File No. 33-59261, 811-5626
Filed under Rule 497(c)
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Granite PrimElite
Deferred
Variable
Annuity
Prospectus
May 1, 1997
Golden American Life Insurance Company
May 1, 1997
Equi-Select Series Trust
February 28, 1997
Travelers Series Fund Inc.
April 29, 1997
Smith Barney Series Fund
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<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is a stock company domiciled in
Wilmington, Delaware
DEFERRED VARIABLE ANNUITY PROSPECTUS
GRANITE PRIMELITE
This prospectus describes individual deferred variable annuity Contracts
(the "Contract") offered by Golden American Life Insurance Company ("Golden
American" "we" "our" or "us"). The Owner ("you" or "your") purchases the
Contract with an Initial Premium and is permitted to make additional premium
payments.
The Contract is funded by Separate Account B ("Account B" or the "Account").
Eight Divisions of Account B are currently available under the Contract
offered by this prospectus. The investments available through the Divisions of
Account B include mutual fund portfolios (the "Portfolios") of Equi-Select
Series Trust (the "ESS Trust"), Travelers Series Fund Inc. (the "Travelers
Fund") and Smith Barney Series Fund (the "Smith Barney Fund").
This prospectus describes the Contract and provides background information
regarding Account B. The prospectuses for the ESS Trust, Travelers Fund and
Smith Barney Fund (individually, a "Trust," and collectively, the "Trusts"),
which must accompany this prospectus, provide information regarding investment
activities and policies of the Trusts.
You may allocate your premiums among the eight Divisions in any way you
choose, subject to certain restrictions. You may change the allocation of your
Accumulation Value during a Contract Year free of charge. We reserve the
right, however, to assess a charge for each allocation change after the
twelfth allocation change in a Contract Year.
Your Accumulation Value in Account B will vary in accordance with the
investment performance of the Divisions selected by you. Therefore, you bear
the entire investment risk for all amounts allocated to Account B.
We will pay a death benefit to the Beneficiary if the Owner dies prior to
the Annuity Commencement Date or the Annuitant dies prior to the Annuity
Commencement Date when the Owner is other than an individual.
This prospectus describes your principal rights and limitations and sets
forth the information concerning the Account that investors should know before
investing. A Statement of Additional Information, dated May 1, 1997, about
Account B has been filed with the Securities and Exchange Commission ("SEC")
and is available without charge upon request. To obtain a copy of this
document call or write our Customer Service Center. The Table of Contents of
the Statement of Additional Information may be found on the last page of this
prospectus. The Statement of Additional Information is incorporated herein by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
CONTRACTS AND UNDERLYING SERIES SHARES WHICH FUND THE CONTRACTS ARE NOT
INSURED BY THE FDIC OR ANY OTHER AGENCY. THEY ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF ANY BANK AND ARE NOT BANK GUARANTEED. THEY ARE SUBJECT TO
MARKET FLUCTUATION, REINVESTMENT RISK AND POSSIBLE LOSS OF PRINCIPAL INVESTED.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS NOT
VALID UNLESS ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR THE ESS TRUST, THE
TRAVELERS FUND AND THE SMITH BARNEY FUND.
ISSUED BY: DISTRIBUTED BY: ADMINISTERED AT:
Golden American Life Directed Services, Inc. Customer Service Center
Insurance Company Wilmington, Delaware Mailing Address:
19801 P.O. Box 8794
Wilmington, Delaware
19899-8794
1-888-354-0800
PROSPECTUS DATED: MAY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
DEFINITION OF TERMS........................................................ 1
SUMMARY OF THE CONTRACT.................................................... 3
FEE TABLE.................................................................. 5
CONDENSED FINANCIAL AND OTHER INFORMATION.................................. 7
Financial Statements..................................................... 7
Performance Related Information.......................................... 8
INTRODUCTION............................................................... 9
Facts About the Company and the Account.................................. 9
Golden American.......................................................... 9
The ESS Trust, The Travelers Fund and The Smith Barney Fund.............. 9
Separate Account B....................................................... 10
Account B Divisions...................................................... 10
Changes Within Account B................................................. 12
FACTS ABOUT THE CONTRACT................................................... 12
The Owner................................................................ 12
The Annuitant............................................................ 12
The Beneficiary.......................................................... 13
Change of Owner or Beneficiary........................................... 13
Availability of the Contract............................................. 13
Types of Contracts....................................................... 13
Your Right to Select or Change Contract Options.......................... 14
Premiums................................................................. 14
Qualified Plans.......................................................... 14
Where to make Payments................................................... 14
Making Additional Premium Payments....................................... 14
Crediting Premium Payments............................................... 15
Your Right to Reallocate................................................. 16
Dollar Cost Averaging.................................................... 16
What Happens If a Division Is Not Available.............................. 17
Your Accumulation Value.................................................. 17
Accumulation Value in Each Division...................................... 17
Measurement of Investment Experience..................................... 18
Cash Surrender Value..................................................... 18
Surrendering to Receive the Cash Surrender Value......................... 19
Partial Withdrawals...................................................... 19
Automatic Rebalancing.................................................... 20
Proceeds Payable to the Beneficiary...................................... 21
Death Benefit Options.................................................... 21
How to Claim Payments to Beneficiary..................................... 22
Reports to Owners........................................................ 22
When We Make Payments.................................................... 22
CHARGES AND FEES........................................................... 22
Charge Deduction Division................................................ 22
Charges Deducted from the Accumulation Value............................. 23
Surrender Charge......................................................... 23
Surrender Charge for Excess Partial Withdrawal........................... 23
Charges Deducted from the Divisions...................................... 25
Trust Expenses........................................................... 25
</TABLE>
i
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<TABLE>
<S> <C>
CHOOSING YOUR ANNUITIZATION OPTIONS......................................... 25
Annuitization of Your Contract............................................ 25
Annuity Commencement Date Selection....................................... 26
Frequency Selection....................................................... 26
The Annuitization Options................................................. 26
Payment When Named Person Dies............................................ 27
OTHER CONTRACT PROVISIONS................................................... 27
In Case of Errors in Application Information.............................. 27
Sending Notice to Us ..................................................... 27
Assigning the Contract as Collateral...................................... 28
Non-Participating......................................................... 28
Authority to Make Agreements.............................................. 28
Contract Changes--Applicable Tax Law...................................... 28
Your Right to Cancel or Exchange Your Contract............................ 28
Cancelling Your Contract.................................................. 28
Exchanging Your Contract.................................................. 28
Other Contract Changes.................................................... 28
Group or Sponsored Arrangements........................................... 28
Selling the Contract...................................................... 29
REGULATORY INFORMATION...................................................... 29
Voting Rights............................................................. 29
State Regulation.......................................................... 29
Legal Proceedings......................................................... 30
FEDERAL TAX CONSIDERATIONS.................................................. 30
Introduction.............................................................. 30
Tax Status of Golden American............................................. 30
Taxation of Non-Qualified Annuities....................................... 30
IRA Contracts and Other Qualified Retirement Plans........................ 34
Federal Income Tax Withholding............................................ 38
STATEMENT OF ADDITIONAL INFORMATION......................................... 39
Table of Contents......................................................... 39
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
ii
<PAGE>
DEFINITION OF TERMS
ACCOUNT -- Separate Account B.
ACCUMULATION VALUE -- The total amount invested under the Contract.
Initially, this amount is equal to the premium paid. Thereafter, the
Accumulation Value will reflect the premiums paid, investment experience of
the Divisions, charges deducted and any partial withdrawals.
ANNUAL RATCHET ENHANCED DEATH BENEFIT OPTION -- An enhanced death benefit
option that may be elected only at issue and only if the Owner or Annuitant
(when the Owner is other than an individual) is age 79 or younger. The
enhanced death benefit provided by this option is the highest Accumulation
Value on any Contract Anniversary on or prior to the Owner turning age 80, as
adjusted for additional premiums and partial withdrawals.
ANNUITANT -- The person designated by the Owner to be the measuring life in
determining Annuity Payments.
ANNUITY COMMENCEMENT DATE -- The date on which Annuity Payments begin.
ANNUITY OPTIONS -- Options the Owner selects that determine the form and
amount of Annuity Payments.
ANNUITY PAYMENT -- The periodic payment an Owner receives. It may be either
a fixed or a variable amount based on the Annuity Option chosen.
ATTAINED AGE -- The Issue Age of the Owner or Annuitant plus the number of
full years elapsed since the Contract Date.
BENEFICIARY -- The person designated to receive benefits in the case of the
death of the Owner or the Annuitant (when the Owner is other than an
individual).
BUSINESS DAY -- Any day the New York Stock Exchange ("NYSE") is open for
trading, exclusive of Federal holidays, or any day on which the SEC requires
that mutual funds, unit investment trusts or other investment portfolios be
valued.
CASH SURRENDER VALUE -- The amount the Owner receives upon surrender of the
Contract.
CHARGE DEDUCTION DIVISION -- The Division from which all charges are
deducted if so designated by you. The Charge Deduction Division currently is
the Smith Barney Money Market Division.
CONTINGENT ANNUITANT -- The person designated by the Owner who, upon the
Annuitant's death prior to the Annuity Commencement Date, becomes Annuitant.
CONTRACT -- The entire Contract consisting of the basic Contract and any
riders or endorsements.
CONTRACT ANNIVERSARY -- The anniversary of the Contract Date.
CONTRACT DATE -- The date on which we have received the Initial Premium and
upon which we begin determining the Contract values. It may or may not be the
same as the Issue Date. This date is used to determine Contract months,
processing dates, years and anniversaries.
CONTRACT PROCESSING DATES -- The days when we deduct certain charges from
the Accumulation Value. If the Contract Processing Date is not a Valuation
Date, it will be on the next succeeding Valuation Date. The Contract
Processing Dates will be once each year on the Contract Anniversary.
1
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CONTRACT PROCESSING PERIOD -- The first Contract processing period begins
with the Contract Date and ends at the close of business on the first Contract
Processing Date. All subsequent Contract processing periods begin at the close
of business on the most recent Contract Processing Date and extend to the
close of business on the next Contract Processing Date. There is one Contract
processing period each year.
CONTRACT YEAR -- The period between Contract anniversaries.
CUSTOMER SERVICE CENTER -- Where service is provided to you. The mailing
address and telephone number of the Customer Service Center are shown on the
cover.
DIVISIONS -- The investment options available under Account B.
ENDORSEMENTS -- An endorsement changes or adds provisions to the Contract.
EXCHANGE CONTRACTS -- Contracts issued by insurance companies not affiliated
with Golden American.
EXPERIENCE FACTOR -- The factor which reflects the investment experience of
the portfolio in which a Division invests and also reflects the charges
assessed against the Division for a Valuation Period.
FREE LOOK PERIOD -- The period of time within which the Owner may examine
the Contract and return it for a refund.
INDEX OF INVESTMENT EXPERIENCE -- The index that measures the performance of
a Division.
INITIAL PREMIUM -- The payment required to put a Contract into effect.
ISSUE AGE -- The Owner's or Annuitant's age on his or her last birthday on
or before the Contract Date.
ISSUE DATE -- The date the Contract is issued at our Customer Service
Center.
OWNER -- The person who owns the Contract and is entitled to exercise all
rights under the Contract. This person's death also initiates payment of the
death benefit.
RIDER -- A rider amends the Contract, in certain instances adding benefits.
SPECIALLY DESIGNATED DIVISION -- The Division to which distributions from a
portfolio underlying a Division in which reinvestment is not available will be
allocated unless you specify otherwise. The Specially Designated Division
currently is the Smith Barney Money Market Division.
STANDARD DEATH BENEFIT OPTION -- The death benefit option that you will
receive under the Contact unless the enhanced death benefit option is elected.
The death benefit provided by this option is equal to the greatest of (i)
Accumulation Value; (ii) total premium payments less any partial withdrawals;
and (iii) Cash Surrender Value.
VALUATION DATE -- The day at the end of a Valuation Period when each
Division is valued.
VALUATION PERIOD -- Each business day together with any non-business days
before it.
2
<PAGE>
SUMMARY OF THE CONTRACT
This prospectus has been designed to provide you with information regarding
the Contract and the Account which funds the Contract. Information concerning
the Portfolios underlying the Divisions of Account B is set forth in the
Trusts' prospectuses.
This summary is intended to provide only a very brief overview of the more
significant aspects of the Contract. Further detail is provided in this
prospectus and in the Contract. The Contract, together with any riders or
endorsements, constitutes the entire agreement between you and us and should
be retained.
This prospectus has been designed to provide you with the necessary
information to make a decision on purchasing the Contract. You have a choice
of investments. We do not promise that your Accumulation Value will increase.
Depending on the investment experience of the Divisions, your Accumulation
Value, Cash Surrender Value and death benefit may increase or decrease on any
day. You bear the investment risk.
DESCRIPTION OF THE CONTRACT
The Contract is designed to establish retirement benefits for two types of
purchasers. The first type of purchaser is one who is eligible to participate
in, and purchases a Contract for use with, an individual retirement annuity
("IRA") meeting the requirements of section 408(b) of the Internal Revenue
Code of 1986 ("qualified plan"). For a Contract funding a qualified plan,
distributions may be made to you to satisfy requirements imposed by Federal
tax law. The second type of purchaser is one who purchases a Contract outside
of a qualified plan ("non-qualified plan").
The Contract also offers a choice of Annuity Options to which you may apply
all or a portion of the Accumulation Value on the annuity commencement date or
the Cash Surrender Value upon surrender of the Contract. See Choosing Your
Annuity Options.
AVAILABILITY
We can issue a Contract if both the Annuitant and the Owner are not older
than age 85 and accept additional premium payments until either the Annuitant
or Owner reaches the Attained Age of 85 for non-qualified plans (age 70 for
qualified plans, except for rollover contributions). The minimum Initial
Premium is $5,000 for a non-qualified plan and $1,500 for a qualified plan. We
may change the minimum initial or additional premium requirements for certain
group or sponsored arrangements. See Other Contract Provisions, Group or
Sponsored Arrangements.
The minimum additional premium payment we will accept is $500 for a non-
qualified plan and $250 for a qualified plan. You must receive our prior
approval before making a premium payment that causes the Accumulation Value of
all annuities that you maintain with us to exceed $1,000,000.
THE DIVISIONS
Each of the eight Divisions of Account B offered under this prospectus
invests in a mutual fund portfolio with its own distinct investment objectives
and policies. Each Division of Account B invests in a corresponding Portfolio
of the ESS Trust, managed by Equitable Investment Services, Inc. ("EISI"), the
Travelers Fund, managed by Smith Barney Mutual Funds Management Inc. ("SBMFM")
or the Smith Barney Fund, also managed by SBMFM. EISI has retained a Portfolio
Manager to manage the assets of the Portfolios of the ESS Trust. See Facts
About the Company and the Account, Account B Divisions.
3
<PAGE>
HOW THE ACCUMULATION VALUE VARIES
The Accumulation Value in the Divisions varies each day based on investment
results. You bear the risk of poor investment performance and you receive the
benefits from favorable investment performance. The Accumulation Value also
reflects premium payments, charges deducted and partial withdrawals. See Facts
About the Contract, Accumulation Value in Each Division.
SURRENDERING YOUR CONTRACT
You may surrender the Contract and receive its Cash Surrender Value at any
time while both the Annuitant and Owner are living and before the Annuity
Commencement Date. See Facts About the Contract, Cash Surrender Value and
Surrendering to Receive the Cash Surrender Value.
TAKING PARTIAL WITHDRAWALS
After the Free Look Period, prior to the Annuity Commencement Date and while
the Contract is in effect, you may take partial withdrawals from the
Accumulation Value of your Contract. You may elect in advance to take
systematic partial withdrawals on a monthly, quarterly, or annual basis. If
you have an IRA Contract, you may elect IRA partial withdrawals on a monthly,
quarterly or annual basis.
Partial withdrawals are subject to certain restrictions as defined in this
prospectus, including a surrender charge. Partial withdrawals above a
specified percentage of your Accumulation Value may be subject to a surrender
charge. See Facts About the Contract, Partial Withdrawals.
DOLLAR COST AVERAGING
Under this program, you may choose to have a specified dollar amount
transferred from the Smith Barney Money Market Division to the other Divisions
of Account B on a monthly basis with the objective of shielding your
investment from short-term price fluctuations. See Facts About the Contract,
Dollar Cost Averaging.
YOUR RIGHT TO CANCEL THE CONTRACT
You may cancel your Contract within the Free Look Period which is a ten day
period of time beginning once you receive the Contract. For purposes of
administering our allocation and certain other administrative rules, we deem
this period to end 15 days after the Contract is mailed from our Customer
Service Center. Some states may require that we provide a longer free look
period. In some states we restrict the Initial Premium allocation during the
Free Look Period. See Other Contract Provisions, Your Right to Cancel or
Exchange Your Contract.
YOUR RIGHT TO CHANGE THE CONTRACT
The Contract may be changed to another annuity plan subject to our rules at
the time of the change. See Other Contract Provisions, Other Contract Changes.
DEATH BENEFIT OPTIONS
The Contract provides a death benefit to the beneficiary if the Owner dies
prior to the Annuity Commencement Date. Subject to our rules, there is a
Standard Death Benefit Option and the Annual Ratchet Enhanced Death Benefit
Option. See Facts About the Contract, Death Benefit Options. We may offer a
reduced death benefit under certain group and sponsored arrangements. See
Other Contract Provisions, Group or Sponsored Arrangements.
4
<PAGE>
DEDUCTIONS FOR CHARGES AND FEES
We invest the entire amount of the initial and any additional premium
payments in the Divisions you select, subject to certain restrictions we
impose. See Facts About the Contract, Restrictions on Allocation of Premium
Payments. We then may deduct an annual Contract fee from your Accumulation
Value. See Other Contract Provisions, Charges and Fees. We may reduce certain
charges under group or sponsored arrangements. See Other Contract Provisions,
Group or Sponsored Arrangements. Unless you have elected the Charge Deduction
Division, charges are deducted proportionately from all Account B Divisions in
which you are invested.
FEDERAL INCOME TAXES
The ultimate effect of Federal income taxes on the amounts held under an
annuity Contract, on Annuity Payments and on the economic benefits to the
Owner, Annuitant or Beneficiary depends on Golden American's tax status and
upon the tax status of the individuals concerned. In general, an Owner is not
taxed on increases in value under an annuity Contract until some form of
distribution is made under it. There may be tax penalties if you make a
withdrawal or surrender the contract before reaching 59 1/2. See Federal Tax
Considerations.
FEE TABLE
TRANSACTION EXPENSES
Contingent Deferred Sales Charge (/1/) (imposed as a percentage of premium
payments withdrawn upon excess partial withdrawal or surrender): (/2/)
<TABLE>
<CAPTION>
COMPLETE YEARS ELAPSED SURRENDER
SINCE PREMIUM PAYMENT CHARGE
---------------------- ---------
<S> <C>
0............................................................ 7%
1............................................................ 7%
2............................................................ 6%
3............................................................ 5%
4............................................................ 4%
5............................................................ 3%
6............................................................ 1%
7+........................................................... 0%
</TABLE>
<TABLE>
<S> <C>
Excess Allocation Charge.............................................. $ 0(/3/)
ANNUAL CONTRACT FEES
Administrative Charge................................................. $40
</TABLE>
(Waived if the Accumulation Value equals or exceeds $100,000 at the end of the
Contract Year, or once the sum of premiums paid equals or exceeds $100,000.)
SEPARATE ACCOUNT ANNUAL EXPENSES (percentage of assets in each Division) (/4/)
<TABLE>
<CAPTION>
STANDARD ANNUAL RATCHET
DEATH BENEFIT ENHANCED DEATH BENEFIT
------------- ----------------------
<S> <C> <C>
Mortality and Expenses Risk Charge.... 1.10% 1.25%
Asset Based Administrative Charge..... 0.15% 0.15%
---- ----
Total Separate Account Expenses....... 1.25% 1.40%
</TABLE>
5
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THE ESS TRUST ANNUAL EXPENSES (as
a percentage of the average
daily net assets of a Portfolio)
<TABLE>
<CAPTION>
OTHER TOTAL
EXPENSES EXPENSES
MANAGEMENT AFTER EXPENSE AFTER EXPENSE
FEES REIMBURSEMENT (/5/) REIMBURSEMENT
---------- ------------------- -------------
<S> <C> <C> <C>
OTC Portfolio.................... 0.80% 0.40% 1.20%
Research Portfolio............... 0.80% 0.40% 1.20%
Total Return Portfolio........... 0.80% 0.40% 1.20%
TRAVELERS FUND INC.'S ANNUAL EX-
PENSES (as a percentage of the
average daily net assets of a
Portfolio)
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
FEES EXPENSES EXPENSES
---------- ------------------- -------------
<S> <C> <C> <C>
Smith Barney Income and Growth
Portfolio....................... 0.65% 0.08% 0.73%
Smith Barney International Equity
Portfolio....................... 0.90 0.20 1.10
Smith Barney High Income Portfo-
lio............................. 0.60 0.24 0.84
Smith Barney Money Market Portfo-
lio(/6/)........................ 0.60 0.14 0.74
SMITH BARNEY FUND'S ANNUAL EX-
PENSES
(as a percentage of the average
daily net assets of a Portfolio)
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
FEES EXPENSES EXPENSES
---------- ------------------- -------------
<S> <C> <C> <C>
Appreciation Portfolio........... 0.75% 0.10% 0.85%
</TABLE>
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(1) We also deduct a charge for premium taxes (which can range from 0% to 3.5%
of premium) from your Accumulation Value upon surrender, excess partial
withdrawals or on the Annuity Commencement Date. See Premium Taxes.
(2) For purposes of calculating the surrender charge for the excess partial
withdrawal, (i) we treat premium payments as being withdrawn on a first-in
first-out basis, and (ii) amounts withdrawn which are not considered an
excess partial withdrawal are not treated as a withdrawal of any premium
payments. See Charges Deducted from the Accumulation Value, Surrender
Charge for Excess Partial Withdrawals.
(3) We reserve the right to impose a charge in the future at a maximum of $25
for each allocation change in excess of twelve per Contract Year. See
Excess Allocation Charge.
(4) See Facts About the Contract, Death Benefit Options, for a description of
the Contract's Standard and Enhanced Death Benefit Options.
(5) Other expenses shown take into account the effect of EISI's agreement to
reimburse the Portfolios for all operating expenses, excluding management
fees, that exceed 0.40% of their average daily net assets. This
reimbursement agreement commenced February 3, 1997. Prior to February 3,
1997, EISI reimbursed the Portfolios for all operating expenses, excluding
management fees, that exceeded 0.75% of their average daily net assets.
This reimbursement is voluntary and can be terminated at any time. In the
absence of the current reimbursement agreement, Other Expenses would have
been 0.55%, 0.51% and 0.45%, respectively, for the OTC, Research and Total
Return Portfolios for the year ended December 31, 1996.
(6) Smith Barney Mutual Funds Management Inc., the Fund's investment manager,
waived part of its Management Fees for the year ended October 31, 1996 for
the Smith Barney Money Market Portfolio such that the actual total annual
expenses charged in 1996 was 0.65%. This voluntary fee waiver can be
terminated at any time.
EXAMPLES:
The examples do not take into account any deduction for premium taxes.
Premium taxes currently range from 0% to 3.5% of premium payments. There may
be surrender charges if you choose to annuitize within the first three
Contract Years.
6
<PAGE>
If at issue you elect the Annual Ratchet Enhanced Death Benefit Option and
you surrender your Contract at the end of the applicable time period, you
would pay the following expenses for each $1,000 of Initial Premium assuming a
5% annual return on assets:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
------ ------- ------- -------
<S> <C> <C> <C> <C>
OTC............................................. $97.52 $134.39 $173.76 $304.02
Research........................................ $97.52 $134.39 $173.76 $304.02
Total Return.................................... $97.52 $134.39 $173.76 $304.02
Smith Barney Income and Growth.................. $92.82 $120.25 $150.20 $257.05
Smith Barney International Equity............... $96.52 $131.40 $168.80 $294.23
Smith Barney High Income........................ $93.92 $123.58 $155.77 $268.26
Smith Barney Money Market....................... $92.92 $120.55 $150.71 $258.08
Appreciation.................................... $94.02 $123.88 $156.27 $269.27
</TABLE>
If at issue you elect the Annual Ratchet Enhanced Death Benefit Option and
you do not surrender your Contract or if you annuitize on the Annuity
Commencement Date, you would pay the following expenses for each $1,000 of
initial premium assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
------ ------ ------- -------
<S> <C> <C> <C> <C>
OTC.............................................. $27.52 $84.39 $143.76 $304.02
Research......................................... $27.52 $84.39 $143.76 $304.02
Total Return..................................... $27.52 $84.39 $143.76 $304.02
Smith Barney Income and Growth................... $22.82 $70.25 $120.20 $257.05
Smith Barney International Equity................ $26.52 $81.40 $138.80 $294.23
Smith Barney High Income......................... $23.92 $73.58 $125.77 $268.26
Smith Barney Money Market........................ $22.92 $70.55 $120.71 $258.08
Appreciation..................................... $24.02 $73.88 $126.27 $269.27
</TABLE>
The purpose of the Fee Table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly. For purposes of
computing the annual per Contract administrative charge, the dollar amounts
shown in the examples are based on an Initial Premium of $33,000.
The examples reflect the election at issue of the Annual Ratchet Enhanced
Death Benefit Option. If the Standard Death Benefit Option is elected, the
actual expenses incurred will be less than those represented in the Examples.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, SUBJECT TO
THE GUARANTEES UNDER THE CONTRACT.
