of the federal income tax
considerations associated with this Contract and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. You should consult your counsel or other competent tax advisers for
more complete information. This discussion is based upon our understanding of
the present federal income tax laws. We do not make any representations as to
the likelihood of continuation of the present federal income tax laws or as to
how they may be interpreted by the IRS.
TYPES OF CONTRACTS: NON-QUALIFIED OR QUALIFIED
The Contract may be purchased on a non-tax-qualified basis or purchased on a
tax-qualified basis. Qualified Contracts are designed for use by individuals
whose premium payments are comprised solely of proceeds from and/or
contributions under retirement plans that are intended to qualify as plans
entitled to special income tax treatment under Sections 401(a), 403(b), 408, or
408A of the Code. The ultimate effect of federal income taxes on the amounts
held under a Contract, or annuity payments, depends on the type of retirement
plan, on the tax and employment status of the individual concerned, and on our
tax status. In addition, certain requirements must be satisfied in purchasing a
qualified Contract with proceeds from a tax-qualified plan and receiving
distributions from a qualified Contract in order to continue receiving
favorable tax treatment. Some retirement plans are subject to distribution and
other requirements that are not incorporated into our Contract administration
procedures. Contract owners, participants and beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contract comply with applicable law. Therefore, you should seek
competent legal and tax advice regarding the suitability of a Contract for your
particular situation. The following discussion assumes that qualified Contracts
are purchased with proceeds from and/or contributions under retirement plans
that qualify for the intended special federal income tax treatment.
Tax Status of the Contracts
DIVERSIFICATION REQUIREMENTS. The Code requires that the investments of a
variable account be "adequately diversified" in order for nonqualified
Contracts to be treated as annuity contracts for federal income tax purposes.
It is intended that Account B, through the subaccounts, will satisfy these
diversification requirements.
In certain circumstances, owners of variable annuity contracts have been
considered for federal income tax purposes to be the owners of the assets of
the separate account supporting their contracts due to their ability to
exercise investment control over those assets. When this is the case, the
contract owners have been currently taxed on income and gains attributable to
the separate account assets. There is little guidance in this area, and some
features of the Contracts, such as the flexibility of a contract owner to
allocate premium payments and transfer contract values, have not been
explicitly addressed in published rulings. While we believe that the Contracts
do not give contract owners investment control over Account B assets, we
reserve the right to modify the Contracts as necessary to prevent a contract
owner from being treated as the owner of the Account B assets supporting the
Contract.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
federal income tax purposes, the Code requires any non-qualified Contract to
contain certain provisions specifying how your interest in the Contract will be
distributed in the event of your death. The non-qualified Contracts contain
provisions that are intended to comply with these Code requirements, although
no regulations interpreting these requirements have yet been issued. We intend
to review such provisions and modify them if necessary to assure that they
comply with the applicable requirements when such requirements are clarified by
regulation or otherwise.
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Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
TAX TREATMENT OF ANNUITIES
IN GENERAL. We believe that if you are a natural person you will generally
not be taxed on increases in the value of a Contract until a distribution
occurs or until annuity payments begin. (For these purposes, the agreement to
assign or pledge any portion of the contract value, and, in the case of a
qualified Contract, any portion of an interest in the qualified plan, generally
will be treated as a distribution.)
Taxation of Non-Qualified Contracts
NON-NATURAL PERSON. The owner of any annuity contract who is not a natural
person generally must include in income any increase in the excess of the
contract value over the "investment in the contract" (generally, the premiums
or other consideration you paid for the contract less any nontaxable
withdrawals) during the taxable year. There are some exceptions to this rule
and a prospective contract owner that is not a natural person may wish to
discuss these with a tax adviser. The following discussion generally applies to
Contracts owned by natural persons.
WITHDRAWALS. When a withdrawal from a non-qualified Contract occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the contract value (unreduced by the
amount of any surrender charge) immediately before the distribution over the
contract owner's investment in the Contract at that time. The tax treatment of
market value adjustments is uncertain. You should consult a tax adviser if you
are considering taking a withdrawal from your Contract in circumstances where a
market value adjustment would apply.
In the case of a surrender under a non-qualified Contract, the amount received
generally will be taxable only to the extent it exceeds the contract owner's
investment in the Contract.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
non-qualified Contract, there may be imposed a federal tax penalty equal to 10%
of the amount treated as income. In general, however, there is no penalty on
distributions:
o made on or after the taxpayer reaches age 591/2;
o made on or after the death of a contract owner;
o attributable to the taxpayer's becoming disabled; or
o made as part of a series of substantially equal periodic payments for
the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special
rules may be applicable in connection with the exceptions enumerated above. A
tax adviser should be consulted with regard to exceptions from the penalty tax.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
payment option elected under an annuity contract, a portion of each annuity
payment is generally not taxed and the remainder is taxed as ordinary income.
The non-taxable portion of an annuity payment is generally determined in a
manner that is designed to allow you to recover your investment in the Contract
ratably on a tax-free basis over the expected stream of annuity payments, as
determined when annuity payments start. Once your investment in the Contract
has been fully recovered, however, the full amount of each annuity payment is
subject to tax as ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of your death or the death of the annuitant. Generally, such
amounts are includible in the income of recipient as follows: (i) if
distributed in a lump sum, they are taxed in the same manner as a surrender of
the Contract, or (ii) if distributed under a payment option, they are taxed in
the same way as annuity payments.
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TRANSFERS, ASSIGNMENTS, EXCHANGES AND ANNUITY DATES OF A CONTRACT. A
transfer or assignment of ownership of a Contract, the designation of an
annuitant, the selection of certain dates for commencement of the annuity
phase, or the exchange of a Contract may result in certain tax consequences to
you that are not discussed herein. A contract owner contemplating any such
transfer, assignment or exchange, should consult a tax advisor as to the tax
consequences.
WITHHOLDING. Annuity distributions are generally subject to withholding
for the recipient's federal income tax liability. Recipients can generally
elect, however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS. All non-qualified deferred annuity contracts that are
issued by us (or our affiliates) to the same contract owner during any calendar
year are treated as one annuity contract for purposes of determining the amount
includible in such contract owner's income when a taxable distribution occurs.
TAXATION OF QUALIFIED CONTRACTS
The Contracts are designed for use with several types of qualified plans. The
tax rules applicable to participants in these qualified plans vary according to
the type of plan and the terms and contributions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from: contributions in
excess of specified limits; distributions before age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; and in other specified circumstances. Therefore, no
attempt is made to provide more than general information about the use of the
Contracts with the various types of qualified retirement plans. Contract
owners, annuitants, and beneficiaries are cautioned that the rights of any
person to any benefits under these qualified retirement plans may be subject to
the terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contract, but we shall not be bound by the terms and
conditions of such plans to the extent such terms contradict the Contract,
unless the Company consents.
DISTRIBUTIONS. Annuity payments are generally taxed in the same manner as
under a non-qualified Contract. When a withdrawal from a qualified Contract
occurs, a pro rata portion of the amount received is taxable, generally based
on the ratio of the contract owner's investment in the Contract (generally, the
premiums or other consideration paid for the Contract) to the participant's
total accrued benefit balance under the retirement plan. For qualified
Contracts, the investment in the Contract can be zero. For Roth IRAs,
distributions are generally not taxed, except as described below.
For qualified plans under Section 401(a) and 403(b), the Code requires that
distributions generally must commence no later than the later of April 1 of the
calendar year following the calendar year in which the contract owner (or plan
participant) (i) reaches age 701/2 or (ii) retires, and must be made in a
specified form or manner. If the plan participant is a "5 percent owner" (as
defined in the Code), distributions generally must begin no later than April 1
of the calendar year following the calendar year in which the contract owner
(or plan participant) reaches age 701/2. For IRAs described in Section 408,
distributions generally must commence no later than April 1 of the calendar
year following the calendar year in which the contract owner (or plan
participant) reaches age 701/2. Roth IRAs under Section 408A do not require
distributions at any time before the contract owner's death.
WITHHOLDING. Distributions from certain qualified plans generally are
subject to withholding for the contract owner's federal income tax liability.
The withholding rates vary according to the type of distribution and the
contract owner's tax status. The contract owner may be provided the opportunity
to elect not to have tax withheld from distributions. "Eligible rollover
distributions" from section 401(a) plans and section 403(b) tax-sheltered
annuities are subject to a mandatory federal income tax withholding of 20%. An
eligible rollover distribution is the taxable portion of any distribution from
such a plan, except certain distributions that are required by the Code or
distributions in a specified annuity form. The 20% withholding does not apply,
however, if the contract owner chooses a "direct rollover" from the plan to
another tax-qualified plan or IRA.
Brief descriptions of the various types of qualified retirement plans in
connection with a Contract follow. We will endorse the Contract as necessary to
conform it to the requirements of such plan.
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REQUIRED DISTRIBUTIONS UPON CONTRACT OWNER'S DEATH
We will not allow any payment of benefits provided under a non-qualified
Contract which do not satisfy the requirements of Section 72(s) of the Code.
If any owner of a non-qualified Contract dies before the annuity start date,
the death benefit payable to the beneficiary will be distributed as follows:
(a) the death benefit must be completely distributed within 5 years of the
contract owner's date of death; or (b) the beneficiary may elect, within the
1-year period after the contract owner's date of death, to receive the death
benefit in the form of an annuity from us, provided that (i) such annuity is
distributed in substantially equal installments over the life of such
beneficiary or over a period not extending beyond the life expectancy of such
beneficiary; and (ii) such distributions begin not later than 1 year after the
contract owner's date of death.
Notwithstanding (a) and (b) above, if the sole contract owner's beneficiary is
the deceased owner's surviving spouse, then such spouse may elect to continue
the Contract under the same terms as before the contract owner's death. Upon
receipt of such election from the spouse at our Customer Service Center: (1)
all rights of the spouse as contract owner's beneficiary under the Contract in
effect prior to such election will cease; (2) the spouse will become the owner
of the Contract and will also be treated as the contingent annuitant, if none
has been named and only if the deceased owner was the annuitant; and (3) all
rights and privileges granted by the Contract or allowed by Golden American
will belong to the spouse as contract owner of the Contract. This election will
be deemed to have been made by the spouse if such spouse makes a premium
payment to the Contract or fails to make a timely election as described in this
paragraph. If the owner's beneficiary is a nonspouse, the distribution
provisions described in subparagraphs (a) and (b) above, will apply even if the
annuitant and/or contingent annuitant are alive at the time of the contract
owner's death.
If we do not receive an election from a nonspouse owner's beneficiary within
the 1-year period after the contract owner's date of death, then we will pay
the death benefit to the owner's beneficiary in a cash payment within five
years from date of death. We will determine the death benefit as of the date we
receive proof of death. We will make payment of the proceeds on or before the
end of the 5-year period starting on the owner's date of death. Such cash
payment will be in full settlement of all our liability under the Contract.
If the contract owner dies after the annuity start date, we will continue to
distribute any benefit payable at least as rapidly as under the annuity option
then in effect. All of the contract owner's rights granted under the Contract
or allowed by us will pass to the contract owner's beneficiary.
If the Contract has joint owners we will consider the date of death of the
first joint owner as the death of the contract owner and the surviving joint
owner will become the contract owner of the Contract.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS
Section 401(a) of the Code permits corporate employers to establish various
types of retirement plans for employees, and permits self-employed individuals
to establish these plans for themselves and their employees. These retirement
plans may permit the purchase of the Contracts to accumulate retirement savings
under the plans. Adverse tax or other legal consequences to the plan, to the
participant, or to both may result if this Contract is assigned or transferred
to any individual as a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such benefits before
transfer of the Contract. Employers intending to use the Contract with such
plans should seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity" or
"IRA." These IRAs are subject to limits on the amount that can be contributed,
the deductible amount of the contribution, the persons who may be eligible, and
the time when distributions commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" or transferred on a
tax-deferred basis into an IRA. There are significant restrictions on rollover
or transfer contributions from Savings Incentive Match Plans (SIMPLE), under
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which certain employers may provide contributions to IRAs on behalf of their
employees, subject to special restrictions. Employers may establish Simplified
Employee Pension (SEP) Plans to provide IRA contributions on behalf of their
employees. Sales of the Contract for use with IRAs may be subject to special
requirements of the IRS.
ROTH IRAS
Section 408A of the Code permits certain eligible individuals to contribute to
a Roth IRA. Contributions to a Roth IRA, which are subject to certain
limitations, are not deductible, and must be made in cash or as a rollover or
transfer from another Roth IRA or other IRA. A rollover from or conversion of
an IRA to a Roth IRA may be subject to tax, and other special rules may apply.
Distributions from a Roth IRA generally are not taxed, except that, once
aggregate distributions exceed contributions to the Roth IRA, income tax and a
10% penalty tax may apply to distributions made (1) before age 591/2 (subject
to certain exceptions) or (2) during the five taxable years starting with the
year in which the first contribution is made to any Roth IRA.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code allows employees of certain Section 501(c)(3)
organizations and public schools to exclude from their gross income the premium
payments made, within certain limits, on a Contract that will provide an
annuity for the employee's retirement. These premium payments may be subject to
FICA (social security) tax. Distributions of (1) salary reduction contributions
made in years beginning after December 31, 1988; (2) earnings on those
contributions; and (3) earnings on amounts held as of the last year beginning
before January 1, 1989, are not allowed prior to age 591/2, separation from
service, death or disability. Salary reduction contributions may also be
distributed upon hardship, but would generally be subject to penalties.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax consequences under
the Contracts are not exhaustive, and special rules are provided with respect
to other tax situations not discussed in this prospectus. Further, the federal
income tax consequences discussed herein reflect our understanding of current
law, and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each contract owner
or recipient of the distribution. A competent tax adviser should be consulted
for further information.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always the
possibility that the tax treatment of the Contracts could change by legislation
or other means. It is also possible that any change could be retroactive (that
is, effective before the date of the change). A tax adviser should be consulted
with respect to legislative developments and their effect on the Contract.
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MORE INFORMATION ABOUT GOLDEN AMERICAN LIFE INSURANCE COMPANY
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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 Holdings, Inc. ("PFHI"), a Delaware
corporation, acquired all of the outstanding capital stock of
Equitable of Iowa Companies ("Equitable of Iowa"), according to a
merger agreement among Equitable of Iowa, PFHI, and ING Groep N.V.
(the "ING acquisition"). On August 13, 1996, Equitable of Iowa
acquired all of the outstanding capital stock of BT Variable,
Inc., then the parent of Golden American (the "Equitable
acquisition"). For financial statement purposes, the ING
acquisition was accounted for as a purchase effective October 25,
1997 and the Equitable acquisition was accounted for as a purchase
effective August 14, 1996. As a result, the financial data
presented below for periods after 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.
<TABLE>
SELECTED GAAP BASIS FINANCIAL DATA
(IN THOUSANDS)
Post-Merger | Post-Acquisition
--------------------------------------------|---------------------------------
For the Period For For the Period | For the Period For the Period
January 1, 1999 the Year October 25, | January 1, August 14, 1996
through Ended 1997 through | 1997 through 1996 through
September 30, December 31, December 31, | October 24, December 31,
1999 1998 1997 | 1997 1996
------------ ------------ -------------- | -------------- ---------------
<S> <C> <C> <C> | <C> <C>
Annuity and Interest |
Sensitive Life |
Product Charges....... $ 55,195 $ 39,119 $ 3,834 | $18,288 $ 8,768
Net Income before |
Federal Income Tax.... $ 7,269 $ 10,353 $ (279) | $ (608) $ 570
Net Income (Loss)....... $ 3,551 $ 5,074 $ (425) | $ 729 $ 350
Total Assets............ $7,312,027 $4,752,533 $2,446,395 | N/A $1,677,899
Total Liabilities....... $6,858,151 $4,398,639 $2,219,082 | N/A $1,537,415
Total Stockholder's |
Equity................ $ 453,876 $ 353,894 $ 227,313 | N/A $ 140,484
</TABLE>
<TABLE>
(IN THOUSANDS)
Pre-Acquisition
---------------------------------------
For the Period
January 1, For the Years
1996 through Ended December 31,
August 13, ----------------------
1996 1995 1994
-------------- ---------- ----------
<S> <C> <C> <C>
Annuity and Interest
Sensitive Life
Product Charges....... $12,259 $ 18,388 $ 17,519
Net Income before
Federal Income Tax.... $ 1,736 $ 3,364 $ 2,222
Net Income (Loss)....... $ 3,199 $ 3,364 $ 2,222
Total Assets............ N/A $1,203,057 $1,044,760
Total Liabilities....... N/A $1,104,932 $ 955,254
Total Stockholder's
Equity................ N/A $ 98,125 $ 89,506
</TABLE>
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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 five
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 October of 1997, Golden American introduced three new variable
annuity products (GoldenSelect Access, GoldenSelect ES II and
GoldenSelect Premium Plus) which have contributed significantly to
sales.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze Golden
American Life Insurance Company's ("Golden American") 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 jointly with
the consolidated financial statements, related notes and the
Cautionary Statement Regarding Forward-Looking Statements, which
appear elsewhere in the financial report. Golden American reports
financial results on a consolidated basis. The consolidated financial
statements include the accounts of Golden American and its wholly
owned subsidiary, First Golden American Life Insurance Company of
New York ("First Golden," and collectively with Golden American,
the "Companies").
RESULTS OF OPERATIONS
MERGER. On October 23, 1997, Equitable of Iowa Companies'
("Equitable") shareholders approved an Agreement and Plan of
Merger ("Merger Agreement") dated July 7, 1997 among Equitable,
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 according 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. In addition, Equitable owned all the outstanding
capital stock of Locust Street Securities, Inc., Equitable
Investment Services, Inc. (subsequently dissolved), Directed
Services, Inc. ("DSI"), Equitable of Iowa Companies Capital Trust,
Equitable of Iowa Companies Capital Trust II and Equitable of Iowa
Securities Network, Inc. (subsequently renamed ING Funds
Distributor, Inc.). In exchange for the outstanding capital stock
of Equitable, ING paid total consideration of approximately $2.1
billion in cash and stock and assumed approximately $400 million
in debt. As a result of this transaction, Equitable of Iowa
Companies was merged into PFHI, which was simultaneously renamed
Equitable of Iowa Companies, Inc. ("EIC" or "Parent"), a Delaware
corporation.
For financial statement purposes, the change in control of the
Companies through the ING merger 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 the merger date. As a result, the Companies'
financial statements for periods after October 24, 1997 are
presented on the Post-Merger new basis of accounting.
The purchase price was allocated to EIC and its subsidiaries with
$227.6 million allocated to the Companies. 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 attributed to the Companies. 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.