CONDENSED FINANCIAL AND OTHER INFORMATION
No condensed financial information is presented because the Divisions
available in connection with the Contracts offered by this prospectus were not
available for investment as of December 31, 1996.
FINANCIAL STATEMENTS
The audited financial statements of Separate Account B for the years ended
December 31, 1996 and 1995 (as well as the auditors' report thereon) and the
audited financial statements of The Managed Global Account of
7
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Separate Account D, the predecessor entity of the Managed Global Series for
accounting purposes, for the years ended December 31, 1995 and 1994 (as well
as the auditors' report thereon) appear in the Statement of Additional
Information. The audited financial statements of Golden American prepared in
accordance with generally accepted accounting principles for the years ended
December 31, 1996, 1995 and 1994 (as well as the auditors' report thereon) are
also contained in the Statement of Additional Information.
PERFORMANCE RELATED INFORMATION
Performance information for the Divisions of Account B, including the yield
and effective yield of the Smith Barney Money Market Division, the yield of
the remaining Divisions, and the total return of all Divisions may appear in
reports and promotional literature to current or prospective Owners.
Current yield for the Smith Barney Money Market Division will be based on
income received by a hypothetical investment over a given 7-day period (less
expenses accrued during the period), and then "annualized" (i.e., assuming
that the 7-day yield would be received for 52 weeks, stated in terms of an
annual percentage return on the investment). "Effective yield" for the Liquid
Asset Division is calculated in a manner similar to that used to calculate
yield, but when annualized, the income earned by the investment is assumed to
be reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of earnings.
For the remaining Divisions, quotations of yield will be based on all
investment income per unit (Accumulation Value divided by the index of
investment experience, see Facts About the Contract, Measurement of Investment
Experience, Index of Investment Experience and Unit Value) earned during a
given 30 day period, less expenses accrued during the period ("net investment
income"). Quotations of average annual total return for any Division will be
expressed in terms of the average annual compounded rate of return on a
hypothetical investment in a Contract over a period of one, five, and ten
years (or, if less, up to the life of the Division), and will reflect the
deduction of the applicable surrender charge, the administrative charge and
the applicable mortality and expense risk charge. See Charges and Fees.
Quotations of total return may simultaneously be shown for other periods that
do not take into account certain contractual charges, such as the surrender
charge.
Performance information for a Division may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, or other indices measuring performance of a pertinent
group of securities so that investors may compare a Division's results with
those of a group of securities widely regarded by investors as representative
of the securities markets in general; (ii) other variable annuity separate
accounts or other investment products tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds and other
investment companies by overall performance, investment objectives, and
assets, or tracked by other ratings services, including VARDS, companies,
publications, or persons who rank separate accounts or other investment
products on overall performance or other criteria; and (iii) the Consumer
Price Index (measure for inflation) to assess the real rate of return from an
investment in the Contract. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
Performance information for any Division reflects only the performance of a
hypothetical Contract under which the Accumulation Value is allocated to a
Division during a particular time period on which the calculations are based.
Performance information should be considered in light of the investment
objectives and policies, characteristics and quality of the Portfolio of the
respective Trust in which the Division invests and the market conditions
during the given time period, and should not be considered as a representation
of what may be achieved in the future. For a description of the methods used
to determine yield and total return for the Divisions, see the Statement of
Additional Information.
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Reports and promotional literature may also contain other information
including the ranking of any Division derived from rankings of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services or by rating services, companies, publications, or other
persons who rank separate accounts or other investment products on overall
performance or other criteria.
INTRODUCTION
FACTS ABOUT THE COMPANY AND THE ACCOUNT
The following information describes the Contract and Account B. Account B
invests in mutual fund portfolios of the Trusts.
GOLDEN AMERICAN
Golden American Life Insurance Company ("Golden American" or the "Company")
is a stock life insurance company organized under the laws of the State of
Delaware and is a wholly owned subsidiary of Equitable of Iowa Companies
("Equitable of Iowa"). Prior to December 30, 1993, Golden American was a
Minnesota corporation. Prior to August 13, 1996, Golden American was a wholly
owned indirect subsidiary of Bankers Trust Company. We are authorized to do
business in all jurisdictions except New York. We offer variable annuities and
variable life insurance. Administrative services for the Contract are provided
at our Customer Service Center, the address is shown on the cover.
Equitable of Iowa is the holding company for Equitable Life Insurance
Company of Iowa, USG Annuity & Life Company, Locust Street Securities, Inc.,
Equitable American Insurance Company, Equitable Investment Services, Inc.
("EISI"), Equitable of Iowa Securities Network, Inc., Directed Services, Inc.
("DSI"), and Golden American.
As of December 31, 1996, Equitable of Iowa had over $12.5 billion in assets.
THE ESS TRUST, THE TRAVELERS FUND AND THE SMITH BARNEY FUND
The ESS Trust is an open-end management investment company. Currently, the
ESS Trust's shares are not available to separate accounts of other insurance
companies other than insurance companies affiliated with Equitable of Iowa
such as Golden American. It is anticipated that in the future the ESS Trust
will become available to separate accounts of unaffiliated companies as well
as to separate accounts funding variable life insurance policies offered by
Golden American.
The Travelers Fund is an open-end management investment company underlying
certain variable annuity and variable life insurance contracts. Prior to
September 3, 1996, it was known as Smith Barney/Travelers Series Fund Inc.
The Smith Barney Fund is a diversified, open-end management investment
company.
Shares of the Travelers Fund and Smith Barney Fund are issued and redeemed
in connection with investments in and payments under certain variable annuity
contracts and variable life insurance policies of various life insurance
companies which may or may not be affiliated. The Funds do not foresee any
disadvantage to Owners arising out of the fact that they offer their shares
for products offered by life insurance companies which are not affiliated.
Nevertheless, the Boards of Trustees of the Travelers Fund and Smith Barney
Fund intend to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any,
should be taken in response thereto. If such a conflict were to occur, one or
more insurance company separate accounts might withdraw its investments in the
Travelers Fund and Smith Barney Fund. An irreconcilable conflict might result
in the withdrawal of a substantial amount of a Portfolio's assets which could
adversely affect such Portfolio's net asset value per share.
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You will find complete information about the ESS Trust, the Travelers Fund
and the Smith Barney Fund, including the risks associated with each Portfolio,
in the accompanying Trusts' prospectuses. You should read them carefully in
conjunction with this prospectus before investing. Additional copies of the
Trusts' prospectuses may be obtained by contacting our Customer Service
Center.
SEPARATE ACCOUNT B
All obligations under the Contract are general obligations of Golden
American. Account B is a separate investment account used to support our
variable annuity Contracts and for other purposes as permitted by applicable
laws and regulations. The assets of Account B are kept separate from our
general account and any other separate accounts we may have. We may offer
other variable annuity Contracts investing in Account B which are not
discussed in this prospectus. Account B may also invest in other Portfolios
which are not available to the Contract described in this prospectus.
We own all the assets in Account B. Income and realized and unrealized gains
or losses from assets in the account are credited to or charged against that
account without regard to other income, gains or losses in our other
investment accounts. As required, the assets in Account B are at least equal
to the reserves and other liabilities of that account. These assets may not be
charged with liabilities from any other business we conduct.
They may, however, be subject to liabilities arising from Divisions whose
assets are attributable to other variable annuity Contracts supported by
Account B. If the assets exceed the required reserves and other liabilities,
we may transfer the excess to our general account.
Account B was established on July 14, 1988 to invest in mutual funds, unit
investment trusts or other investment portfolios which we determine to be
suitable for the Contract's purposes. Account B is treated as a unit
investment trust under Federal securities laws. It is registered with the SEC
under the Investment Company Act of 1940 (the "1940 Act") as an investment
company and meets the definition of a separate account under the Federal
securities laws. It is governed by the laws of Delaware, our state of
domicile, and may also be governed by the laws of other states in which we do
business. Registration with the SEC does not involve any supervision by the
SEC of the management or investment policies or practices of Account B.
ACCOUNT B DIVISIONS
Account B is divided into Divisions. Currently, each Division of Account B
offered under this prospectus invests in a Portfolio of the ESS Trust, the
Travelers Fund or the Smith Barney Fund. EISI serves as the Manager to each
Portfolio of the ESS Trust and SBMFM serves as the manager to each Portfolio
of both the Travelers Fund and the Appreciation Portfolio of the Smith Barney
Fund. EISI has retained a Portfolio Manager to manage the assets of the
Portfolios of the ESS Trust. EISI (not the ESS Trust) pays the Portfolio
Manager a monthly fee for managing the assets of the Portfolios. See the
Trusts' prospectuses for details. There may be restrictions on the
availability and/or the amount of the allocation to certain Divisions based on
state laws and regulations. The investment objectives of the various
Portfolios in the Trusts are described below. 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. Account B also has other
Divisions investing in other portfolios which are not available to the
Contract described in this prospectus.
Each Trust pays its respective Manager for its services a fee, payable
monthly, based on the annual rates of the average daily net assets of the
Portfolio as shown in the Fee Table. In addition, EISI pays its manager for
its services a fee, payable monthly, based on the annual rates of the average
daily net assets of the Portfolios shown in the table below.
THE ESS TRUST
<TABLE>
<CAPTION>
PORTFOLIOS FEES
---------- ----
<S> <C>
OTC, Research, and Total Return
Portfolios: 0.80% of first $300 million
0.55% of amount in excess of $300 million
</TABLE>
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The following Divisions invest in a designated Portfolio of the ESS Trust.
OTC DIVISION -- OTC PORTFOLIO
OBJECTIVE -- Long-term growth of capital.
INVESTMENTS -- Investment primarily in securities of companies that are
traded principally on the over-the-counter (OTC) market.
PORTFOLIO MANAGER -- Massachusetts Financial Services Company
RESEARCH DIVISION -- RESEARCH PORTFOLIO
OBJECTIVE -- Long term growth of capital and future income.
INVESTMENTS -- Investment primarily in common stocks or securities
convertible into common stocks of companies believed to possess better than
average prospects for long-term growth.
PORTFOLIO MANAGER -- Massachusetts Financial Services Company
TOTAL RETURN DIVISION -- TOTAL RETURN PORTFOLIO
OBJECTIVE -- Above-average income consistent with prudent employment of
capital.
INVESTMENTS -- Investment primarily in equity securities.
PORTFOLIO MANAGER -- Massachusetts Financial Services Company
The following Divisions invest in a designated Portfolio of the Travelers
Fund.
SMITH BARNEY INCOME AND GROWTH DIVISION -- SMITH BARNEY INCOME AND GROWTH
PORTFOLIO
OBJECTIVE -- Current income and long-term growth of income and capital.
INVESTMENTS -- Investment primarily in common stocks offering a current
return from dividends and interest-paying debt obligations and high-quality
short-term debt obligations.
SMITH BARNEY INTERNATIONAL EQUITY DIVISION -- SMITH BARNEY INTERNATIONAL
EQUITY PORTFOLIO
OBJECTIVE -- Total return on its assets from growth of capital and income.
INVESTMENTS -- Diversified portfolio of equity securities of established
non-U.S. issuers.
SMITH BARNEY HIGH INCOME DIVISION -- SMITH BARNEY HIGH INCOME PORTFOLIO
OBJECTIVE -- High current income.
INVESTMENTS -- High-yielding corporate debt obligations and preferred stock.
In addition, the Portfolio may invest up to 20% of its assets in the
securities of foreign issuers that are denominated in currencies other than
U.S. dollars.
SMITH BARNEY MONEY MARKET DIVISION -- SMITH BARNEY MONEY MARKET PORTFOLIO
OBJECTIVE -- Maximum current income and preservation of capital.
INVESTMENTS -- Bank obligations and high quality commercial paper, corporate
obligations and municipal obligations in addition to U.S. government
securities and related repurchase agreements.
The following Division invests in a designated Portfolio of the Smith Barney
Fund.
APPRECIATION DIVISION -- APPRECIATION PORTFOLIO
OBJECTIVE -- Long-term appreciation of capital.
INVESTMENTS -- Primarily in equity and equity-related securities that are
believed to afford attractive opportunities for appreciation.
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CHANGES WITHIN ACCOUNT B
We may from time to time make additional Divisions available. These
Divisions will invest in investment portfolios we find suitable for the
Contract. We also have the right to eliminate investment Divisions from
Account B, to combine two or more Divisions, or to substitute a new portfolio
for the portfolio in which a Division invests. A substitution may become
necessary if, in our judgment, a portfolio no longer suits the purposes of the
Contract. This may happen due to a change in laws or regulations, or a change
in a portfolio's investment objectives or restrictions, or because the
portfolio is no longer available for investment, or for some other reason. In
addition, we reserve the right to transfer assets of Account B, which we
determine to be associated with the class of Contracts to which your Contract
belongs, to another account. If necessary, we will get prior approval from the
insurance department of our state of domicile before making such a
substitution or transfer. We will also get any required approval from the SEC
and any other required approvals before making such a substitution or
transfer. We will notify you as soon as practicable of any proposed changes.
When permitted by law, We reserve the right to:
(1) deregister Account B under the 1940 Act;
(2) operate Account B as a management company under the 1940 Act if it is
operating as a unit investment trust;
(3) operate Account B as a unit investment trust under the 1940 Act if it
is operating as a managed separate account;
(4) restrict or eliminate any voting rights as to Account B; and
(5) combine Account B with other accounts.
FACTS ABOUT THE CONTRACT
THE OWNER
You are the Owner. You are also the Annuitant unless another Annuitant is
named in the application or enrollment form. You have the rights and options
described in the Contract. One or more persons may own the Contract. If there
are multiple Owners named, the age of the oldest Owner shall determine the
applicable death benefit.
Death of an Owner activates the death benefit provision. In the case of a
sole Owner who dies prior to the annuity commencement date, we will pay the
Beneficiary the death benefit when due. The sole Owner's estate will be the
Beneficiary if no Beneficiary designation is in effect, or if the designated
Beneficiary has predeceased the Owner. In the case of a joint Owner of the
Contract dying prior to the annuity commencement date, we will designate the
surviving Owner(s) as the Beneficiary(ies). This supersedes any previous
Beneficiary designation.
In the case where the Owner is a trust and a beneficial Owner of the trust
has been designated, the beneficial Owner will be treated as the Owner of the
Contract solely for the purpose of determining the death benefit provision. If
a beneficial Owner is changed or added after the Contract Date, this will be
treated as a change of Owner for purposes of determining the death benefit.
See Change of Owner or Beneficiary. If no beneficial Owner of the Trust has
been designated, the availability of enhanced death benefits will be
determined by the age of the Annuitant at issue.
THE ANNUITANT
The Annuitant is the person designated by the Owner to be the measuring life
in determining Annuity Payments. The Owner will receive the annuity benefits
of the Contract if the Annuitant is living on the Annuity Commencement Date.
If the Annuitant dies before the Annuity Commencement Date, and a contingent
Annuitant has been named, the contingent Annuitant becomes the Annuitant
(unless the Owner is not an individual, in which case the death benefit
becomes payable). Once named, the Annuitant may not be changed at any time.
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If there is no contingent Annuitant when the Annuitant dies prior to the
Annuity Commencement Date, the Owner will become the Annuitant. The Owner may
designate a new Annuitant within 60 days of the death of the Annuitant.
If there is no contingent Annuitant when the Annuitant dies prior to the
Annuity Commencement Date and the Owner is not an individual, we will pay the
Beneficiary the death benefit then due. The Beneficiary will be as provided in
the Beneficiary designation then in effect. If no Beneficiary designation is
in effect, or if there is no designated Beneficiary living, the Owner will be
the Beneficiary. If the Annuitant was the sole Owner and there is no
Beneficiary designation, the Annuitant's estate will be the Beneficiary.
Regardless of whether a death benefit is payable, if the Annuitant dies and
any Owner is not an individual, such death will trigger application of the
distribution rules imposed by Federal tax law.
THE BENEFICIARY
The Beneficiary is the person to whom we pay death benefit proceeds and who
becomes the successor Owner if the Owner dies prior to the annuity
commencement date. We pay death benefit proceeds to the primary Beneficiary
(unless there are joint Owners, in which case death proceeds are payable to
the surviving Owner(s)). See Proceeds Payable to the Beneficiary.
If the Beneficiary dies before the Annuitant or Owner, the death benefit
proceeds are paid to the contingent Beneficiary, if any. If there is no
surviving Beneficiary, we pay the death benefit proceeds to the Owner's
estate.
One or more persons may be named as Beneficiary or contingent Beneficiary.
In the case of more than one Beneficiary, unless otherwise specified, we will
assume any death benefit proceeds are to be paid in equal shares to the
surviving beneficiaries.
You have the right to change beneficiaries during the Annuitant's lifetime
unless you have designated an irrevocable Beneficiary. When an irrevocable
Beneficiary has been designated, you and the irrevocable Beneficiary may have
to act together to exercise certain rights and options under the Contract.
CHANGE OF OWNER OR BENEFICIARY
During the Annuitant's lifetime and while your Contract is in effect, you
may transfer ownership of the Contract (if purchased in connection with a
nonqualified plan) subject to our published rules at the time of the change. A
change in Ownership may affect the amount of the death benefit and the
guaranteed death benefit. You may also change the Beneficiary. To make either
of these changes, you must send us written notice of the change in a form
satisfactory to us. The change will take effect as of the day the notice is
signed. The change will not affect any payment made or action taken by us
before recording the change at our Customer Service Center. See Federal Tax
Considerations, Transfer of Annuity Contracts, and Assignments.
AVAILABILITY OF THE CONTRACT
We can issue a Contract if both the Annuitant and the Owner are not older
than age 85.
TYPES OF CONTRACTS
QUALIFIED CONTRACTS
The Contract may be issued as an Individual Retirement Annuity or in
connection with an individual retirement account. In the latter case, the
Contract will be issued without an Individual Retirement Annuity endorsement,
and the rights of the participant under the Contract will be affected by the
terms and conditions of the particular individual retirement trust or
custodial account, and by provisions of the Code and the regulations
thereunder. For example, the individual retirement trust or custodial account
will impose minimum distribution
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<PAGE>
rules, which may require distributions to commence not later than April 1st of
the calendar year following the calendar year in which you attain age 70 1/2.
For both Individual Retirement Annuities and individual retirement accounts,
the minimum Initial Premium is $1,500.
IF THE CONTRACT IS PURCHASED TO FUND A QUALIFIED PLAN, DISTRIBUTION MUST
COMMENCE NOT LATER THAN APRIL 1ST OF THE CALENDAR YEAR FOLLOWING THE CALENDAR
YEAR IN WHICH YOU ATTAIN AGE 70 1/2. IF YOU OWN MORE THAN ONE QUALIFIED PLAN,
YOU SHOULD CONSULT YOUR TAX ADVISOR.
NON-QUALIFIED CONTRACTS
The Contract may fund any non-qualified plan. Non-qualified Contracts do not
qualify for any tax-favored treatment other than the benefits provided for by
annuities.
YOUR RIGHT TO SELECT OR CHANGE CONTRACT OPTIONS
Before the Annuity Commencement Date, you may change the Annuity
Commencement Date, frequency of Annuity Payments or the Annuity Option by
sending a written request to our Customer Service Center. The Annuitant may
not be changed at any time.
PREMIUMS
You purchase the Contract with an Initial Premium. After the end of the Free
Look Period, you may make additional premium payments. See Making Additional
Premium Payments. The minimum Initial Premium is $5,000 for a non-qualified
Contract and $1,500 for a qualified Contract.
You must receive our prior approval before making a premium payment that
causes the Accumulation Value of all annuities that you maintain with us to
exceed $1,000,000. We may change the minimum initial or additional premium
requirements for certain group or sponsored arrangements. See Group or
Sponsored Arrangements.
QUALIFIED PLANS
For IRA Contracts, the annual premium on behalf of any individual Contract
may not exceed $2,000. Provided your spouse does not make a contribution to an
IRA, you may set up a spousal IRA even if your spouse has earned some
compensation during the year. The maximum deductible amount for a spousal IRA
program is the lesser of $2,250 or 100% of your compensation reduced by the
contribution (if any) made by you for the taxable year to your own IRA.
However, no more than $2,000 can go to either your or your spouse's IRA in any
one year. For example, $1,750 may go to your IRA and $500 to your spouse's
IRA. These maximums are not applicable if the premium is the result of a
rollover from another qualified plan.
WHERE TO MAKE PAYMENTS
Remit premium payments to our Customer Service Center. The address is shown
on the cover. We will send you a confirmation notice.
MAKING ADDITIONAL PREMIUM PAYMENTS
You may make additional premium payments after the end of the Free Look
Period. We can accept additional premium payments until either the Annuitant
or Owner reaches the Attained Age of 85 under non-qualified plans. For
qualified plans, no contributions may be made to an IRA Contract for the
taxable year in which you attain age 70 1/2 and thereafter (except for
rollover contributions). The minimum additional premium payment we will accept
is $500 for a non-qualified plan and $250 for a qualified plan.
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CREDITING PREMIUM PAYMENTS
The Initial Premium will be accepted or rejected within two business days of
receipt by us if accompanied by information sufficient to permit us to
determine if we are able to issue a Contract. We may retain an Initial Premium
for up to five business days while attempting to obtain information sufficient
to enable us to issue the Contract. If we are unable to do so within five
business days, the applicant or enrollee will be informed of the reasons for
the delay and the Initial Premium will be returned immediately unless the
applicant or enrollee consents to our retaining the Initial Premium until we
have received the information we require. Thereafter, all additional premiums
will be accepted on the day received.
We will also accept, by agreement with broker-dealers, transmittal of
initial and additional premium payments by wire order from the broker-dealer
to our Customer Service Center. Such transmittals must be accompanied by a
simultaneous telephone facsimile or other electronic data transmission
containing the essential information we require to open an account and
allocate the premium payment. Contact our Customer Service Center to find out
about state availability and broker-dealer requirements.
Upon our acceptance of premium payments received via wire order and
accompanied by sufficient electronically transmitted data, we will issue the
Contract, allocate the premium payment according to your instructions, and
invest the payment at the value next determined following receipt. See
Restrictions on Allocation of Premium Payments. Wire orders not accompanied by
sufficient data to enable us to accept the premium payment may be retained for
up to five business days while we attempt to obtain information sufficient to
enable us to issue the Contract. If we are unable to do so, our Customer
Service Center will inform the broker-dealer, on behalf of the applicant or
enrollee, of the reasons for the delay and return the premium payment
immediately to the broker-dealer for return to the applicant or enrollee,
unless the applicant or enrollee specifically consents to allow us to retain
the premium payment until our Customer Service Center receives the required
information.
On the date we receive and accept your initial or additional premium
payment:
(1) We allocate the Initial Premium among the Divisions according to your
instructions, subject to any restrictions. See Restrictions on Allocation
of Premium Payments. For additional premium payments, the Accumulation
Value will increase by the amount of the premium. If we do not receive
instructions from you, the increase in the Accumulation Value will be
allocated among the Divisions in proportion to the amount of Accumulation
Value in each Division as of the date we receive and accept the additional
premium payment.
(2) For an Initial Premium, we calculate your applicable death benefit.
When an additional premium payment is made, we increase your applicable
death benefit in accordance with the death benefit option in effect for
your Contract.
Following receipt and acceptance of the wire order and accompanying data,
and investment of the premium payment, we will follow one of the two
procedures set forth below. The one we follow is determined by the procedures
of the broker-dealer which submitted the wire order.
(1) We will issue the Contract. However, until we have received and
accepted a properly completed application or enrollment form, we reserve
the right to rescind the Contract. If the form is not received within
fifteen days of receipt of the premium payment, we will refund the
Accumulation Value plus any charges we deducted, and the Contract will be
voided.
(2) Based on the information provided, we will issue the Contract. We
will mail the Contract to you, together with an Application Acknowledgement
Statement. You must execute the Application Acknowledgement Statement and
return it to us at our Customer Service Center. Until we receive the
executed Application Acknowledgement Statement, neither you nor the broker
dealer may execute any financial transactions with respect to the Contract
unless such transactions are appropriately requested in writing by you.
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YOUR RIGHT TO REALLOCATE
You may reallocate your Accumulation Value among the Divisions at the end of
the free look period. We currently do not assess a charge for allocation
changes made during a Contract Year. We reserve the right, however, to assess
a $25 charge for each allocation change after the twelfth allocation change in
a Contract Year. We require that each reallocation of your Accumulation Value
equal at least $250 or, if less, your entire Accumulation Value within a
Division. We reserve the right to limit, upon notice, the maximum number of
reallocations you may make within a Contract Year. In addition, we reserve the
right to defer the reallocation privilege at any time we are unable to
purchase or redeem shares of the Trusts. We also reserve the right to modify
or terminate your right to reallocate your Accumulation Value at any time in
accordance with applicable law. To make a reallocation change, you must
provide us with satisfactory notice at our Customer Service Center.
We reserve the right to limit the number of reallocations of your
Accumulation Value among the Divisions or refuse any reallocation request if
we believe that: (a) excessive trading by you or a specific reallocation
request may have a detrimental effect on unit values or the share prices of
the underlying Portfolio; or (b) we are informed by the ESS Trust, the
Travelers Fund or the Smith Barney Fund that the purchase or redemption of
shares is to be restricted because of excessive trading or a specific
reallocation or group of reallocations is deemed to have a detrimental effect
on share prices of the ESS Trust, the Travelers Fund or the Smith Barney Fund.
Where permitted by law, we may accept your authorization of third party
reallocation on your behalf, subject to our rules. We may suspend or cancel
such acceptance at any time. We will notify you of any such suspension or
cancellation. We may restrict the Divisions that will be available to you for
reallocations of premiums during any period in which you authorize such third
party to act on your behalf. We will give you prior notification of any such
restrictions. However, we will not enforce such restrictions if we are
provided evidence satisfactory to us that: (a) such third party has been
appointed by a court of competent jurisdiction to act on your behalf; or (b)
such third party has been appointed by you to act on your behalf for all your
financial affairs.
Some restrictions may apply based on the free look provisions of the state
where the Contract is issued. See Your Right to Cancel or Exchange Your
Contract.
DOLLAR COST AVERAGING
If you have at least $10,000 of Accumulation Value in the Smith Barney Money
Market Division you may elect the dollar cost averaging program and have a
specified dollar amount transferred from such Division on a monthly basis.
The main objective of dollar cost averaging is to attempt to shield your
investment from short-term price fluctuations. Since the same dollar amount is
transferred to other Divisions each month, more units are purchased in a
Division if the value per unit is low and less units are purchased if the
value per unit is high.
Therefore, a lower than average value per unit may be achieved over the long
term. This plan of investing allows investors to take advantage of market
fluctuations but does not assure a profit or protect against a loss in
declining markets.
Dollar cost averaging may be elected at issue or at a later date. The
minimum amount that may be transferred each month is $250. The maximum amount
which may be transferred is equal to your Accumulation Value in the Smith
Barney Money Market Division when you elect the dollar cost averaging program,
divided by 12.
The transfer date will be the same calendar day each month as the Contract
Date. The dollar amount will be allocated to the Divisions in which you are
invested in proportion to your Accumulation Value in each Division unless you
specify otherwise. If, on any transfer date, your Accumulation Value is equal
to or less than the
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amount you have elected to have transferred, the entire amount will be
transferred and the program will end. You may change the transfer amount once
each Contract Year, or cancel this program by sending satisfactory notice to
our Customer Service Center at least seven days before the next transfer date.
Any allocation under this program will not be included in determining if the
excess allocation charge will apply.
WHAT HAPPENS IF A DIVISION IS NOT AVAILABLE
When a distribution is made from an investment portfolio supporting a
Division of Account B in which reinvestment is not available, we will allocate
the distribution, unless you specify otherwise, to the Specially Designated
Division.
Such a distribution can occur when (a) an investment portfolio matures, or
(b) a distribution from a portfolio or Division cannot be reinvested in the
portfolio or Division due to the unavailability of securities for acquisition.
When an investment portfolio matures, we will notify you in writing 30 days in
advance of that date. To elect an allocation of the distribution to other than
the Specially Designated Division, you must provide satisfactory notice to us
at least seven days prior to the date the portfolio matures. Such allocations
are not counted for purposes of the number of free allocation changes
permitted. When a distribution from a portfolio or Division cannot be
reinvested in the portfolio due to the unavailability of securities for
acquisition, we will notify you promptly after the allocation has occurred. If
within 30 days you allocate the Accumulation Value from the Specially
Designated Division to other Divisions of your choice, such allocations will
not be included in determining if the excess allocation charge will apply.
YOUR ACCUMULATION VALUE
Your Accumulation Value is the sum of the amounts in each of the Divisions
in which you are invested, and is the amount available for investment at any
time. You select the Divisions to which to allocate your Accumulation Value.
We adjust your Accumulation Value on each Valuation Date to reflect the
Divisions' investment performance, any additional premium payments or partial
withdrawals since the previous Valuation Date, and on each Contract processing
date to reflect any deduction of the annual Contract fee. Your Accumulation
Value is applied to your choice of an Annuity Option on the Annuity
Commencement Date subject to our published rules at such time. See Choosing an
Income Plan.
ACCUMULATION VALUE IN EACH DIVISION
ON THE CONTRACT DATE
On the Contract Date, your Accumulation Value is allocated to each Division
as you have specified. See Your Right to Cancel or Exchange Your Contract.
ON EACH VALUATION DATE
At the end of each subsequent Valuation Period, the amount of Accumulation
Value in each Division will be calculated as follows:
(1) We take the Accumulation Value in the Division at the end of the
preceding Valuation Period.
(2) We multiply (1) by the Division's net rate of return for the current
Valuation Period.
(3) We add (1) and (2).
(4) We add to (3) any additional premium payments allocated to the Division
during the current Valuation Period.
(5) We add or subtract allocations to or from that Division during the
current Valuation Period.
(6) We subtract from (5) any partial withdrawals and any associated charges
allocated to that Division during the current Valuation Period.
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<PAGE>
(7) We subtract from (6) the amounts allocated to that Division for:
(a) any Contract fees; and
(b) any charge for premium taxes.
All amounts in (7) are allocated to each Division in the proportion that (6)
bears to the Accumulation Value in Account B, unless the Charge Deduction
Division has been specified. See Charges Deducted from the Accumulation Value.
MEASUREMENT OF INVESTMENT EXPERIENCE
INDEX OF INVESTMENT EXPERIENCE AND UNIT VALUE
The investment experience of a Division is determined on each Valuation
Date. We use an index to measure changes in each Division's experience during
a Valuation Period. We set the index at $14.64, $16.43 and $13.76 for the OTC,
Research and Total Return Divisions, respectively. The index for the rest of
the Divisions was set at $10. The index for a current Valuation Period equals
the index for the preceding Valuation Period multiplied by the experience
factor for the current Valuation Period.
We may express the value of amounts allocated to the Divisions in terms of
units. We determine the number of units for a given amount on a Valuation Date
by dividing the dollar value of that amount by the index of investment
experience for that date. The index of investment experience is equal to the
value of a unit.
HOW WE DETERMINE THE EXPERIENCE FACTOR
For Divisions of Account B the experience factor reflects the investment
experience of the Portfolio in which a Division invests as well as the charges
assessed against the Division for a Valuation Period. The factor is calculated
as follows:
(1) We take the net asset value of the portfolio in which the Division
invests at the end of the current Valuation Period.
(2) We add to (1) the amount of any dividend or capital gains
distribution declared for the investment portfolio and reinvested in such
portfolio during the current Valuation Period. We subtract from that amount
a charge for our taxes, if any.
(3) We divide (2) by the net asset value of the portfolio at the end of
the preceding Valuation Period.
(4) We subtract the applicable daily mortality and expense risk charge
from each Division for each day in the valuation period.
(5) We subtract the daily asset based administrative charge from each
Division for each day in the valuation period.
Calculations for Divisions investing in a Portfolio are made on a per share
basis.
NET RATE OF RETURN FOR A DIVISION
The net rate of return for a Division during a valuation period is the
experience factor for that Valuation Period minus one.
CASH SURRENDER VALUE
Your Contract's Cash Surrender Value fluctuates daily with the investment
results of the Divisions. We do not guarantee any minimum Cash Surrender
Value. On any date before the Annuity Commencement Date while the Contract is
in effect, the cash surrender value is calculated as follows:
(1) We take the Contract's Accumulation Value;
(2) We deduct from (1) any surrender charge and any charge for premium
taxes; and
(3) We deduct from (2) any charges incurred but not yet deducted.
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SURRENDERING TO RECEIVE THE CASH SURRENDER VALUE
The Contract may be surrendered by the Owner at any time while the Annuitant
is living and before the Annuity Commencement Date.
A surrender will be effective on the date your written request and the
Contract are received at our Customer Service Center. The Cash Surrender Value
is determined and all benefits under the Contract will then be terminated, as
of that date. You may receive the Cash Surrender Value in a single sum payment
or apply it under one or more Annuity Options. See The Annuity Options. We
will usually pay the Cash Surrender Value within seven days but we may delay
payment. See When We Make Payments.
PARTIAL WITHDRAWALS
Prior to the Annuity Commencement Date, while the Annuitant is living and
the Contract is in effect, you may take partial withdrawals from the
Accumulation Value by sending satisfactory notice to our Customer Service
Center. Unless you specify otherwise, the amount of the withdrawal, including
any surrender charge, will be taken in proportion to the amount of
Accumulation Value in each Division in which you are invested.
There are three options available for selecting partial withdrawals, the
Conventional Partial Withdrawal Option, the Systematic Partial Withdrawal
Option and the IRA Partial Withdrawal Option. All three options are described
below. The maximum amount you may withdraw each Contract Year without
incurring a surrender charge is 15% of your Accumulation Value. See Surrender
Charge for Excess Partial Withdrawals. Partial withdrawals may not be repaid.
A partial withdrawal request for an amount in excess of 90% of the Cash
Surrender Value will be treated as a request to surrender the Contract.
CONVENTIONAL PARTIAL WITHDRAWAL OPTION
After the Free Look Period, you may take conventional partial withdrawals.
The minimum amount you may withdraw under this option is $1,000.
SYSTEMATIC PARTIAL WITHDRAWAL OPTION
This option may be elected at the time you apply for a Contract, or at a
later date. This option may be elected to commence in a Contract Year where a
conventional partial withdrawal has been taken. However, it may not be elected
while the IRA Partial Withdrawal Option is in effect.
You may choose to receive systematic partial withdrawals on a monthly,
quarterly, or annual basis from your Accumulation Value in the Divisions. The
commencement of payments under this option may not be elected to start sooner
than 28 days after the Contract Issue Date. You select the date when the
withdrawals will be made but no later than the 28th day of the month. If no
date is selected, the withdrawals will be made on the same calendar day of
each month as the Contract Date.
You may select a dollar amount or a percentage of the Accumulation Value
from the Divisions in which you are invested as the amount of your withdrawal
subject to the following maximums, but in no event can a payment be less than
$100:
<TABLE>
<CAPTION>
FREQUENCY MAXIMUM PERCENTAGE
--------- ------------------
<S> <C>
Monthly................................................... 1.25%
Quarterly................................................. 3.75%
Annual.................................................... 15.00%
</TABLE>
If a dollar amount is selected and the amount to be systematically withdrawn
would exceed the applicable maximum percentage of your Accumulation Value on
the withdrawal date, the amount withdrawn will be reduced so that it equals
such percentage. For example, if a $500 monthly withdrawal was elected and on
the
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<PAGE>
withdrawal date 1.25% of the Accumulation Value equaled $300, the withdrawal
amount would be reduced to $300. If a percentage is selected and the amount to
be systematically withdrawn based on that percentage would be less than the
minimum of $100, we would increase the amount to $100 provided it does not
exceed the maximum percentage. If it is below the maximum percentage we will
send the minimum. If it is above the maximum percentage we will send the
amount and then cancel the option. For example, if you selected 1.0% to be
systematically withdrawn on a monthly basis and that amount equaled $90, and
since $100 is less than 1.25% of the Accumulation Value, we would send $100.
If 1.0% equaled $75, and since $100 is more than 1.25% of the Accumulation
Value we would send $75 and then cancel the option. In such a case, in order
to receive systematic partial withdrawals in the future, you would be required
to submit a new notice to our Customer Service Center.
You may change the amount or percentage of your withdrawal once each
Contract Year or cancel this option at any time by sending satisfactory notice
to our Customer Service Center at least seven days prior to the next scheduled
withdrawal date. However, you may not change the amount or percentage of your
withdrawals in any Contract Year during which you have previously taken a
conventional partial withdrawal.
IRA PARTIAL WITHDRAWAL OPTION
If you have an IRA Contract and will attain age 70 1/2 in the current
calendar year, distributions may be made to you to satisfy requirements
imposed by Federal tax law. IRA partial withdrawals provide payout of amounts
required to be distributed by the Internal Revenue Service rules governing
mandatory distributions under qualified plans. See Federal Tax Considerations.
We will send you a notice before your distributions commence, and you may
elect this option at that time, or at a later date. You may not elect IRA
partial withdrawals while the Systematic Partial Withdrawal Option is in
effect. If you do not elect the IRA Partial Withdrawal Option, and
distributions are required by Federal tax law, distributions adequate to
satisfy the requirements imposed by Federal tax law may be made. Thus, if the
Systematic Partial Withdrawal Option is in effect, distributions under that
option must be adequate to satisfy the mandatory distribution rules imposed by
Federal tax law.
You may choose to receive IRA partial withdrawals on a monthly, quarterly or
annual frequency. You select the day of the month when the withdrawals will be
made, but it cannot be later than the 28th day of the month. If no date is
selected, the withdrawals will be made on the same calendar day of the month
as the Contract Date.
At your request, we will determine the amount that is required to be
withdrawn from your Contract each year based on the information you give us
and various choices you make. For information regarding the calculation and
choices you have to make, see the Statement of Additional Information. The
minimum dollar amount you can withdraw is $100. At the time we determine the
required partial withdrawal amount for a taxable year based on the frequency
you select, if that amount is less than $100, we will pay $100. At any time
where the partial withdrawal amount is greater than the Accumulation Value, we
will cancel the Contract and send you the amount of the Cash Surrender Value.
You may change the payment frequency of your withdrawals once each Contract
Year or cancel this option at any time by sending us satisfactory notice to
our Customer Service Center at least seven days prior to the next scheduled
withdrawal date.
PARTIAL WITHDRAWALS IN GENERAL
CONSULT YOUR TAX ADVISOR REGARDING THE TAX CONSEQUENCES ASSOCIATED WITH
TAKING PARTIAL WITHDRAWALS. A partial withdrawal made before the taxpayer
reaches age 59 1/2 may result in imposition of a tax penalty of 10% of the
taxable portion withdrawn. See Federal Tax Considerations for more details.
AUTOMATIC REBALANCING
If you have at least $10,000 of Accumulation Value invested in the
Divisions, you may elect to participate in our automatic rebalancing program.
Automatic rebalancing provides you with an easy way to maintain the
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particular asset allocation that you and your financial advisor have
determined are most suitable for your individual long-term investment goals.
We do not charge a fee for participating in our automatic rebalancing program.
Under the program you may elect to have all your allocations among the
Divisions rebalanced on a quarterly, semi-annual, or annual calendar basis.
The minimum size of an allocation to a Division must be in full percentage
points. The program may be used in conjunction with the systematic partial
withdrawal option only where such withdrawals are taken pro rata. Automatic
rebalancing is not available if you participate in dollar cost averaging.
Automatic rebalancing will not take place during the free look period.
To participate in automatic rebalancing you must submit to our Customer
Service Center written notice in a form satisfactory to us. We will begin the
program on the last Valuation Date of the applicable calendar period in which
we receive the notice. You may cancel the program at any time. The program
will automatically terminate if you choose to reallocate your Accumulation
Value among the Divisions or if you make an additional premium payment or
partial withdrawal on other than a pro rata basis. Additional premium payments
and partial withdrawals effected on a pro rata basis will not cause the
automatic rebalancing program to terminate.
PROCEEDS PAYABLE TO THE BENEFICIARY
If the Owner or the Annuitant (when the Owner is other than an individual)
dies prior to the annuity commencement date, we will pay the Beneficiary the
death benefit proceeds under the Contract. Such amount may be received in a
single sum or applied to any of the Annuity Options. See The Annuity Options.
If we do not receive a request to apply the death benefit proceeds to an
Annuity Option, a single sum distribution will be made. Any distributions from
non-qualified Contracts must comply with applicable Federal tax law
distribution requirements.
DEATH BENEFIT OPTIONS
Subject to our rules, there are two death benefit options that may be
elected by you at issue under the Contract: the Standard Death Benefit Option
and the Annual Ratchet Enhanced Death Benefit Option.
The Annual Ratchet Enhanced Death Benefit Option may only be elected at
issue and only if the Owner or Annuitant (when the Owner is other than an
individual) is age 79 or younger at issue.
If the enhanced death benefit is elected, the death benefit under the
Contract is equal to the greatest of: (i) the Accumulation Value; (ii) total
premium payments less any partial withdrawals; (iii) the Cash Surrender Value;
and (iv) the enhanced death benefit (see below).
We may offer a reduced death benefit under certain group and sponsored
arrangements. See Other Contract Provisions, Group or Sponsored Arrangements.
STANDARD DEATH BENEFIT OPTION
You will automatically receive the Standard Death Benefit Option unless you
elect the enhanced death benefit. The Standard Death Benefit Option for the
Contract is equal to the greatest of: (i) your Accumulation Value; (ii) total
premiums less any partial withdrawals; and (iii) the Cash Surrender Value.
ANNUAL RATCHET ENHANCED DEATH BENEFIT OPTION
(1) We take the enhanced death benefit from the prior Valuation Date. On
the Contract Date, the enhanced death benefit is equal to the Initial
Premium.
(2) We add to (1) any additional premiums paid since the prior Valuation
Date and subtract from (1) any partial withdrawals (including surrender
charges incurred) taken since the prior Valuation Date.
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(3) On a Valuation Date that occurs on or prior to the Owner's Attained Age
80 which is also a Contract Anniversary, we set the enhanced death
benefit equal to the greater of (2) or the Accumulation Value as of
such date.
On all other Valuation Dates, the enhanced death benefit is equal to (2).
HOW TO CLAIM PAYMENTS TO BENEFICIARY
We must receive due proof of the death of the Owner or the Annuitant (if the
Owner is other than an individual) (such as an official death certificate) at
our Customer Service Center before we will make any payments to the
Beneficiary. We will calculate the death benefit as of the date we receive due
proof of death. The Beneficiary should contact our Customer Service Center for
instructions.
REPORTS TO OWNERS
We will send you a report once each calendar quarter within 31 days after
the end of each calendar quarter. The report will show the Accumulation Value,
the Cash Surrender Value, and the death benefit as of the end of the calendar
quarter. The report will also show the allocation of your Accumulation Value
as of such date and the amounts deducted from or added to the Accumulation
Value since the last report. The report will also include any other
information that may be currently required by the insurance supervisory
official of the jurisdiction in which the Contract is delivered.
We will also send you copies of any shareholder reports of the portfolios or
securities in which Account B invests, as well as any other reports, notices
or documents required by law to be furnished to Owners.
WHEN WE MAKE PAYMENTS
We will generally pay death benefit proceeds and the cash surrender value
within seven days after our Customer Service Center receives all the
information needed to process the payment.
However, we may delay payment of amounts derived from the Divisions if it is
not practical for us to value or dispose of shares of Account B because:
(1) The NYSE is closed for trading;
(2) The SEC determines that a state of emergency exists;
(3) An order or pronouncement of the SEC permits a delay for the protection
of Owners; or,
(4) The check used to pay the premium has not cleared through the banking
system. This may take up to 15 days.
During such times, as to amounts allocated to the Divisions, we may delay:
(1) Determination and payment of any Cash Surrender Value;
(2) Determination and payment of any death benefit if death occurs before
the Annuity Commencement Date;
(3) Allocation changes of the Accumulation Value; or,
(4) Application under an Annuity Option of the Accumulation Value.
CHARGES AND FEES
We deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the Contracts. We incur certain
costs and expenses for the distribution and administration of the Contracts,
for providing the benefits payable thereunder and for bearing various risks
thereunder. The amount of
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a charge will not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge.
For example, the Surrender Charge collected may not fully cover all of the
distribution expenses incurred by us.
CHARGE DEDUCTION DIVISION
You may specify at issue if you wish to have all charges against the
Accumulation Value deducted from the Smith Barney Money Market Division. We
call this the Charge Deduction Division Option, and within this context refer
to the Smith Barney Money Market Division as the Charge Deduction Division. If
you do not elect this option, or if the amount of the charges is greater than
the amount in the Division, the charges will be deducted as discussed below.
You may also choose to elect or cancel this option while the Contract is in
force by sending satisfactory notice to our Customer Service Center.
CHARGES DEDUCTED FROM THE ACCUMULATION VALUE
We invest the entire amount of the initial and any additional premium
payments in the Divisions you select, subject to certain restrictions. See
Restrictions on Allocation of Premium Payments. We then may deduct certain
amounts from your Accumulation Value. We may reduce certain fees and charges,
including any surrender, administration, and mortality and expense risk
charges, under group or sponsored arrangements. See Group or Sponsored
Arrangements. Unless you have elected the Charge Deduction Division, charges
are deducted proportionately from all affected Divisions in which you are
invested. The charges we deduct are:
SURRENDER CHARGE
A contingent deferred sales charge ("Surrender Charge") is imposed as a
percentage of each premium payment if the Contract is surrendered or an excess
partial withdrawal is taken during the seven year period from the date we
receive and accept such premium payment. The percentage of premium payments
deducted at the time of surrender or excess partial withdrawal depends upon
the number of complete years that have elapsed since that premium payment was
made. We determine the surrender charge as a percentage of each premium
payment as follows:
<TABLE>
<CAPTION>
COMPLETE YEARS ELAPSED SURRENDER
SINCE PREMIUM PAYMENT CHARGE
---------------------- ---------
<S> <C>
0........................................................... 7%
1........................................................... 7%
2........................................................... 6%
3........................................................... 5%
4........................................................... 4%
5........................................................... 3%
6........................................................... 1%
7+.......................................................... 0%
</TABLE>
Subject to our rules and as described in the Contract, the surrender charge
arising from a surrender or excess partial withdrawal will be waived in the
following events:
(1) you begin receiving qualified extended medical care on or after the
first Contract anniversary for at least 45 days during any continuous
sixty-day period, and your request for the surrender or withdrawal,
together with all required proof of such qualified extended medical
care, must be received at our Customer Service Center during the term
of such care or within ninety days after the last day upon which you
received such care.
(2) you are first diagnosed by a qualifying medical professional, on or
after the first Contract Anniversary, as having a Qualifying Terminal
Illness. Written proof of terminal illness, satisfactory to us, must be
received at our Customer Service Center. We reserve the right to
require an examination by a physician of our choice.
See your Contract for more information. The waiver of surrender charge may
not be available in all states.
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SURRENDER CHARGE FOR EXCESS PARTIAL WITHDRAWALS
There is considered to be an excess partial withdrawal in any Contract Year
in which the amount withdrawn exceeds 15% of your Accumulation Value on the
date of the withdrawal minus any amount withdrawn during that Contract Year.
Where you are receiving systematic partial withdrawals, any combination of
conventional partial withdrawals taken and any systematic partial withdrawals
expected to be received in a Contract Year will be considered in determining
the amount of the excess partial withdrawal. Such a withdrawal will be
considered a partial surrender of the Contract and we will impose a surrender
charge and any associated premium tax. Such charges will be deducted from the
Accumulation Value in proportion to the Accumulation Value in each Division
from which the excess partial withdrawal was taken. In instances where the
excess partial withdrawal equals the entire Accumulation Value in each such
Division, charges will be deducted proportionately from all other Divisions in
which you are invested.
For purposes of calculating the surrender charge for the excess partial
withdrawal, (i) we treat premium payments as being withdrawn on a first-in
first-out basis, and (ii) amounts withdrawn which are not considered an excess
partial withdrawal are not treated as a withdrawal of any premium payments.
Although we treat premium payments as being withdrawn before earnings for
purposes of calculating the surrender charge for excess partial withdrawals,
the Federal income tax law treats earnings as withdrawn first. See Federal Tax
Considerations, Taxation of Non-Qualified Annuities.
For example, the following assumes an Initial Premium payment of $10,000 and
additional premium payments of $10,000 in each of the second and third
Contract Years, for total premium payments under the Contract of $30,000. It
also assumes a partial withdrawal at the beginning of the fourth Contract Year
of 20% of the Accumulation Value of $35,000.
In this example, $5,250 ($35,000 x .15) is the maximum partial withdrawal
that may be withdrawn during the Contract Year without the imposition of a
surrender charge. The total partial withdrawal would be $7,000 ($35,000 x .2).
Therefore, $1,750 ($7,000-$5,250) is considered an excess partial withdrawal
of a part of the Initial Premium payment of $10,000 and would be subject to a
5% surrender charge of $87.50 ($1,750 x .05). This example does not take into
account the deduction of any premium taxes.
PREMIUM TAXES
We make a charge for state and local premium taxes in certain states which
can range from 0% to 3.5% of premium. The charge depends on the Owner's state
of residence. We reserve the right to change this amount to conform with
changes in the law or if the Owner changes state of residence.
Premium taxes are generally incurred on the annuity commencement date and a
charge for such premium taxes is then deducted from your Accumulation Value on
such date. However, some jurisdictions impose a premium tax at the time that
initial and additional premiums are paid, regardless of the Annuity
Commencement Date. In those states we may initially defer collection of the
amount of the charge for premium taxes from your Accumulation Value and deduct
it against Accumulation Value on surrender of the Contract, excess partial
withdrawals or on the Annuity Commencement Date.
ADMINISTRATIVE CHARGE
The administrative charge is incurred at the beginning of the Contract
processing period and deducted at the end of each Contract processing period.
We deduct this charge when determining the Cash Surrender Value payable if you
surrender the Contract prior to the end of a Contract processing period. If
the Accumulation Value at the end of the Contract processing period equals or
exceeds $100,000 or the sum of the premiums paid equals or exceeds $100,000,
the charge is zero. Otherwise, the amount deducted is $40 per Contract Year.
See Asset Based Administrative Charge, below.
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EXCESS ALLOCATION CHARGE
We currently do not assess a charge for allocation changes made during a
Contract Year. We reserve the right, however, to assess a $25 charge for each
allocation change after the twelfth allocation change in a Contract Year. This
amount represents the maximum we will charge. The charge would be deducted
from the Divisions from which each such reallocation is made in proportion to
the amount being transferred from each such Division unless you have chosen to
use the Charge Deduction Division. The excess allocation charge is set at a
level that is not designed to produce profit for Golden American or any
affiliate. Any allocations or transfers due to the election of dollar cost
averaging and reallocation under the provision What Happens if a Division is
Not Available will not be included in determining if the excess allocation
charge should apply.