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CHANGE IN CONTROL--ACQUISITION. On August 13, 1996, Equitable
acquired all of the outstanding capital stock of BT Variable, Inc.
("BT Variable") and its wholly owned subsidiaries, Golden American
and DSI. After 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, 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 effective August 14, 1996. This acquisition resulted
in a new basis of accounting reflecting estimated fair values of
assets and liabilities at the acquisition date. As a result, the
Companies' financial statements 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.
The purchase price was allocated to the three companies purchased
- - BT Variable, DSI, and Golden American. The allocation of the
purchase price to Golden American was approximately $139.9
million. Goodwill of $41.1 million was established for the excess
of the acquisition cost over the fair value of the assets and
liabilities and attributed to Golden American. At June 30, 1997,
goodwill was increased by $1.8 million due to the adjustment of
the value of a receivable existing at the acquisition date. Before
the ING merger, goodwill resulting from the acquisition was being
amortized over 25 years on a straight-line basis.
<TABLE>
THE FIRST NINE MONTHS OF 1999 COMPARED TO THE SAME PERIOD OF 1998
PREMIUMS.
PERCENTAGE DOLLAR
NINE MONTHS ENDED SEPTEMBER 30 1999 CHANGE CHANGE 1998
---- ---------- ------ ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Variable annuity premiums:
Separate account................ $1,783.5 64.9% $702.1 $1,081.4
Fixed account................... 539.4 55.6 192.8 346.6
-------- ---- ------ --------
Total variable annuity premiums... 2,322.9 62.7 894.9 1,428.0
Variable life premiums............ 7.0 (38.9) (4.4) 11.4
-------- ---- ------ --------
Total premiums.................... $2,329.9 61.9% $890.5 $1,439.4
======== ==== ====== ========
</TABLE>
For the Companies' variable contracts, premiums collected are not reported as
revenues, but as deposits to insurance liabilities. Revenues for these
products are recognized over time in the form of investment income and
product charges.
Variable annuity separate account premiums increased 64.9% during the
first nine months of 1999. The fixed account portion of the Companies'
variable annuity premiums increased 55.6% during the first nine months
of 1999. These increases resulted from increased sales of the Premium
Plus variable annuity product.
Premiums, net of reinsurance, for variable products from two
significant broker/dealers each having at least ten percent of total
sales for the nine months ended September 30, 1999 totaled $664.2
million, or 29% of total premiums ($142.6 million, or 10%, from the
one significant broker/dealer for the nine months ended September 30,
1998).
37
<PAGE>
<PAGE>
<TABLE>
REVENUES.
PERCENTAGE DOLLAR
NINE MONTHS ENDED JUNE 30 1999 CHANGE CHANGE 1998
---- ---------- ------ ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Annuity and interest sensitive
life product charges............ $ 55.2 104.5% $ 28.2 $ 27.0
Management fee revenue............ 6.8 107.4 3.5 3.3
Net investment income............. 42.7 45.7 13.4 29.3
Realized gains(losses) on
investments..................... (2.2) (607.5) (2.6) 0.4
Other income...................... 7.4 55.0 2.6 4.8
------- ------ ------ ------
Total premiums.................... $ 109.9 69.6% $ 45.1 $ 64.8
======= ====== ====== ======
</TABLE>
Total revenues increased 69.6% in the first nine months of 1999 from
the same period in 1998. Annuity and interest sensitive life product
charges increased 104.5% in the first nine months of 1999 due to
additional fees earned from the increasing block of business
in the separate accounts.
Golden American provides certain managerial and supervisory services
to Directed Services, Inc. ("DSI"). The fee paid to Golden American
for these services, which is calculated as a percentage of average
assets in the variable separate accounts, was $6.8 million and $3.3
million for the first nine months of 1999 and 1998, respectively.
Net investment income increased 45.7% in the first nine months of 1999
due to growth in invested assets from September 30, 1998. The
Companies had $2.2 million of realized losses resulting from the
writedown of two fixed maturities in the second quarter of 1999 and
from the sale of investments in the first nine months of 1999,
compared to gains of $0.4 million in the same period of 1998. Other
income increased $2.6 million to $7.4 million in the first nine months
of 1999 due primarily to income received due to a modified coinsurance
agreement with an unaffiliated reinsurer, which was offset by a
reduction in the Companies' deferred policy acquisition costs.
EXPENSES. Total insurance benefits and expenses increased $44.5
million, or 84.6%, to $97.0 million in the first nine months of 1999.
Interest credited to account balances increased $61.3 million, or
95.6%, to $125.4 million in the first nine months of 1999. The extra
credit bonus on the Premium Plus variable annuity product increased
$49.9 million to $85.7 million at September 30, 1999 resulting in an
increase in interest credited during the first nine months of 1999
compared to the same period in 1998. The bonus interest on the fixed
account increased $2.6 million to $7.6 million at September 30, 1999
resulting in an increase in interest credited during the first nine
months of 1999 compared to the same period in 1998. The remaining
increase in interest credited relates to higher account balances
associated with the Companies' fixed account option within the
variable products.
Commissions increased $49.6 million, or 58.4%, to $134.6 million in
the first nine months of 1999. Insurance taxes, state licenses, and
fees increased $0.9 million, or 32.3%, to $3.5 million in the first
nine months of 1999. Changes in commissions and insurance taxes, state
licenses, and fees are generally related to changes in the level and
composition of variable product sales. Insurance taxes, state
licenses, and fees are impacted by several other factors, which
include an increase in FICA taxes primarily due to bonuses and
expenses for the triennial insurance department examination of Golden
American. Most costs incurred as the result of sales have been deferred,
thus having very little impact on current earnings.
General expenses increased $24.1 million, or 102.5%, to $47.6 million
in the first nine months of 1999. Management expects general expenses
to continue to increase in 1999 as a result of the emphasis on
expanding the salaried wholesaler distribution network and the growth
in sales. The Companies use a network of wholesalers to distribute
products and the salaries and sales bonuses of these wholesalers are
included in general expenses. The portion of these salaries and
related expenses that varies directly with production levels is
deferred thus having little impact on current earnings. The increase
in general expenses was partially offset by reimbursements received
from DSI and Equitable Life, an affiliate, for certain advisory,
computer, and other resources and services provided by Golden
American.
38
<PAGE>
<PAGE>
The Companies' previous balances of deferred policy acquisition costs
("DPAC"), value of purchased insurance in force ("VPIF"), and unearned
revenue reserve were eliminated and an asset of $44.3 million
representing VPIF was established for all policies in force at the
merger date. During the first nine months of 1999, VPIF was adjusted
to increase amortization by $0.7 million to reflect changes in the
assumptions related to the timing of estimated gross profits. During
the first nine months of 1998, VPIF decreased $2.7 million to adjust
the value of other receivables and increased $0.2 million as a result
of an adjustment to the merger costs. Amortization of DPAC increased
$15.7 million, or 390.7%, in the first nine months of 1999. This
increase resulted from growth in policy acquisition costs deferred
from $133.6 million at September 30, 1998 to $244.8 million at
September 30, 1999, which was generated by expenses associated with
the large sales volume experienced since September 30, 1998. Based on
current conditions and assumptions as to the impact of future events
on acquired policies in force, the expected approximate net
amortization relating to VPIF as of September 30, 1999 is $1.1 million
for the remainder of 1999, $4.3 million in 2000, $4.0 million in 2001,
$3.6 million in 2002, $3.2 million in 2003, and $2.4 million in 2004.
Actual amortization may vary based upon changes in assumptions and
experience.
Amortization of goodwill during the first nine months of 1999 totaled
$2.8 million, unchanged from the first nine months of 1998. Goodwill
resulting from the merger is being amortized on a straight-line basis
over 40 years.
Interest expense on the $25 million surplus note issued in December
1996 and expiring December 2026 was $1.5 million in the first nine
months of 1999, unchanged from the same period of 1998. Interest
expense on the $60 million surplus note issued in December 1998 and
expiring December 2028 was $3.3 million in the first nine months of
1999. Golden American also paid $0.7 million in the first nine months
of 1999 compared to $1.3 million in the same period of 1998 to ING
America Insurance Holdings, Inc. ("ING AIH") for interest on the
reciprocal loan agreement. Interest expense on the revolving note
payable with SunTrust Bank, Atlanta was $0.1 million for the first
nine months of 1999. In addition, Golden American paid interest of
$0.2 million during the first quarter of 1998 on the line of
credit with Equitable, which was repaid with a capital contribution
from the Parent and with funds borrowed from ING AIH.
INCOME. Net income for the first nine months of 1999 was $3.6
million, a decrease of $1.3 million from net income of $4.9 million in
the same period of 1998.
Comprehensive loss for the first nine months of 1999 was $18,000, a
decrease of $5.5 million from comprehensive income of $5.5 million in
the same period of 1998.
1998 COMPARED TO 1997
The following analysis combines Post-Merger and Post-Acquisition
activity for 1997.
PREMIUMS.
<TABLE>
POST-MERGER COMBINED POST-MERGER | POST-ACQUISITION
For the Period | For the Period
For the Year For the Year October 25, 1997 | January 1, 1997
ended ended through | through
December 31, 1998 December 31, 1997 December 31, 1997 | October 24, 1997
----------------- ----------------- ----------------- | ----------------
(Dollars in millions) |
<S> <C> <C> <C> | <C>
Variable annuity |
premiums: |
Separate account.... $1,513.3 $291.2 $111.0 | $180.2
Fixed account....... 588.7 318.0 60.9 | 257.1
-------- ------ ------ | ------
2,102.0 609.2 171.9 | 437.3
Variable life |
premiums............ 13.8 15.6 1.2 | 14.4
-------- ------ ------ | ------
Total premiums........ $2,115.8 $624.8 $173.1 | $451.7
======== ====== ====== | ======
</TABLE>
For the Companies' variable contracts, premiums collected are not
reported as revenues, but are reported as deposits to insurance
liabilities. Revenues for these products are recognized over time in
the form of investment income and product charges.
39
<PAGE>
<PAGE>
Variable annuity separate account premiums increased 419.7% in 1998
primarily due to increased sales of the Premium Plus product
introduced in October of 1997 and the increased sales levels of the
Companies' other products. The fixed account portion of the Companies'
variable annuity premiums increased 85.1% in 1998. Variable life
premiums decreased 11.4% in 1998. Total premiums increased 238.7% in
1998.
During 1998, the Companies' sales were further diversified among
broker/dealers. Premiums, net of reinsurance, for variable products
from two significant broker/dealers having at least ten percent of
total sales for the year ended December 31, 1998 totaled $580.7
million, or 27% of premiums ($328.2 million, or 53% from two
significant broker/dealers for the year ended December 31, 1997).
REVENUES.
<TABLE>
POST-MERGER COMBINED POST-MERGER | POST-ACQUISITION
For the Period | For the Period
For the Year For the Year October 25, 1997 | January 1, 1997
ended ended through | through
December 31, 1998 December 31, 1997 December 31, 1997 | October 24, 1997
----------------- ----------------- ----------------- | ----------------
(Dollars in millions) |
<S> <C> <C> <C> | <C>
Annuity and interest |
sensitive life |
product charges...... $39.1 $22.1 $3.8 | $18.3
Management fee |
revenue.............. 4.8 2.8 0.5 | 2.3
Net investment |
income............... 42.5 26.8 5.1 | 21.7
Realized gains (losses) |
on investments....... (1.5) 0.1 -- | 0.1
Other income........... 5.6 0.7 0.3 | 0.4
----- ----- ---- | -----
$90.5 $52.5 $9.7 | $42.8
===== ===== ==== | =====
</TABLE>
Total revenues increased 72.3%, or $38.0 million, to $90.5 million in
1998. Annuity and interest sensitive life product charges increased
76.8%, or $17.0 million, to $39.1 million in 1998 due to additional
fees earned from the increasing block of business under management in
the separate accounts and an increase in surrender charge revenues.
This increase was partially offset by the elimination of the unearned
revenue reserve related to in force acquired business at the merger
date, which resulted in lower annuity and interest sensitive life
product charges compared to Post-Acquisition levels.
Golden American provides certain managerial and supervisory services
to DSI. The fee paid to Golden American for these services, which is
calculated as a percentage of average assets in the variable separate
accounts, was $4.8 million for 1998 and $2.8 million for 1997.
Net investment income increased 58.6%, or $15.7 million, to $42.5
million in 1998 from $26.8 million in 1997 due to growth in invested
assets. During 1998, the Company had net realized losses on
investments of $1.5 million, which included a $1.0 million write down
of two impaired bonds, compared to gains of $0.1 million in 1997.
Other income increased $4.9 million to $5.6 million in 1998 due
primarily to income received under a modified coinsurance agreement
with an unaffiliated reinsurer as a result of increased sales.
40
<PAGE>
<PAGE>
EXPENSES.
<TABLE>
POST-MERGER COMBINED POST-MERGER | POST-ACQUISITION
For the Period | For the Period
For the Year For the Year October 25, 1997 | January 1, 1997
ended ended through | through
December 31, 1998 December 31, 1997 December 31, 1997 | October 24, 1997
----------------- ----------------- ----------------- | ----------------
(Dollars in millions) |
<S> <C> <C> <C> | <C>
Insurance benefits |
and expenses: |
Annuity and interest |
sensitive life |
benefits: |
Interest credited to |
account balances.. $94.9 $26.7 $7.4 | $19.3
Benefit claims |
incurred in excess |
of account |
balances.......... 2.1 0.1 -- | 0.1
Underwriting, |
acquisition, and |
insurance expense: |
Commission.......... 121.2 36.3 9.4 | 26.9
General Expenses.... 37.6 17.3 3.4 | 13.9
Insurance taxes..... 4.1 2.3 0.5 | 1.8
Policy acquisition |
costs deferred (197.8) (42.7) (13.7) | (29.0)
Amortization: |
Deferred policy |
acquisition |
costs........... 5.1 2.6 0.9 | 1.7
Value of purchased |
insurance in |
force........... 4.7 6.1 0.9 | 5.2
Goodwill............ 3.8 2.0 0.6 | 1.4
------ ----- ----- | -----
$ 75.7 $50.7 $ 9.4 | $41.3
====== ===== ===== | =====
</TABLE>
Total insurance benefits and expenses increased 49.2%, or $25.0
million, in 1998 from $50.7 million in 1997. Interest credited to
account balances increased 255.4%, or $68.2 million, in 1998 from
$26.7 in 1997. The extra credit bonus on the Premium Plus product
introduced in October of 1997 generated a $51.6 million increase in
interest credited during 1998 compared to 1997. The remaining increase
in interest credited related to higher account balances associated
with the Companies' fixed account option within its variable products.
Commissions increased 234.2%, or $84.9 million, in 1998 from $36.3
million in 1997. Insurance taxes increased 77.0%, or $1.8 million, in
1998 from $2.3 million in 1997. Changes in commissions and insurance
taxes are generally related to changes in the level of variable
product sales. Insurance taxes are impacted by several other factors,
which include an increase in FICA taxes primarily due to bonuses. Most
costs incurred as the result of new sales including the extra credit
bonus were deferred, thus having very little impact on current
earnings.
General expenses increased 117.7%, or $20.3 million, in 1998 from
$17.3 million in 1997. Management expects general expenses to continue
to increase in 1999 as a result of the emphasis on expanding the
salaried wholesaler distribution network. The Companies use a network
of wholesalers to distribute products and the salaries of these
wholesalers are included in general expenses. The portion of these
salaries and related expenses that varies with production levels is
deferred thus having little impact on current earnings. The 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.
At the merger date, the Companies' deferred policy acquisition costs
("DPAC"), previous balance of value of purchased insurance in force
("VPIF") and unearned revenue reserve were eliminated and a new asset
of $44.3 million representing VPIF was established for all policies in
force at the merger date. During 1998, VPIF was adjusted to reduce
amortization by $0.2 million to reflect changes in the assumptions
related to the timing of future gross profits. VPIF decreased $2.6
million in the second quarter of 1998 to adjust the value of other
receivables recorded at the time of merger and increased $0.2 million
in the first quarter of
41
<PAGE>
<PAGE>
1998 as the result of an adjustment to the
merger costs. The amortization of VPIF and DPAC increased $1.1
million, or 13.0%, in 1998. During the second quarter of 1997, VPIF
was adjusted by $2.3 million to reflect narrower spreads than the
gross profit model assumed.
Amortization of goodwill for the year ended December 31, 1998 totaled
$3.8 million compared to $2.0 million for the year ended December 31,
1997.
Interest expense on the $25 million surplus note issued December 1996
and expiring December 2026 was $2.1 million for the year ended
December 31, 1998, unchanged from the same period of 1997. In
addition, Golden American incurred interest expense of $0.2 million in
1998 compared to $0.5 million in 1997 on the line of credit with
Equitable which was repaid with a capital contribution. Golden
American also paid $1.8 million in 1998 to ING America Insurance
Holdings, Inc. ("ING AIH") for interest on the reciprocal loan
agreement. Interest expense on the revolving note payable with
SunTrust Bank, Atlanta was $0.3 million for the year ended December
31, 1998.
INCOME. Net income for 1998 was $5.1 million, an increase of $4.8
million from $0.3 million in 1997.
Comprehensive income for 1998 was $3.9 million, an increase of $1.8
million from $2.1 million in 1997.
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>
POST-MERGER | COMBINED | POST-ACQUISITION
-------------------|-------------------|-----------------
For the Period | | For the Period
October 25, 1997 | For the Year | January 1, 1997
through | ended | through
December 31, 1997 | December 31, 1997 | 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>
POST-ACQUISITION | COMBINED | PRE-ACQUISITION
-------------------|-------------------|-----------------
For the Period | | For the Period
August 14, 1996 | For the Year | January 1, 1996
through | ended | through
December 31, 1996 | December 31, 1996 | 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>
42
<PAGE>
<PAGE>
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
Companies' variable annuity premiums increased 29.7% in 1997 due to
the Companies' marketing emphasis on fixed rates during the second
and third quarters. Premiums, net of reinsurance, for variable
products from two significant broker/dealers having at least ten
percent of total sales for the year ended December 31, 1997, totaled
$328.2 million, or 53% of premiums ($298.0 million or 67% from two
significant broker/dealers for the year ended December 31, 1996).
REVENUES.
<TABLE>
POST-MERGER | COMBINED | POST-ACQUISITION
-------------------|-------------------|-----------------
For the Period | | For the Period
October 25, 1997 | For the Year | January 1, 1997
through | ended | through
December 31, 1997 | December 31, 1997 | 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>
POST-ACQUISITION | COMBINED | PRE-ACQUISITION
-------------------|-------------------|-----------------
For the Period | | For the Period
August 14, 1996 | For the Year | January 1, 1996
through | ended | through
December 31, 1996 | December 31, 1996 | 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>
<PAGE>
EXPENSES.
<TABLE>
POST-MERGER | COMBINED | POST-ACQUISITION
-------------------|-------------------|-----------------
For the Period | | For the Period
October 25, 1997 | For the Year | January 1, 1997
through | ended | through
December 31, 1997 | December 31, 1997 | 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>
POST-ACQUISITION | COMBINED | PRE-ACQUISITION
-------------------|-------------------|-----------------
For the Period | | For the Period
August 14, 1996 | For the Year | January 1, 1996
through | ended | through
December 31, 1996 | December 31, 1996 | 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 were deferred, thus having very
little impact on earnings.
44
<PAGE>
<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.
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.
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.
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's
monthly average aggregate cost of short-term funds plus 1.00%. During
1997, the Company paid $0.6 million to Equitable for interest on the
line of credit.
INCOME. Net income on a combined basis for 1997 was $0.3 million, a
decrease of $3.2 million, or 91.4%, from 1996.
FINANCIAL CONDITION
RATINGS. During 1998, the Companies' ratings were upgraded by
Standard & Poor's Rating Services ("Standard & Poor's") from AA to
AA+. During the first quarter of 1999, the Companies' ratings were
upgraded by Duff & Phelps Credit Rating Company from AA+ to AAA.
INVESTMENTS. The financial statement carrying value and amortized
cost basis of the Companies' total investment portfolio grew 8.7% and
10.5%, respectively, during the first nine months of 1999. All of the
Companies' investments, other than mortgage loans on real estate, are
carried at fair value in the Companies' financial statements. As such,
growth in the carrying value of the Companies' investment portfolio
included changes in unrealized appreciation and depreciation of fixed
maturities as well as growth in the cost basis of these securities.
Growth in the cost basis of the Companies' investment portfolio
resulted from the investment of premiums from the sale of the
Companies' fixed account options. The Companies manage the growth of
insurance operations in order to maintain adequate capital ratios. To
support the fixed account options of the Companies' variable insurance
products, cash flow was invested primarily in fixed maturities and
short-term investments.
At September 30, 1999 and December 31, 1998, the Companies had no
investments in default. At September 30, 1999 and December 31, 1998,
the Companies' investment portfolio had a yield of 6.6% and 6.4%,
respectively. The Companies estimate the total investment portfolio,
excluding policy loans, had a fair value approximately equal to 98.0%
of amortized cost value at September 30, 1999 (100.2% at December
31, 1998).
Fixed Maturities: At September 30, 1999, the Companies had fixed
maturities with an amortized cost of $815.0 million and an estimated
fair value of $798.7 million. At December 31, 1998, the Companies had
fixed maturities with an amortized cost of $739.8 million and an
estimated fair value of $742.0 million.
The Companies classify 100% of securities as available for sale. At
September 30, 1999, net unrealized depreciation on fixed maturities of
$16.3 million was comprised of gross appreciation of $0.8 million and
gross depreciation of $17.1 million. Net unrealized holding losses on
these securities, net of adjustments to VPIF, DPAC, and deferred
income taxes of $4.0 million, was included in stockholder's equity at
September
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30, 1999. At December 31, 1998 net unrealized appreciation
of fixed maturities of $2.2 million was comprised of gross
appreciation of $6.7 million and gross depreciation of $4.5 million.
Net unrealized holding gains on these securities, net of adjustments
to VPIF, DPAC, and deferred income taxes of $1.0 million was included
in stockholder's equity at December 31, 1998.
The individual securities in the Companies' fixed maturities portfolio
(at amortized cost) include investment grade securities, which include
securities issued by the U.S. government, its agencies, and
corporations, that are rated at least A- by Standard & Poor's ($528.0
million or 64.8% at September 30, 1999 and $477.4 million or 64.5% at
December 31, 1998), that are rated BBB+ to BBB- by Standard & Poor's
($138.0 million or 16.9% at September 30, 1999 and $124.0 million or
16.8% at December 31, 1998) and below investment grade securities
which are securities issued by corporations that are rated BB+ to CCC-
by Standard & Poor's ($72.3 million or 8.9% at September 30, 1999 and
$51.6 million or 7.0% at December 31, 1998). Securities not rated by
Standard & Poor's had a National Association of Insurance
Commissioners ("NAIC") rating of 1, 2, 3 or 4 ($76.7 million or 9.4%
at September 30, 1999 and $86.8 million or 11.7% at December 31,
1998). The Companies' fixed maturity investment portfolio had a
combined yield at amortized cost of 6.6% at September 30, 1999 and
6.5% at December 31, 1998.
Fixed maturities rated BBB+ to BBB- may have speculative
characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of the
issuer to make principal and interest payments than is the case with
higher rated fixed maturities.
At September 30, 1999, the amortized cost value of the Companies'
total investment in below investment grade securities, excluding
mortgage-backed securities, was $73.7 million, or 7.4%, of the
Companies' investment portfolio ($52.7 million, or 5.9%, at December
31, 1998). The Companies intend to purchase additional below
investment grade securities but do not expect the percentage of the
portfolio invested in such securities to exceed 10% of the investment
portfolio. At September 30, 1999, the yield at amortized cost on the
Companies' below investment grade portfolio was 7.8% compared to 6.6%
for the Companies' investment grade corporate bond portfolio. AAt
December 31, 1998, the yield at amortized cost on the Companies' below
investment grade portfolio was 7.9% compared to 6.4% for the
Companies' investment grade corporate bond portfolio. The Companies
estimate the fair value of the below investment grade portfolio was
$70.5 million, or 95.6% of amortized cost value, at September 30, 1999
($51.7 million, or 98.1% of amortized cost value, at December 31,
1998).
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 a
recession or increasing interest rates, than are investment grade
issuers. The Companies attempt to reduce the overall risk in the below
investment grade portfolio, as in all investments, through careful
credit analysis, strict investment policy guidelines, and
diversification by company and by industry.
The Companies analyze the investment portfolio, including below
investment grade securities, at least quarterly in order to determine
if the Companies' ability to realize the 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 Companies 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
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 Companies' portfolio. Significant write-downs in
the carrying value of investments could materially adversely affect
the Companies' net income in future periods.
During the nine months ended September 30, 1999 and Ifor the year
ended December 31, 1998, fixed maturities designated as available for
sale with a combined amortized cost of $170.6 million and $145.3
million, respectively, were called or repaid by their issuers. In
total, net pre-tax losses from sales, calls, and repayments of fixed
maturities amounted to $2.2 million and $0.5 million, for the first
nine months of 1999 and for the year ended December 31, 1998,
respectively.
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During the fourth quarter of 1998, Golden American determined that the
carrying value of two bonds exceeded their estimated net realizable
value. As a result, at December 31, 1998, Golden American
recognized a total pre-tax loss of approximately $1.0 million to
reduce the carrying value of the bonds to their combined net
realizable value of $2.9 million. During the second quarter of 1999,
further information was received regarding these bonds and Golden
American determined that the carrying value of the two bonds exceeded
their estimated net realizeable value. As a result, at June 30, 1999
Golden American recognized a total pre-tax loss of approximately $1.6
million to further reduce the carrying value of the bonds to their
combined net realizeable value of $1.1 million.
Equity Securities: At September 30, 1999 and December 31, 1998,
Eequity securities represented 1.5% and 1.6%, respectively, of the
Companies' investment portfolio. At September 30, 1999 and December
31, 1998, the Companies owned equity securities with a cost of $14.4
million and an estimated fair value of $13.7 million and $11.5
million, respectively. At September 30, 1999, net unrealized
depreciation of equity securities of $0.7 million was comprised of
gross appreciation of $0.3 million and gross depreciation of
$1.0 million at December 31, 1998 net unrealized depreciation of
equity securities was comprised entirely of
gross depreciation of $2.9 million . Equity securities are primarily
comprised of investments in shares of the mutual funds underlying the
Companies' registered separate accounts.
Mortgage Loans on Real Estate: Mortgage loans on real estate
represented 9.5% and 10.9% of the Companies' investment portfolio at
September 30, 1999 and at December 31, 1998, respectively. Mortgages
outstanding at amortized cost were $93.9 million September 30, 1999
with an estimated fair value of $91.2 million. Mortgages outstanding
were $97.3 million at December 31, 1998 with an estimated fair value
of $99.8 million. At September 30, 1999, the Companies' mortgage loan
portfolio included 57 loans with an average size of $1.6 million and
average seasoning of 0.8 years if weighted by the number of loans. At
December 31, 1998, Tthe Companies' mortgage loan portfolio includeds
57 loans with an average size of $1.7 million and average seasoning of
0.9 years if weighted by the number of loans. The Companies' mortgage
loans on real estate are typically secured by occupied buildings in
major metropolitan locations and not speculative developments and are
diversified by type of property and geographic location.
Mortgage loans on real estate have been analyzed by geographical
location with concentrations by state identified as California (12% in
1998 and 1997), Utah (11% in 1998, 13% in 1997) and Georgia (10% in
1998, 11% in 1997). There are no other concentrations of mortgage
loans in any state exceeding ten percent at December 31, 1998 and
1997. Mortgage loans on real estate have also been analyzed by
collateral type with significant concentrations identified in office
buildings (36% in 1998, 43% in 1997), industrial buildings (32% in
1998, 33% in 1997) and retail facilities (20% in 1998, 15% in 1997).
As of September 30, 1999, there have been no significant changes to
the concentrations of mortgage loans on real estate compared to December
31, 1998. At September 30, 1999 and December 31, 1998, the yield on
the Companies' mortgage loan portfolio was 7.3%.
At September 30, 1999 and December 31, 1998, no mortgage loan on real
estate was delinquent by 90 days or more. The Companies' loan
investment strategy is consistent with other life insurance
subsidiaries of ING in the U.S. The insurance subsidiaries of EIC have
experienced a historically low default rate in their mortgage loan
portfolios.
OTHER ASSETS. Accrued investment income increased $2.3 million during
the first nine months of 1999 due to an increase in the overall size
of the portfolio resulting from the investment of premiums allocated
to the fixed account options of the Companies' variable products.
DPAC represents certain deferred costs of acquiring insurance
business, principally first year commissions and interest bonuses,
extra credit bonuses and other expenses related to the production of
new business after the merger. The Companies' previous balances of
DPAC and VPIF were eliminated as of the merger date, and an asset
representing VPIF was established for all policies in force at the
merger date. VPIF is amortized into income in proportion to the
expected gross profits of in force acquired business in a manner
similar to DPAC amortization. Any expenses which vary directly with
the sales of the Companies' products are deferred and amortized. At
September 30, 1999, the Companies had DPAC and VPIF balances of $439.2
million and $33.0 million ($205.0 million and $36.0 million,
respectively at December 31, 1998). During the first nine months of
1998, VPIF decreased $2.7 million to adjust the value of other
receivables and increased $0.2 million as a result of an adjustment to
the merger costs.
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Property and equipment increased $5.7 million, or 77.1%, during the
first nine months of 1999, due to the purchase of furniture and other
equipment for Golden American's new offices in West Chester,
Pennsylvania. Property and equipment increased $5.8 million during
1998, due to installation of a new policy administration system,
introduction of an imaging system as well as the growth in the
business.
Goodwill totaling $151.1 million, representing the excess of the
acquisition cost over the fair value of net assets acquired, was
established at the merger date. Accumulated amortization of goodwill
as of September 30, 1999 and December 31, 1998 was $7.2 million and
$4.4 million, respectively.
Other assets increased $35.8 million during the first nine months of
1999 due mainly to an increase in a receivable from the separate
account. Other assets increased $5.5 million during 1998 due mainly
to an increase in amounts due from an unaffiliated reinsurer under a
modified coinsurance agreement.
At September 30, 1999, the Companies had $5.6 billion of separate
account assets compared to $3.4 billion at December 31, 1998. The
increase in separate account assets resulted from market appreciation,
increased transfer activity, and sales of the Companies' variable
annuity products, net of redemptions. At December 31, 1998, the
Companies had $3.4 billion of separate account assets compared to $1.6
billion at December 31, 1997. The increase in separate account assets
resulted from market appreciation and growth in sales of the
Companies' variable annuity products, net of redemptions.
At September 30, 1999, the Companies had total assets of $7.3 billion,
a 53.9% increase from December 31, 1998. At December 31, 1998,
the Companies had total assets of $4.8 billion, an increase of 94.3%
from December 31, 1997.
LIABILITIES. In conjunction with the volume of variable annuity
sales, the Companies' total liabilities increased $2.5 billion, or
55.9%, during the first nine months of 1999 and totaled $6.9 billion
at September 30, 1999. At September 30, 1999, future policy benefits
for annuity and interest sensitive life products increased $128.3
million, or 14.6%, to $1.0 billion reflecting premium growth in the
Companies' fixed account options of its variable products, net of
transfers to the separate accounts. Market appreciation, increased
transfer activity, and premiums, net of redemptions, accounted for the
$2.2 billion, or 64.9%, increase in separate account liabilities to
$5.6 billion at September 30, 1999.
In conjunction with the volume of variable annuity sales, the
Companies' total liabilities increased $2.2 billion, or 98.2%, during
1998 and totaled $4.4 billion at December 31, 1998. Future policy
benefits for annuity and interest sensitive life products increased
$375.8 million, or 74.4%, to $881.1 million reflecting premium growth
in the Companies' fixed account option of its variable products.
Market appreciation and premium growth, net of redemptions, accounted
for the $1.7 billion, or 106.3%, increase in separate account
liabilities to $3.4 billion at December 31, 1998.
On September 30, 1999, Golden American issued a $75 million, 7.75%
surplus note to ING AIH, which matures on September 29, 2029.
On December 30, 1998, Golden American issued a $60 million, 7.25%
surplus note to Equitable Life, which matures on December 29, 2028.
On December 17, 1996, Golden American issued a $25 million, 8.25%
surplus note to Equitable which matures on December 17, 2026. As a
result of the merger, the surplus note is now payable to EIC.
At September 30, 1999, other liabilities increased $47.5 million from
$32.6 million at December 31, 1998, due primarily to increases in
securities payables and remittances to be applied.
At December 31, 1998, other liabilities increased $15.3 million from
$17.3 million at December 31, 1997, due primarily to increases in
accounts payable, outstanding checks, guaranty fund assessment
liability, and pension liability.
The effects of inflation and changing prices on the Companies'
financial position 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 stockholder's equity when monetary assets exceed monetary
liabilities.
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STOCKHOLDER'S EQUITY. Additional paid-in capital increased $100.0
million, or 28.8%, from December 31, 1998 to $447.6 million at
September 30, 1999 due to capital contributions from the Parent.
Additional paid-in capital increased $122.6 million, or 54.5%, from
December 31, 1997 to $347.6 million at December 31, 1998 primarily due
to capital contributions from the Parent.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the Companies to generate sufficient cash
flows to meet the cash requirements of operating, investing, and
financing activities. The Companies' principal sources of cash are
variable annuity premiums and product charges, investment income,
maturing investments, proceeds from debt issuance, and capital
contributions made by the Parent. Primary uses of these funds are
payments of commissions and
operating expenses, interest and extra premium credits, investment
purchases, repayment of debt, as well as withdrawals and surrenders.
Net cash used in operating activities was $60.0 million in the first
nine months of 1999 compared to $22.7 million in the same period of
1998. Net cash used in operating activities was $63.9 million in 1998
compared to $4.8 million in 1997. The Companies have predominantly had
negative cash flows from operating activities since Golden American
started issuing variable insurance products in 1989. These negative
operating cash flows result primarily from the funding of commissions
and other deferrable expenses related to the continued growth in the
variable annuity products. The 1998 increase in net cash used in
operating activities resulted principally from the introduction of
Golden American's extra premium credit product in October 1997. In
1998, $54.4 million in extra premium credits was added to contract
holders' account values versus $2.8 million in 1997.
Net cash used in investing activities was $111.3 million during the
first nine months of 1999 as compared to $224.5 million in the same
period of 1998. This decrease is primarily due to greater net
purchases of fixed maturities, equity securities, and mortgage loans
on real estate during the first nine months of 1998 than in the same
period of 1999. Net purchases of fixed maturities reached $79.7
million during the first nine months of 1999 versus $199.0 million in
the same period of 1998. Net sales of mortgage loans on real estate
were $3.2 million during the first nine months of 1999 compared to net
purchases of $13.2 million during the first nine months of 1998.
Net cash used in investing activities was $390.0 million during 1998
as compared to $198.5 million in 1997. This increase is primarily due
to greater net purchases of fixed maturities resulting from an
increase in funds available from net fixed account deposits. Net
purchases of fixed maturities reached
$331.3 million in 1998 versus $135.3 million in 1997. Net purchases
of mortgage loans on real estate, on the other hand, declined to $12.6
million from $51.2 at December 31, 1997in the prior year. In 1998,
net purchases of short-term investments were unusually high due to
the investment of the remaining proceeds of Golden American's $60.0
million surplus note issued on December 30, 1998.
Net cash provided by financing activities was $177.5 million during
the first nine months of 1999 compared to $245.1 million during the
same period of 1998. In the first nine months of 1999, net cash
provided by financing activities was positively impacted by net fixed
account deposits of $441.7 million compared to $300.0 million in the
same period of 1998. This increase was offset by net reallocations to
the Companies' separate accounts, which increased to $439.2 million
from $163.5 million during the prior year, and by a decrease in net
borrowings of $54.8 million in the first nine months of 1999 compared
to the first nine months of 1998. In the first nine months of 1999,
another important source of cash provided by financing activities was
$100.0 million in capital contributions from the Parent compared to
$53.8 million in the first nine months of 1998. In addition, another
source of cash provided by financing activities during the third
quarter of 1999 was $75.0 million in proceeds from a surplus note
with ING AIH.
Net cash provided by financing activities was $439.5 million during
1998 as compared to $218.6 million during the prior year. In 1998, net
cash provided by financing activities was positively impacted by net
fixed account deposits of $520.8 million compared to $303.6 million in
1997. This increase was partially offset by net reallocations to the
Companies' separate accounts, which increased to $239.7 million from
$110.1 million during the prior year. In 1998, other important sources
of cash provided by financing activities were $98.4 million of capital
contributions from the Parent and $60.0 million of proceeds from the
issuance of a surplus note on December 30, 1998. The Companies have
used part of the proceeds of the surplus note to repay outstanding
short-term debt.
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The Companies' liquidity position is managed by maintaining adequate
levels of liquid assets, such as cash or cash equivalents and short-
term investments. Additional sources of liquidity include borrowing
facilities to meet short-term cash requirements. Golden American
maintains a $65.0 million reciprocal loan agreement with ING AIH,
which expires on December 31, 2007. In addition, the Companies
have an $85.0 million revolving note facility with SunTrust Bank,
Atlanta, which expires on July 31, 2000. Management believes that
these sources of liquidity are adequate to meet the Companies'
short-term cash obligations.