CHARGES DEDUCTED FROM THE DIVISIONS
MORTALITY AND EXPENSE RISK CHARGE
The amount of the mortality and expense risk charge depends on the death
benefit option that is in effect. If the Standard Death Benefit Option is in
effect, the charge is equivalent, on an annual basis, to 1.10% of the assets
in each Division. The charge is deducted on each Valuation Date at the rate of
.003030% for each day in the Valuation Period. If the Annual Rachet Death
Benefit Option is in effect, the charge is equivalent, on an annual basis, to
1.25% of the assets in each Division. The charge is deducted on each Valuation
Date at the rate of .003446% for each day in the Valuation Period.
ASSET BASED ADMINISTRATIVE CHARGE
We will deduct a daily charge from the assets in each Division, to
compensate us for a portion of the administrative expenses under the Contract.
The daily charge is at a rate of 0.000411% (equivalent to an annual rate of
0.15%) on the assets in each Division.
This asset based administrative charge plus the administrative charge above
will not exceed the cost of the services to be provided over the life of the
Contract.
TRUST EXPENSES
There are fees and charges deducted from each Portfolio of the ESS Trust,
the Travelers Fund and the Smith Barney Fund. Please read the respective Trust
prospectus for details.
CHOOSING YOUR ANNUITIZATION OPTIONS
ANNUITIZATION OF YOUR CONTRACT
If the Annuitant and Owner are living on the Annuity Commencement Date, we
will begin making payments to the Owner under an income plan. We will make
these payments under the Annuity Option chosen. You may change an Annuity
Option by making a written request to us at least 30 days prior to the Annuity
Commencement Date of the Contract. The amount of the payments will be
determined by applying your Accumulation Value on the Annuity Commencement
Date in accordance with The Annuity Options section below, subject to our
published rules at such time. See When We Make Payments.
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You may also elect an Annuity Option on surrender of the Contract for its
Cash Surrender Value or you may choose one or more Annuity Options for the
payment of death benefit proceeds while it is in effect and before the Annuity
Commencement Date. If, at the time of the Owner's death or the Annuitant's
death (if the Owner is not an individual), no option has been chosen for
paying death benefit proceeds, the Beneficiary may choose an option within 60
days. In all events, payments of death benefit proceeds must comply with the
distribution requirements of applicable Federal tax law.
The minimum monthly annuity income payment that we will make is $20. We may
require that a single sum payment be made if the Accumulation Value is less
than $2,000 or if the calculated monthly annuity income payment is less than
$20.
For each option we will issue a separate written agreement putting the
option into effect. Before we pay any annuity benefits, we require the return
of the Contract. If your Contract has been lost, we will require that you
complete and return the applicable Contract form. Various factors will affect
the level of annuity benefits including the Annuity Option chosen, the
applicable payment rate used and the investment results of the Divisions in
which the Accumulation Value has been invested.
Some annuity options may provide only for fixed payments. Fixed Annuity
Payments are regular payments, the amount of which is fixed and guaranteed by
us. The amount of the payments will depend only on the form and duration of
payments chosen, the age of the Annuitant or Beneficiary (and sex, where
appropriate), the total Accumulation Value applied to purchase the fixed
option, and the applicable payment rate.
Our approval is needed for any option where:
(1) The person named to receive payment is other than the Owner or
Beneficiary;
(2) The person named is not a natural person, such as a corporation; or
(3) Any income payment would be less than the minimum annuity income
payment allowed.
ANNUITY COMMENCEMENT DATE SELECTION
You select the Annuity Commencement Date. You may select any date following
the third Contract Anniversary but before the Contract Processing Date in the
month following the Annuitant's 90th birthday. If, on the Annuity Commencement
Date, a Surrender Charge remains, the elected Annuity Option must include a
period certain of at least five years duration. If you do not select a date,
the Annuity Commencement Date will be in the month following the Annuitant's
90th birthday. If the Annuity Commencement Date occurs when the Annuitant is
at an advanced age, such as over age 85, it is possible that the Contract will
not be considered an annuity for Federal tax purposes. See Federal Tax
Considerations. For a Contract purchased in connection with a qualified plan,
distribution must commence not later than April 1st of the calendar year
following the calendar year in which you attain age 70 1/2. Consult your tax
advisor.
FREQUENCY SELECTION
You choose the frequency of the Annuity Payments. They may be monthly,
quarterly, semi-annually or annually. If we do not receive written notice from
you, the payments will be made monthly. There may be certain restrictions on
minimum payments that we will allow.
THE ANNUITIZATION OPTIONS
There are four options to choose from as shown below. Options 1 through 3
are fixed and option 4 may be fixed or variable. For a fixed option, the
Accumulation Value in the Divisions is transferred to the general account.
OPTION 1. INCOME FOR A FIXED PERIOD
Payment is made in equal installments for a fixed number of years based on
the Accumulation Value as of the annuity commencement date. We guarantee that
each monthly payment will be at least the amount set forth
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<PAGE>
in the Contract. Guaranteed amounts for annual, semi-annual and quarterly
payments are available upon request. Illustrations are available upon request.
If the Cash Surrender Value or Accumulation Value is applied under this
option, a 10% penalty tax may apply to the taxable portion of each income
payment until the Owner reaches age 59 1/2.
OPTION 2. INCOME FOR LIFE
Payment is made in equal monthly installments and guaranteed for at least a
period certain. The period certain can be 10 or 20 years. Other periods
certain may be available on request. A refund certain may be chosen instead.
Under this arrangement, income is guaranteed until payments equal the amount
applied. If the person named lives beyond the guaranteed period, payments
continue until his or her death. We guarantee that each payment will be at
least the amount set forth in the Contract corresponding to the person's age
on his or her last birthday before the option's effective date. Amounts for
ages not shown in the Contract are available upon request.
OPTION 3. JOINT LIFE INCOME
This option is available if there are two persons named to receive payments.
At least one of the persons named must be either the Owner or Beneficiary of
the Contract. Monthly payments are guaranteed and are made as long as at least
one of the named persons is living. There is no minimum number of payments.
Monthly payment amounts are available upon request.
OPTION 4. ANNUITY PLAN
An amount can be used to buy any single premium annuity we offer on the
option's effective date.
PAYMENT WHEN NAMED PERSON DIES
When the person named to receive payment dies, we will pay any amounts still
due as provided by the option agreement. The amounts still due are determined
as follows:
(1) For option 1, or any remaining guaranteed payments under option 2,
payments will be continued. Under options 1 and 2, the discounted
values of the remaining guaranteed payments may be paid in a single
sum. This means we deduct the amount of the interest each remaining
guaranteed payment would have earned had it not been paid out early.
The discount interest rate is never less than 3% for option 1 and 3.50%
for option 2 per year. We will, however, base the discount interest
rate on the interest rate used to calculate the payments for options 1
and 2 if such payments were not based on the tables in the Contract.
(2) For option 3, no amounts are payable after both named persons have
died.
(3) For option 4, the annuity agreement will state the amount due, if any.
OTHER CONTRACT PROVISIONS
IN CASE OF ERRORS IN APPLICATION INFORMATION
If an age or sex given in the application or enrollment form is misstated,
the amounts payable or benefits provided by the Contract shall be those that
the premium payment would have bought at the correct age or sex.
SENDING NOTICE TO US
Any written notices, inquiries or requests should be sent to our Customer
Service Center. Please include your name, your Contract number and, if you are
not the Annuitant, the name of the Annuitant.
ASSIGNING THE CONTRACT AS COLLATERAL
You may assign a non-qualified Contract as collateral security for a loan or
other obligation. This does not change the Ownership. However, your rights and
any Beneficiary's rights are subject to the terms of the assignment. See
Transfer of Annuity Contracts, and Assignments. An assignment may have Federal
tax consequences. See Federal Tax Considerations.
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You must give us satisfactory written notice at our Customer Service Center
in order to make or release an assignment. We are not responsible for the
validity of any assignment.
NON-PARTICIPATING
The Contract does not participate in the divisible surplus of Golden
American.
AUTHORITY TO MAKE AGREEMENTS
All agreements made by us must be signed by our president or a vice
president and by our secretary or an assistant secretary. No other person,
including an insurance agent or broker, can change any of the Contract's
terms, make any agreements binding on us or extend the time for premium
payments.
CONTRACT CHANGES -- APPLICABLE TAX LAW
We reserve the right to make changes in the Contract to the extent we deem
it necessary to continue to qualify the Contract as an annuity. Any such
changes will apply uniformly to all Contracts that are affected. You will be
given advance written notice of such changes.
YOUR RIGHT TO CANCEL OR EXCHANGE YOUR CONTRACT
CANCELLING YOUR CONTRACT
You may cancel your Contract within your Free Look Period, which is ten days
after you receive your Contract. For purposes of administering our allocation
and administrative rules, we deem this period to expire 15 days after the
Contract is mailed to you. Some states may require a longer Free Look Period.
If you decide to cancel, you may mail or deliver the Contract to our Customer
Service Center. We will refund the Accumulation Value plus any charges we
deducted, and the Contract will be voided as of the date we receive the
Contract and your request. See Facts About the Contract, Measurement of
Investment Experience, Index of Experience and Unit Value.
EXCHANGING YOUR CONTRACT
For information regarding exchanges under Section 1035 of the Internal
Revenue Code of 1986, as amended, see Federal Tax Considerations.
OTHER CONTRACT CHANGES
You may change the Contract to another annuity plan subject to our rules at
the time of the change.
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may reduce any surrender,
administration, and mortality and expense risk charges. We may also change the
minimum initial and additional premium requirements, or offer a reduced death
benefit. Group arrangements include those in which a trustee or an employer,
for example, purchases Contracts covering a group of individuals on a group
basis. Sponsored arrangements include those in which an employer allows us to
sell Contracts to its employees on an individual basis.
Our costs for sales, administration, and mortality generally vary with the
size and stability of the group among other factors. We take all these factors
into account when reducing charges. To qualify for reduced charges, a group or
sponsored arrangement must meet certain requirements, including our
requirements for size and number of years in existence. Group or sponsored
arrangements that have been set up solely to buy Contracts or that have been
in existence less than six months will not qualify for reduced charges. We
will make these and any similar reductions according to our rules in effect
when an application or enrollment form for a Contract is approved. We may
change these rules from time to time. Any variation in the administrative
charge will reflect differences in costs or services and will not be unfairly
discriminatory.
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SELLING THE CONTRACT
DSI is principal underwriter and distributor of the Contract as well as for
other Contracts issued through Account B and other separate accounts of Golden
American. We pay DSI for acting as principal underwriter under a distribution
agreement. The offering of the Contract will be continuous.
Commissions will be paid to broker-dealers who sell the Contract. Broker-
dealers will be paid commissions, up to an amount currently equal to 6.5% of
premium payments, for promotional or distribution expenses associated with the
marketing of the Contract. Golden American may, by agreement with the broker-
dealer, pay commissions as a combination of a certain percentage amount at the
time of sale and a trail commission (which when combined could exceed 6.5% of
premiums). In addition, under certain circumstances, Golden American may pay
certain sellers production bonuses which will take into account, among other
things, the total premium payments which have been made under the Contract
associated with the broker-dealer. Additional payments or allowances may be
made for other services not directly related to the sale of the Contract.
REGULATORY INFORMATION
VOTING RIGHTS
ACCOUNT B
We will vote the shares of a Trust owned by Account B according to your
instructions. However, if the Investment Company Act of 1940 or any related
regulations should change, or if interpretations of it or related regulations
should change, and we decide that we are permitted to vote the shares of a
Trust in our own right, we may decide to do so.
We determine the number of shares that you have in a Division by dividing
the Contract's Accumulation Value in that Division by the net asset value of
one share of the portfolio in which a Division invests. Fractional votes will
be counted. We will determine the number of shares you can instruct us to vote
180 days or less before a Trust's meeting. We will ask you for voting
instructions by mail at least 10 days before the meeting.
If we do not get your instructions in time, we will vote the shares in the
same proportion as the instructions received from all Contracts in that
Division. We will also vote shares we hold in Account B which are not
attributable to Owners in the same proportion.
STATE REGULATION
We are regulated and supervised by the Insurance Department of the State of
Delaware, which periodically examines our financial condition and operations.
We are also subject to the insurance laws and regulations of all jurisdictions
where we do business. The Contract offered by this prospectus has been
approved by the Insurance Department of the State of Delaware and by the
Insurance Department of New Hampshire and any other states in which it may be
offered. 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
Golden American, as an insurance company, is ordinarily involved in
litigation. We do not believe that any current litigation is material and we
do not expect to incur significant losses from such actions.
LEGAL MATERS
The legal validity of the Contract described in this prospectus has been
passed on by Myles R. Tashman, Esquire, Executive Vice President, General
Counsel and Secretary of Golden American. Sutherland, Asbill & Brennan, L.L.P.
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,
Separate Account B and The Managed Global Account of Separate Account D
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.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following discussion of the federal income tax treatment of the Contract
is not exhaustive, does not purport to cover all situations, and is not
intended as tax advice. The federal income tax treatment of the Contract is
unclear in certain circumstances, and a qualified tax adviser should always be
consulted with regard to the application of the tax law to individual
circumstances. This discussion is based on the Internal Revenue Code of 1986,
as amended (the "Code"), Treasury Department regulations, and interpretations
existing on the date of this prospectus. These authorities, however, are
subject to change by Congress, the Treasury Department, and judicial
decisions.
This discussion does not address state or local tax consequences associated
with the purchase of the Contract. In addition, GOLDEN AMERICAN MAKES NO
GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
TAX STATUS OF GOLDEN AMERICAN
Golden American is taxed as a life insurance company under the Code. Since
the operations of Account B are a part of, and are taxed with, the operations
of Golden American, Account B is not separately taxed as a "regulated
investment company" under the Code. Under existing federal income tax laws,
investment income and capital gains of Account B are not taxed to Golden
American to the extent they are applied to increase reserves under a Contract.
Golden American does not anticipate that it will incur any federal income tax
liability in Account B attributable to Contract obligations, and therefore
Golden American does not intend to make provision for any such taxes. If
Golden American is taxed on investment income or capital gains of Account B,
then Golden American may impose a charge against Account B, as appropriate, in
order to make provision for such taxes.
TAXATION OF NON-QUALIFIED ANNUITIES
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any
increase in an Owner's Accumulation Value is generally not taxable to the
Owner until amounts are received from the Contract, either in the form of
annuity payments as contemplated by the Contract, or in some other form of
distribution. However, this rule allowing deferral applies only if (1) the
investments of Account B are "adequately diversified" in accordance with
Treasury Department regulations, (2) Golden American, rather than the Owner,
is considered the owner of the assets of Account B for federal income tax
purposes, and (3) the Contract is owned by an individual (or is treated as
owned by an individual). In addition to the foregoing, if the Contract's
annuity commencement date occurs at a time when the Annuitant is at an
advanced age, such as over age 85, it is possible that the Owner will be
taxable currently on the annual increase in the Accumulation Value.
Diversification Requirements. The Code and Treasury Department regulations
prescribe the manner in which the investments of a segregated asset account,
such as the Divisions of Account B, are to be "adequately diversified." If a
Division of Account B failed to comply with these diversification standards,
contracts based on that segregated asset account would not be treated as an
annuity contract for federal income tax purposes and the
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Owner would generally be taxable currently on the income on the contract (as
defined in the tax law) beginning with the period of non-diversification.
Golden American expects that the Divisions of Account B will comply with the
diversification requirements prescribed by the Code and Treasury Department
regulations.
Ownership Treatment. In certain circumstances, variable annuity contract
owners may be considered the owners, for federal income tax purposes, of the
assets of a segregated asset account, such as the Divisions of Account B, used
to support their contracts. In those circumstances, income and gains from the
segregated asset account would be includible in the contract owners' gross
income. The Internal Revenue Service (the "IRS") has stated in published
rulings that a variable contract owner will be considered the owner of the
assets of a segregated asset account if the owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. In addition, the Treasury Department announced, in connection
with the issuance of regulations concerning investment diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor, rather than the insurance company, to be treated as the
owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular sub-accounts
(of a segregated asset account) without being treated as owners of the
underlying assets." As of the date of this prospectus, no such guidance has
been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of the assets of a segregated
asset account. For example, the Owner of this Contract has the choice of more
investment options to which to allocate purchase payments and the Accumulation
Value, and may be able to transfer among investment options more frequently,
than in such rulings. These differences could result in the Owner being
treated as the owner of all or a portion of the assets of Account B. In
addition, Golden American does not know what standards will be set forth in
the regulations or rulings which the Treasury Department has stated it expects
to issue. Golden American therefore reserves the right to modify the Contract
as necessary to attempt to prevent Contract Owners from being considered the
owners of the assets of Account B. However, there is no assurance that such
efforts would be successful.
Frequently, if the IRS or the Treasury Department sets forth a new position
which is adverse to taxpayers, the position is applied on a prospective basis
only. Thus, if the IRS or the Treasury Department were to issue regulations or
a ruling which treated an Owner of this Contract as the owner of Account B,
that treatment might apply on a prospective basis. However, if the regulations
or ruling were not considered to set forth a new position, an Owner might
retroactively be determined to be the owner of the assets of Account B.
Non-Natural Owner. As a general rule, Contracts held by "non-natural
persons" such as a corporation, trust or other similar entity, as opposed to a
natural person, are not treated as annuity contracts for federal tax purposes.
The income on such Contracts (as defined in the tax law) is taxed as ordinary
income that is received or accrued by the Owner of the Contract during the
taxable year. There are several exceptions to this general rule for non-
natural Owners. First, Contracts will generally be treated as held by a
natural person if the nominal Owner is a trust or other entity which holds the
Contract as an agent for a natural person. However, this special exception
will not apply in the case of any employer who is the nominal Owner of a
Contract under a non-qualified deferred compensation arrangement for its
employees.
In addition, exceptions to the general rule for non-natural Owners will
apply with respect to (1) Contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) certain Contracts issued in
connection with qualified retirement plans, (3) certain Contracts purchased by
employers upon the termination of certain qualified retirement plans, (4)
certain Contracts used in connection with structured settlement agreements,
and (5) Contracts purchased with a single purchase payment when the annuity
starting date (as defined in the tax law) is no later than a year from
purchase of the Contract and substantially equal periodic payments are made,
not less frequently than annually, during the annuity period.
The remainder of this discussion assumes that the Contract will be treated
as an annuity contract for federal income tax purposes.
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TAXATION OF PARTIAL WITHDRAWALS AND SURRENDERS
In the case of a partial withdrawal prior to the annuity commencement date,
amounts received generally are includible in income to the extent the Owner's
Accumulation Value (determined without regard to any surrender charge, within
the meaning of the tax law) before the surrender exceeds his or her
"investment in the contract." In the case of a surrender of the Contract for
the cash surrender value, amounts received are includible in income to the
extent they exceed the "investment in the contract." For these purposes, the
investment in the contract at any time equals the total of the premium
payments made under the Contract to that time (to the extent such payments
were neither deductible when made nor excludable from income as, for example,
in the case of certain contributions to IRAs and other qualified retirement
plans) less any amounts previously received from the Contract which were not
includible in income.
In the case of systematic partial withdrawals, the amount of each withdrawal
will generally be taxed in the same manner as a partial withdrawal made prior
to the annuity commencement date, as described above. However, there is some
uncertainty regarding the tax treatment of systematic partial withdrawals, and
it is possible that additional amounts may be includible in income.
The Contract provides a death benefit that in certain circumstances may
exceed the greater of the premium payments and the Accumulation Value. As
described elsewhere in this prospectus, Golden American imposes certain
charges with respect to the death benefit. It is possible that some portion of
those charges could be treated for federal tax purposes as a partial
withdrawal from the Contract.
In certain circumstances, surrender charges may be waived because of the
Owner's need for extended medical care or because of the Owner's terminal
illness. Distributions made in respect of which surrender charges are waived
are treated as partial withdrawals or surrenders, as the case may be, for
income tax purposes.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. In the case of
fixed annuity payments, the exclusion amount is the amount determined by
multiplying (1) the fixed annuity payment by (2) the ratio of the "investment
in the contract" (defined above), adjusted for any period certain or refund
feature, allocated to the fixed annuity option to the total expected amount of
fixed annuity payments for the period of the Contract (determined under
Treasury Department regulations). In the case of variable annuity payments,
the exclusion amount for each variable annuity payment is a specified dollar
amount equal to the investment in the contract allocated to the variable
annuity option when payments begin divided by the number of variable payments
expected to be made (determined by Treasury Department regulations).
Once the total amount of the investment in the Contract is excluded using
these formulas, annuity payments will be fully taxable. If annuity payments
cease because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the Annuitant or Beneficiary (depending upon the
circumstances).
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the annuity commencement date, amounts may be distributed from a
Contract because of the death of an Owner or, in certain circumstances, the
death of the Annuitant. Such death benefit proceeds are includible in income
as follows: (1) if distributed in a lump sum, they are taxed in the same
manner as a surrender, as described above, or (2) if distributed under an
annuity option, they are taxed in the same manner as annuity payments, as
described above. After the annuity commencement date, where a guaranteed
period exists under an annuity option and the Annuitant dies before the end of
that period, payments made to the Beneficiary for the remainder of that period
are includible in income as follows: (1) if received in a lump sum, they are
includible in income to the extent that they exceed the unrecovered investment
in the contract at that time, or (2) if distributed
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in accordance with the existing annuity option selected, they are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered, and all annuity payments thereafter are fully
includible in income.
If certain amounts become payable in a lump sum from a Contract, such as the
death benefit, it is possible that such amounts might be viewed as
constructively received and thus subject to tax, even though not actually
received. A lump sum will not be constructively received if it is applied
under an annuity option within 60 days after the date on which it becomes
payable. (Any annuity option selected must comply with applicable minimum
distribution requirements imposed by the Code.)
ASSIGNMENTS, PLEDGES, AND GRATUITOUS TRANSFERS
Other than in the case of Contracts issued as IRAs or in connection with
certain other qualified retirement plans (which generally cannot be assigned
or pledged), any assignment or pledge (or agreement to assign or pledge) of
any portion of the value of the Contract is treated for federal income tax
purposes as a partial withdrawal of such amount or portion. The investment in
the contract is increased by the amount includible as income with respect to
such assignment or pledge, though it is not affected by any other aspect of
the assignment or pledge (including its release). If an Owner transfers a
Contract without adequate consideration to a person other than the Owner's
spouse (or to a former spouse incident to divorce), the Owner will be taxed on
the difference between the cash surrender value (within the meaning of the tax
law) and the investment in the contract at the time of transfer. In such case,
the transferee's investment in the contract will be increased to reflect the
increase in the transferor's income.
SECTION 1035 EXCHANGES
Code section 1035 provides that no gain or loss is recognized when an
annuity contract is received in exchange for a life, endowment, or annuity
contract, provided that no cash or other property is received in the exchange
transaction. Special rules and procedures apply in order for an exchange to
meet the requirements of section 1035. Also, there are additional tax
considerations involved when the contracts are issued in connection with
qualified retirement plans. Prospective Owners of this Contract should consult
a tax advisor before entering into a section 1035 exchange (with respect to
non-qualified annuity contracts) or a trustee-to-trustee transfer or rollover
(with respect to qualified annuity contracts).
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a Contract has not been issued as an IRA or in connection with another
qualified retirement plan, there generally is a 10% penalty tax on the taxable
amount of any payment from the Contract unless the payment is: (a) received on
or after the Owner reaches age 59 1/2; (b) attributable to the Owner's
becoming disabled (as defined in the tax law); (c) made on or after the death
of the Owner or, if the Owner is not an individual, on or after the death of
the primary annuitant (as defined in the tax law); (d) made as a series of
substantially equal periodic payments (not less frequently than annually) for
the life (or life expectancy) of the Owner or the joint lives (or joint life
expectancies) of the Owner and a designated beneficiary (as defined in the tax
law), or (e) made under a Contract purchased with a single purchase payment
when the annuity starting date (as defined in the tax law) is no later than a
year from purchase of the Contract and substantially equal periodic payments
are made, not less frequently than annually, during the annuity period.
In the case of systematic partial withdrawals, it is unclear whether such
withdrawals will qualify for exception (d) above. (For reporting purposes, we
currently treat such withdrawals as if they do not qualify for this
exception). In addition, if withdrawals are of interest amounts only,
exception (d) will not apply.
AGGREGATION OF CONTRACTS
In certain circumstances, the amount of an annuity payment, withdrawal or
surrender from a Contract that is includible in income is determined by
combining some or all of the annuity contracts owned by an individual not
issued in connection with qualified retirement plans. For example, if a person
purchases two or more deferred
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annuity contracts from the same insurance company (or its affiliates) during
any calendar year, all such contracts will be treated as one contract for
purposes of determining whether any payment not received as an annuity
(including withdrawals and surrenders prior to the annuity commencement date)
is includible in income. In addition, if a person purchases a Contract offered
by this prospectus and also purchases at approximately the same time an
immediate annuity, the IRS may treat the two contracts as one contract. The
effects of such aggregation are not clear; however, it could affect the time
when income is taxable and the amount which might be subject to the 10%
penalty tax described above.
IRA CONTRACTS AND OTHER QUALIFIED RETIREMENT PLANS IN GENERAL
In addition to issuing the Contracts as non-qualified annuities, Golden
American also currently issues the Contracts as IRAs. (As indicated above, in
this prospectus, IRAs are referred to as "qualified plans.") Golden American
may also issue the Contracts in connection with certain other types of
qualified retirement plans which receive favorable treatment under the Code.
Numerous special tax rules apply to the owners under IRAs and other qualified
retirement plans and to the contracts used in connection with such plans.