Based on current trends, the Companies expect to continue to use net
cash in operating activities, given the continued growth of the
variable annuity products. It is anticipated that a continuation of
capital contributions from the Parent and the issuance of additional
surplus notes will cover these net cash outflows. ING is committed to
the sustained growth of Golden American. During 1999, ING will
maintain Golden American's statutory capital and surplus at the end of
each quarter at a level such that: 1) the ratio of Total Adjusted
Capital divided by Company Action Level Risk Based Capital exceeds
300%; 2) the ratio of Total Adjusted Capital (excluding surplus notes)
divided by Company Action Level Risk Based Capital exceeds 200%; and
3) Golden American's statutory capital and surplus exceeds the
"Amounts Accrued for Expense Allowances Recognized in Reserves" as
disclosed on page 3, Line 13A of Golden American's Statutory
Statement.
During the first quarter of 1999, Golden American's operations were
moved to a new site in West Chester, Pennsylvania. During the third
quarter of 1999, Golden American occupied an additional 20,000 square
feet and currently occupies 85,000 square feet of leased space, its
affiliate occupies 20,000 square feet, and it has made commitments for
an additional 20,000 square feet to be occupied by itself or its
affiliates during the fourth quarter of 1999. Previously, Golden
American's home office operations were housed in leased locations in
Wilmington, Delaware and various locations in Pennsylvania, which were
leased on a short-term basis for use in the transition to the new
office building. Golden American's New York subsidiary is housed in
leased space in New York, New York. The Companies intend to spend
approximately $1.0 million on capital needs during the remainder of
1999.
The ability of Golden American to pay dividends to its Parent is
restricted. Prior approval of insurance regulatory authorities is
required for payment of dividends to the stockholder which exceed an
annual limit. During 1999, Golden American cannot pay dividends to its
Parent without prior approval of statutory authorities.
Under the provisions of the insurance laws of the State of New York,
First Golden cannot distribute any dividends to its stockholder,
Golden American, unless a notice of its intent to declare a dividend
and the amount of the dividend has been filed with the New York
Insurance Department at least thirty days in advance of the proposed
declaration. If the Superintendent of the New York Insurance Department
finds the financial condition of First Golden does not warrant the
distribution, the Superintendent may disapprove the distribution by
giving written notice to First Golden within thirty days after the
filing. The management of First Golden does not anticipate paying
any dividends to Golden American during 1999.
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 monitor the capitalization of insurance companies based upon the
type and mixture of risks inherent in a company's operations. The
formula includes components for asset risk, liability risk, interest
rate exposure and other factors. The Companies have complied with the
NAIC's risk-based capital reporting requirements. Amounts reported
indicate the Companies have total adjusted capital well above all
required capital levels.
Reinsurance: At September 30, 1999 and at December 31, 1998, Golden
American had reinsurance treaties with four unaffiliated reinsurers
and one affiliated reinsurer covering a significant portion of the
mortality risks under its variable contracts. Golden American remains
liable to the extent its reinsurers do not meet their obligations
under the reinsurance agreements.
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MARKET RISK AND RISK MANAGEMENT
Asset/liability management is integrated into many aspects of the
Companies' operations, including investment decisions, product
development and crediting rates determination. As part of the risk
management process, different economic scenarios are modeled,
including cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables include
contractholder behavior and the variable separate accounts'
performance.
Contractholders bear the majority of the investment risks related
to the variable products. Therefore, the risks associated with the
investments supporting the variable separate accounts are assumed
by contractholders, not by the Companies (subject to, among other
things, certain minimum guarantees). The Companies' products also
provide certain minimum death benefits that depend on the
performance of the variable separate accounts. Currently the
majority of death benefit risks are reinsured, which protects the
Companies from adverse mortality experience and prolonged capital
market decline.
A surrender, partial withdrawal, transfer or annuitization made
prior to the end of a guarantee period from the fixed account may
be subject to a market value adjustment. As the majority of the
liabilities in the fixed account are subject to market value
adjustment, the Companies do not face a material amount of market
risk volatility. The fixed account liabilities are supported by a
portfolio principally composed of fixed rate investments that can
generate predictable, steady rates of return. The portfolio
management strategy for the fixed account considers the assets
available for sale. This enables the Companies to respond to
changes in market interest rates, changes in prepayment risk,
changes in relative values of asset sectors and individual
securities and loans, changes in credit quality outlook and other
relevant factors. The objective of portfolio management is to
maximize returns, taking into account interest rate and credit
risks as well as other risks. The Companies' asset/liability
management discipline includes strategies to minimize exposure to
loss as interest rates and economic and market conditions change.
On the basis of these analyses, management believes there is no
material solvency risk to the Companies. With respect to a 10%
drop in equity values from year-end 1998 levels, variable separate
account funds, which represent 85% of the in force as of
September 30, 1999, pass the risk in underlying fund performance
to the contract holder (except for certain minimum guarantees that
are mostly reinsured). With respect to interest rate movements
up or down 100 basis points from year-end 1998 levels, the
remaining 15% of the in force as of September 30, 1999 are fixed
account funds and almost all of these have market value adjustments
which provide significant protection against changes in interest
rates.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other
oral or written statement by the Companies or any of their
officers, directors or employees is qualified by the fact that
actual results of the Companies may differ materially from such
statement, among other risks and uncertainties inherent in the
Companies' business, due to the following important factors:
1. Prevailing interest rate levels and stock market performance,
which may affect the ability of the Companies to sell their
products, the market value and liquidity of the Companies'
investments and the lapse rate of the Companies' policies,
notwithstanding product design features intended to enhance
persistency of the Companies' products.
2. Changes in the federal income tax laws and regulations which
may affect the tax status of the Companies'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 Companies'
products.
4. Increasing competition in the sale of the Companies' products.
5. Other factors that could affect the performance of the
Companies, including, but not limited to, market conduct
claims, litigation, insurance industry insolvencies,
availability of competitive reinsurance on new business,
investment performance of the underlying portfolios of the
variable products, variable product design and sales volume by
significant sellers of the Companies' variable products.
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6. To the extent third parties are unable to transact business in
the Year 2000 and thereafter, the Companies' operations could
be adversely affected.
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, three of whom, Locust Street
Securities, Inc., Vestax Securities
Corporation, and Multi-Financial Securities Corporation, are affiliates
of Golden American. As of September 30, 1999, two broker-dealers produce
10% or more of Golden American's product sales.
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, 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 were $0.5 million.
Pursuant to a service agreement between Golden American and Equitable
Life, Equitable Life provides certain administrative, financial and
other services to Golden American. Equitable Life billed Golden
American and its subsidiary First Golden American Life Insurance
Company of New York ("First Golden"), $0.9 million, $1.1 million,
and $29,000 for the first nine months of 1999 and the years ended
December 31, 1998 and 1997, respectively, under this service
agreement.
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 the variable separate accounts, was $6.8 million,
$4.8 million, $2.8 million and $2.3 million for the first nine months
of 1999, and the years of 1998, 1997 and 1996, respectively.
Since January 1, 1998, Golden American and First Golden have had an
asset management agreement with ING Investment Management LLC ("ING
IM"), an affiliate, in which ING IM provides asset management and
accounting services for a fee, payable quarterly. For the first nine
months of 1999 and for the year
52
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<PAGE>
ended December 31, 1998, Golden
American and First Golden incurred fees of $1.6 million and $1.5 million,
respectively, under this agreement. Prior to 1998, Golden American and
First Golden had a service agreement with Equitable Investment Services,
Inc. ("EISI"), an affiliate, in which EISI provided investment
management services. Golden American and First Golden paid fees of
$1.0 million for 1997 and $72,000 for the period from August 14,
1996 through December 31, 1996, respectively.
Since 1997, Golden American has provided certain advisory, computer
and other resources and services to Equitable Life. Revenues for these
services totaled $0.9 million for the first nine months of 1999,
$5.8 million for 1998 and $4.3 million for 1997.
The Companies provide resources and services to DSI. Revenues for
these services totaled $0.8 million for the first nine months of 1999.
Golden American provides resources and services to ING Mutual Funds
Management Co., LLC, an affiliate. Revenues for these services
totaled $0.4 million for the first nine months of 1999 and $2.1
million for 1998.
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 September 30,
1999 and December 31, 1998, are sold primarily through two
broker/dealer institutions. For the nine months ended September 30,
1999 and the years 1998, 1997 and 1996, commissions paid by Golden
American to DSI (including commissions paid by First Golden)
aggregated $130.4 million, $117.5 million, $36.4 million and $27.1
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 hired
individuals to perform various management services and has looked
to Equitable of Iowa and its affiliates for certain other
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 1475
Dunwoody Drive, West Chester, Pennsylvania 19380, 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 Department 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 initiatives designed to
improve the surveillance and financial analysis regarding the
solvency of insurance companies in general. These initiatives
include the development and implementation of a risk-based capital
formula for determining adequate levels of capital
53
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<PAGE>
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 "Management's
Discussion and Analysis Results of Operations"
In addition, many states regulate affiliated groups of insurers,
such as Golden American, and its affiliates, 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 insolvent. 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 11 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 OFFICERS
NAME (AGE) POSITION(S) WITH THE COMPANY
- ---------- ----------------------------
Barnett Chernow (50) President and Director
Myles R. Tashman (57) Director, Executive Vice President,
General Counsel and Secretary
Michael W. Cunningham (50) Director
Mark A. Tullis (44) Director
Phillip R. Lowery (46) Director
James R. McInnis (51) Executive Vice President and
Chief Marketing Officer
Stephen J. Preston (42) Executive Vice President and Chief
Actuary
E. Robert Koster (41) Senior Vice President and Chief Financial
Officer
Patricia M. Corbett (34) Treasurer and Assistant V.P.
David L. Jacobson (50) Senior Vice President and Assistant
Secretary
William L. Lowe (35) Senior Vice President, Sales and Marketing
Ronald R. Blasdell (46) Senior Vice President, Project Implementation
Steven G. Mandel (40) Senior Vice President and
Chief Information Officer
Gary F. Haynes (54) Senior Vice President, Operations
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. Some 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
and President of 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 September 1996.
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.
He also serves as a Director, Executive Vice President, General
Counsel and Secretary of First Golden.
54
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<PAGE>
Mr. Michael W. Cunningham became a Director of Golden American and
First Golden in April 1999. Also, he has served as a Director of
Life of Georgia and Security Life of Denver since 1995.
Currently, he serves as
Executive Vice President and Chief Financial Officer of ING North
America Insurance Corporation, and has worked for them since 1991.
Mr. Mark A. Tullis became a Director of Golden American in January
2000. He has served as Executive Vice President, Strategy and
Operations for ING Americas Region since September 1999.
Mr. Phillip R. Lowery became a Director of Golden American in
April 1999. He has served as Executive Vice President and Chief
Actuary for ING Americas Region since 1990.
Mr. James R. McInnis joined Golden American in December, 1997 as
Executive Vice President. From 1982 through November 1997, he held
several positions with the Endeavor Group and was President upon
his departure.
Mr. E. Robert Koster was elected Senior Vice President and Chief
Financial Officer of Golden American in September 1998. From
August, 1984 to September, 1998 he has held various positions with
ING companies in The Netherlands.
Ms. Patricia M. Corbett was elected Treasurer of Golden American
in December 1998. She joined Equitable Life Insurance Company of
Iowa in 1987 and is currently Treasurer and Assistant Vice
President of Equitable Life and USG Annuity & Life Company.
Mr. David L. Jacobson joined Golden American in November 1993 as
Senior Vice President and Assistant Secretary.
Mr. Stephen J. Preston joined Golden American in December, 1993 as
Senior Vice President, Chief Actuary and Controller. He became an
Executive Vice President and Chief Actuary in June 1998.
Mr. William L. 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 was also
President of Equitable of Iowa Securities Network, Inc. until
October 1998.
Mr. Steven G. Mandel joined Golden American in October 1988 and
became Senior Vice President and Chief Information Officer in
June 1998.
Mr. Ronald R. Blasdell joined Golden American in February 1994 and
became Senior Vice President, Project Implementation in June 1998.
Mr. Gary Haynes joined Golden American in April 1999 and became
Senior Vice President, Operations in April 1999.
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, 1998. 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.
55
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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
Officers and the five other most highly compensated executive
officers for the fiscal year ended December 31, 1998. As of
the date of this prospectus 1999 data was not yet available.
<TABLE>
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
------------------- ------------------------ ------------
RESTRICTED SECURITIES
NAME AND STOCK AWARDS UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) OPTIONS(3)
- ------------------ ---- ------ -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Barnett Chernow, 1998 $284,171 $105,375 8,000
President 1997 $234,167 $ 31,859 $277,576 4,000
1996 $207,526 $150,000 $ 7,755(4)
James R. McInnis, 1998 $250,004 $626,245 2,000
Executive Vice
President
Keith Glover, 1998 $250,000 $145,120 3,900
Executive Vice
President
Myles R. Tashman, 1998 $189,337 $ 54,425 3,500
Executive Vice 1997 $181,417 $ 25,000 $165,512 5,000
President, 1996 $176,138 $ 90,000 $ 5,127(4)
General Counsel
and Secretary
Stephen J. Preston, 1998 $173,870 $ 32,152 3,500
Executive Vice 1997 $160,758 $ 16,470
President 1996 $156,937 $ 58,326
and Chief Actuary
Paul R. Schlaack, 1998 $406,730 $210,600
Former Chairman 1997 $351,000 $249,185 $1,274,518 19,000 $15,000
and Vice President 1996 $327,875 $249,185 $ 245,875 19,000 $15,000
Terry L. Kendall, 1998 $145,237 $181,417
Former President 1997 $362,833 $ 80,365 $ 644,844 16,000
and CEO 1996 $288,298 $400,000 $11,535(4)
</TABLE>
(1) The amount shown relates to bonuses paid in 1998, 1997
and 1996.
(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 control of Equitable of Iowa
and were cashed out for the difference between $68.00 and the
exercise price.
(4) In 1996, 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 1996 to employees on record as of December 31,
1996, after an employee completed one year of service with the
company. This contribution could 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.
56
<PAGE>
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR (1998)
<TABLE> POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM (3)
OPTIONS IN FISCAL OR BASE EXPIRATION ------------------
NAME GRANTED(1) YEAR PRICE (2) DATE 5% 10%
- ---- ---------- ----- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Barnett Chernow 8,000 11.99 $60.518 5/26/2003 $164,016 $362,433
James R. McInnis 2,000 3.00 $60.518 5/26/2003 $ 41,004 $ 90,608
Keith Glover 3,900 5.85 $60.518 5/26/2003 $ 79,958 $176,686
Myles R. Tashman 3,500 5.25 $60.518 5/26/2003 $ 71,758 $158,564
Stephen J. Preston 3,500 5.25 $60.518 5/26/2003 $ 71,758 $158,564
</TABLE>
(1) Stock appreciation rights granted on May 26, 1998 to the
officers of Golden American have a three-year vesting period
and an expiration date as shown.
(2) The base price was equal to the fair market value of
ING's stock on on the date of grant.
(3) Total dollar gains based on indicated rates of
appreciation of share price over a the five year term of the
rights.
Directors of Golden American receive no additional compensation
for serving as a director.
57
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[Shaded Section Header]
- --------------------------------------------------------------------------
UNAUDITED FINANCIAL STATEMENTS OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at
fair value (cost: 1999 -- $815,027;
1998 -- $739,772) $ 798,708 $ 741,985
Equity securities, at fair value (cost: 13,679 11,514
1999 -- $14,437; 1998 -- $14,437)
Mortgage loans on real estate 93,884 97,322
Policy loans 13,454 11,772
Short-term investments 66,519 41,152
---------- ----------
Total investments 986,244 903,745
Cash and cash equivalents 12,908 6,679
Due from affiliates 1,460 2,983
Accrued investment income 11,896 9,645
Deferred policy acquisition costs 439,176 204,979
Value of purchased insurance in force 32,984 35,977
Current income taxes recoverable 204 628
Deferred income tax asset 29,690 31,477
Property and equipment, less allowances
for depreciation of $2,807 in 1999
and $801 in 1998 13,017 7,348
Goodwill, less accumulated amortization
of $7,242 in 1999 and $4,408 in 1998 143,886 146,719
Other assets 42,072 6,239
Separate account assets 5,598,490 3,396,114
---------- ----------
Total assets $7,312,027 $4,752,533
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive life
products $1,009,382 $881,112
Unearned revenue reserve 5,855 3,840
Other policy claims and benefits 15 --
---------- ----------
1,015,252 884,952
Surplus notes 160,000 85,000
Due to affiliates 4,328 --
Other liabilities 80,081 32,573
Separate account liabilities 5,598,490 3,396,114
---------- ----------
6,858,151 4,398,639
Commitments and contingencies
Stockholder's equity:
Common stock, par value $10 per share,
authorized, issued, 2,500 2,500
and outstanding 250,000 shares
Additional paid-in capital 447,640 347,640
Accumulated other comprehensive loss (4,464) (895)
Retained earnings 8,200 4,649
---------- ----------
Total stockholder's equity 453,876 353,894
---------- ----------
Total liabilities and stockholder's
equity $7,312,027 $4,752,533
========== ==========
See accompanying notes.
</TABLE> 58
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months ended Months ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenues:
Annuity and interest sensitive
life product charges $ 55,195 $ 26,984
Management fee revenue 6,755 3,257
Net investment income 42,671 29,296
Realized gains (losses) on
investments (2,215) 436
Other income 7,448 4,805
--------- --------
109,854 64,778
Insurance benefits and expenses:
Annuity and interest sensitive
life benefits:
Interest credited to account 125,404 64,110
balances
Benefit claims incurred in 3,452 862
excess of account balances
Underwriting, acquisition, and
insurance expenses:
Commissions 134,585 84,958
General expenses 47,551 23,480
Insurance taxes, state 3,545 2,680
licenses, and fees
Policy acquisition costs (244,840) (133,616)
deferred
Amortization:
Deferred policy acquisition 19,699 4,014
costs
Value of purchased insurance 4,803 3,252
in force
Goodwill 2,834 2,834
--------- --------
97,033 52,574
Interest expense 5,552 3,033
--------- --------
102,585 55,607
--------- --------
Income before income taxes 7,269 9,171
Income taxes 3,718 4,294
--------- --------
Net income $ 3,551 $ 4,877
========= ========
See accompanying notes.
</TABLE> 59
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months ended Months ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (60,026) $ (22,666)
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities -- available for sale 170,548 92,707
Mortgage loans on real estate 4,241 3,145
Short-term investments -- net -- 2,575
---------- ----------
174,789 98,427
Acquisition of investments:
Fixed maturities -- available for sale (250,277) (291,687)
Equity securities -- (10,000)
Mortgage loans on real estate (1,034) (16,390)
Policy loans -- net (1,682) (1,385)
Short term investments -- net (25,367) --
---------- ----------
(278,360) (319,462)
Net purchase of property and equipment (7,700) (3,470)
---------- ----------
Net cash used in investing activities (111,271) (224,505)
FINANCING ACTIVITIES
Proceeds from reciprocal loan agreement 488,950 242,847
borrowings
Repayment of reciprocal loan agreement (488,950) (202,847)
borrowings
Proceeds from revolving note payable 131,595 20,082
Repayment of revolving note payable (131,595) --
Proceeds from surplus note 75,000 --
Repayment of line of credit borrowings -- (5,309)
Receipts from annuity and interest
sensitive life policies credited
to account balances 540,464 350,385
Return of account balances on annuity
and interest sensitive life policies (98,715) (50,370)
Net reallocations to Separate Accounts (439,223) (163,455)
Contributions from parent 100,000 53,750
---------- ----------
Net cash provided by financing 177,526 245,083
activities
---------- ----------
Increase (decrease) in cash and cash
equivalents 6,229 (2,088)
Cash and cash equivalents at beginning
of period 6,679 21,039
---------- ----------
Cash and cash equivalents at end of
period $ 12,908 $ 18,951
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 5,078 $ 3,493
Taxes 10 80
Non-cash financing activities:
Non-cash adjustment to additional paid
in capital for adjusted merger costs -- 143
Non-cash contribution of capital from
parent to repay line of credit
borrowings -- 18,750
See accompanying notes.
</TABLE> 60
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, the financial
statements do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All adjustments
were of a normal recurring nature, unless otherwise noted in Management's
Discussion and Analysis and the Notes to Financial Statements. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1999. These financial statements should be read in
conjunction with the financial statements and related notes included in
the Golden American Life Insurance Company's annual report on Form 10-K
for the year ended December 31, 1998.
CONSOLIDATION
The condensed 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
"Companies"). All significant intercompany accounts and transactions
have been eliminated.
ORGANIZATION
Golden American is a wholly owned subsidiary of Equitable of Iowa
Companies, Inc. ("EIC" or the "Parent"). On October 24, 1997, PFHI
Holdings, Inc. ("PFHI"), a Delaware corporation, acquired all of the
outstanding capital stock of Equitable of Iowa Companies ("Equitable")
according to the terms of an Agreement and Plan of Merger dated July 7,
1997 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 this transaction, Equitable was
merged into PFHI, which was simultaneously renamed Equitable of Iowa
Companies, Inc., a Delaware corporation.
FAIR VALUES
Estimated fair values of publicly traded fixed maturities for 1999 are as
reported by an independent pricing service.
STATUTORY
Net loss for Golden American as determined in accordance with statutory
accounting practices was $75,508,000 and $32,198,000 for the nine months
ended September 30, 1999 and 1998, respectively. Total statutory capital
and surplus was $285,674,000 at September 30, 1999 and $183,045,000 at
December 31, 1998.
RECLASSIFICATIONS
Certain amounts in the September 30, 1998 and December 31, 1998 financial
statements have been reclassified to conform to the September 30, 1999
financial statement presentation.
2. COMPREHENSIVE INCOME
As of January 1, 1998, the Companies adopted the Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement had no
61
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
2. COMPREHENSIVE INCOME (continued)
impact on the Companies' net income or stockholder's
equity. SFAS No. 130 requires unrealized gains or losses on the
Companies' available for sale securities (net of adjustments for value of
purchased insurance in force ("VPIF"), deferred policy acquisition costs
("DPAC"), and deferred income taxes) to be included in other
comprehensive income.
During the third quarter and first nine months of 1999, other
comprehensive income (loss) for the Companies amounted to $2,059,000 and
$(18,000), respectively ($2,426,000 and $5,478,000, respectively, for the
same periods of 1998). Included in these amounts are other comprehensive
income (loss) for First Golden of $(14,000) and $(258,000) for the third
quarter and first nine months of 1999, respectively ($601,000 and
$1,174,000, respectively, for the same periods of 1998). Other
comprehensive income (loss) excludes net investment gains (losses)
included in net income which merely represent transfers from unrealized
to realized gains and losses. These amounts totaled $(460,000) and
$(2,512,000) during the third quarter and first nine months of 1999,
respectively ($263,000 and $388,000, respectively, for the same periods
of 1998). Such amounts, which have been measured through the date of
sale, are net of income taxes and adjustments for VPIF and DPAC totaling
$(38,000) and $297,000 for the third quarter and first nine months of
1999, respectively ($40,000 and $48,000, respectively, for the same
periods of 1998).
3. INVESTMENTS
INVESTMENT VALUATION ANALYSIS: The Companies analyze the investment
portfolio at least quarterly in order to determine if the carrying value
of any investment 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 the fourth quarter of 1998, Golden American determined that the
carrying value of two bonds exceeded their estimated net realizable
value. As a result, at December 31, 1998, Golden American recognized a
total pre-tax loss of $973,000 to reduce the carrying value of the bonds
to their combined net realizable value of $2,919,000. During the second
quarter of 1999, further information was received regarding these bonds
and Golden American determined that the carrying value of the two bonds
exceeded their estimated net realizable value. As a result, at June 30,
1999, Golden American recognized a total pre-tax loss of $1,639,000 to
further reduce the carrying value of the bonds to their combined net
realizable value of $1,137,000.
4. RELATED PARTY TRANSACTIONS
OPERATING AGREEMENTS: Directed Services, Inc. ("DSI"), an affiliate,
acts as the principal underwriter (as defined in the Securities Act of
1933 and the Investment Company Act of 1940, as amended) and distributor
of the variable insurance products issued by the Companies. DSI is
authorized to enter into agreements with broker/dealers to distribute the
Companies' variable insurance products and appoint representatives of the
broker/dealers as agents. The Companies paid commissions and expenses to
DSI totaling $50,131,000 in the third quarter and $130,419,000 for the
first nine months of 1999 ($32,104,000 and $82,548,000, respectively, for
the same periods of 1998).
Golden American provides certain managerial and supervisory services to
DSI. The fee paid by DSI for these services is calculated as a
percentage of average assets in the variable separate accounts. For the
third quarter and first nine months of 1999, the fee was $2,659,000 and
$6,755,000, respectively ($1,234,000 and $3,257,000, respectively, for
the same periods of 1998).
The Companies have an asset management agreement with ING Investment
Management LLC ("ING IM"), an affiliate, in which ING IM provides asset
management and accounting services. Under the agreement, the Companies
record a fee based on the value of the assets under management. The fee
is payable quarterly. For the third quarter and first nine months of
1999, the Companies incurred fees of $523,000 and $1,637,000, respectively,
under this agreement ($341,000 and $1,013,000, respectively, for the same
periods of 1998).
62
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
4. RELATED PARTY TRANSACTIONS (continued)
Golden American has a guaranty agreement with Equitable Life Insurance
Company of Iowa ("Equitable Life"), an affiliate. 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 at June 30, 1999 or
1998.
Golden American provides certain advisory, computer and other resources
and services to Equitable Life. Revenues for these services, which
reduce general expenses incurred by Golden American, totaled $237,000 in
the third quarter of 1999 and $898,000 for the first nine months of 1999
($1,524,000 and $5,091,000, respectively, for the same periods of 1998).
The Companies have a service agreement with Equitable Life in which
Equitable Life provides administrative and financial related services.
Under this agreement, the Companies incurred expenses of $50,000 in the
third quarter of 1999 and $855,000 for the first nine months of 1999
($261,000 and $575,000, respectively, for the same periods of 1998).
The Companies provide resources and services to DSI. Revenues for these
services, which reduce general expenses incurred by the Companies,
totaled $276,000 in the third quarter of 1999 and $759,000 for the first
nine months of 1999 ($19,000 and $57,000, respectively, for the same
periods of 1998).
Golden American provides resources and services to ING Mutual Funds
Management Co., LLC, an affiliate. Revenues for these services, which
reduce general expenses incurred by Golden American, totaled $159,000 in
the third quarter of 1999 and $376,000 for the first nine months of
1999.
For the third quarter of 1999, the Companies received 7.8% of total
premiums (9.7% in the same period of 1998), net of reinsurance, for
variable products sold through four affiliates, Locust Street Securities,
Inc. ("LSSI"), Vestax Securities Corporation ("Vestax"), DSI, and Multi-
Financial Securities Corporation ("Multi-Financial") of $46,600,000,
$12,900,000, $0, and $11,000,000, respectively ($34,600,000, $14,200,000,
$1,800,000, and $4,100,000, respectively, for the same period of 1998).
For the first nine months of 1999, the Companies received 9.5% of total
premiums (10.0% in the same period of 1998), net of reinsurance, from
LSSI, Vestax, DSI, and Multi-Financial of $121,900,000, $72,000,000,
$2,300,000, and $24,400,000, respectively ($92,700,000, $30,000,000,
$10,700,000, and $10,000,000, respectively, for the same period of 1998).
RECIPROCAL LOAN AGREEMENT: Golden American maintains a reciprocal loan
agreement with ING America Insurance Holdings, Inc. ("ING AIH"), a
Delaware corporation and affiliate, 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 AIH can borrow up to $65,000,000 from one
another. Prior to lending funds to ING AIH, Golden American must obtain
approval from the Department of Insurance of the State of Delaware.
Interest on any Golden American borrowings is charged at the rate of ING
AIH's cost of funds for the interest period plus 0.15%. Interest on any
ING AIH borrowings is charged at a rate based on the prevailing interest
rate of U.S. commercial paper available for purchase with a similar
duration. Under this agreement, Golden American incurred interest
expense of $397,000 in the third quarter of 1999 and $633,000 for the
first nine months of 1999 ($505,000 and $1,269,000, respectively, for the
same periods of 1998). At September 30, 1999, Golden American did not
have any borrowings or receivables from ING AIH under this agreement.
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
63
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
4. RELATED PARTY TRANSACTIONS (continued)
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, Golden American
incurred interest expense of $211,000 for the first quarter of 1998.
The outstanding balance was paid by a capital contribution from the
Parent and with funds borrowed from ING AIH.
SURPLUS NOTES: On September 30, 1999, Golden American issued a 7.75%
surplus note in the amount of $75,000,000 to ING AIH. The note matures on
September 29, 2029. Payment of the note and related accrued interest is
subordinate to payments due to policyholders, claimant and beneficiary
claims, as well as debts owed to all other classes of debtors, other than
surplus note holders, of Golden American. Any payment of principal and/or
interest made is subject to the prior approval of the Delaware Insurance
Commissioner. Under this agreement, Golden American incurred no interest
expense in the third quarter of 1999.
On December 30, 1998, Golden American issued a 7.25% surplus note in the
amount of $60,000,000 to Equitable Life. The note matures on December
29, 2028. Payment of the note and related accrued interest is
subordinate to payments due to policyholders, claimant and beneficiary
claims, as well as debts owed to all other classes of debtors, other than
surplus note holders, of Golden American. Any payment of principal
and/or interest made is subject to the prior approval of the Delaware
Insurance Commissioner. Under this agreement, Golden American incurred
interest expense of $1,088,000 in the third quarter of 1999 and
$3,263,000 for the first nine months of 1999.
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. Payment of the note and related accrued interest is 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 is subject to the prior approval of the
Delaware Insurance Commissioner. Golden American incurred interest
totaling $516,000 in the third quarter of 1999 and $1,547,000 for the
first nine months of 1999, unchanged from the same periods of 1998. As a
result of the merger, the surplus note is now payable to EIC.
STOCKHOLDER'S EQUITY: During the third quarter of 1999 and the first
nine months of 1999, Golden American received capital contributions from
its Parent of $20,000,000 and $100,000,000, respectively ($0 and
$72,500,000, respectively, for the same periods of 1998).
5. COMMITMENTS AND CONTINGENCIES
REINSURANCE: At September 30, 1999, Golden American had reinsurance
treaties with four unaffiliated reinsurers and one affiliated reinsurer
covering a significant portion of the mortality risks under its variable
contracts. Golden American remains liable to the extent its reinsurers do
not meet their obligations under the reinsurance agreements. At September
30, 1999 and 1998, the Companies had a net receivable of $14,041,000 and
$6,539,000, respectively, for reserve credits, reinsurance claims, or
other receivables from these reinsurers comprised of $2,268,000 and
$257,000, respectively, for claims recoverable from reinsurers, $918,000
and $451,000, respectively, for a payable for reinsurance premiums and
$12,691,000 and $6,733,000, respectively, for a receivable from an
unaffiliated reinsurer. Included in the accompanying financial
statements are net considerations to reinsurers of $2,638,000 in the
third quarter of 1999 and $6,656,000 for the first nine months of 1999
compared to $1,293,000 and $3,259,000, respectively, for the same periods
in 1998. Also included in the accompanying financial statements are net
policy benefits of $2,569,000 in the third quarter of 1999 and $4,008,000 for
the first nine months of 1999 compared to $1,272,000 and $2,096,000,
respectively, for the same periods in 1998.
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.
GUARANTY FUND ASSESSMENTS: Assessments are levied on the Companies by
life and health guaranty associations in most states in which the
Companies are licensed to cover losses of policyholders of insolvent
64
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
5. COMMITMENTS AND CONTINGENCIES (continued)
or rehabilitated insurers. In some states, these assessments can be
partially recovered through a reduction in future premium taxes. The
Companies cannot predict whether and to what extent legislative
initiatives may affect the right to offset. The associated cost for a
particular insurance company can vary significantly based upon its fixed
account premium volume by line of business and state premiums as well as
its potential for premium tax offset. The Companies have established an
undiscounted reserve to cover such assessments, review information
regarding known failures, and revise estimates of future guaranty fund
assessments. Accordingly, the Companies accrued and charged to expense
an additional $208,000 and $598,000 in the third quarter and first nine
months of 1998, respectively. At September 30, 1999, the Companies have
an undiscounted reserve of $2,444,000 to cover estimated future
assessments (net of related anticipated premium tax credits) and have
established an asset totaling $586,000 for assessments paid which may be
recoverable through future premium tax offsets. The Companies believe
this reserve is sufficient to cover expected future guaranty fund
assessments based upon previous premiums and known insolvencies at this
time.
LITIGATION: The Companies, like other insurance companies, may be named
or otherwise involved in lawsuits, including class action lawsuits and
arbitrations. In some class action and other actions involving insurers,
substantial damages have been sought and/or material settlement or award
payments have been made. The Companies currently believe no pending or
threatened lawsuits or actions exist that are reasonably likely to have a
material adverse impact on the Companies.
VULNERABILITY FROM CONCENTRATIONS: The Companies have various
concentrations in the investment portfolio. The Companies' 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. Substantial changes in tax laws that would
make these products less attractive to consumers and extreme fluctuations
in interest rates or stock market returns, which may result in higher
lapse experience than assumed, could cause a severe impact on the
Companies' financial condition. Two broker/dealers, each having at least
ten percent of total sales, generated 29% of the Companies' sales during
the first nine months of 1999 (10% by one broker/dealer in the same
period of 1998). The Premium Plus variable annuity product generated 78%
of the Companies' sales during the first nine months of 1999 (59% in the
same period of 1998).
REVOLVING NOTE PAYABLE: To enhance short-term liquidity, the Companies
established a revolving note payable effective July 27, 1998 and expiring
July 31, 1999 with SunTrust Bank, Atlanta (the "Bank"). The note was
approved by the Boards of Directors of Golden American and First Golden
on August 5, 1998 and September 29, 1998, respectively. As of July 31,
1999, the SunTrust Bank, Atlanta revolving note facility was extended to
July 31, 2000. The total amount the Companies may have outstanding is
$85,000,000, of which Golden American and First Golden have individual
credit sublimits of $75,000,000 and $10,000,000, respectively. The note
accrues interest at an annual rate equal to: (1) the cost of funds for
the Bank for the period applicable for the advance plus 0.25% or (2) a
rate quoted by the Bank to the Companies for the advance. The terms of
the agreement require the Companies to maintain the minimum level of
Company Action Level Risk Based Capital as established by applicable
state law or regulation. During the quarter and nine months ended
September 30, 1999, the Companies paid interest expense of $55,000 and
$109,000, respectively ($6,000 for the same periods of 1998). At
September 30, 1999, the Companies did not have any borrowings under this
agreement.
65
<PAGE>
<PAGE>
[Shaded Section Header]
- --------------------------------------------------------------------------
FINANCIAL STATEMENTS OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------
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, 1998 and
1997, and the related consolidated statements of operations,
changes in stockholder's equity, and cash flows for the year ended
December 31, 1998 and 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. These financials are the
responsibility of the Companies' management. Our responsibility
is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Golden American Life Insurance Company at December 31,
1998 and 1997, and the consolidated results of its operations and
its cash flows for the year ended December 31, 1998 and 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 in conformity
with generally accepted accounting principles.
/s/Ernst & Young LLP
Des Moines, Iowa
February 12, 1999
66
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
POST-MERGER
------------------------------------
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for
sale, at fair value (cost:
1998 - $739,772; 1997 -
$413,288)...................... $ 741,985 $ 414,401
Equity securities, at fair value
(cost: 1998 - $14,437; 1997 -
$4,437)........................ 11,514 3,904
Mortgage loans on real estate.... 97,322 85,093
Policy loans..................... 11,772 8,832
Short-term investments........... 41,152 14,460
---------- ----------
Total investments.................. 903,745 526,690
Cash and cash equivalents.......... 6,679 21,039
Due from affiliates................ 2,983 827
Accrued investment income.......... 9,645 6,423
Deferred policy acquisition costs.. 204,979 12,752
Value of purchased insurance in
force............................ 35,977 43,174
Current income taxes recoverable... 628 272
Deferred income tax asset.......... 31,477 36,230
Property and equipment, less
allowances for depreciation
of $801 in 1998 and $97 in 1997.. 7,348 1,567
Goodwill, less accumulated
amortization of $4,408 in 1998
and $630 in 1997................. 146,719 150,497
Other assets....................... 6,239 755
Separate account assets............ 3,396,114 1,646,169
---------- ----------
Total assets....................... $4,752,533 $2,446,395
========== ==========
</TABLE>
See accompanying notes.