These tax rules vary according to the type of plan and the terms and
conditions of the plan itself. For example, for both surrenders and annuity
payments under certain contracts issued in connection with qualified
retirement plans, there may be no "investment in the contract" and the total
amount received may be taxable. Also, special rules apply to the time at which
distributions must commence and the form in which the distributions must be
paid. Therefore, no attempt is made to provide more than general information
about the use of Contracts with the various types of qualified retirement
plans. A qualified tax advisor should be consulted before purchase of a
Contract in connection with a qualified retirement plan.
When issued in connection with a qualified retirement plan, a Contract will
be amended as necessary to conform to the requirements of the plan. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under qualified retirement plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contract. In addition, Golden American is not bound by terms
and conditions of qualified retirement plans to the extent such terms and
conditions contradict the Contract, unless Golden American consents.
INDIVIDUAL RETIREMENT ANNUITIES
As indicated above, Golden American currently issues the Contract as an IRA.
If the Contract is used for this purpose, the Owner must be the Annuitant.
Premium Payments. Both the premium payments that may be paid, and the tax
deduction that an individual may claim for such premium payments, are limited
under an IRA. In general, the premium payments that may be made for an IRA for
any year are limited to the lesser of $2,000 or 100% of the individual's
earned income for the year. Also, with respect to an individual who has less
income than his or her spouse, premium payments may be made by that individual
into an IRA to the extent of (1) $2,000, or (2) the sum of (i) the
compensation includible in the gross income of the individual's spouse for the
taxable year and (ii) the compensation includible in the gross income of the
individual's spouse for the taxable year reduced by the amount allowed as a
deduction for IRA contributions to such spouse. An excise tax is imposed on
IRA contributions that exceed the law's limits.
The deductible amount of the premium payments made for an IRA for any
taxable year (including a contract for a noncompensated spouse) is limited to
the amount of premium payments that may be paid for the contract for that
year, or a lesser amount where the individual or his or her spouse is an
active participant in certain qualified retirement plans. A single person who
is an active participant in a qualified retirement plan (including a qualified
pension, profit-sharing, or annuity plan, a simplified employee pension plan,
or a "section 403(b)" annuity plan, as discussed below) and who has adjusted
gross income in excess of $35,000 may not deduct premium payments, and such a
person with adjusted gross income between $25,000 and $35,000 may deduct only
a portion of such payments. Also, married persons who file a joint return, one
of whom is an active participant in a qualified retirement plan, and who have
adjusted gross income in excess of $50,000 may not
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deduct premium payments, and those with adjusted gross in come between $40,000
and $50,000 may deduct only a portion of such payments. Married persons filing
separately may not deduct premium payments if either the taxpayer or the
taxpayer's spouse is an active participant in a qualified retirement plan.
In applying these and other rules applicable to an IRA, all individual
retirement accounts and IRAs owned by an individual are treated as one
contract, and all amounts distributed during any taxable year are treated as
one distribution.
Tax Deferral During Accumulation Period. Until distributions are made from
an IRA, increases in the Accumulation Value of the Contract are not taxed.
IRAs and individual retirement accounts (that may invest in this Contract)
generally may not invest in life insurance contracts, but an annuity contract
that is issued as an IRA (or that is purchased by an individual retirement
account) may provide a death benefit that equals the greater of the premiums
paid and the contract's cash value. The Contract provides a death benefit that
in certain circumstances may exceed the greater of the premium payments and
the Accumulation Value. It is possible that an enhanced death benefit could be
viewed as violating the prohibition on investment in life insurance contracts,
with the result that the Contract would not be viewed as satisfying the
requirements of an IRA and would not be a permissible investment for an
individual retirement account.
Taxation of Distributions and Rollovers. If all premium payments made to an
IRA were deductible, all amounts distributed from the Contract are included in
the recipient's income when distributed. However, if nondeductible premium
payments were made to an IRA (within the limits allowed by the tax laws), a
portion of each distribution from the Contract typically is includible in
income when it is distributed. In such a case, any amount distributed as an
annuity payment or in a lump sum upon death or surrender is taxed as described
above in connection with such a distribution from a non qualified contract,
treating as the investment in the contract the sum of the nondeductible
premium payments at the end of the taxable year in which the distribution
commences or is made (less any amounts previously distributed that were
excluded from income). Also, in such a case, any amount distributed upon a
partial withdrawal is partially includible in income. The includible amount is
the excess of the distribution over the exclusion amount, which in turn
generally equals the distribution multiplied by the ratio of the investment in
the Contract to the Accumulation Value.
In any event, subject to the direct rollover and mandatory withholding
requirements (discussed below), amounts may be "rolled over" from certain
qualified retirement plans to an IRA (or from one IRA or individual retirement
account to an IRA) without incurring current income tax if certain conditions
are met. Only certain types of distributions to eligible individuals from
qualified retirement plans, individual retirement accounts, and IRAs may be
rolled over.
Penalty Taxes. Subject to certain exceptions, a penalty tax is imposed on
distributions from an IRA equal to 10% of the amount of the distribution
includible in income. (Amounts rolled over from an IRA generally are
excludable from income.) The exceptions provide, however, that this penalty
tax does not apply to distributions made to the Owner (1) on or after age 59
1/2, (2) on or after death or because of disability (as defined in the tax
law), or (3) as part of a series of substantially equal periodic payments over
the life (or life expectancy) of the Owner or the joint lives (or joint life
expectancies) of the Owner and his or her beneficiary (as defined in the tax
law). In addition to the foregoing, failure to comply with a minimum
distribution requirement will result in the imposition of a penalty tax of 50%
of the amount by which a minimum required distribution exceeds the actual
distribution from an IRA. Under this requirement, distributions of minimum
amounts from an IRA as specified in the tax law must generally commence by
April 1 of the calendar year following the calendar year in which the Owner
attains age 70 1/2.
OTHER TYPES OF QUALIFIED RETIREMENT PLANS
The following sections describe tax considerations of Contracts used in
connection with various types of qualified retirement plans other than IRAs.
Golden American does not currently offer all of the types of qualified
35
<PAGE>
retirement plans described and may not offer them in the future. Prospective
purchasers of Contracts for use in connection with such qualified retirement
plans should therefore contact Golden American's Customer Service Center to
ascertain the availability of the Contract for qualified retirement plans at
any given time.
Simplified Employee Pensions (SEP-IRAs). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met.
Under these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the
treatment of the Contract's enhanced death benefit for purposes of certain tax
rules governing IRAs (which would include SEP-IRAs). Employers intending to
use the contract in connection with such plans should seek competent advice.
SIMPLE IRAs. Section 408(p) of the Code permits certain small employers to
establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by
both employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may
be eligible, and the time when distributions may commence. As discussed above
(see Individual Retirement Annuities), there is some uncertainty regarding the
proper characterization of the Contract's enhanced death benefit for purposes
of certain tax rules governing IRAs (which would include SIMPLE IRAs).
Employers intending to use the Contract in connection with a SIMPLE retirement
account should seek competent advice.
Corporate and Self-Employed ("H.R. 10" or "Keogh") Pension and Profit-
Sharing Plans. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. The Contract provides a
death benefit that in certain circumstances may exceed the greater of the
premium payments and the Accumulation Value. It is possible that such death
benefit could be characterized as an incidental death benefit. There are
limitations on the amount of incidental benefits that may be provided under
pension and profit sharing plans. In addition, the provision of such benefits
may result in currently taxable income to participants. Employers intending to
use the contract in connection with such plans should seek competent advice.
Section 403(b) Annuity Contracts. Section 403(b) of the Code permits public
school employees, employees of certain types of charitable, educational and
scientific organizations exempt from tax under section 501(c)(3) of the Code,
and employees of certain types of State educational organizations specified in
section 170(b)(l)(A)(ii), to have their employers purchase annuity contracts
for them and, subject to certain limitations, to exclude the amount of premium
payments from gross income for federal income tax purposes. Purchasers of the
contracts for use as a "Section 403(b) Annuity Contract" should seek competent
advice as to eligibility, limitations on permissible amounts of premium
payments and other tax consequences associated with such contacts. In
particular, purchasers and their advisors should consider that this Contract
provides a death benefit that in certain circumstances may exceed the greater
of the premium payments and the Accumulation Value. It is possible that such
death benefit could be characterized as an incidental death benefit. If the
death benefit were so characterized, this could result in currently taxable
income to purchasers. In addition, there are limitations on the amount of
incidental death benefits that may be provided under a Section 403(b) Annuity
Contract. Even if the death benefit under the contract were characterized as
an incidental death benefit, it is unlikely to violate those limits unless the
purchaser also purchases a life insurance contract as part of his or her
Section 403(b) Annuity Contract.
Section 403(b) Annuity Contracts contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after 1988 on amounts attributable to salary reduction contributions
(and earnings on those contributions) held as of the last year beginning
before January 1, 1989. These amounts can be paid only if the
36
<PAGE>
employee has reached age 59 1/2, separated from service, died, become disabled
(within the meaning of the tax law), or in the case of hardship. Amounts
permitted to be distributed in the event of hardship are limited to actual
contributions; earnings thereon cannot be distributed on account of hardship.
(These limitations on withdrawals do not apply to the extent Golden American
is directed to transfer some or all of the Accumulation Value as a tax-free
direct transfer to the issuer of another Section 403(b) Annuity Contract or
into a section 403(b)(7) custodial account subject to withdrawal restrictions
which are at least as stringent.)
Eligible Deferred Compensation Plans of State and Local Governments and Tax-
Exempt Organizations. Section 457 of the Code permits employees of state and
local governments and tax-exempt organizations to defer a portion of their
compensation without paying current federal income taxes. The employees must
be participants in an eligible deferred compensation plan. To the extent the
contract is used in connection with an eligible plan, the employer as owner of
the contract has the sole right to the proceeds of the contract, until paid or
made available to the participant or other recipient, subject only to the
claims of the employer's general creditors. Generally, a Contract purchased by
a state or local government or a tax-exempt organization will not be treated
as an annuity contract for federal income tax purposes. Those who intend to
use the contracts in connection with such plans should seek competent advice.
DIRECT ROLLOVERS AND FEDERAL INCOME TAX WITHHOLDING FOR "ELIGIBLE ROLLOVER
DISTRIBUTIONS"
In the case of an annuity contract used in connection with a pension, profit
sharing, or annuity plan qualified under sections 401(a) or 403(a) of the
Code, or that is a Section 403(b) Annuity Contract, any "eligible rollover
distribution" from the contract will be subject to direct rollover and
mandatory withholding requirements. An eligible rollover distribution
generally is the taxable portion of any distribution from a qualified pension
plan under section 401(a) of the Code, qualified annuity plan under Section
403(a) of the Code, or Section 403(b) Annuity or custodial account, excluding
certain amounts (such as minimum distributions required under section
401(a)(9) of the Code and distributions which are part of a "series of
substantially equal periodic payments" made for the life (or life expectancy)
of the employee, or for the joint lives (or joint life expectancies) of the
employee and the employee's designated beneficiary (within the meaning of the
tax law), or for a specified period of 10 years or more).
Under these new requirements, federal income tax equal to 20% of the
eligible rollover distribution will be withheld from the amount of the
distribution. Unlike withholding on certain other amounts distributed from the
Contract, discussed below, the taxpayer cannot elect out of withholding with
respect to an eligible rollover distribution. However, this 20% withholding
will not apply to that portion of the eligible rollover distribution which,
instead of receiving, the taxpayer elects to have directly transferred to
certain eligible retirement plans (such as to this contract when issued as an
IRA).
If this Contract is issued in connection with a pension, profit-sharing, or
annuity plan qualified under sections 401(a) or 403(a) of the Code, or is a
Section 403(b) Annuity Contract, then, prior to receiving an eligible rollover
distribution, the owner will receive a notice (from the plan administrator or
Golden American) explaining generally the direct rollover and mandatory
withholding requirements and how to avoid the 20% withholding by electing a
direct transfer.
FEDERAL INCOME TAX WITHHOLDING
Golden American will withhold and remit to the federal government a part of
the taxable portion of each distribution made under the Contract unless the
distributee notifies Golden American at or before the time of the distribution
that he or she elects not to have any amounts withheld. In certain
circumstances, Golden American may be required to withhold tax, as explained
above. The withholding rates applicable to the taxable portion of periodic
annuity payments (other than eligible rollover distributions) are the same as
the withholding rates generally applicable to payments of wages. In addition,
the withholding rate applicable to the taxable portion of non-periodic
payments (including surrenders prior to the annuity commencement date) is 10%.
Regardless of whether you elect to have federal income tax withheld, you are
still liable for payment of federal income tax on the taxable portion of the
payment. As discussed above, the withholding rate applicable to eligible
rollover distributions is 20%.
37
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION
Description of Golden American Life Insurance Company............................ 1
Safekeeping of Assets............................................................ 1
The Administrator................................................................ 1
Independent Auditors............................................................. 2
Distribution of Contracts........................................................ 2
Performance Information.......................................................... 2
IRA Partial Withdrawal Option.................................................... 9
Other Information................................................................ 9
Financial Statements of Separate Account B....................................... 10
Financial Statements of The Managed Global Account of Separate Account D......... 10
Financial Statements of Golden American Life Insurance Company................... 10
Appendix--Description of Bond Ratings............................................ A-1
</TABLE>
38
<PAGE>
PLEASE TEAR OFF, COMPLETE AND RETURN THE FORM BELOW TO ORDER A FREE
STATEMENT OF ADDITIONAL INFORMATION FOR THE CONTRACTS OFFERED UNDER THE
PROSPECTUS. ADDRESS THE FORM TO OUR CUSTOMER SERVICE CENTER, THE ADDRESS IS
SHOWN ON THE COVER.
- ------------------------------------------------------------------------------
PLEASE SEND ME A FREE COPY OF THE STATEMENT OF ADDITIONAL INFORMATION FOR
SEPARATE ACCOUNT B
PLEASE PRINT OR TYPE
_______________________________
NAME
_______________________________
SOCIAL SECURITY NUMBER
_______________________________
STREET ADDRESS
_______________________________
CITY, STATE, ZIP
PE-I-NH 5.97
- ------------------------------------------------------------------------------
39
<PAGE>
EQUI-SELECT SERIES TRUST
699 WALNUT STREET
DES MOINES, IOWA 50309
----------------
Equi-Select Series Trust (the "Trust") is an open-end, series management
investment company which currently offers shares of beneficial interest of
nine series (the "Portfolios"), each of which has a different investment
objective and represents the entire interest in a separate portfolio of
investments. These Portfolios are currently available to the public only
through certain variable annuity contracts and variable life insurance
policies ("Variable Contracts") issued by Equitable Life Insurance Company of
Iowa and/or its affiliated life insurance companies (collectively, the "Life
Companies"). This Prospectus contains information pertaining to the Research
Portfolio, Total Return Portfolio and OTC Portfolio which are the only
Portfolios of the Trust offered under the Variable Contracts described in the
accompanying Variable Contract Prospectus.
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing. Please read it carefully
and retain it for future reference. A Statement of Additional Information
("SAI") dated May 1, 1997, as amended, is available without charge upon
request and may be obtained by calling Equitable Life Insurance Company of
Iowa at (800) 648-6810 or by writing to Equitable Life Insurance Company of
Iowa, P.O. Box 9271, Des Moines, Iowa 50306-9271. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission. The Securities and
Exchange Commission maintains a Web site (http:\\www.sec.gov) that contains
the SAI, material incorporated by reference, and other information regarding
the Trust.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS DATED MAY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................... 1
The Trust................................................................ 1
Investment Adviser and Sub-Adviser....................................... 1
The Portfolios........................................................... 1
Investment Risks......................................................... 2
Sales and Redemptions.................................................... 2
FINANCIAL HIGHLIGHTS....................................................... 3
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS....................... 5
OTC Portfolio............................................................ 5
Research Portfolio....................................................... 7
Total Return Portfolio................................................... 9
MANAGEMENT OF THE TRUST.................................................... 11
Investment Adviser....................................................... 11
Advisory Fee Waiver and Expense Cap...................................... 12
Expenses of the Trust.................................................... 12
Sub-Adviser.............................................................. 12
SALES AND REDEMPTIONS...................................................... 13
NET ASSET VALUE............................................................ 14
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS................................... 14
ADDITIONAL INFORMATION..................................................... 15
APPENDIX................................................................... A-1
</TABLE>
i
<PAGE>
SUMMARY
THE TRUST
The Trust is an open-end management investment company established as a
Massachusetts business trust under a Declaration of Trust dated May 11, 1994.
Each Portfolio issues a separate class of shares. The Declaration of Trust
permits the Trustees to issue an unlimited number of full or fractional shares
of each class of stock.
Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future. Only shares of the Research, Total
Return and OTC Portfolios are offered herein. (The Research, Total Return and
OTC Portfolios may be referred to herein as "the Portfolios".)
INVESTMENT ADVISER AND SUB-ADVISER
Subject to the authority of the Board of Trustees of the Trust, Equitable
Investment Services, Inc. (the "Adviser") serves as the Trust's investment
adviser and has responsibility for the overall management of the investment
strategies and policies of the Portfolios. The Adviser has engaged
Massachusetts Financial Services Company as a Sub-Adviser to make investment
decisions and place orders for the Portfolios. For additional information
concerning the Adviser and the Sub-Adviser, including a description of
advisory and sub-advisory fees, see "Management of the Trust."
THE PORTFOLIOS
OTC PORTFOLIO. The primary investment objective of the OTC Portfolio is to
seek to obtain long-term growth of capital. The Portfolio seeks to achieve
this objective by investing at least 65% of its total assets, under normal
circumstances, in securities principally traded on the over-the-counter (OTC)
securities market. The Portfolio is intended for investors who understand and
are willing to accept the risks entailed in seeking long-term growth of
capital. The Portfolio may invest 20% or more of its net assets in foreign
securities (not including American Depositary Receipts ("ADRs")); however,
under normal market conditions, the Portfolio expects to invest less than 35%
of its net assets in foreign securities. The Portfolio may invest up to 10% of
its net assets in emerging markets or countries with limited or developing
capital markets. (See "Appendix--Foreign Investments" and the SAI for a
discussion of the risks involved in foreign investing.) The Portfolio may
invest a portion of its assets in lower-grade corporate debt securities
commonly known as "junk bonds." Investors should be aware that such
investments involve a significant degree of risk. (See "Appendix--Lower-Rated
Securities" and the SAI for a discussion of the risks involved in investing in
lower-rated securities.)
RESEARCH PORTFOLIO. The Research Portfolio seeks to provide long-term growth
of capital and future income by investing a substantial portion of its assets
in common stocks or securities convertible into common stocks of companies
believed to possess better than average prospects for long-term growth. A
smaller proportion of the assets may be invested in bonds, short-term
obligations, preferred stocks or common stocks whose principal characteristic
is income production rather than growth. The Portfolio may invest up to 20%
(and generally expects to invest between 0% and 20%) of its net assets in
foreign securities (not including ADRs). (See "Appendix--Foreign Investments"
and the SAI for a discussion of the risks involved in foreign investing.) The
Portfolio may invest up to 10% of its net assets in lower-grade corporate debt
securities commonly known as "junk bonds." Investors should be aware that such
investments involve a significant degree of risk. (See "Appendix--Lower-Rated
Securities" and the SAI for a discussion of the risks involved in investing in
lower-rated securities.)
TOTAL RETURN PORTFOLIO. The Total Return Portfolio primarily seeks to obtain
above-average income (compared to a portfolio entirely invested in equity
securities) consistent with the prudent employment of capital. The Portfolio's
secondary objective is to take advantage of opportunities for growth of
capital and income. Under normal market conditions, at least 25% of the
Portfolio's assets will be invested in fixed income securities and at
1
<PAGE>
least 40% and no more than 75% of the Portfolio's assets will be invested in
equity securities, which include: common and preferred stocks; securities such
as bonds, warrants or rights that are convertible into stock; and depository
receipts for those securities. The Portfolio may invest up to 20% (and
generally expects to invest between 5% and 20%) of its net assets in foreign
securities (not including ADRs). (See "Appendix--Foreign Investments" and the
SAI for a discussion of the risks involved in foreign investing.) The
Portfolio may invest a portion of its assets in lower-grade corporate debt
securities commonly known as "junk bonds." Investors should be aware that such
investments involve a significant degree of risk. (See "Appendix--Lower-Rated
Securities" and the SAI for a discussion of the risks involved in investing in
lower-rated securities.)
The investment objectives of the Portfolios are not fundamental and may be
changed without the approval of a majority of the outstanding shares of a
Portfolio. Investment policies and restrictions specifically cited as
fundamental may not be changed without the approval of a majority of the
outstanding shares of that Portfolio. Other investment policies and practices
described in this Prospectus and the SAI are not fundamental, and the Board of
Trustees may change them without shareholder approval. A complete list of
investment restrictions, including those restrictions which cannot be changed
without shareholder approval, is contained in the SAI. There is no assurance
that a Portfolio will meet its stated objective.
INVESTMENT RISKS
The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities,
with the general level of interest rates. When interest rates decline, the
value of an investment portfolio invested in fixed-income securities can be
expected to rise. Conversely, when interest rates rise, the value of an
investment portfolio invested in fixed-income securities can be expected to
decline. In the case of foreign currency denominated securities, these trends
may be offset or amplified by fluctuations in foreign currencies. Investments
by a Portfolio in foreign securities may be affected by adverse political,
diplomatic, and economic developments, changes in foreign currency exchange
rates, taxes or other assessments imposed on distributions with respect to
those investments, and other factors affecting foreign investments generally.
High-yielding fixed-income securities, which are commonly known as "junk
bonds", are subject to greater market fluctuations and risk of loss of income
and principal than investments in lower yielding fixed-income securities.
Certain of the Portfolios intend to employ, from time to time, certain
investment techniques which are designed to enhance income or total return or
hedge against market or currency risks but which themselves involve additional
risks. These techniques include options on securities, futures, options on
futures, options on indexes, options on foreign currencies, foreign currency
exchange transactions, lending of securities and when-issued securities and
delayed-delivery transactions. The Portfolios may have higher-than-average
portfolio turnover which may result in higher-than-average brokerage
commissions and transaction costs.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Companies
as a funding vehicle for the Variable Contracts offered by the Life Companies.
No fee is charged upon the sale or redemption of the Trust's shares. Expenses
of the Trust are passed through to the separate accounts of the Life
Companies, and therefore, are ultimately borne by Variable Contract owners. In
addition, other fees and expenses are assessed by the Life Companies at the
separate account level. (See the Prospectus for the Variable Contract for a
description of all fees and charges relating to the Variable Contract.)
2
<PAGE>
FINANCIAL HIGHLIGHTS
EQUI-SELECT SERIES TRUST
The following tables which have been audited by Ernst & Young LLP,
independent auditors, include selected data, derived from the Financial
Statements, for a share outstanding throughout the period shown for each of
the Research, Total Return and OTC Portfolios at December 31, 1996. The tables
should be read in conjunction with the Financial Statements and notes thereto
included in the Trust's Annual Report to Contractholders which is incorporated
by reference in the Statement of Additional Information. The Financial
Statements of the Trust at December 31, 1996 are incorporated herein by
reference in reliance upon the report of Ernst & Young LLP such report given
upon the authority of such firm as experts in accounting and auditing.
Further information about the performance of the Trust is contained in the
Trust's December 31, 1996 Annual Report which may be obtained without charge
by calling Equitable Life Insurance Company of Iowa at (800) 648-6810.
3
<PAGE>
EQUI-SELECT SERIES TRUST
OTC PORTFOLIO, RESEARCH PORTFOLIO AND TOTAL RETURN PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
<TABLE>
<CAPTION>
NET REALIZED
NET ASSET NET AND UNREALIZED TOTAL DISTRIBUTIONS NET ASSET
VALUE AT INVESTMENT GAIN (LOSS) FROM FROM NET NET VALUE AT
BEGINNING INCOME ON INVESTMENT INVESTMENT CAPITAL GAINS TOTAL END TOTAL
OF PERIOD (LOSS)(1) INVESTMENTS OPERATIONS INCOME DISTRIBUTIONS DISTRIBUTION OF PERIOD RETURN(2)
--------- ---------- -------------- ---------- ------------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTC Portfolio
Year ended
December 31,
1996............ $12.08 $(0.03) $2.52 $2.49 $0.00 $(0.75) $(0.75) $13.82 20.68%
Year ended
December 31,
1995............ 10.36 (0.02) 3.07 3.05 0.00 (1.33) (1.33) 12.08 29.23
Period ended
December 31,
1994*........... 10.00 0.00 0.36 0.36 0.00 0.00 0.00 10.36 3.59
Research
Portfolio
Year ended
December 31,
1996............ 12.88 0.00 3.00 3.00 0.00 (6) (0.45) (0.45) 15.43 23.37
Year ended
December 31,
1995............ 9.59 0.03 3.48 3.51 (0.03) (0.19) (0.22) 12.88 36.58
Period ended
December 31,
1994*........... 10.00 0.09 (0.41) (0.32) (0.09) 0.00 (0.09) 9.59 (3.22)
Total Return
Portfolio
Year ended
December 31,
1996............ 11.90 0.26 1.37 1.63 (0.26) (0.12) (0.38) 13.15 13.70
Year ended
December 31,
1995............ 9.76 0.21 2.19 2.40 (0.21) (0.05) (0.26) 11.90 24.51
Period ended
December 31,
1994*........... 10.00 0.09 (0.24) (0.15) (0.09) 0.00 (0.09) 9.76 (1.47)
<CAPTION>
RATIO RATIO OF NET
OF OPERATING INVESTMENT
NET ASSETS EXPENSES INCOME (LOSS) PORTFOLIO AVERAGE
END TO AVERAGE TO AVERAGE TURNOVER COMMISSION
OF PERIOD NET ASSETS(1)(3) NET ASSETS(3) RATE(4) RATE(5)
----------- ---------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
OTC Portfolio
Year ended
December 31,
1996............ $43,321,580 1.35% (0.63)% 122% $.0402
Year ended
December 31,
1995............ 9,054,622 1.07 (0.22) 111 --
Period ended
December 31,
1994*........... 1,695,685 0.75 0.16 6 --
Research
Portfolio
Year ended
December 31,
1996............ 75,178,842 1.31 0.05 68 .0281
Year ended
December 31,
1995............ 16,185,802 1.12 0.58 83 --
Period ended
December 31,
1994*........... 1,626,521 0.75 4.65 85 --
Total Return
Portfolio
Year ended
December 31,
1996............ 57,301,963 1.25 3.29 131 .0510
Year ended
December 31,
1995............ 15,502,907 1.11 3.88 89 --
Period ended
December 31,
1994*........... 1,298,365 0.75 4.58 45 --
</TABLE>
- ----
(1) Net investment income is after reimbursement of certain fees and expenses
by Equitable Investment Services, Inc. ("EISI"). Had EISI not undertaken
to reimburse expenses related to the Portfolios, net investment income
(loss) per share and ratio of operating expenses to average net assets
would have been as follows for the year ended December 31, 1996, for the
year ended December 31, 1995 and for the period ended December 31, 1994,
respectively: OTC Portfolio, $(0.03) and 1.35%, $(0.10) and 2.52%, $(0.12)
and 7.10%; Research Portfolio, $0.00 and 1.31%, $(0.04) and 2.48%, $(0.04)
and 7.48%; and Total Return Portfolio, $0.26 and 1.25%, $0.14 and 2.36%,
$(0.06) and 8.31%.
(2) Total return figures are not annualized for periods less than one year.
Total return does not reflect expenses that apply to the separate account
or related variable insurance contracts and inclusion of these charges
would result in reducing the total return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
(5) The average commission rate paid is applicable for Portfolios that invest
greater than 10% of average net assets in equity security transactions for
which commissions are charged. This disclosure is required for fiscal
periods beginning on or after September 1, 1995.
(6) Amount is less than $0.003 per share.
* For the period October 4, 1994 (commencement of investment operations)
through December 31, 1994.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each Portfolio of the Trust has a different investment objective or
objectives which it pursues through separate investment policies as described
below. The differences in objectives and policies among the Portfolios can be
expected to affect the return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject. An investment in a single
Portfolio should not be considered a complete investment program. The
investment objective(s) and policies of each Portfolio, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. Such changes may result in a
Portfolio having an investment objective(s) which differs from that which an
investor may have considered at the time of investment. There is no assurance
that any Portfolio will achieve its objective(s). United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolios intend to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S.
Treasury, the Trust may be required to limit the availability or change the
investment policies of one or more Portfolios or to take steps to liquidate
one or more Portfolios. The Trust will not change any fundamental investment
policy of a Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt
security held by a Portfolio declines below the minimum rating for securities
in which the Portfolio may invest, the Portfolio will not be required to
dispose of the security, but the Portfolio's Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objectives and policies, each Portfolio uses
a variety of instruments, strategies and techniques which are described in
more detail in the Appendix and the SAI. With respect to each Portfolio's
investment policies, use of the term "primarily" means that under normal
circumstances, at least 65% of such Portfolio's assets will be invested as
indicated. A description of the ratings systems used by the following
nationally recognized statistical rating organizations ("NRSROs") is also
contained in the SAI: Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors
Service, Inc. ("Fitch"), Thomson Bankwatch, Inc., IBCA Limited and IBCA Inc.
New instruments, strategies and techniques, however, are evolving continually
and the Trust reserves authority to invest in or implement them to the extent
consistent with its investment objectives and policies. If new instruments,
strategies or techniques would involve a material change to the information
contained herein, they will not be purchased or implemented until this
Prospectus is appropriately supplemented.
OTC PORTFOLIO
The investment objective of the OTC Portfolio is to seek to obtain long-term
growth of capital.
INVESTMENT POLICIES AND RISKS--OTC PORTFOLIO
The Portfolio seeks to achieve its objective by investing at least 65% of
its total assets, under normal circumstances, in securities principally traded
on the over-the-counter (OTC) securities market. OTC securities tend to be
securities of companies which are smaller or newer than those listed on the
New York or American Stock Exchanges. Issuers of the securities of companies
which are traded on the OTC market include, among others, industrial
corporations, financial service institutions, public utilities, and
transportation companies. OTC securities include both equity and debt
securities (including obligations of the U.S. government). The Portfolio may
also invest in securities of companies that are not traded on the OTC
securities market that represent opportunities for capital appreciation. The
Portfolio will seek to invest in companies that are undervalued relative to
present or future earnings, cash flow or book value. While the Portfolio
intends to invest primarily in equity securities, the Portfolio may also
invest in fixed income securities as described below. Equity securities
include: common stocks and preferred stocks; securities such as bonds,
warrants or rights that are convertible into stock; and depositary receipts
for those securities.
5
<PAGE>
The Portfolio will not purchase a security, under normal circumstances, if
it would result in less than 65% of its total assets being invested in OTC
securities (the "65% limitation"). Securities that were principally traded on
the OTC securities market when purchased but which have since been listed on
the New York or American Stock Exchange or a foreign exchange will be
considered to fall within the Portfolio's 65% limitation for 12 months after
the date the security was listed on an exchange.
Debt securities of issuers in which the Portfolio may invest include all
types of long- or short-term debt obligations, such as bonds, debentures,
notes and commercial paper. Fixed income securities in which the Portfolio may
invest include securities in the lower rating categories of recognized rating
agencies (and comparable unrated securities). Fixed income securities in which
the Portfolio may invest also include zero coupon bonds, deferred interest
bonds and bonds on which the interest is payable in kind. Such investments
involve certain risks. See "Appendix--Lower-Rated Securities" and the SAI for
a discussion of the risks involved in investing in lower-rated securities.
Investing in securities traded on the OTC securities market can involve
greater risk than is customarily associated with investing in securities
traded on the New York or American Stock Exchanges since OTC securities are
generally securities of companies which are smaller or newer than those listed
on the New York or American Stock Exchange. For example, these companies often
have limited product lines, markets, or financial resources, may be dependent
for management on one or a few key persons, and can be more susceptible to
losses. Also, their securities may be thinly traded (and therefore have to be
sold at a discount from current prices or sold in small lots over an extended
period of time), may be followed by fewer investment research analysts and may
be subject to wider price swings and thus may create a greater risk of loss
than securities of larger capitalization or established companies. Shares of
the Portfolio, therefore, are subject to greater fluctuation in value than
shares of a conservative equity fund or of a growth fund which invests
entirely in proven growth stocks. Therefore, the Portfolio is intended for
long-term investors who understand and can accept the risks entailed in
seeking long-term growth of capital. The Portfolio is not meant to provide a
vehicle for those who wish to play short-term swings in the stock market.
Accordingly, an investment in shares of the Portfolio should not be considered
a complete investment program. Each prospective purchaser should take into
account his investment objectives as well as his other investments when
considering the purchase of shares of the Portfolio.
When the Sub-Adviser believes that investing for temporary defensive
purposes is appropriate, such as during periods of unusual market conditions,
part or all of the Portfolio's assets may be temporarily invested in cash
(including foreign currency) or cash equivalent short-term obligations
including, but not limited to, certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities and repurchase agreements.
The Portfolio may invest 20% or more of its net assets in foreign securities
(not including ADRs); however, under normal market conditions, the Portfolio
expects to invest less than 35% of its net assets in foreign securities. The
Portfolio may invest up to 10% of its net assets in emerging markets or
countries with limited or developing capital markets. Investing in securities
of foreign issuers generally involves risks not ordinarily associated with
investing in securities of domestic issuers. (See "Appendix--Foreign
Investments" and the SAI for a discussion of the risks involved in foreign
investing.)
The Portfolio may invest in ADRs which are certificates issued by a U.S.
depository (usually a bank) and represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as collateral.
Although ADRs are issued by a U.S. depository, they are subject to many of the
risks of foreign securities such as changes in exchange rates and more limited
information about foreign issuers.
The Portfolio may also purchase securities that are not registered under the
Securities Act of 1933 ("1933 Act") ("restricted securities"), including those
that can be offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act ("Rule 144A securities"). The Trust's Board of
Trustees confirms based upon information and recommendations provided by the
Sub-Adviser that a specific Rule 144A security is liquid and thus not subject
to the Portfolio's limitation on investing not more than 15% of its net assets
in illiquid investments. The Board of Trustees has adopted guidelines and
delegated to the Sub-Adviser the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, will retain
sufficient
6
<PAGE>
oversight and be ultimately responsible for the determinations. This
investment practice could have the effect of decreasing the level of liquidity
in a Portfolio to the extent that qualified institutional buyers become for a
time uninterested in purchasing Rule 144A securities held in the investment
portfolio.
The Portfolio is classified as a "non-diversified" investment company. As a
result, the Portfolio is limited as to the percentage of its assets which may
be invested in the securities of any one issuer only by its own investment
restrictions and the diversification requirements imposed by the Internal
Revenue Code of 1986, as amended. U.S. Government securities which are
generally considered free of credit risk and are assured as to payment of
principal and interest if held to maturity are not subject to any investment
limitation. Since the Portfolio may invest a relatively high percentage of its
assets in a limited number of issuers, the Portfolio may be more susceptible
to any single economic, political or regulatory occurrence and to the
financial conditions of the issuers in which it invests. For these reasons, an
investment in shares of the Portfolio should not be considered to constitute a
complete investment program.
While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate.
Because the Portfolio is expected to have a portfolio turnover rate of over
100%, transaction costs incurred by the Portfolio and the realized capital
gains and losses of the Portfolio may be greater than that of a portfolio with
a lesser turnover rate. The portfolio turnover rates of the Portfolio for the
periods ended December 31, 1996, 1995 and 1994 are set forth herein under
"Financial Highlights." (See also "Portfolio Turnover" in the SAI.)
ADDITIONAL PORTFOLIO INVESTMENTS AND TRANSACTIONS. The Portfolio may enter
into repurchase agreements to earn income on available cash or as a temporary
defensive measure. The Portfolio may seek to increase its income by lending
portfolio securities. The Portfolio may purchase securities on a "when issued"
or on a "forward delivery" basis, which means that the securities will be
delivered to the Portfolio at a future date usually beyond customary
settlement time.
The Portfolio may invest in indexed securities whose value is linked to
foreign currencies, commodities, indices, or other financial indicators. The
Portfolio may enter into mortgage "dollar roll" transactions with selected
banks and broker-dealers.
The Portfolio also may purchase restricted securities, corporate asset-
backed securities, options on securities, options on stock indices, options on
foreign currencies, futures contracts, options on futures contracts and
forward foreign currency exchange contracts.
All of the Portfolio investments and transactions described in this section
are described in greater detail in the Appendix and the SAI.
RESEARCH PORTFOLIO
The investment objective of the Research Portfolio is to provide long-term
growth of capital and future income.
The portfolio securities of the Research Portfolio are selected by a
committee of investment research analysts. This committee includes investment
analysts employed not only by MFS but also by MFS International (U.K.)
Limited, a wholly-owned subsidiary of MFS. The Portfolio's assets are
allocated among industries by the analysts acting together as a group.
Individual analysts are then responsible for selecting what they view as the
securities best suited to meet the Portfolio's investment objective within
their assigned industry responsibility.
INVESTMENT POLICIES AND RISKS--RESEARCH PORTFOLIO
The Portfolio's policy is to invest a substantial proportion of its assets
in the common stocks or securities convertible into common stocks of companies
believed to possess better than average prospects for long-term
7
<PAGE>
growth. A smaller proportion of the assets may be invested in bonds, short-
term obligations, preferred stocks or common stocks whose principal
characteristic is income production rather than growth. Such securities may
also offer opportunities for growth of capital as well as income. In the case
of both growth stocks and income issues, emphasis is placed on the selection
of progressive, well-managed companies. The Portfolio's debt investments, if
any, may consist of "investment grade" securities (e.g., rated Baa or better
by Moody's or BBB or better by S&P or Fitch), and, with respect to no more
than 10% of its net assets, securities in the lower rated categories (e.g.,
rated Ba or lower by Moody's or BB or lower by S&P or Fitch), or securities
which the Sub-Adviser believes to be of similar quality to these lower rated
securities (commonly known as "junk bonds"). For a description of bond
ratings, see the SAI. It is not the Portfolio's policy to rely exclusively on
ratings issued by established credit rating agencies but rather to supplement
such ratings with the Sub-Adviser's own independent and ongoing review of
credit quality. The Portfolio's achievement of its investment objective may be
more dependent on the Sub-Adviser's own credit analysis than in the case of a
fund investing in primarily higher quality bonds. From time to time, the
Portfolio's management will exercise its judgment with respect to the
proportions invested in growth stocks, income-producing securities or cash
(including foreign currency) and cash equivalents depending on its view of
their relative attractiveness.
The Portfolio may enter into repurchase agreements in order to earn income
on available cash or as a temporary defensive measure. The Portfolio may make
loans of its fixed income portfolio securities. (See "Appendix" for a further
description of these investments.)
The Portfolio may invest in ADRs which are certificates issued by a U.S.
depository (usually a bank) and represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as collateral.
Although ADRs are issued by a U.S. depository, they are subject to many of the
risks of foreign securities such as changes in exchange rates and more limited
information about foreign issuers.
The Portfolio may invest up to 20% (and generally expects to invest between
0% and 20%) of its net assets in foreign securities (not including ADRs). The
Portfolio may invest in emerging markets or countries with limited or
developing capital markets. Investing in securities of foreign issuers
generally involves risks not ordinarily associated with investing in
securities of domestic issuers. (See "Appendix--Foreign Investments" and the
SAI for a discussion of the risks involved in foreign investing.)
As described above, the Portfolio may invest in fixed income (i.e., debt)
securities rated Baa by Moody's or BBB by S&P or Fitch and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade fixed income securities. (See "Appendix--Lower-Rated Securities" and the
SAI for a discussion of the risks involved in investing in lower-rated
securities.)
The Portfolio may also purchase securities that are not registered under the
Securities Act of 1933 ("1933 Act") ("restricted securities"), including those
that can be offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act ("Rule 144A securities"). The Trust's Board of
Trustees confirms based upon information and recommendations provided by the
Sub-Adviser that a specific Rule 144A security is liquid and thus not subject
to the Portfolio's limitation on investing not more than 10% of its net assets
in illiquid investments. The Board of Trustees has adopted guidelines and has
delegated to the Sub-Adviser the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations.
This investment practice could have the effect of decreasing the level of
liquidity in the Portfolio to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
investment portfolio. Subject to the Portfolio's 10% limitation on investments
in illiquid investments and subject to the diversification requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), the Portfolio may also
invest in restricted securities that may not be sold under Rule 144A, which
presents certain risks. As a result, the Portfolio might not be able to sell
these securities when the Sub-Adviser wishes to do so, or might have to sell
them at less than fair value. In addition, market quotations are less readily
available. Therefore, judgment may at times play a greater role in valuing
these securities than in the case of unrestricted securities.
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<PAGE>
While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate. The
portfolio turnover rate of the Portfolio for the periods ended December 31,
1996, 1995 and 1994 are set forth herein under "Financial Highlights." (See
"Portfolio Turnover" in the SAI.)
TOTAL RETURN PORTFOLIO
The primary investment objective of the Total Return Portfolio is to obtain
above-average income (compared to a portfolio entirely invested in equity
securities) consistent with the prudent employment of capital. While current
income is the primary objective, the Portfolio believes that there should also
be a reasonable opportunity for growth of capital and income, since many
securities offering a better than average yield may also possess growth
potential. Thus, in selecting securities for its portfolio, the Portfolio
considers each of these objectives. Under normal market conditions, at least
25% of the Portfolio's assets will be invested in fixed income securities and
at least 40% and no more than 75% of the Portfolio's assets will be invested
in equity securities.
INVESTMENT POLICIES AND RISKS--TOTAL RETURN PORTFOLIO
The Portfolio's policy is to invest in a broad list of securities, including
short-term obligations. The list may be diversified not only by companies and
industries, but also by type of security. Fixed income securities and equity
securities (which include: common stocks and preferred stocks; securities such
as bonds, warrants or rights that are convertible into stock; and depository
receipts for those securities) may be held by the Portfolio. Some fixed income
securities may also have a call on common stock by means of a conversion
privilege or attached warrants. The Portfolio may vary the percentage of
assets invested in any one type of security in accordance with the Sub-
Adviser's interpretation of economic and money market conditions, fiscal and
monetary policy and underlying security values. The Portfolio's debt
investments may consist of both "investment grade" securities (rated Baa or
better by Moody's or BBB or better by S&P, Fitch or Duff & Phelps Credit
Rating Co. ("Duff")) and securities that are unrated or are in the lower
rating categories (rated Ba or lower by Moody's or BB or lower by S&P, Fitch
or Duff) (commonly known as "junk bonds") including up to 20% of its assets in
nonconvertible fixed income securities that are in these lower rating
categories and comparable unrated securities. Generally, most of the
Portfolio's long-term debt investments will consist of "investment grade"
securities. See the SAI for a description of these ratings. It is not the
Portfolio's policy to rely exclusively on ratings issued by established credit
rating agencies but rather to supplement such ratings with the Sub-Adviser's
own independent and ongoing review of credit quality.
U.S. GOVERNMENT SECURITIES. The Portfolio may also invest in U.S. government
securities, including: (1) U.S. Treasury obligations, which differ only in
their interest rates, maturities and times of issuance; U.S. Treasury bills
(maturities of one year or less); U.S. Treasury notes (maturities of one to
ten years); and U.S. Treasury bonds (generally maturities of greater than ten
years), all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of GNMA;
some of which are supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; and some of which
are backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association.
MORTGAGE PASS-THROUGH SECURITIES. The Portfolio may invest in mortgage pass-
through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S.
9
<PAGE>
government (in the case of securities guaranteed by GNMA); or guaranteed by
U.S. government-sponsored corporations (such as FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. government to
purchase the agency's obligations). Mortgage pass-through securities may also
be issued by non-governmental issuers (such as commercial banks, savings and
loan institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers). See the Appendix for a further discussion of
these securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS. Fixed income
securities that the Portfolio may invest in also include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind
("PIK bonds"). Zero coupon and deferred interest bonds are debt obligations
which are issued or purchased at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at
a rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide that the issuer thereof may, at its
option, pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash. Such investments may
experience greater volatility in market value due to changes in interest rates
than debt obligations which make regular payments of interest. The Portfolio
will accrue income on such investments for tax and accounting purposes, as
required, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Portfolio's distribution obligations.
AMERICAN DEPOSITARY RECEIPTS. The Portfolio may invest in ADRs which are
certificates issued by a U.S. depository (usually a bank), that represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. Although ADRs are issued by a U.S. depository,
they are subject to many of the risks of foreign securities such as changes in
exchange rates and more limited information about foreign issuers.
The Portfolio may invest up to 20% (and generally expects to invest between
5% and 20%) of its net assets in foreign securities (including investments in
emerging markets or countries with limited or developing capital markets) (not
including ADRs). Investing in securities of foreign issuers generally involves
risks not ordinarily associated with investing in securities of domestic
issuers. (See "Appendix--Foreign Investments" and the SAI for a discussion of
the risks involved in foreign investing.)
In order to protect the value of the Portfolio's investments from interest
rate fluctuations, the Portfolio may enter into various hedging transactions,
such as interest rate swaps, and the purchase or sale of interest rate caps,
floors and collars. (See the SAI for information relating to these
transactions including related risks.)
The Portfolio may also purchase securities that are not registered under the
1933 Act ("restricted securities"), including those that can be offered and
sold to "qualified institutional buyers" under Rule 144A under the 1933 Act
("Rule 144A securities"). The Trust's Board of Trustees confirms based upon
information and recommendations provided by the Sub-Adviser that a specific
Rule 144A security is liquid and thus not subject to the Portfolio's
limitation on investing not more than 15% of its net assets in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to the
Sub-Adviser the daily function of determining and monitoring the liquidity of
Rule 144A securities. The Board, however, will retain sufficient oversight and
be ultimately responsible for the determinations. This investment practice
could have the effect of decreasing the level of liquidity in a Portfolio to
the extent that qualified institutional buyers become for a time uninterested
in purchasing Rule 144A securities held in the investment portfolio. Subject
to the Portfolio's 15% limitation on investments in illiquid investments and
subject to the diversification requirements of the Code, the Portfolio may
also invest in restricted securities that may not be sold under Rule 144A,
which presents certain risks. As a result, the Portfolio might not be able to
sell these securities when the Sub-Adviser wishes to do so, or might have to
sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
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While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate.
Because the Portfolio is expected to have a portfolio turnover rate of over
100%, transaction costs incurred by the Portfolio and the realized capital
gains and losses of the Portfolio may be greater than that of a portfolio with
a lesser turnover rate. The portfolio turnover rates of the Portfolio for the
periods ended December 31, 1996, 1995 and 1994 are set forth herein under
"Financial Highlights." (See also "Portfolio Turnover" in the SAI.)
ADDITIONAL PORTFOLIO INVESTMENTS AND TRANSACTIONS. The Portfolio may enter
into repurchase agreements to earn income on available cash or as a temporary
defensive measure. The Portfolio may seek to increase its income by lending
portfolio securities. The Portfolio may purchase securities on a "when issued"
or on a "delayed delivery" basis, which means that the securities will be
delivered to the Portfolio at a future date usually beyond customary
settlement time.
The Portfolio may invest in indexed securities whose value is linked to
foreign currencies, indices, or other financial indicators. The Portfolio may
enter into mortgage "dollar roll" transactions with selected banks and broker-
dealers. The Portfolio may invest a portion of its assets in loan
participations and other direct indebtedness.
The Portfolio also may purchase restricted securities, corporate asset-
backed securities, options on securities, options on stock indices, options on
foreign currencies, futures contracts, options on futures contracts and
forward foreign currency exchange contracts.
All of the Portfolio investments and transactions described in this section
are described in greater detail in the Appendix and the SAI.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated October 1, 1994, Equitable
Investment Services, Inc., 699 Walnut Street, Des Moines, Iowa 50309 (the
"Adviser"), manages the business and affairs of the Portfolios and the Trust,
subject to the control of the Trustees.
The Adviser is an Iowa corporation which was incorporated in 1969. The
Adviser is engaged in the business of providing investment advice to
affiliated insurance companies.
Under the Investment Advisory Agreement, the Adviser is obligated to
formulate a continuing program for the investment of the assets of each
Portfolio of the Trust in a manner consistent with each Portfolio's investment
objectives, policies and restrictions and to determine from time to time
securities to be purchased, sold, retained or lent by the Trust and implement
those decisions. The Investment Advisory Agreement also provides that the
Adviser shall manage the Trust's business and affairs and shall provide such
services required for effective administration of the Trust as are now
provided by employees or other agents engaged by the Trust. The Investment
Advisory Agreement further provides that the Adviser shall furnish the Trust
with office space and necessary personnel, pay ordinary office expenses, pay
all executive salaries of the Trust and furnish, without expense to the Trust,
the services of such members of its organization as may be duly elected
officers or Trustees of the Trust. The Investment Advisory Agreement provides
that Adviser may retain sub-advisers, at the Adviser's own cost and expense,
for the purpose of making investment recommendations and research information
available to the Trust.
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As full compensation for its services under the Investment Advisory
Agreement, the Trust pays the Adviser a monthly fee at the following annual
rates shown in the table below based on the average daily net assets of each
Portfolio.
<TABLE>
<CAPTION>
ADVISORY FEE
PORTFOLIO (ANNUAL RATE BASED ON AVERAGE DAILY NET ASSETS OF EACH PORTFOLIO)
------------ -----------------------------------------------------------------
<S> <C>
OTC .80% of first $300 million
.55% of average net assets over and above $300 million
Research .80% of first $300 million
.55% of average net assets over and above $300 million
Total Return .80% of first $300 million
.55% of average net assets over and above $300 million
</TABLE>
ADVISORY FEE WAIVER AND EXPENSE CAP
The Adviser has undertaken to reimburse each Portfolio for all operating
expenses, excluding management fees, that exceed .40% of each Portfolio's
average daily net assets. This undertaking is subject to termination at any
time without notice to shareholders. With respect to the OTC, Research and
Total Return Portfolios, the Adviser had agreed to reimburse the Trust for
expenses in excess of the voluntary expense limitations. For the year ended
December 31, 1996, no reimbursements were due the Portfolios for expenses in
excess of the voluntary expense limitations.
EXPENSES OF THE TRUST
The organizational expenses of the Trust are being amortized on a straight-
line basis over a period of five years (beginning with the commencement of
operations). If any of the initial shares (purchased by Equitable Life
Insurance Company of Iowa through its contribution of the initial "seed money"
to the Trust totaling $10,000 per Portfolio) are redeemed during the
amortization period by the holder thereof, the redemption proceeds will be
reduced by any unamortized organizational expenses in the same proportion as
the number of initial shares being redeemed bears to the number of initial
shares outstanding at the time of the redemption.
SUB-ADVISER
In accordance with each Portfolio's investment objective and policies and
under the supervision of Adviser and the Trust's Board of Trustees, the Sub-
Adviser is responsible for the day to day investment management of the
Portfolio, makes investment decisions for the Portfolio and places orders on
behalf of the Portfolio to effect the investment decisions made as provided in
a Sub-Advisory Agreement among the Sub-Adviser, the Adviser and the Trust.