67
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands, except per share data)
<TABLE>
POST-MERGER
------------------------------------
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive life
products......................... $ 881,112 $ 505,304
Unearned revenue reserve........... 3,840 1,189
Other policy claims and benefits... -- 10
---------- ----------
884,952 506,503
Line of credit with affiliate....... -- 24,059
Surplus notes....................... 85,000 25,000
Due to affiliates................... -- 80
Other liabilities................... 32,573 17,271
Separate account liabilities........ 3,396,114 1,646,169
---------- ----------
4,398,639 2,219,082
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......... 347,640 224,997
Accumulated other comprehensive
income (loss).................... (895) 241
Retained earnings (deficit)........ 4,649 (425)
---------- ----------
Total stockholder's equity.......... 353,894 227,313
---------- ----------
Total liabilities and stockholder's
equity............................ $4,752,533 $2,446,395
========== ==========
</TABLE>
See accompanying notes.
68
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
POST-MERGER | POST-ACQUISITION | PRE-ACQUISITION
------------------------------------ | ----------------------------------- | ---------------
For the period | For the period For the period | For the period
For the year October 25,1997 | January 1,1997 August 14, 1996 | January 1, 1996
ended through | through through | through
December 31, 1998 December 31, 1997 | October 24, 1997 December 31, 1996 | August 13, 1996
----------------- ----------------- | ---------------- ----------------- | ---------------
<S> <C> <C> | <C> <C> | <C>
REVENUES: | |
Annuity and interest sensitive | |
life product charges........ $ 39,119 $ 3,834 | $ 18,288 $ 8,768 | $12,259
Management fee revenue....... 4,771 508 | 2,262 877 | 1,390
Net investment income........ 42,485 5,127 | 21,656 5,795 | 4,990
Realized gains (losses) on | |
investments................. (1,491) 15 | 151 42 | (420)
Other income................. 5,569 236 | 426 486 | 70
--------- -------- | -------- ------- | -------
90,453 9,720 | 42,783 15,968 | 18,289
| |
| |
INSURANCE BENEFITS AND EXPENSES: | |
Annuity and interest sensitive | |
life benefits: | |
Interest credited to account | |
balances..................... 94,845 7,413 | 19,276 5,741 | 4,355
Benefit claims incurred in | |
excess of account balances... 2,123 -- | 125 1,262 | 915
Underwriting, acquisition | |
and insurance expenses: | |
Commissions.................. 121,171 9,437 | 26,818 9,866 | 16,549
General expenses............. 37,577 3,350 | 13,907 5,906 | 9,422
Insurance taxes.............. 4,140 450 | 1,889 672 | 1,225
Policy acquisition costs | |
deferred................... (197,796) (13,678) | (29,003) (11,712) | (19,300)
Amortization: | |
Deferred policy acquisition | |
costs..................... 5,148 892 | 1,674 244 | 2,436
Value of purchased insurance | |
in force.................. 4,724 948 | 5,225 2,745 | 951
Goodwill.................... 3,778 630 | 1,398 589 | --
--------- --------- | -------- ------ | -------
75,710 9,442 | 41,309 15,313 | 16,553
| |
Interest expense............... 4,390 557 | 2,082 85 | --
--------- --------- | -------- ------ | -------
80,100 9,999 | 43,391 15,398 | 16,553
--------- --------- | -------- ------ | -------
Income (loss) before income | |
taxes........................ 10,353 (279) | (608) 570 | 1,736
| |
Income taxes................... 5,279 146 | (1,337) 220 | (1,463)
--------- --------- | -------- ------ | -------
Net income (loss).............. $ 5,074 $ (425) | $ 729 $ 350 | $ 3,199
========= ========= | ======== ======= | ========
</TABLE>
See accompanying notes.
69
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
Accumulated
Redeemable Additional Other Retained Total
Common Preferred Paid-in Comprehensive Earnings Stockholder's
Stock Stock Capital Income (Loss) (Deficit) Equity
------------------------------------------------------------------------------
PRE-ACQUISITION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996........ $2,500 $50,000 $ 45,030 $ 658 $ (63) $ 98,125
Comprehensive income:
Net income...................... -- -- -- -- 3,199 3,199
Change in net unrealized
investment gains (losses)..... -- -- -- (1,175) -- (1,175)
---------
Comprehensive income............. 2,024
Preferred stock dividends........ -- -- -- -- (719) (719)
------ ------- -------- ------- ------ ---------
Balance at August 13, 1996........ $2,500 $50,000 $ 45,030 $ (517) $2,417 $ 99,430
====== ======= ======== ======== ====== =========
</TABLE>
<TABLE>
------------------------------------------------------------------------------
POST-ACQUISITION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 14, 1996........ $2,500 $50,000 $ 87,372 -- -- $139,872
Comprehensive income:
Net income...................... -- -- -- -- $ 350 350
Change in net unrealized
investment gains (losses)...... -- -- -- $ 262 -- 262
--------
Comprehensive income............. 612
Contribution of preferred stock
to additional paid-in capital... -- (50,000) 50,000 -- -- --
------ ------- -------- ------- ------ --------
Balance at December 31, 1996...... 2,500 -- 137,372 262 350 140,484
Comprehensive income:
Net income...................... -- -- -- -- 729 729
Change in net unrealized
investment gains (losses)...... -- -- -- 1,543 -- 1,543
--------
Comprehensive income............. 2,272
Contribution of capital.......... -- -- 1,121 -- -- 1,121
------ ------- -------- ------- ------ --------
Balance at October 24, 1997 $2,500 -- $138,493 $1,805 $1,079 $143,877
====== ======= ======== ====== ====== ========
</TABLE>
<TABLE>
------------------------------------------------------------------------------
POST-MERGER
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 25, 1997....... $2,500 -- $224,997 -- -- $227,497
Comprehensive loss:
Net loss....................... -- -- -- -- $ (425) (425)
Change in net unrealized
investment gains (losses)...... -- -- -- $ 241 -- 241
--------
Comprehensive loss............... (184)
------ ------- -------- ------- ------ --------
Balance at December 31, 1997...... 2,500 -- 224,997 241 (425) 227,313
Comprehensive income:
Net income...................... -- -- -- -- 5,074 5,074
Change in net unrealized
investment gains (losses)...... -- -- -- (1,136) -- (1,136)
--------
Comprehensive income............. 3,938
Contribution of capital.......... -- -- 122,500 -- -- 122,500
Other............................ -- -- 143 -- -- 143
------ ------- -------- ------- ------ --------
Balance at December 31, 1998...... $2,500 -- $347,640 $ (895) $4,649 $353,894
====== ======= ======== ======= ====== ========
</TABLE>
See accompanying notes.
70
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
POST-MERGER | POST-ACQUISITION | PRE-ACQUISITION
------------------------------------ | ----------------------------------- | ---------------
For the period | For the period For the period | For the period
For the year October 25,1997 | January 1,1997 August 14, 1996 | January 1, 1996
ended through | through through | through
December 31, 1998 December 31, 1997 | October 24, 1997 December 31, 1996 | August 13, 1996
----------------- ----------------- | ---------------- ----------------- | ---------------
<S> <C> <C> | <C> <C> | <C>
OPERATING ACTIVITIES | |
Net income (loss)............ $ 5,074 $ (425) | $ 729 $ 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: | |
Interest credited and other | |
charges on interest | |
sensitive products........ 94,690 7,361 | 19,177 5,106 | 4,472
Change in unearned | |
revenues.................. 2,651 1,189 | 3,292 2,063 | 2,084
Decrease (increase) in | |
accrued investment income.. (3,222) 1,205 | (3,489) (877) | (2,494)
Policy acquisition costs | |
deferred................... (197,796) (13,678) | (29,003) (11,712) | (19,300)
Amortization of deferred | |
policy acquisition costs... 5,148 892 | 1,674 244 | 2,436
Amortization of value of | |
purchased insurance in | |
force...................... 4,724 948 | 5,225 2,745 | 951
Change in other assets, | |
other liabilities and | |
accrued income taxes....... 9,891 4,205 | (8,944) (96) | 4,672
Provision for depreciation | |
and amortization........... 8,147 1,299 | 3,203 1,242 | 703
Provision for deferred | |
income taxes............... 5,279 146 | 316 220 | (1,463)
Realized (gains) losses on | |
investments................ 1,491 (15) | (151) (42) | 420
--------- -------- | -------- -------- | ---------
Net cash provided by (used | |
in)operating activities..... (63,923) 3,127 | (7,971) (757) | (4,320)
| |
INVESTING ACTIVITIES | |
Sale, maturity or repayment | |
of investments: | |
Fixed maturities - available | |
for sale 145,253 9,871 | 39,622 47,453 | 55,091
Mortgage loans on real | |
estate..................... 3,791 1,644 | 5,828 40 | --
Short-term investments-net.. -- -- | 11,415 2,629 | 354
--------- -------- | -------- -------- | ---------
149,044 11,515 | 56,865 50,122 | 55,445
Acquisition of investments: | |
Fixed maturities - available | |
for sale................... (476,523) (29,596) | (155,173) (147,170) | (184,589)
Equity securities........... (10,000) (1) | (4,865) (5) | --
Mortgage loans on real | |
estate..................... (16,390) (14,209) | (44,481) (31,499) | --
Policy loans - net.......... (2,940) (328) | (3,870) (637) | (1,977)
Short-term investments-net.. (26,692) (13,244) | -- -- | --
--------- -------- | -------- -------- | ---------
(532,545) (57,378) | (208,389) (179,311) | (186,566)
Purchase of property and | |
equipment................... (6,485) (252) | (875) (137) | --
--------- -------- | -------- -------- | ---------
Net cash used in investing | |
activities.................. (389,986) (46,115) | (152,399) (129,326) | (131,121)
</TABLE>
See accompanying notes.
71
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
POST-MERGER | POST-ACQUISITION | PRE-ACQUISITION
------------------------------------ | ----------------------------------- | ---------------
For the period | For the period For the period | For the period
For the year October 25,1997 | January 1,1997 August 14, 1996 | January 1, 1996
ended through | through through | through
December 31, 1998 December 31, 1997 | October 24, 1997 December 31, 1996 | August 13, 1996
----------------- ----------------- | ---------------- ----------------- | ---------------
<S> <C> <C> | <C> <C> | <C>
FINANCING ACTIVITIES | |
Proceeds from issuance of | |
surplus note................ $ 60,000 -- | -- $ 25,000 | --
Proceeds from reciprocal loan | |
agreement borrowings........ 500,722 -- | -- -- | --
Repayment of reciprocal loan | |
agreement borrowings........ (500,722) -- | -- -- | --
Proceeds from revolving | |
note payable................ 108,495 -- | -- -- | --
Repayment of revolving note | |
payable..................... (108,495) -- | -- -- | --
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 | |
account balances............ 593,428 62,306 | 261,549 116,819 | $149,750
Return of account balances | |
on annuity and interest | |
sensitive life policies..... (72,649) (6,350) | (13,931) (3,315) | (2,695)
Net reallocations to Separate | |
Accounts (239,671) (17,017) | (93,069) (10,237) | (8,286)
Contributions of capital by | |
parent...................... 98,441 -- | 1,011 -- | --
Dividends paid on preferred | |
stock....................... -- -- | -- -- | (719)
Net cash provided by | |
financing activities........ 439,549 46,851 | 171,707 128,267 | 138,050
| |
Increase (decrease) in cash | |
and cash equivalents........ (14,360) 3,863 | 11,337 (1,816) | 2,609
Cash and cash equivalents at | |
beginning of period......... 21,039 17,176 | 5,839 7,655 | 5,046
Cash and cash equivalents at | |
end of period............... $ 6,679 $21,039 | $ 17,176 $ 5,839 | $ 7,655
| |
SUPPLEMENTAL DISCLOSURE | |
OF CASH FLOW INFORMATION | |
Cash paid during the period | |
for: | |
Interest.................... $ 4,305 $ 295 | $ 1,912 -- | --
Income taxes................ 99 -- | 283 -- | --
Non-cash financing activities: | |
Non-cash adjustment to | |
additional paid-in capital | |
for adjusted merger costs.. 143 -- | -- -- | --
Contribution of property and | |
equipment from EIC Variable, | |
Inc. net of $353 of | |
accumulated depreciation... -- -- | 110 -- | --
Contribution of capital from | |
parent to repay line of | |
credit borrowings.......... 24,059 -- | -- -- | --
</TABLE>
See accompanying notes.
72
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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
"Companies"). 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 Companies' products
are marketed by broker/dealers, financial institutions and
insurance agents. The Companies' primary customers are consumers
and corporations.
On October 24, 1997, PFHI Holding, Inc. ("PFHI"), a Delaware
corporation, acquired all of the outstanding capital stock of
Equitable of Iowa Companies ("Equitable") according to the terms
of an Agreement and Plan of Merger ("Merger Agreement") dated July
7, 1997 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 this
transaction, Equitable was merged into PFHI, which was
simultaneously renamed Equitable of Iowa Companies, Inc. ("EIC" or
the "Parent"), a Delaware corporation. See Note 6 for additional
information regarding the merger.
On August 13, 1996, Equitable acquired all of the outstanding
capital stock of BT Variable, Inc. (subsequently known as EIC
Variable, Inc.) and its wholly owned subsidiaries, Golden American
and Directed Services, Inc. ("DSI") from Whitewood Properties
Corporation ("Whitewood"). See Note 7 for additional information
regarding the acquisition.
For financial statement purposes, the ING 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 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 Companies' financial
statements for the periods after 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: The Companies account for their investments
under the Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," which requires fixed maturities 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 value
of purchased insurance in force ("VPIF"), deferred policy acquisition
costs ("DPAC") and deferred income taxes. At December 31, 1998 and 1997,
all of the Companies' fixed maturities are designated as available
for sale, although the Companies are not precluded from designating
fixed maturities 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 new cost basis by a charge to realized losses in the
Companies'
73
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Statements of Operations. Premiums and discounts are
amortized/accrued utilizing a method which results in a constant
yield over the securities' expected lives. Amortization/accrual of
premiums and discounts on mortgage and other asset-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 then becomes the new cost basis by a
charge to realized losses in the Companies' Statements of
Operations.
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 Companies 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.
Realized Gains and Losses: Realized gains and losses are
determined on the basis of specific identification and average
cost methods for manager initiated and issuer initiated disposals,
respectively.
Fair Values: Estimated fair values, as reported herein, of
conventional mortgage-backed securities not actively traded in a
liquid market and publicly traded fixed maturities 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 consist of the Companies'
investment in its registered separate accounts are based upon the
quoted fair value of the securities comprising the individual
portfolios underlying the separate accounts.
CASH AND CASH EQUIVALENTS
For purposes of the accompanying Statements of Cash Flows, the
Companies consider 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.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally
first year commissions and interest bonuses, extra credit bonuses
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 adjusted
retrospectively when the Companies revise their 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 maturities the Companies have
designated as "available for sale" under SFAS No. 115.
VALUE OF PURCHASED INSURANCE IN FORCE
As a result of the merger and the acquisition, a portion of the
purchase price related to each transaction was allocated to the
right to receive future cash flows from existing insurance
contracts. This allocated cost
74
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
represents VPIF 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 VPIF is charged
to expense in proportion to expected gross profits of the
underlying business. This amortization is adjusted retrospectively
when the Companies revise the estimate of current or future gross
profits to be realized from the insurance contracts acquired. VPIF
is adjusted to reflect the pro forma impact of unrealized gains
and losses on available for sale fixed maturities. See Notes 6 and
7 for additional information on VPIF resulting from the merger and
acquisition.
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements,
office furniture, certain other equipment and capitalized computer
software and are not considered to be significant to the
Companies' 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 and is being
amortized over 40 years on a straight-line basis. Goodwill
established as a result of the acquisition was being amortized
over 25 years on a straight-line basis. See Notes 6 and 7 for
additional information on the merger and acquisition.
FUTURE POLICY BENEFITS
Future policy benefits for divisions with fixed interest
guarantees 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 3.00% to 10.00% during 1998, 3.30% to 8.25% during
1997 and 4.00% to 7.25% during 1996. The unearned revenue reserve
represents unearned distribution fees. These distribution fees
have been deferred and are amortized over the life of the
contracts in proportion to expected gross profits.
SEPARATE ACCOUNTS
Assets and liabilities of the separate accounts reported in the
accompanying Balance Sheets represent funds separately
administered principally for variable annuity and variable life
contracts. Contractholders, rather than the Companies, bear the
investment risk for the variable products. At the direction of the
contractholders, the separate accounts invest the premiums from
the sale of variable 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
Companies. The portion of the separate account assets equal to the
reserves and other liabilities of variable annuity and variable
life contracts cannot be charged with liabilities arising out of
any other business the Companies may conduct.
Variable separate account assets are carried at fair value of the
underlying investments and 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; the fair value of these liabilities is equal to their
carrying amount. Net investment income and realized and unrealized
capital gains and losses related to separate account assets are
not reflected in the accompanying Statements of Operations.
Product charges recorded by the Companies from variable 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
75
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 maturities the Companies have 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 Companies'
Statements of Operations are based on the changes in the deferred
tax asset or liability from period to period (excluding the SFAS
No. 115 adjustment).
DIVIDEND RESTRICTIONS
Golden American's ability to pay dividends to its Parent is
restricted. Prior approval of insurance regulatory authorities is
required for payment of dividends to the stockholder which exceed
an annual limit. During 1999, Golden American cannot pay dividends
to its Parent without prior approval of statutory authorities.
Under the provisions of the insurance laws of the State of New
York, First Golden cannot distribute any dividends to its
stockholder unless a notice of its intent to declare a dividend
and the amount of the dividend has been filed at least thirty days
in advance of the proposed declaration. If the Superintendent
finds the financial condition of First Golden does not warrant the
distribution, the Superintendent may disapprove the distribution
by giving written notice to First Golden within thirty days after
the filing.
SEGMENT REPORTING
As of December 31, 1998, the Companies adopted the SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 superseded SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way public business enterprises
report information about operating segments in annual financial
statements and requires enterprises to report selected information
about operating segments in interim financial reports. SFAS No.
131 also establishes standards for related disclosures about
products and services, geographic areas and major customers.
The Companies manage their business as one segment, the sale of
variable products designed to meet customer needs for tax-
advantaged methods of saving for retirement and protection from
unexpected death. Variable products are sold to consumers and
corporations throughout the United States. The adoption of SFAS
No. 131 did not affect the results of operations or financial
position of the Companies.
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
76
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
acquisition costs and value of purchased insurance
in force, (4) fair values of assets and liabilities recorded as a
result of merger and acquisition transactions, (5) asset valuation
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 proceeding are inherently subject
to change and are reassessed periodically. Changes in estimates
and assumptions could materially impact the financial statements.
RECLASSIFICATIONS
Certain amounts in the financial statements for the periods ended
within the years ended December 31, 1997 and 1996 have been
reclassified to conform to the December 31, 1998 financial
statement presentation.