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street,
Boston, Massachusetts 02116, is the Sub-Adviser for the OTC Portfolio, the
Research Portfolio and the Total Return Portfolio of the Trust.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $43.9 billion on behalf of approximately 1.9 million investor
accounts as of February 28, 1997. As of such date, the MFS organization
managed approximately $28.9 billion of assets in equity securities and $19.9
billion of assets in fixed income securities. Approximately $4.0 billion of
assets managed by MFS are invested in securities of foreign issuers and non-
U.S. dollar denominated securities of U.S. issuers. MFS is a subsidiary of Sun
Life Assurance Company of Canada (U.S.) which in turn is a wholly-owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D.
McNeil and Donald R. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is the
President and
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Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Stewart are the Chairman and the President, respectively,
of Sun Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the U.S.
since 1895, establishing a headquarters office in the U.S. in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
Kevin R. Parke is the portfolio manager for the Research Portfolio. Mr.
Parke oversees the selection of portfolio securities made by various equity
research analysts employed by MFS. Mr. Parke is a Senior Vice President--
Investments of MFS and has been employed as a portfolio manager by MFS since
1985.
David M. Calabro heads a team of portfolio managers of MFS for the Total
Return Portfolio. Mr. Calabro is a Vice President--Investments of MFS and
manages the equity portion of the portfolio along with Judith N. Lamb, a Vice
President--Investments of MFS, Lisa B. Nurme, a Vice President--Investments of
MFS and Maura Shaughnessy, a Vice President--Investments of MFS. Geoffrey L.
Kurinsky, a Senior Vice President--Investment manages the fixed income portion
of the portfolio and has been employed as a portfolio manager by MFS since
1987. Mr. Calabro has been employed as a portfolio manager by MFS since 1992.
Ms. Lamb has been employed as a portfolio manager by MFS since 1992. Ms. Nurme
has been employed as a portfolio manager by MFS since 1987. Ms. Shaughnessy
has been employed as a portfolio manager by MFS since 1991.
John W. Ballen and Mark Regan are the portfolio managers for the OTC
Portfolio. Mr. Ballen is a Senior Vice President--Investments and the Chief
Equity Officer at MFS and has been employed by MFS since 1984. Mr. Regan is a
Vice President--Investments at MFS and has been employed as a portfolio
manager by MFS since 1989.
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to MFS,
as full compensation for services rendered under the Sub-Advisory Agreement
with respect to the OTC, Research and Total Return Portfolios, the following
annual fees:
<TABLE>
<CAPTION>
<S> <C>
OTC Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
Research Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
Total Return Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
</TABLE>
SALES AND REDEMPTIONS
The separate accounts of the Life Companies place orders to purchase and
redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to the Variable Contracts issued by the Life
Companies. Orders received by the Trust are effected on days on which the New
York Stock Exchange is open for trading, at the net asset value per share next
determined after receipt of the order. For orders received before 4:00 p.m.
New York time, such purchases and redemptions of shares of each Portfolio are
effected at the respective net asset values per share determined as of 4:00
p.m. New York time on that day. See "Net Asset Value," below and
"Determination of Net Asset Value" in the Trust's SAI. Payment for redemptions
will be made within seven days after receipt of a redemption request in good
order. No fee is charged the separate accounts of the Life Companies when they
redeem Portfolio shares. The Trust may suspend the sale of shares at any time
and may refuse any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio
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securities or the determination of net asset value not reasonably practicable;
(iii) as the Securities and Exchange Commission may by order permit for the
protection of the security holders of the Trust; or (iv) at any time when the
Trust may, under applicable laws and regulations, suspend payment on the
redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of a share by dividing the
total value of its assets, less liabilities, by the number of shares
outstanding. Shares are valued as of 4:00 p.m. New York time on each day the
New York Stock Exchange is open.
Because foreign securities are quoted in foreign currencies which will be
translated into U.S. dollars at the New York cable transfer rates or at such
other rates as the Trustees may determine in computing net asset value,
fluctuations in the value of such currencies in relation to the U.S. dollar
will affect the net asset value of shares of a Portfolio investing in foreign
securities even though there has not been any change in the local currency
values of such securities.
Performance information for the Portfolios may also be presented from time
to time in advertisements and sales literature. The Portfolios may advertise
several types of performance information. These are the "yield," "average
annual total return" and "aggregate total return". Each of these figures is
based upon historical results and is not necessarily representative of the
future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net
investment income earned per share for a stated period (normally one month or
thirty days) and dividing the result by the net asset value per share at the
end of the valuation period. The average annual total return and aggregate
total return figures measure both the net investment income generated by, and
the effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in a Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the SAI.
Any Portfolio performance information presented will also include
performance information for the separate accounts of the Life Companies
investing in the Trust which will take into account insurance-related charges
and expenses under such insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe and Financial Services Week. Any such comparisons or rankings are
based on past performance and the statistical computation performed by
publications and services, and are not necessarily indications of future
performance. Because the Portfolios are managed investment vehicles investing
in a wide variety of securities, the securities owned by a Portfolio will not
match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment
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company, a Portfolio will not be subject to federal income tax on its net
ordinary income and net realized capital gains to the extent such income and
gains are distributed to the separate accounts of the Life Company which hold
its shares. For further information concerning federal income tax consequences
for the holders of the Variable Contracts of the Life Company, investors
should consult the prospectus used in connection with the issuance of their
Variable Contracts.
The Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains,
if any, at least annually. Distributions of ordinary income and capital gains
will be made in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Companies
will be informed at least annually about the amount and character of
distributions from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws
of Massachusetts by a Declaration of Trust dated May 11, 1994 (the
"Declaration of Trust"). Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners for
the obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with Trust property or the
acts, obligations, or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of a Portfolio's property of any shareholder
of that Portfolio held personally liable for the claims and liabilities to
which a shareholder may become subject by reason of being or having been a
shareholder. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Portfolio itself would be unable to meet its obligations. A copy of the
Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial
interest. Shares of the Trust are entitled to one vote per share (with
proportional voting for fractional shares) and are freely transferable, and,
in liquidation of a Portfolio, shareholders of the Portfolio are entitled to
receive pro rata the net assets of the Portfolio. Although no Portfolio is
required to hold annual meetings of its shareholders, shareholders have the
right to call a meeting to elect or remove Trustees or to take other actions
as provided in the Declaration of Trust. Shareholders have no preemptive
rights. The Trust's custodian, transfer and dividend-paying agent is State
Street Bank and Trust Company.
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Adviser have
adopted policies that restrict securities trading in personal accounts of the
portfolio managers and others who normally come into possession of information
on portfolio transactions. These policies comply, in all material respects,
with the recommendations of the Investment Company Institute.
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APPENDIX
SECURITIES AND INVESTMENT PRACTICES
In attempting to achieve its investment objective or policies each Portfolio
employs a variety of instruments, strategies and techniques, which are
described in greater detail below. Risks and restrictions associated with these
practices are also described. Policies and limitations are considered at the
time a security or instrument is purchased or a practice initiated. Generally,
securities need not be sold if subsequent changes in market value result in
applicable limitations not being met.
A Portfolio might not buy all of these securities or use all of these
techniques to the full extent permitted unless the Sub-Adviser, subject to
oversight by Adviser, believes that doing so will help the Portfolio achieve
its goal. As a shareholder, you will receive Portfolio reports every six months
detailing the Trust's holdings and describing recent investment practices.
The investment guidelines set forth below may be changed at any time without
shareholder consent by vote of the Board of Trustees of the Trust. A complete
list of investment restrictions that identifies additional restrictions that
cannot be changed without the approval of a majority of an affected Portfolio's
outstanding shares is contained in the SAI.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS
Certain of the Portfolios may invest in securities of foreign issuers
directly or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other similar securities representing
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities they represent. ADRs are
receipts typically issued by a United States bank or trust company evidencing
beneficial ownership of the underlying foreign securities. EDRs are receipts
issued by a European financial institution evidencing a similar arrangement.
Generally, ADRs, in registered form, are designed for use in the United States
securities markets, and EDRs, in bearer form, are designed for use in European
securities markets.
ASSET-BACKED SECURITIES
Certain of the Portfolios may purchase asset-backed securities, which
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool of assets similar to
one another. Assets generating such payments may include motor vehicle
installment purchase obligations, credit card receivables and home equity
loans.
BANK OBLIGATIONS
All of the Portfolios may invest in Bank Obligations, which include
certificates of deposit, time deposits and bankers' acceptances of U.S.
commercial banks or savings and loan institutions which are determined by the
Sub-Adviser to present minimal credit risks. Certain of the Portfolios may
invest in foreign-currency denominated Bank Obligations, including Euro-
currency instruments and securities of U.S. and foreign banks and thrifts.
BORROWING
Each of the Portfolios may borrow money (up to 33 1/3% of its assets) for
temporary or emergency purposes. If a Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. If the
Portfolio makes additional investments while borrowings are outstanding, this
may be construed as a form of leverage.
Borrowing, including reverse repurchase agreements and, in certain
circumstances, dollar rolls, creates leverage which increases a Portfolio's
investment risk. If the income and gains on the securities purchased with
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the proceeds of borrowings exceed the cost of the arrangements, the
Portfolio's earnings or net asset value will increase faster than would be the
case otherwise. Conversely, if the income and gains fail to exceed the costs,
earnings or net asset value will decline faster than would otherwise be the
case.
COMMON STOCK AND OTHER EQUITY SECURITIES
Common Stocks represent an equity (ownership) interest in a corporation.
This ownership interest generally gives a Portfolio the right to vote on
measures affecting the company's organization and operations.
Certain of the Portfolios may also buy securities such as convertible debt,
preferred stock, warrants or other securities exchangeable for shares of
Common Stock. In selecting equity investments for a Portfolio, the Sub-Adviser
will generally invest the Portfolio's assets in industries and companies that
it believes are experiencing favorable demand for their products and services
and which operate in a favorable competitive and regulatory climate.
CONVERTIBLE SECURITIES
A convertible security is a security that may be converted either at a
stated price or rate within a specified period of time into a specified number
of shares of Common Stock. By investing in Convertible Securities, a Portfolio
seeks the opportunity, through the conversion feature, to participate in the
capital appreciation of the Common Stock into which the securities are
convertible, while earning a higher fixed rate of return than is available in
Common Stocks.
CURRENCY MANAGEMENT
A Portfolio's flexibility to participate in higher yielding debt markets
outside of the United States may allow the Portfolio to achieve higher yields
than those generally obtained by domestic money market funds and short-term
bond investments. When a Portfolio invests significantly in securities
denominated in foreign currencies, however, movements in foreign currency
exchange rates versus the U.S. dollar are likely to impact the Portfolio's
share price stability relative to domestic short-term income funds.
Fluctuations in foreign currencies can have a positive or negative impact on
returns. Normally, to the extent that the Portfolio is invested in foreign
securities, a weakening in the U.S. dollar relative to the foreign currencies
underlying a Portfolio's investments should help increase the net asset value
of the Portfolio. Conversely, a strengthening in the U.S. dollar versus the
foreign currencies in which a Portfolio's securities are denominated will
generally lower the net asset value of the Portfolio. The Portfolio's Sub-
Adviser attempts to minimize exchange rate risk through active portfolio
management, including hedging currency exposure through the use of futures,
options and forward currency transactions and attempting to identify bond
markets with strong or stable currencies. There can be no assurance that such
hedging will be successful and such transactions, if unsuccessful, could
result in additional losses or expenses to a Portfolio.
DOLLAR ROLL TRANSACTIONS
Certain Portfolios seeking a high level of current income may enter into
dollar rolls or "covered rolls" in which the Portfolio sells securities
(usually Mortgage-Backed Securities) and simultaneously contracts to purchase,
typically in 30 to 60 days, substantially similar, but not identical
securities, on a specified future date. The proceeds of the initial sale of
securities in the Dollar Roll Transactions may be used to purchase long-term
securities which will be held during the roll period. During the roll period,
the Portfolio forgoes principal and interest paid on the securities sold at
the beginning of the roll period. The Portfolio is compensated by the
difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or
cash equivalent securities position that matures on or before the forward
settlement date of the dollar roll transaction. As used herein the term
"dollar roll" refers to dollar rolls that are not "covered rolls." At the end
of the roll commitment period, the Portfolio may or may not take delivery of
the securities the Portfolio has contracted to purchase.
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The Portfolio will establish a segregated account with its custodian in
which it will maintain cash, U.S. Government Securities or other liquid high-
grade debt obligations equal in value at all times to its obligations in
respect of dollar rolls, and, accordingly, the Portfolio will not treat such
obligations as senior securities for purposes of the 1940 Act. "Covered rolls"
are not subject to these segregation requirements. Dollar Roll Transactions
may be considered borrowings and are, therefore, subject to the borrowing
limitations applicable to the Portfolios.
EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL ORGANIZATIONS
Portfolios authorized to invest in securities of foreign issuers may invest
assets in equity and debt securities issued or guaranteed by Supranational
Organizations, such as obligations issued or guaranteed by the Asian
Development Bank, Inter-American Development Bank, International Bank for
Reconstruction and Development (World Bank), African Development Bank,
European Coal and Steel Community, European Economic Community, European
Investment Bank and the Nordic Investment Bank.
EXCHANGE RATE-RELATED SECURITIES
Certain of the Portfolios may invest in securities which are indexed to
certain specific foreign currency exchange rates. The terms of such security
would provide that the principal amount or interest payments are adjusted
upwards or downwards (but not below zero) at payment to reflect fluctuations
in the exchange rate between two currencies while the obligation is
outstanding, depending on the terms of the specific security. A Portfolio will
purchase such security with the currency in which it is denominated and will
receive interest and principal payments thereon in the currency, but the
amount of principal or interest payable by the issuer will vary in proportion
to the change (if any) in the exchange rate between the two specific
currencies between the date the instrument is issued and the date the
principal or interest payment is due. The staff of the SEC is currently
considering whether a mutual fund's purchase of this type of security would
result in the issuance of a "senior security" within the meaning of the 1940
Act. The Trust believes that such investments do not involve the creation of
such a senior security, but nevertheless undertakes, pending the resolution of
this issue by the staff, to establish a segregated account with respect to
such investments and to maintain in such account cash not available for
investment or U.S. Government Securities or other liquid high quality debt
securities having a value equal to the aggregate principal amount of
outstanding securities of this type.
Investment in Exchange Rate-Related Securities entails certain risks. There
is the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an Exchange Rate-Related
Security is linked. In addition, there is no assurance that sufficient trading
interest to create a liquid secondary market will exist for a particular
Exchange Rate-Related Security due to conditions in the debt and foreign
currency markets. Illiquidity in the forward foreign exchange market and the
high volatility of the foreign exchange market may from time to time combine
to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.
FIXED-INCOME SECURITIES
The market value of fixed-income obligations held by the Portfolios and,
consequently, the net asset value per share of the Portfolios can be expected
to vary inversely to changes in prevailing interest rates. Investors should
also recognize that, in periods of declining interest rates, to the extent the
Portfolios are invested in fixed income obligations, the yields of the
Portfolios will tend to be somewhat higher than prevailing market rates and,
in periods of rising interest rates, the Portfolios' yields will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the Portfolios from the continuous sales of their shares will, to the
extent that their assets are to be invested in fixed income obligations,
likely be invested in instruments producing lower yields than the balance of
their assets, thereby reducing current yields. In periods of rising interest
rates, the opposite can be expected to occur. Prices of longer term securities
generally increase or decrease more sharply than those of shorter term
securities in response to interest rate changes. In addition, obligations
purchased by the Portfolios that are rated in the lower categories are
considered to have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
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capacity to make principal and interest payments than is the case with higher
grade securities. (See "Lower Rated Securities" in this Appendix.)
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Certain of the Portfolios may engage in foreign currency exchange
transactions. Portfolios that buy and sell securities denominated in
currencies other than the U.S. dollar, and receive interest, dividends and
sale proceeds in currencies other than the U.S. dollar, may enter into foreign
currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. A
Portfolio can either enter into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
use forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Portfolio
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward foreign currency exchange contract generally has no deposit
requirement, and is traded at a net price without a commission. When a
Portfolio engages in forward contracts for the sale or purchase of currencies,
the Portfolio will either cover its position or establish a segregated
account. The Portfolio will consider its position covered if it has securities
in the currency subject to the forward contract, or otherwise has the right to
obtain that currency at no additional cost. In the alternative, the Trust, on
behalf of the Portfolio, will place cash which is not available for
investment, liquid, high-grade debt securities or other securities
(denominated in the foreign currency subject to the forward contract) in a
separate account. The amounts in such separate account will equal the value of
the Portfolio's total assets which are committed to the consummation of
foreign currency exchange contracts. If the value of the securities placed in
the separate account declines, the Trust, on behalf of the Portfolio, will
place additional cash or securities in the account on a daily basis so that
the value of the account will equal the amount of the Portfolio's commitments
with respect to such contracts. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices of the
Portfolio's portfolio securities or in foreign exchange rates, or prevent loss
if the prices of these securities should decline.
A Portfolio may enter into foreign currency exchange transactions for
hedging purposes as well as for non-hedging purposes. Transactions are entered
into for hedging purposes in an attempt to protect against changes in foreign
currency exchange rates between the trade and settlement dates of specific
securities transactions or changes in foreign currency exchange rates that
would adversely affect a portfolio position or an anticipated portfolio
position. Although these transactions tend to minimize the risk of loss due to
a decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might be realized should the value of the hedged
currency increase. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible because
the future value of these securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain. In addition,
when the Sub-Adviser believes that the currency of a specific country may
deteriorate against another currency, it may enter into a forward contract to
sell the less attractive currency and buy the more attractive one. The amount
in question could be less than or equal to the value of the Portfolio's
securities denominated in the less attractive currency. The Portfolio may also
enter into a forward contract to sell a currency which is linked to a currency
or currencies in which some or all of the Portfolio's portfolio securities are
or could be denominated, and to buy U.S. dollars. These practices are referred
to as "cross hedging" and "proxy hedging."
A Portfolio may enter into foreign currency exchange transactions for other
than hedging purposes which presents greater profit potential but also
involves increased risk. For example, if the Sub-Adviser believes that the
value of a particular foreign currency will increase or decrease relative to
the value of the U.S. dollar, the Portfolio may purchase or sell such
currency, respectively, through a forward foreign currency exchange contract.
If the expected changes in the value of the currency occur, the Portfolio will
realize profits which will increase
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its gross income. Where exchange rates do not move in the direction or to the
extent anticipated, however, the Portfolio may sustain losses which will
reduce its gross income. Such transactions, therefore, could be considered
speculative.
Forward currency exchange contracts are agreements to exchange one currency
for another--for example, to exchange a certain amount of U.S. dollars for a
certain amount of Japanese Yen--at a future date and specified price.
Typically, the other party to a currency exchange contract will be a
commercial bank or other financial institution. Because there is a risk of
loss to the Portfolio if the other party does not complete the transaction,
the Portfolio's Sub-Adviser will enter into foreign currency exchange
contracts only with parties approved by the Trust's Board of Trustees.
A Portfolio may maintain "short" positions in forward currency exchange
transactions in which the Portfolio agrees to exchange currency that it
currently does not own for another currency--for example, to exchange an
amount of Japanese Yen that it does not own for a certain amount of U.S.
dollars--at a future date and specified price in anticipation of a decline in
the value of the currency sold short relative to the currency that the
Portfolio has contracted to receive in the exchange.
While such actions are intended to protect the Portfolio from adverse
currency movements, there is a risk that currency movements involved will not
be properly anticipated. Use of this technique may also be limited by
management's need to protect the status of the Portfolio as a regulated
investment company under the Internal Revenue Code of 1986, as amended. The
projection of currency market movements is extremely difficult, and the
successful execution of currency strategies is highly uncertain.
FOREIGN INVESTMENTS
Certain Portfolios may invest in securities of foreign issuers. There are
certain risks involved in investing in foreign securities, including those
resulting from fluctuations in currency exchange rates, devaluation of
currencies, future political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws
or restrictions, reduced availability of public information concerning
issuers, and the fact that foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic companies. Moreover, securities of many foreign companies may be less
liquid and the prices more volatile than those of securities of comparable
domestic companies. With respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Portfolios,
including the withholding of dividends.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolios hold various foreign
currencies from time to time, the value of the net assets of the Portfolios as
measured in U.S. dollars will be affected favorably or unfavorably by changes
in exchange rates. The cost of the Portfolio's currency exchange transactions
will generally be the difference between the bid and offer spot rate of the
currency being purchased or sold. In order to protect against uncertainty in
the level of future foreign currency exchange rates, the Portfolios are
authorized to enter into certain foreign currency exchange transactions.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. Extensive research of the economic,
political and social factors that influence global markets is conducted by the
Sub-Adviser. Particular attention is given to country-specific analysis,
reviewing the strength or weakness of a country's overall economy, the
government policies influencing business conditions and the outlook for the
country's currency. Certain Portfolios are authorized to engage in foreign
currency options, futures, options on futures and forward currency contract
transactions for hedging and/or other permissible purposes.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, the Portfolios' foreign investments may
be less liquid and their prices may be more volatile than comparable
investments in securities of United States companies. Moreover, the settlement
periods for foreign securities, which are often longer than
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those for securities of United States issuers, may affect portfolio liquidity.
In buying and selling securities on foreign exchanges, the Portfolio normally
pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. In addition, there is generally less
governmental supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.
Certain of the Portfolios may invest, as described below, in countries or
regions with relatively low gross national product per capita compared to the
world's major economies, and in countries or regions with the potential for
rapid economic growth (emerging markets). Emerging markets will include any
country: (i) having an "emerging stock market" as defined by the International
Finance Corporation; (ii) with lowto middle-income economies according to the
International Bank for Reconstruction and Development (the World Bank); (iii)
listed in World Bank publications as developing; or (iv) determined by the
Sub-Adviser to be an emerging market as defined above. The Portfolio may
invest in securities of: (i) companies the principal securities trading market
for which is an emerging market country; (ii) companies organized under the
laws of, and with a principal office in, an emerging market country; (iii)
companies whose principal activities are located in emerging market countries;
(iv) companies traded in any market that derive 50% or more of their total
revenue from either goods or services produced in an emerging market or sold
in an emerging market; (v) companies that have 50% or more of their assets in
an emerging market country; or (vi) the security is issued or guaranteed by
the government of an emerging market country or any of its agencies,
authorities or instrumentalities.
The risks of investing in foreign securities may be intensified in the case
of investments in emerging markets. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the
world, reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be
predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to
increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements.
FUTURES AND OPTIONS ON FUTURES
When deemed appropriate by its Sub-Adviser, certain Portfolios may enter
into financial or currency futures and related options that are traded on a
U.S. exchange or board of trade or, to the extent permitted by applicable law,
on exchanges located outside the U.S., for hedging purposes or for non-hedging
purposes to the extent permitted by applicable law. A Portfolio may not enter
into futures and options contracts for which aggregate initial margin deposits
and premiums paid for unexpired futures options entered into for purposes
other than "bona fide hedging" positioning as defined in regulations adopted
by the Commodity Futures Trading Commission exceed 5% of the fair market value
of the Portfolio's net assets, after taking into account unrealized profits
and unrealized losses on futures contracts into which it has entered. With
respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract will always be covered by cash and
cash equivalents set aside plus accrued profits held at the futures commission
merchant.
A financial or currency futures contract provides for the future sale by one
party and the purchase by the other party of a specified amount of a
particular financial instrument or currency (e.g., debt security or currency)
at a specified price, date, time and place. An index futures contract is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. An option on a futures contract generally
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time prior
to the expiration date of the option.
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The purpose of entering into a futures contract by a Portfolio is to either
enhance return or to protect the Portfolio from fluctuations in the value of
its securities caused by anticipated changes in interest rates, currency or
market conditions without necessarily buying or selling the securities. The
use of futures contracts and options on futures contracts involves several
risks. There can be no assurance that there will be a correlation between
price movements in the underlying securities, currencies or index, on the one
hand, and price movements in the securities which are the subject of the
futures contract or option on futures contract, on the other hand. Positions
in futures contracts and options on futures contracts may be closed out only
on the exchange or board of trade on which they were entered into, and there
can be no assurance that an active market will exist for a particular contract
or option at any particular time. If a Portfolio has hedged against the
possibility of an increase in interest rates or bond prices adversely
affecting the value of securities held in its portfolio and rates or prices
decrease instead, a Portfolio will lose part or all of the benefit of the
increased value of securities that it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if a Portfolio had insufficient cash, it may have to sell securities to meet
daily variation margin requirements at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates or bond prices, as
the case may be. In addition, the Portfolio would pay commissions and other
costs in connection with such investments, which may increase the Portfolio's
expenses and reduce its return. While utilization of options, futures
contracts and similar instruments may be advantageous to the Portfolio, if the
Portfolio's Sub-Adviser is not successful in employing such instruments in
managing the Portfolio's investments, the Portfolio's performance will be
worse than if the Portfolio did not make such investments.
Losses incurred in futures contracts and options on futures contracts and
the costs of these transactions will adversely affect a Portfolio's
performance.
GEOGRAPHICAL AND INDUSTRY CONCENTRATION
Where a Portfolio invests at least 25% of its assets in Bank Obligations,
the Portfolio's investments may be subject to greater risk than a Portfolio
that does not concentrate in the banking industry. In particular, Bank
Obligations may be subject to the risks associated with interest rate
volatility, changes in federal and state laws and regulations governing
banking and the inability of borrowers to pay principal and interest when due.