2. BASIS OF FINANCIAL REPORTING
The financial statements of the Companies 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
divisions with fixed interest guarantees 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 value of
purchased insurance in force, deferred policy acquisition costs
and deferred income taxes (if applicable), credited/charged
directly to stockholder's equity rather than valued at amortized
cost; (6) the carrying value of fixed maturities is reduced to
fair value by a charge to realized losses in the Statements of
Operations 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 products consist of policy charges applicable to each
contract 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.
The net loss for Golden American as determined in accordance with
statutory accounting practices was $68,002,000 in 1998, $428,000
in 1997 and $9,188,000 in 1996. Total statutory capital and
surplus was $183,045,000 at December 31, 1998 and $76,914,000 at
December 31, 1997.
77
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
3. INVESTMENT OPERATIONS
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
<TABLE>
POST-MERGER | POST-ACQUISITION | PRE-ACQUISITION
------------------------------------ | ----------------------------------- | ---------------
For the period | For the period For the period | For the period
For the year October 25,1997 | January 1,1997 August 14, 1996 | January 1, 1996
ended through | through through | through
December 31, 1998 December 31, 1997 | October 24, 1997 December 31, 1996 | August 13, 1996
----------------- ----------------- | ---------------- ----------------- | ---------------
| (Dollars in thousands) |
<S> <C> <C> | <C> <C> | <C>
Fixed maturities............. $35,224 $4,443 | $18,488 $5,083 | $4,507
Equity securities............ -- 3 | -- 103 | --
Mortgage loans on | |
real estate................. 6,616 879 | 3,070 203 | --
Policy loans................. 619 59 | 482 78 | 73
Short-term | |
investments................. 1,311 129 | 443 441 | 341
Other, net................... 246 (154) | 24 2 | 22
Funds held in | |
escrow...................... -- -- | -- -- | 145
------- ------ | ------- ------ | ------
Gross investment | |
income...................... 44,016 5,359 | 22,507 5,910 | 5,088
Less investment | |
expenses.................... (1,531) (232) | (851) (115) | (98)
------- ------ | ------- ------ | ------
Net investment | |
income...................... $42,485 $5,127 | $21,656 $5,795 | $4,990
======= ====== | ======= ====== | ======
</TABLE>
Realized gains (losses) on investments are as follows:
<TABLE>
POST-MERGER | POST-ACQUISITION | PRE-ACQUISITION
------------------------------------ | ----------------------------------- | ---------------
For the period | For the period For the period | For the period
For the year October 25,1997 | January 1,1997 August 14, 1996 | January 1, 1996
ended through | through through | through
December 31, 1998 December 31, 1997 | October 24, 1997 December 31, 1996 | August 13, 1996
----------------- ----------------- | ---------------- ----------------- | ---------------
| (Dollars in thousands) |
<S> <C> <C> | <C> <C> | <C>
Fixed maturities: | |
available for sale.......... $(1,428) $25 | $151 $42 | $(420)
Mortgage loans............... (63) (10) | -- -- | --
------- --- | ---- --- | -----
Realized gains (losses) | |
on investments.............. $(1,491) $15 | $151 $42 | $(420)
======= === | ==== === | =====
</TABLE>
78
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
3. INVESTMENT OPERATIONS (continued)
The change in unrealized appreciation (depreciation) of securities
at fair value is as follows:
<TABLE>
POST-MERGER | POST-ACQUISITION | PRE-ACQUISITION
------------------------------------ | ----------------------------------- | ---------------
For the period | For the period For the period | For the period
For the year October 25,1997 | January 1,1997 August 14, 1996 | January 1, 1996
ended through | through through | through
December 31, 1998 December 31, 1997 | October 24, 1997 December 31, 1996 | August 13, 1996
----------------- ----------------- | ---------------- ----------------- | ---------------
| (Dollars in thousands) |
<S> <C> <C> | <C> <C> | <C>
Fixed maturities: | |
Available for sale.......... $1,100 $(3,494) | $4,197 $2,497 | $(3,045)
Held for investment......... -- -- | -- -- | (90)
Equity securities............ (2,390) (68) | (462) (4) | (2)
------ ------- | ------ ------ | -------
Unrealized appreciation | |
(depreciation) of | |
securities.................. $(1,290) $(3,562) | $3,735 $2,493 | $(3,137)
======= ======= | ====== ====== | =======
</TABLE>
At December 31, 1998 and December 31, 1997, amortized cost, gross
unrealized gains and losses and estimated fair values of fixed
maturities, all of which are designated as available for sale, are
as follows:
<TABLE>
POST-MERGER
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. government and governmental
agencies and authorities............. $ 13,568 $ 182 $ (8) $ 13,742
Foreign governments................... 2,028 8 -- 2,036
Public utilities...................... 67,710 546 (447) 67,809
Corporate securities.................. 365,569 4,578 (2,658) 367,489
Other asset-backed securities......... 99,877 281 (1,046) 99,112
Mortgage-backed securities............ 191,020 1,147 (370) 191,797
-------- ------ ------- --------
Total................................. $739,772 $6,742 $(4,529) $741,985
======== ====== ======= ========
DECEMBER 31, 1997
U.S. government and governmental
agencies and authorities............ $ 5,705 $ 5 $ (1) $ 5,709
Foreign governments................... 2,062 -- (9) 2,053
Public utilities...................... 26,983 55 (4) 27,034
Corporate securities.................. 259,798 1,105 (242) 260,661
Other asset-backed securities......... 3,155 32 -- 3,187
Mortgage-backed securities............ 115,585 202 (30) 115,757
-------- ------ ------- --------
Total................................. $413,288 $1,399 $ (286) $414,401
======== ====== ======= ========
</TABLE>
At December 31, 1998, net unrealized investment gains on fixed
maturities designated as available for sale totaled $2,213,000.
Appreciation of $1,005,000 was included in stockholder's equity at
December 31, 1998 (net of an adjustment of $203,000 to VPIF, an
adjustment of $455,000 to DPAC and deferred income taxes of
$550,000). 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.
79
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
3. INVESTMENT OPERATIONS (continued)
Amortized cost and estimated fair value of fixed maturities
designated as available for sale, by contractual maturity, at
December 31, 1998 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.
POST-MERGER
---------------------------
Amortized Estimated
December 31, 1998 Cost Fair Value
- ----------------------------------------------------------------------
(Dollars in thousands)
Due within one year...................... $ 50,208 $ 50,361
Due after one year through five years.... 310,291 311,943
Due after five years through ten years... 78,264 78,541
Due after ten years...................... 10,112 10,231
448,875 451,076
Other asset-backed securities............ 99,877 99,112
Mortgage-backed securities............... 191,020 191,797
-------- --------
Total.................................... $739,772 $741,985
======== ========
An analysis of sales, maturities and principal repayments of the
Companies' fixed maturities portfolio is as follows:
<TABLE>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
--------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
POST-MERGER
For the year ended December 31, 1998:
Scheduled principal repayments,
calls and tenders...................... $102,504 $ 60 $ (3) $102,561
Sales................................... 43,204 518 (1,030) 42,692
-------- ---- ------- --------
Total................................... $145,708 $578 $(1,033) $145,253
======== ==== ======= ========
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
======== ==== ======= ========
</TABLE>
80
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
3. INVESTMENT OPERATIONS (continued)
<TABLE>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
--------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
POST- ACQUISITION
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
======= ==== ==== =======
PRE-ACQUISITION
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
======= ==== ===== =======
</TABLE>
Investment Valuation Analysis: The Companies analyze the
investment portfolio at least quarterly in order to determine if
the carrying value of any investment 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 the year ended
December 31, 1998, Golden American recognized a loss on two fixed
maturity investments of $973,000. During 1997 and 1996, no
investments were identified as having an other than temporary
impairment.
Investments on Deposit: At December 31, 1998 and 1997, affidavits
of deposits covering bonds with a par value of $6,470,000 and
$6,605,000, respectively, were on deposit with regulatory
authorities pursuant to certain statutory requirements.
Investment Diversifications: The Companies' investment policies
related to the 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, 1998 and December 31, 1997. Fixed maturities included
investments in basic industrials (26% in 1998, 30% in 1997),
conventional mortgage-backed securities (25% in 1998, 13% in
1997), financial companies (19% in 1998, 24% in 1997), other asset-
backed securities (11% in 1998) and various government bonds and
government or agency mortgage-backed securities (5% in 1998, 17%
in 1997). Mortgage loans on real estate have been analyzed
by geographical location with concentrations by state identified as
California (12% in 1998 and 1997), Utah (11% in 1998, 13% in 1997)
and Georgia (10% in 1998, 11% in 1997). There are no other
concentrations of mortgage loans in any state exceeding ten
percent at December 31, 1998 and 1997. Mortgage loans on real
81
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
3. INVESTMENT OPERATIONS (continued)
estate have also been analyzed by collateral type with significant
concentrations identified in office buildings (36% in 1998, 43% in
1997), industrial buildings (32% in 1998, 33% in 1997) and retail
facilities (20% in 1998, 15% in 1997). Equity securities are not
significant to the Companies' 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, 1998.
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Companies adopted the SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes new
rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no
impact on the Companies' net income or stockholder's equity. SFAS
No. 130 requires unrealized gains or losses on the Companies'
available for sale securities (net of VPIF, DPAC and deferred
income taxes) to be included in other comprehensive income. Prior
to the adoption of SFAS No. 130, unrealized gains (losses) were
reported separately in stockholder's equity. Prior year financial
statements have been reclassified to conform to the requirements
of SFAS No. 130.
Total comprehensive income (loss) for the Companies includes
$1,015,000 for the year ended December 31, 1998 for First Golden
($159,000, $536,000 and $(57,000), respectively, for the periods
October 25, 1997 through December 31, 1997, January 1, 1997
through October 24, 1997 and December 17, 1996 through December
31, 1996). Other comprehensive income excludes net investment
gains (losses) included in net income which merely represent
transfers from unrealized to realized gains and losses. These
amounts total $(2,133,000) in 1998. Such amounts, which have been
measured through the date of sale, are net of income taxes and
adjustments to VPIF and DPAC totaling $705,000 in 1998.
5. 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 Companies' investments, investment
contracts and debt fall within the standards' definition of a
financial instrument. Fair values for the Companies' 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 Companies' business or financial condition based on the
information presented herein.
The Companies closely monitor the composition and yield of 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 Companies' 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. These assumptions may not
result in values consistent with those obtained through an actuarial
appraisal of the Companies' business or values that might arise in
a negotiated transaction.
82
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
5. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The following compares carrying values as shown for financial
reporting purposes with estimated fair values:
<TABLE>
POST-MERGER
-----------------------------------------------
December 31, 1998 December 31, 1997
---------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities, available
for sale...................... $ 741,985 $ 741,985 $ 414,401 $ 414,401
Equity securities.............. 11,514 11,514 3,904 3,904
Mortgage loans on real estate.. 97,322 99,762 85,093 86,348
Policy loans................... 11,772 11,772 8,832 8,832
Short-term investments......... 41,152 41,152 14,460 14,460
Cash and cash equivalents...... 6,679 6,679 21,039 21,039
Separate account assets........ $3,396,114 $3,396,114 $1,646,169 $1,646,169
LIABILITIES
Annuity products............... 869,009 827,597 493,181 469,714
Surplus notes.................. 85,000 90,654 25,000 28,837
Line of credit with affiliate.. -- -- 24,059 24,059
Separate account liabilities... 3,396,114 3,396,114 1,646,169 1,646,169
</TABLE>
The following methods and assumptions were used by the Companies
in estimating fair values.
Fixed Maturities: Estimated fair values of conventional mortgage-
backed securities not actively traded in a liquid market and
publicly traded securities 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 Companies' investment in the portfolios
underlying its separate accounts, are based upon the quoted fair
value of individual securities comprising the individual
portfolios. For equity securities not actively traded, estimated
fair values are based upon values of issues of comparable returns
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 Companies' 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 reported at
the quoted fair values of the individual securities in the
separate accounts.
Annuity Products: Estimated fair values of the Companies'
liabilities for future policy benefits for the divisions of the
variable annuity products with fixed interest guarantees and for
supplemental contracts without life contingencies are stated at
cash surrender value, the cost the Companies would incur to
extinguish the liability.
Surplus Notes: Estimated fair value of the Companies' surplus
notes were based upon discounted future cash flows using a
discount rate approximating the Companies' return on invested
assets.
83
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
5. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Line Of Credit With Affiliate: Carrying value reported in the
Companies' historical cost basis balance sheet approximates
estimated fair value for this instrument.
Separate Account Liabilities: Separate account liabilities are
reported at full account value in the Companies' historical cost
balance sheet. Estimated fair values of separate account
liabilities are equal to their carrying amount.
6. MERGER
Transaction: On October 23, 1997, Equitable's shareholders
approved the Merger Agreement dated 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
according 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. In addition, Equitable owned
all the outstanding capital stock of Locust Street Securities,
Inc. ("LSSI"), Equitable Investment Services, Inc. (subsequently
dissolved), DSI, Equitable of Iowa Companies Capital Trust,
Equitable of Iowa Companies Capital Trust II and Equitable of Iowa
Securities Network, Inc. (subsequently renamed ING Funds
Distributor, Inc.). In exchange for the outstanding capital stock
of Equitable, ING paid total consideration of approximately $2.1
billion in cash and stock and assumed approximately $400 million
in debt. As a result of this transaction, 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 with
$227,497,000 allocated to the Companies. Goodwill was established
for the excess of the merger cost over the fair value of the net
assets and attributed to EIC and its subsidiaries including Golden
American and First Golden. The amount of goodwill allocated to the
Companies 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
Companies' DPAC, previous balance of VPIF and unearned revenue
reserve, as of the merger date, were eliminated and a new asset of
$44,297,000 representing VPIF was established for all policies in
force at the merger date.
Value of Purchased Insurance In Force: 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 Companies at the merger date. This allocated cost represents
VPIF reflecting the value of those purchased policies calculated
by discounting the actuarially determined expected future cash
flow at the discount rate determined by ING.
84
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
6. Merger (continued)
An analysis of the VPIF asset is as follows:
POST-MERGER
-------------------------------------
For the period
For the year October 25, 1997
ended through
December 31, 1998 December 31, 1997
----------------- -----------------
(Dollars in thousands)
Beginning balance................. $43,174 $44,297
-------- --------
Imputed interest.................. 2,802 1,004
Amortization...................... (7,753) (1,952)
Changes in assumptions of
timing of gross profits.......... 227 --
-------- --------
Net amortization.................. (4,724) (948)
Adjustment for unrealized gains
on available for sale
securities....................... (28) (175)
Adjustment for other receivables
and merger costs................. (2,445) --
-------- --------
Ending balance.................... $35,977 $43,174
======= =======
Interest is imputed on the unamortized balance of VPIF at a rate
of 7.38% for the year ended December 31, 1998 and 7.03% for the
period October 25, 1997 through December 31, 1997. The
amortization of VPIF, net of imputed interest, is charged to
expense. VPIF decreased $2,664,000 in the second quarter of 1998
to adjust the value of other receivables at merger date and
increased $219,000 in the first quarter of 1998 as a result of an
adjustment to the merger costs. VPIF is 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
amortization relating to VPIF as of December 31, 1998 is
$4,300,000 in 1999, $4,000,000 in 2000, $3,900,000 in 2001,
$3,700,000 in 2002 and $3,300,000 in 2003. Actual amortization may
vary based upon changes in assumptions and experience.
7. 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"),
according to the terms of the Purchase Agreement dated 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. After 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,
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. The allocation
of the purchase price to Golden American was approximately
$139,872,000. Goodwill was established for the excess of the
purchase price over the fair value of the net assets acquired and
attributed to Golden American. 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.
Golden American's DPAC, previous balance of VPIF and unearned
revenue reserve, as of the acquisition date, were eliminated and
an asset of $85,796,000 representing VPIF was established for all
policies in force at the acquisition date.
85
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
7. Acquisition (continued)
Value of Purchased Insurance In Force: 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 Golden American at the date of
acquisition. This allocated cost represents VPIF 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 VPIF asset is as follows:
<TABLE>
POST-ACQUISITION | PRE-ACQUISITION
------------------------------------|----------------
For the period For the period | For the period
January 1, 1997 August 14,1996 | January 1, 1996
through through | through
October 24, 1997 December 31, 1996 | August 13, 1996
---------------- ----------------- | ---------------
(Dollars in thousands)
<S> <C> <C> | <C>
Beginning balance................ $83,051 $85,796 | $6,057
------- ------- | ------
Imputed interest................. 5,138 2,465 | 273
Amortization..................... (12,656) (5,210) | (1,224)
Changes in assumption of | ------
timing of gross profits......... 2,293 -- | --
------- ------- |
Net amortization................. (5,225) (2,745) | (951)
Adjustment for unrealized gains |
(losses) on available for sale |
securities...................... (373) -- | 11
------- ------- | ------
Ending balance $77,453 $83,051 | $5,117
======= ======= | ======
</TABLE>
Pre-Acquisition VPIF 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 VPIF at rates
of 7.70% to 7.80% for the period August 14, 1996 through October
24, 1997. The amortization of VPIF net of imputed interest was
charged to expense. VPIF was also adjusted for the unrealized
gains (losses) on available for sale securities; such changes were
included directly in stockholder's equity.
8. INCOME TAXES
Golden American files a consolidated federal income tax return.
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, 1998, the Companies have net operating loss
("NOL") carryforwards for federal income tax purposes of
approximately $50,917,000. Approximately $5,094,000, $3,354,000
and $42,469,000 of these NOL carryforwards are available to offset
future taxable income of the Companies through the years 2011,
2012 and 2013, respectively.
86
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
8. INCOME TAXES(continued)
INCOME TAX EXPENSE
Income tax expense (benefit) included in the consolidated
financial statements is as follows:
<TABLE>
POST-MERGER | POST-ACQUISITION | PRE-ACQUISITION
------------------------------------ | ----------------------------------- | ---------------
For the period | For the period For the period | For the period
For the year October 25,1997 | January 1,1997 August 14, 1996 | January 1, 1996
ended through | through through | through
December 31, 1998 December 31, 1997 | October 24, 1997 December 31, 1996 | August 13, 1996
----------------- ----------------- | ---------------- ----------------- | ---------------
| (Dollars in thousands) |
<S> <C> <C> | <C> <C> | <C>
Current..................... -- -- | $ 12 -- | --
Deferred.................... $5,279 $146 | (1,349) $220 | $(1,463)
------ ---- | |
$5,279 $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>
POST-MERGER | POST-ACQUISITION | PRE-ACQUISITION
------------------------------------ | ----------------------------------- | ---------------
For the period | For the period For the period | For the period
For the year October 25,1997 | January 1,1997 August 14, 1996 | January 1, 1996
ended through | through through | through
December 31, 1998 December 31, 1997 | October 24, 1997 December 31, 1996 | August 13, 1996
----------------- ----------------- | ---------------- ----------------- | ---------------
| (Dollars in thousands) |
<S> <C> <C> | <C> <C> | <C>
| |
Income (loss) before | |
income taxes.............. $10,353 $(279) | $ ( 608) $570 | $1,736
======= ===== | ======= ==== | ======
Income tax (benefit) at | |
federal statutory rate.... $ 3,624 $ (98) | $ (213) $200 | $ 607
Tax effect (decrease) of: | |
Realization of NOL | |
carryforwards........... -- -- | -- -- | (1,214)
Goodwill amortization..... 1,322 220 | -- -- | --
Compensatory stock | |
option and restricted | |
stock expense............ -- -- | (1,011) -- | --
Meals and | |
entertainment............ 157 23 | 53 20 | --
Other items............... 176 1 | (166) -- | --
Change in valuation | |
allowance................. -- -- | -- -- | (856)
------- ----- | ------- ---- | -------
Income tax expense | |
(benefit)................. $ 5,279 $ 146 | $(1,337) $220 | $(1,463)
======= ===== | ======= ==== | =======
</TABLE>
87
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
8. INCOME TAXES (continued)
DEFERRED INCOME TAXES
The tax effect of temporary differences giving rise to the
Companies' deferred income tax assets and liabilities at December
31, 1998 and 1997 is as follows:
POST-MERGER
------------------------------------
December 31, 1998 December 31, 1997
----------------- -----------------
(Dollars in thousands)
Deferred tax assets:
Net unrealized depreciation of
securities at fair value.......... $ 691 --
Future policy benefits............. 66,273 $27,399
Deferred policy acquisition costs.. -- 4,558
Goodwill........................... 16,323 17,620
Net operating loss carryforwards... 17,821 3,044
Other.............................. 1,272 1,548
-------- -------
102,380 54,169
Deferred tax liabilities:
Net unrealized appreciation of
securities at fair value.......... -- (130)
Fixed maturity securities.......... (1,034) (1,665)
Deferred policy acquisition costs.. (55,520) --
Mortgage loans on real estate...... (845) (845)
Value of purchased insurance in
force............................. (12,592) (15,172)
Other.............................. (912) (127)
-------- --------
(70,903) (17,939)
-------- --------
Deferred income tax asset........... $ 31,477 $ 36,230
======== ========
The Companies are required to establish a "valuation allowance"
for any portion of the deferred tax assets management believes
will not be realized. In the opinion of management, it is more
likely than not the Companies will realize the benefit of the
deferred tax assets; therefore, no such valuation allowance has
been established.
9. RETIREMENT PLANS
Defined Benefit Plans: In 1998 and 1997, the Companies were
allocated their share of the pension liability associated with
their employees. The Companies' employees are covered by the
employee retirement plan of an affiliate, Equitable Life. Further,
Equitable Life sponsors a defined contribution plan that is
qualified under Internal Revenue Code Section 401(k). The
following tables summarize the benefit obligations and the funded
status for pension benefits over the two-year period ended
December 31, 1998:
1998 1997
-------- ------
(Dollars in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1............ $ 956 $192
Service cost............................... 1,138 682
Interest cost.............................. 97 25
Actuarial loss............................. 2,266 57
Benefit payments........................... (3) --
------ ----
Benefit obligation at December 31.......... $4,454 $956
====== ====
88
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
9. RETIREMENT PLANS (continued)
1998 1997
-------- ------
(Dollars in thousands)
FUNDED STATUS
Funded status at December 31............... $(4,454) $(956)
Unrecognized net loss...................... 2,266 --
------- -----
Net amount recognized...................... $(2,188) $(956)
======= =====
During 1998 and 1997, the Companies' plan assets were held by
Equitable Life, an affiliate.
The weighted-average assumptions used in the measurement of the
Companies' benefit obligation are as follows:
1998 1997
------ ------
DECEMBER 31
Discount rate................................ 6.75% 7.25%
Expected return on plan assets............... 9.50 9.00
Rate of compensation increase................ 4.00 5.00
The following table provides the net periodic benefit cost for the
fiscal years 1998 and 1997:
<TABLE>
POST-MERGER | POST-ACQUISITION
------------------------------------ | ----------------
For the period | For the period
For the year October 25,1997 | January 1,1997
ended through | through
December 31, 1998 December 31, 1997 | October 24, 1997
----------------- ----------------- | ----------------
(Dollars in thousands)
<S> <C> <C> | <C>
Service cost................ $1,138 $114 | $568
Interest cost............... 97 10 | 15
Amortization of net loss.... -- -- | 1
------ ---- | ----
Net periodic benefit cost... $1,235 $124 | $584
====== ==== | ====
</TABLE>
There were no gains or losses resulting from curtailments or settlements
during 1998 or 1997.
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for pension plans with accumulated
benefit obligations in excess of plan assets were $4,454,000,
$3,142,000 and $0, respectively, as of December 31, 1998 and
$956,000, $579,000 and $0, respectively, as of December 31, 1997.
10. RELATED PARTY TRANSACTIONS
Operating Agreements: DSI acts as the principal underwriter (as
defined in the Securities Act of 1933 and the Investment Company
Act of 1940, as amended) and distributor of the variable insurance
products issued by the Companies. DSI is authorized to enter into
agreements with broker/dealers to distribute the Companies'
variable insurance products and appoint representatives of the
broker/dealers as agents. For the year ended December 31, 1998 and
for the periods October 25, 1997 through December 31, 1997 and
January 1, 1997 through October 24, 1997, the Companies paid
commissions to DSI totaling $117,470,000, $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).
Golden American provides certain managerial and supervisory
services to DSI. The fee paid by DSI for these services is
calculated as a percentage of average assets in the variable
separate accounts. For the
89
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
10. RELATED PARTY TRANSACTIONS (continued)
year ended December 31, 1998 and for
the periods October 25, 1997 through December 31, 1997 and January
1, 1997 through October 24, 1997, the fee was $4,771,000, $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.
Effective January 1, 1998, the Companies have an asset management
agreement with ING Investment Management LLC ("ING IM"), an
affiliate, in which ING IM provides asset management services.
Under the agreement, the Companies record a fee based on the value
of the assets under management. The fee is payable quarterly. For
the year ended December 31, 1998, the Companies incurred fees of
$1,504,000 under this agreement.
Prior to 1998, the Companies had a service agreement with
Equitable Investment Services, Inc. ("EISI"), an affiliate, in
which EISI provided 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, an
affiliate. 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 in 1998 or in 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 $5,833,000 for the year ended December 31, 1998
($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 Companies have a service agreement with Equitable Life in
which Equitable Life provides administrative and financial related
services. Under this agreement, the Companies incurred expenses of
$1,058,000 for the year ended December 31, 1998 ($13,000 and
$16,000 for the periods October 25, 1997 through December 31, 1997
and January 1, 1997 through October 24, 1997, respectively).
First Golden provides resources and services to DSI. Revenues for
these services, which reduce general expenses incurred by the
Companies, totaled $75,000 in 1998.
For the year ended December 31, 1998, the Companies had premiums,
net of reinsurance, for variable products from four affiliates,
Locust Street Securities, Inc., Vestax Securities Corporation, DSI
and Multi-Financial Securities Corporation of $122,900,000,
$44,900,000, $13,600,000 and $13,400,000, respectively. The
Companies had premiums, net reinsurance, for variable products
from three affiliates, Locust Street Securities, Inc., Vestax
Securities Corporation and DSI of $9,300,000, $1,900,000 and
$2,100,000 respectively, for the period October 25, 1997 through
December 31, 1997 ($16,900,000, $1,200,000 and $400,000 for the
period January 1, 1997 through October 24, 1997, respectively).
Reciprocal Loan Agreement: Golden American maintains a reciprocal
loan agreement with ING America Insurance Holdings, Inc. ("ING
AIH"), a Delaware corporation and affiliate, 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 AIH
can borrow up to $65,000,000 from one another. Prior to lending
funds to ING AIH, Golden American must obtain the approval of the
State of Delaware Department of Insurance. Interest on any Golden
American borrowings
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
10. RELATED PARTY TRANSACTIONS (continued)
is charged at the rate of ING AIH's cost of
funds for the interest period plus 0.15%. Interest on any ING AIH
borrowings is charged at a rate based on the prevailing interest
rate of U.S. commercial paper available for purchase with a
similar duration. Under this agreement, Golden American incurred
interest expense of $1,765,000 in 1998. At December 31, 1998,
Golden American did not have any borrowings or receivables from
ING AIH under this agreement.
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, Golden American incurred interest expense of
$211,000 for the year ended December 31, 1998 ($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). The
outstanding balance was paid by a capital contribution.
Surplus Notes: On December 30, 1998, Golden American issued a
7.25% surplus note in the amount of $60,000,000 to Equitable Life.
The note matures on December 29, 2028. The note and related
accrued interest is subordinate to payments due to policyholders,
claimant and beneficiary claims, as well as debts owed to all
other classes of debtors, other than surplus note holders, of
Golden American. Any payment of principal and/or interest made is
subject to the prior approval of the Delaware Insurance
Commissioner. Golden American incurred no interest in 1998.
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 related accrued interest is
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 is
subject to the prior approval of the Delaware Insurance
Commissioner. Golden American incurred interest totaling
$2,063,000 in 1998 ($344,000 and $1,720,000 for the periods
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.
Stockholder's Equity: On September 23, 1996, EIC Variable, Inc.
contributed $50,000,000 of Preferred Stock to the Companies'
additional paid-in capital. During 1998, Golden American received
$122,500,000 of capital contributions from its Parent.
11. 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 estimated 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
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
11. COMMITMENTS AND CONTINGENCIES (continued)
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, 1998, the Companies had reinsurance
treaties with four unaffiliated reinsurers and one affiliated
reinsurer covering a significant portion of the mortality risks
under variable contracts. The Companies remain liable to the
extent reinsurers do not meet their obligations under the
reinsurance agreements. Reinsurance ceded in force for life
mortality risks were $111,552,000 and $96,686,000 at December 31,
1998 and 1997, respectively. At December 31, 1998, the Companies
have a net receivable of $7,470,000 for reserve credits,
reinsurance claims or other receivables from these reinsurers
comprised of $439,000 for claims recoverable from reinsurers,
$543,000 for a payable for reinsurance premiums and $7,574,000 for
a receivable from an unaffiliated reinsurer. Included in the
accompanying financial statements are net considerations to
reinsurers of $4,797,000, $326,000, $1,871,000, $875,000 and
$600,000 and net policy benefits recoveries of $2,170,000,
$461,000, $1,021,000, $654,000 and $1,267,000 for the year ended
December 31, 1998 and 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.
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 $1,022,000, $265,000,
$335,000, $10,000 and $56,000 for the year ended December 31, 1998
and 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.
Guaranty Fund Assessments: Assessments are levied against the
Companies by life and health guaranty associations in most states
in which the Companies are 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 Companies cannot predict
whether and to what extent legislative initiatives may affect the
right to offset. The associated cost for a particular insurance
company can vary significantly based upon its fixed account
premium volume by line of business and state premiums as well as
its potential for premium tax offset. The Companies have
established an undiscounted reserve to cover such assessments and
regularly reviews information regarding known failures and revises
its estimates of future guaranty fund assessments. Accordingly,
the Companies accrued and charged to expense an additional
$1,123,000 for the year ended December 31, 1998, $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, 1998, the Companies have an undiscounted reserve of
$2,446,000 to cover estimated future assessments (net of related
anticipated premium tax credits) and has established an asset
totaling $586,000 for assessments paid which may be recoverable
through future premium tax offsets. The Companies believe this
reserve is sufficient to cover expected future guaranty fund
assessments, based upon previous premiums, and known insolvencies
at this time.
Litigation: The Companies, like other insurance companies, may be
named or otherwise 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. The Companies currently
believe no pending or threatened lawsuits exist that are
reasonably likely to have a material adverse impact on the
Companies.
Vulnerability from Concentrations: The Companies have various
concentrations in its investment portfolio (see Note 3 for further
information). The Companies' 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. Substantial changes in tax laws that would
make these products less
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
11. COMMITMENTS AND CONTINGENCIES (continued)
attractive to consumers and 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 Companies' financial condition. Two
broker/dealers generated 27% of the Companies' sales (53% by two
broker/dealers during 1997).
Leases: The Companies lease their home office space, certain
other equipment and capitalized computer software under operating
leases which expire through 2018. During the year ended December
31, 1998 and 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, rent expense totaled $1,241,000, $39,000, $331,000, $147,000
and $247,000, respectively. At December 31, 1998, minimum rental
payments due under all non-cancelable operating leases with
initial terms of one year or more are: 1999 - $1,528,000;
2000 - $1,429,000; 2001 - $1,240,000; 2002 - $1,007,000;
2003 - $991,000 and 2004 and thereafter - $5,363,000.
Revolving Note Payable: To enhance short-term liquidity, the
Companies have established a revolving note payable effective July
27, 1998 and expiring July 31, 1999 with SunTrust Bank, Atlanta
(the "Bank"). The note was approved by the Boards of Directors of
Golden American and First Golden on August 5, 1998 and September
29, 1998, respectively. The total amount the Companies may have
outstanding is $85,000,000, of which Golden American and First
Golden have individual credit sublimits of $75,000,000 and
$10,000,000, respectively. The note accrues interest at an annual
rate equal to: (1) the cost of funds for the Bank for the period
applicable for the advance plus 0.25% or (2) a rate quoted by the
Bank to the Companies for the advance. The terms of the agreement
require the Companies to maintain the minimum level of Company
Action Level Risk Based Capital as established by applicable state
law or regulation. During the year ended December 31, 1998, the
Companies incurred interest expense of $352,000. At December 31,
1998, the Companies did not have any borrowings under this
agreement.
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STATEMENT OF ADDITIONAL INFORMATION
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TABLE OF CONTENTS
ITEM PAGE
Introduction...................................................... 1
Description of Golden American Life Insurance Company............. 1
Safekeeping of Assets............................................. 1
The Administrator................................................. 1
Independent Auditors.............................................. 1
Distribution of Contracts......................................... 2
Performance Information........................................... 2
IRA Withdrawal Option............................................. 6
Other Information................................................. 6
Financial Statements of Separate Account B........................ 6
Appendix -- Description of Bond Ratings........................... A-1
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PLEASE TEAR OFF, COMPLETE AND RETURN THE FORM BELOW TO ORDER A FREE STATEMENT
OF ADDITIONAL INFORMATION FOR THE CONTRACTS OFFERED UNDER THE PROSPECTUS. SEND
THE FORM TO OUR CUSTOMER SERVICE CENTER AT THE ADDRESS SHOWN ON THE PROSPECTUS
COVER.
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PLEASE SEND ME A FREE COPY OF THE STATEMENT OF ADDITIONAL INFORMATION FOR
SEPARATE ACCOUNT B.
Please Print or Type:
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NAME
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SOCIAL SECURITY NUMBER
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STREET ADDRESS
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CITY, STATE, ZIP
106302 Value 02/01/00
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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 Interest Allocation with a
guarantee interest period of 10 years, a guaranteed interest rate of 7.5%,
an initial Index Rate ("I") of 7%; that a full surrender is
requested 3 years into the guaranteed interest period; that the then Index
Rate for a 7 year guaranteed interest period ("J") is 8%; and that no
prior transfers or partial withdrawals affecting this Fixed Interest
Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. The contract value of the Fixed Interest 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 Interest Allocation with a
guaranteed interest period of 10 years, a guaranteed interest rate of 7.5%,
an initial Index Rate ("I") of 7%; that a full surrender is
requested 3 years into the guaranteed interest period; that the then Index
Rate for a 7 year guaranteed interest period ("J") is 6%; and that no
prior transfers or partial withdrawals affecting this Fixed Interest
Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. The contract value of the Fixed Interest 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: WITHDRAWAL -- EXAMPLE OF A NEGATIVE MARKET VALUE
ADJUSTMENT
Assume $200,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, a guaranteed interest rate of 7.5%,
an initial Index Rate ("I") of 7%; that a partial withdrawal of
$112,695 is requested 3 years into the guaranteed interest period; that
the then Index Rate ("J") for a 7 year guaranteed interest period is 8%;
and that no prior transfers or partial withdrawals affecting this
Fixed Interest Allocation have been made.
First calculate the amount that must be withdrawn from the Fixed
Interest Allocation to provide the amount requested.
1. The contract value of the Fixed Interest Allocation on the date of
withdrawal is $248,459
( $200,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
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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 withdrawal paid to you is
$112,695, as requested. The Fixed Interest Allocation will be reduced
by the amount of the withdrawal, $112,695, and also reduced by the
Market Value Adjustment of $11,535, for a total reduction in the
Fixed Interest Allocation of $124,230.
EXAMPLE #4: WITHDRAWAL -- EXAMPLE OF A POSITIVE MARKET VALUE
ADJUSTMENT
Assume $200,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, a guaranteed interest rate of 7.5%,
an initial Index Rate of 7%; that a partial withdrawal of $128,371
requested 3 years into the guaranteed interest period; that the then Index
Rate ("J") for a 7 year guaranteed interest period is 6%; and that no
prior transfers or withdrawals affecting this Fixed Interest
Allocation have been made.
First calculate the amount that must be withdrawn from the Fixed
Interest Allocation to provide the amount requested.
1. The contract value of Fixed Interest 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 Interest Allocation will be reduced
by the amount of the partial withdrawal, $128,371, but increased by the
Market Value Adjustment of $4,141, for a total reduction in the
Fixed Interest Allocation of $124,230.
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APPENDIX B
SURRENDER CHARGE FOR EXCESS WITHDRAWALS EXAMPLE
The following assumes you made an initial premium payment of $25,000 and
additional premium payments of $25,000 in each of the second and third contract
years, for total premium payments under the Contract of $75,000. It also
assumes a withdrawal at the beginning of the fifth contract year of 30% of the
contract value of $90,000.
In this example, $15,000 (maximum of $15,000 in earnings or $75,000 x .10) is
the maximum free withdrawal amount that you may withdraw during the contract
year without a surrender charge. The total withdrawal would be $27,000 ($90,000
x .30). Therefore, $12,000 ($27,000 - $15,000) is considered an excess
withdrawal of a part of the initial premium payment of $25,000 and would be
subject to a 4% surrender charge of $480 ($12,000 x .04). This example does not
take into account any Market Value Adjustment or deduction of any premium
taxes.
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ING VARIABLE ANNUITIES
Golden American Life Insurance Company
Golden American Life Insurance Company is a stock company domiciled in Delaware
106302 Value 02/01/00
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Golden American Life Insurance Company is a stock company domiciled |
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