In addition, foreign banks present the risks of investing in foreign
securities generally and are not subject to reserve requirements and other
regulations comparable to those of U.S. Banks.
GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES
Certain Portfolios may invest in Government Stripped Mortgage-Backed
Securities issued or guaranteed by the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"). These securities represent
beneficial ownership interests in either periodic principal distributions
("principal-only") or interest distributions ("interest-only") on mortgage-
backed certificates issued by GNMA, FNMA or FHLMC, as the case may be. The
certificates underlying the Government Stripped Mortgage-Backed Securities
represent all or part of the beneficial interest in pools of mortgage loans.
The Portfolios will invest in interest-only Government Stripped Mortgage-
Backed Securities in order to enhance yield or to benefit from anticipated
appreciation in value of the securities at times when the appropriate Sub-
Adviser believes that interest rates will remain stable or increase. In
periods of rising interest rates, the value of interest-only Government
Stripped Mortgage-Backed Securities may be expected to increase because of the
diminished expectation that the underlying mortgages will be prepaid. In this
situation the expected increase in the value of interest-only Government
Stripped Mortgage-Backed Securities may offset all or a portion of any decline
in value of the portfolio securities of the Portfolios. Investing in
Government Stripped Mortgage-Backed Securities involves the risks normally
associated with investing in mortgage-backed securities issued by government
or government-related entities. See "Mortgage-Backed Securities" below. In
addition, the yields on interest-only and principal-only Government Stripped
Mortgage-Backed Securities are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing
the securities. If a decline in the level of prevailing interest rates results
in a rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the
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yield to maturity on interest-only Government Stripped Mortgage-Backed
Securities and increasing the yield to maturity on principal-only Government
Stripped Mortgage-Backed Securities. Conversely, if an increase in the level
of prevailing interest rates results in a rate of principal prepayments lower
than anticipated, distributions of principal will be deferred, thereby
increasing the yield to maturity on interest-only Government Stripped
Mortgage-Backed Securities and decreasing the yield to maturity on principal-
only Government Stripped Mortgage-Backed Securities. Sufficiently high
prepayment rates could result in the Portfolio not fully recovering its
initial investment in an interest-only Government Stripped Mortgage-Backed
Security. Government Stripped Mortgage-Backed Securities are currently traded
in an over-the-counter market maintained by several large investment banking
firms. There can be no assurance that the Portfolio will be able to effect a
trade of a Government Stripped Mortgage-Backed Security at a time when it
wishes to do so. The Portfolios will acquire Government Stripped Mortgage-
Backed Securities only if a liquid secondary market for the securities exists
at the time of acquisition.
INTEREST RATE TRANSACTIONS
Certain Portfolios may engage in certain Interest Rate Transactions, such as
swaps, caps, floors and collars. Interest rate swaps involve the exchange with
another party of commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such
interest rate floor. An interest rate collar combines the elements of
purchasing a cap and selling a floor. The collar protects against an interest
rate rise above the maximum amount but gives up the benefits of an interest
rate decline below the minimum amount. The net amount of the excess, if any,
of a Portfolio's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account with the Trust's
custodian. If there is a default by the other party to the transaction, the
Portfolio will have contractual remedies pursuant to the agreements related to
the transactions.
ILLIQUID SECURITIES
Up to 10% (15% for the OTC Portfolio and Total Return Portfolio) of the net
assets of a Portfolio may be invested in securities that are not readily
marketable, including, where applicable: (1) Repurchase Agreements with
maturities greater than seven calendar days; (2) time deposits maturing in
more than seven calendar days; (3) to the extent a liquid secondary market
does not exist for the instruments, futures contracts and options thereon; (4)
certain over-the-counter options, as described in the SAI; (5) certain
variable rate demand notes having a demand period of more than seven days; and
(6) securities the disposition of which is restricted under Federal securities
laws (excluding Rule 144A Securities, described below). The Portfolios will
not include for purposes of the restrictions on illiquid investments,
securities sold pursuant to Rule 144A under the Securities Act of 1933, as
amended, so long as such securities meet liquidity guidelines established by
the Trust's Board of Trustees. Under Rule 144A, securities which would
otherwise be restricted may be sold by persons other than issuers or dealers
to qualified institutional buyers.
INVESTMENT COMPANIES
When a Portfolio's Sub-Adviser believes that it would be beneficial for the
Portfolio and appropriate under the circumstances, the Sub-Adviser may invest
up to 10% of the Portfolio's assets in securities of mutual funds. As a
shareholder in any such mutual fund, the Portfolio will bear its ratable share
of the mutual fund's expenses, including management fees, and will remain
subject to the Portfolio's advisory and administration fees with respect to
the assets so invested.
LEASE OBLIGATION BONDS
Lease Obligation Bonds are mortgages on a facility that is secured by the
facility and are paid by a lessee over a long term. The rental stream to
service the debt as well as the mortgage are held by a collateral trustee on
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behalf of the public bondholders. The primary risk of such instrument is the
risk of default. Under the lease indenture, the failure to pay rent is an
event of default. The remedy to cure default is to rescind the lease and sell
the assets. If the lease obligation is not readily marketable or market
quotations are not readily available, such lease obligations will be subject
to a Portfolio's limit on Illiquid Securities.
LENDING OF SECURITIES
All of the Portfolios have the ability to lend portfolio securities to
brokers and other financial organizations. By lending its securities, a
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in short-
term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. Government Securities are used as collateral. These loans,
if and when made, may not exceed 20% of a Portfolio's total assets taken at
value. Loans of portfolio securities by a Portfolio will be collateralized by
cash, irrevocable letters of credit or U.S. Government Securities that are
maintained at all times in an amount at least equal to the current market
value of the loaned securities. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for
the account of the Portfolio involved. The Sub-Adviser will monitor on an
ongoing basis the credit worthiness of the institutions to which the Portfolio
lends securities.
LOWER-RATED SECURITIES
Certain Portfolios may invest in debt securities rated in the lower NRSRO
categories (e.g., BBB- by S&P or Baa3 by Moody's), or of equivalent quality as
determined by the Sub-Adviser. Securities rated BB+, Ba1 or lower are commonly
referred to as high yield securities or "junk bonds."
Securities rated below investment grade as well as unrated securities are
often considered to be speculative and usually entail greater risk (including
the possibility of default or bankruptcy of the issuers). Such securities
generally involve greater price volatility and risk of principal and income,
and may be less liquid, than securities in higher rated categories. Both price
volatility and illiquidity may make it difficult for the Portfolio to value
certain of these securities at certain times and these securities may be
difficult to sell under certain market conditions. Prices for securities rated
below investment grade may be affected by legislative and regulatory
developments. (See SAI for additional information pertaining to lower-rated
securities including risks.)
MORTGAGE-BACKED SECURITIES
Certain of the Portfolios may invest in Mortgage-Backed Securities, which
represent an interest in a pool of mortgage loans. The primary government
issuers or guarantors of Mortgage-Backed Securities are GNMA, FHMA and FHLMC.
Mortgage-Backed Securities provide a monthly payment consisting of interest
and principal payments. Additional payments may be made out of unscheduled
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs that may be
incurred. Prepayments of principal on Mortgage-Backed Securities may tend to
increase due to refinancing of mortgages as interest rates decline. Prompt
payment of principal and interest on GNMA mortgage pass-through certificates
is backed by the full faith and credit of the U.S. government. FNMA guaranteed
mortgage pass-through certificates and FHLMC participation certificates are
solely the obligations of those entities but are supported by the
discretionary authority of the U.S. Government to purchase the agencies'
obligations. Collateralized Mortgage Obligations are a type of bond secured by
an underlying pool of mortgages or mortgage pass-through certificates that are
structured to direct payments on underlying collateral to different series or
classes of the obligations.
To the extent that a Portfolio purchases mortgage-related or mortgage-backed
securities at a premium, prepayments may result in some loss of the
Portfolio's principal investment to the extent of the premium paid. The yield
of the Portfolio may be affected by reinvestment of prepayments at higher or
lower rates than the original investment. In addition, like other debt
securities, the value of mortgage-related securities, including government and
government-related mortgage pools, will generally fluctuate in response to
market interest rates.
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NEW ISSUERS
A Portfolio may invest up to 5% (except for the OTC Portfolio which may
invest without limitation) of its assets in the securities of issuers which
have been in continuous operation for less than three years.
OPTIONS ON SECURITIES
OPTION PURCHASE. Certain Portfolios may purchase put and call options on
portfolio securities in which they may invest that are traded on a U.S. or
foreign securities exchange or in the over-the-counter market. A Portfolio may
utilize up to 10% of its assets to purchase put options on portfolio
securities and may do so at or about the same time that it purchases the
underlying security or at a later time and may also utilize up to 10% of its
assets to purchase call options on securities in which it is authorized to
invest. By buying a put, the Portfolios limit their risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by the Portfolio in
order to acquire the underlying securities for the Portfolio at a price that
avoids any additional cost that would result from a substantial increase in
the market value of a security. The Portfolios may also purchase call options
to increase their return to investors at a time when the call is expected to
increase in value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Portfolio, prior to the exercise of options that it
has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs.
COVERED OPTION WRITING. Certain Portfolios may write put and call options on
securities for hedging purposes. The Portfolios realize fees (referred to as
"premiums") for granting the rights evidenced by the options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price at
any time during the option period. In contrast, a call option embodies the
right of its purchaser to compel the writer of the option to sell to the
option holder an underlying security at a specified price at anytime during
the option period.
Upon the exercise of a put option written by a Portfolio, the Portfolio may
suffer a loss equal to the difference between the price at which the Portfolio
is required to purchase the underlying security and its market value at the
time of the option exercise, less the premium received for writing the option.
Upon the exercise of a call option written by the Portfolio, the Portfolio may
suffer a loss equal to the excess of the security's market value at the time
of the option exercise over the Portfolio's acquisition cost of the security,
less the premium received for writing the option.
Each Portfolio will comply with regulatory requirements of the SEC and the
Commodity Futures Trading Commission with respect to coverage of options and
futures positions by registered investment companies and, if the guidelines so
require, will set aside cash and/or appropriate liquid assets in a segregated
custodial account in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or options position is outstanding,
unless replaced with other permissible assets. As a result, there is a
possibility that the segregation of a large percentage of a Portfolio's assets
may force the Portfolio to close out futures and options positions and/or
liquidate other portfolio securities, any of which may occur at
disadvantageous prices, in order for the Portfolio to meet redemption requests
or other current obligations.
The principal reason for writing covered call and put options on a
securities portfolio is to attempt to realize, through the receipt of
premiums, a greater return than would be realized on the securities alone. In
return for a premium, the writer of a covered call option forfeits the rights
to any appreciation in the value of the underlying security above the strike
price for the life of the option (or until a closing purchase transaction can
be effected). Nevertheless, the call writer retains the risk of a decline in
the price of the underlying security. Similarly, the principal reason for
writing covered put options is to realize income in the form of premiums. The
writer of the covered put option accepts the risk of a decline in the price of
the underlying security. The size of the premiums that the Portfolios may
receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.
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The Portfolios may engage in closing purchase transactions to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the
outstanding option's expiration). To effect a closing purchase transaction,
the Portfolios would purchase, prior to the holder's exercise of an option
that the Portfolio has written, an option of the same series as that on which
the Portfolio desires to terminate its obligation. The obligation of the
Portfolio under an option that it has written would be terminated by a closing
purchase transaction, but the Portfolio would not be deemed to own an option
as the result of the transaction. There can be no assurance that the Portfolio
will be able to effect closing purchase transactions at a time when it wishes
to do so. The ability of the Portfolio to engage in closing transactions with
respect to options depends on the existence of a liquid secondary market.
While the Portfolio will generally purchase or write options only if there
appears to be a liquid secondary market for the options purchased or sold, for
some options no such secondary market may exist or the market may cease to
exist. To facilitate closing purchase transactions, however, the Portfolio
will ordinarily write options only if a secondary market for the options
exists on a U.S. securities exchange or in the over-the-counter market.
Option writing for the Portfolios may be limited by position and exercise
limits established by U.S. securities exchanges and the National Association
of Securities Dealers, Inc. and by requirements of the Code for qualification
as a regulated investment company. In addition to writing covered put and call
options to generate current income, the Portfolios may enter into options
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position.
A hedge is designed to offset a loss on a portfolio position with a gain on
the hedge position; at the same time, however, a properly correlated hedge
will result in a gain on the portfolio position's being offset by a loss on
the hedge position. The Portfolios bear the risk that the prices of the
securities being hedged will not move in the same amount as the hedge. A
Portfolio will engage in hedging transactions only when deemed advisable by
its Sub-Adviser. Successful use by the Portfolio of options will depend on its
Sub-Adviser's ability to correctly predict movements in the direction of the
stock underlying the option used as a hedge. Losses incurred in hedging
transactions and the costs of these transactions will adversely affect the
Portfolio's performance.
OPTIONS ON FOREIGN CURRENCIES
A Portfolio may purchase and write put and call options on foreign
currencies for the purpose of hedging against declines in the U.S. dollar
value of foreign currency-denominated portfolio securities and against
increases in the U.S. dollar cost of such securities to be acquired.
Generally, transactions relating to Options on Foreign Currencies occur in the
over-the-counter market. As in the case of other kinds of options, however,
the writing of an option on a foreign currency constitutes only a partial
hedge, up to the amount of the premium received, and the Portfolio could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of rate movements adverse to the Portfolio's
position, it may forfeit the entire amount of the premium plus related
transaction costs. There is no specific percentage limitation on the
Portfolio's investments in Options on Foreign Currencies. See the SAI for
further discussion of the use, risks and costs of Options on Foreign
Currencies and Over the Counter Options.
OPTIONS ON INDEXES
A Portfolio may, subject to applicable securities regulations, purchase and
write put and call options on stock and fixed-income indexes listed on foreign
and domestic stock exchanges. A stock index fluctuates with changes in the
market values of the stocks included in the index. An example of a domestic
stock index is the Standard and Poor's 500 Stock Index. Examples of foreign
stock indexes are the Canadian Market Portfolio Index (Montreal Stock
Exchange), The Financial Times--Stock Exchange 100 (London Stock Exchange) and
the Toronto Stock Exchange Composite 300 (Toronto Stock Exchange). Examples of
fixed-income indexes include the Lehman Government/Corporate Bond Index and
the Lehman Treasury Bond Index.
Options on Indexes are generally similar to options on securities except
that the delivery requirements are different. Instead of giving the right to
take or make delivery of a security at a specified price, an option on an
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index gives the holder the right to receive a cash "exercise settlement
amount" equal to (a) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed "index multiplier." Receipt of this cash amount will
depend upon the closing level of the index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be equal to
such difference between the closing price of the index and the exercise price
of the option expressed in dollars or a foreign currency, as the case may be,
times a specified multiple. The writer of the option is obligated, in return
for the premium received, to make a delivery of this amount. The writer may
offset its position in index options prior to expiration by entering into a
closing transaction on an exchange or the option may expire unexercised.
The effectiveness of purchasing or writing options as a hedging technique
will depend upon the extent to which price movements in the portion of the
securities portfolio of a Portfolio correlate with price movements of the
stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular
stock, whether a Portfolio will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock. Accordingly, successful use of Options on Indexes by a Portfolio will
be subject to its Sub-Adviser's ability to predict correctly movements in the
direction of the market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Options on securities indexes entail risks in addition to the risks of
options on securities. Because exchange trading of options on securities
indexes is relatively new, the absence of a liquid secondary market to close
out an option position is more likely to occur, although a Portfolio generally
will only purchase or write such an option if the Sub-Adviser believes the
option can be closed out. Because options on securities indexes require
settlement in cash, a Portfolio may be forced to liquidate portfolio
securities to meet settlement obligations. A Portfolio will engage in stock
index options transactions only when determined by its Sub-Adviser to be
consistent with its efforts to control risk. There can be no assurance that
such judgement will be accurate or that the use of these portfolio strategies
will be successful.
OVER-THE-COUNTER OPTIONS
Certain Portfolios may write or purchase options in privately negotiated
domestic or foreign transactions ("OTC Options"), as well as exchange-traded
or "listed" options. OTC Options can be closed out only by agreement with the
other party to the transaction, and thus any OTC Options purchased by a
Portfolio will be considered an Illiquid Security. In addition, certain OTC
Options on foreign currencies are traded through financial institutions acting
as market-makers in such options and the underlying currencies.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a
certain percentage of a Portfolio's assets (the "SEC illiquidity ceiling").
Except as provided below, the Portfolios intend to write over-the-counter
options only with primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York. Also, the contracts which such Portfolios
have in place with such primary dealers will provide that each Portfolio has
the absolute right to repurchase any option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by the Portfolio
for writing the option, plus the amount, if any, of the option's intrinsic
value (i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
money. A Portfolio will treat all or a part of the formula price as illiquid
for purposes of the SEC illiquidity ceiling. Certain Portfolios may also write
over-the-counter options with non-primary dealers, including foreign dealers,
and will treat the assets used to cover these options as illiquid for purposes
of such SEC illiquidity ceiling.
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OTC Options entail risks in addition to the risks of exchange-traded
options. Exchange-traded options are in effect guaranteed by the Options
Clearing Corporation, while a Portfolio relies on the party from whom it
purchases an OTC Option to perform if the Portfolio exercises the option. With
OTC Options, if the transacting dealer fails to make or take delivery of the
securities or amount of foreign currency underlying an option it has written,
in accordance with the terms of that option, the Portfolio will lose the
premium paid for the option as well as any anticipated benefit of the
transaction. Furthermore, OTC Options are less liquid than exchange-traded
options.
REPURCHASE AGREEMENTS
Repurchase Agreements are agreements to purchase underlying debt obligations
from financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the obligations at an established time and
price. The collateral for such Repurchase Agreements will be held by the
Portfolio's custodian or a duly appointed sub-custodian. The Portfolio will
enter into Repurchase Agreements only with banks and broker-dealers that have
been determined to be creditworthy by the Trust's Board of Trustees under
criteria established in consultation with the Adviser and the Sub-Adviser. The
seller under a Repurchase Agreement would be required to maintain the value of
the obligations subject to the Repurchase Agreement at not less than the
repurchase price. Default by the seller would, however, expose the Portfolio
to possible loss because of adverse market action or delay in connection with
the disposition of the underlying obligations. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the obligations, the
Portfolio may be delayed or limited in its ability to sell the collateral.
REVERSE REPURCHASE AGREEMENTS
Reverse Repurchase Agreements are the same as repurchase agreements except
that, in this instance, the Portfolios would assume the role of
seller/borrower in the transaction. The Portfolios will maintain segregated
accounts with the Custodian consisting of U.S. Government Securities, cash or
money market instruments that at all times are in an amount equal to their
obligations under Reverse Repurchase Agreements. Reverse Repurchase Agreements
involve the risk that the market value of the securities sold by a Portfolio
may decline below the repurchase price of the securities and, if the proceeds
from the reverse repurchase agreement are invested in securities, that the
market value of the securities sold may decline below the repurchase price of
the securities sold. Each Portfolio's Sub-Adviser, acting under the
supervision of the Board of Trustees, reviews on an on-going basis the
creditworthiness of the parties with which it enters into Reverse Repurchase
Agreements. Under the 1940 Act, Reverse Repurchase Agreements may be
considered borrowings by the seller. Whenever borrowings by a fund, including
Reverse Repurchase Agreements, exceed 5% of the value of a Portfolio's total
assets, the Portfolio will not purchase any securities.
SMALL COMPANIES
Certain of the Portfolios may invest in small companies, some of which may
be unseasoned. While smaller companies generally have potential for rapid
growth, investments in such companies often involve higher risks because the
companies may lack the management experience, financial resources, product
diversification and competitive strengths of larger corporations. Moreover,
the markets for the shares of such companies typically are less liquid than
those for the shares of larger companies.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of the
Portfolios as stated elsewhere in the Prospectus and SAI of the Trust, each of
the Portfolios may, but is not required to, utilize various investment
strategies as described in this Appendix to hedge various market risks, to
manage the effective maturity or duration of Fixed-Income Securities, or to
seek potentially higher returns. Utilizing these investment strategies, the
Portfolio may purchase and sell, to the extent not otherwise limited or
restricted for such Portfolio, exchange-listed and over-the-counter put and
call options on securities, equity and fixed-income indexes and other
financial
A-13
<PAGE>
instruments, purchase and sell financial futures contracts and options
thereon, enter into various Interest Rate Transactions such as swaps, caps,
floors or collars, and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Portfolio's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Portfolio's unrealized gains in the value of
its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the
Portfolio's portfolio, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities.
Some Strategic Transactions may also be used to seek potentially higher
returns, although no more than 5% of the Portfolio's assets will be used as
the initial margin or purchase price of options for Strategic Transactions
entered into for purposes other than "bona fide hedging" positions as defined
in the regulations adopted by the Commodity Futures Trading Commission. Any or
all of these investment techniques may be used at any time, as use of any
Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Portfolio to utilize these Strategic
Transactions successfully will depend on the Sub-Adviser's ability to predict,
which cannot be assured, pertinent market movements. The Portfolio will comply
with applicable regulatory requirements when utilizing Strategic Transactions.
Strategic Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management or
portfolio management purposes.
U.S. GOVERNMENT SECURITIES
U.S. Government Securities include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes and bonds) and obligations directly issued
or guaranteed by U.S. Government agencies or instrumentalities. Some
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government are backed by the full faith and credit of the U.S. Government
(such as GNMA certificates), others are backed only by the right of the issuer
to borrow from the U.S. Treasury (such as securities of Federal Home Loan
Banks) and still others are backed only by the credit of the instrumentality
(such as FNMA and FHLMC certificates).
WHEN ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
In order to secure yields or prices deemed advantageous at the time, certain
Portfolios may purchase or sell securities on a when-issued or a delayed-
delivery basis. The Portfolios will enter into a when-issued transaction for
the purpose of acquiring portfolio securities and not for the purpose of
leverage. In such transactions, delivery of the securities occurs beyond the
normal settlement periods, but no payment or delivery is made by, and no
interest accrues to, the Portfolios prior to the actual delivery or payment by
the other party to the transaction. Due to fluctuations in the value of
securities purchased on a when-issued or a delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available
in the market on the dates when the investments are actually delivered to the
buyers. Similarly, the sale of securities for delayed-delivery can involve the
risk that the prices available in the market when delivery is made may
actually be higher than those obtained in the transaction itself. A Portfolio
will establish a segregated account with the Custodian consisting of cash,
U.S. Government-securities or other high grade debt obligations in an amount
equal to the amount of its when-issued and delayed-delivery commitments.
A-14
<PAGE>
SMITH BARNEY SERIES FUND
PROSPECTUS DATED APRIL 29, 1997
Smith Barney Series Fund (the "Fund") is a diversified, open-end management
investment company--a mutual fund--with ten portfolios, each with separate
goals and investment policies. The Appreciation Portfolio (the "Portfolio") is
the only portfolio offered herein.
THE APPRECIATION PORTFOLIO'S goal is long-term appreciation of capital. This
Portfolio invests primarily in equity securities.
There can be no guarantee that the Portfolio's goal will be achieved because
any investment involves risks. Discussions of the investments which the
Portfolio will make, and their related risks, are found in the sections of
this Prospectus entitled "Investment Goal and Policies of the Portfolio,"
"Additional Investments" and "Special Considerations" and the Appendix to this
Prospectus.
This Prospectus sets forth certain information that you should know about
the Fund and the Portfolio before investing and should be retained for future
reference. Additional information about the Fund and the Portfolio has been
filed with the Securities and Exchange Commission (the "SEC") in a document
entitled "Statement of Additional Information," dated April 29, 1997, as
amended or supplemented from time to time, which is available upon request and
without charge by calling or writing the Fund at the telephone number or
address set forth below or by contacting a Smith Barney Financial Consultant.
The Fund is responsible only for statements that are included in this
Prospectus, the Statement of Additional Information or in authorized sales
material. The Statement of Additional Information is incorporated by reference
into this Prospectus in its entirety. You cannot buy shares of the Fund
directly. You can invest in the Fund by buying separate accounts which fund
certain variable annuity and variable life insurance contracts (each referred
to herein as a "Contract") offered by designated insurance companies.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS OF THE CONTRACT.
BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SMITH BARNEY SERIES FUND
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
Contract Owner Inquiries: (800) 451-2010
<PAGE>
CONTENTS
<TABLE>
<S> <C>
SYNOPSIS.................................................................... 1
EXPENSES OF THE PORTFOLIO................................................... 2
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO............................... 3
ADDITIONAL INVESTMENTS...................................................... 3
CERTAIN INVESTMENT GUIDELINES............................................... 4
SPECIAL CONSIDERATIONS AND RISK FACTORS..................................... 4
PORTFOLIO TRANSACTIONS...................................................... 5
NET ASSET VALUE............................................................. 5
HOW TO USE THE FUND......................................................... 6
DIVIDENDS AND TAXES......................................................... 7
MANAGEMENT OF THE FUND...................................................... 8
PORTFOLIO MANAGEMENT........................................................ 8
CUSTODIAN AND TRANSFER AGENT................................................ 9
DISTRIBUTOR................................................................. 9
ADDITIONAL INFORMATION...................................................... 9
THE PORTFOLIO'S PERFORMANCE................................................. 10
APPENDIX.................................................................... A-1
</TABLE>
i
<PAGE>
SYNOPSIS
THE FUND
The Fund is a diversified, open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
currently offers a selection of ten portfolios. The Appreciation Portfolio
(the "Portfolio") is the only portfolio available hereunder. See "Investment
Goal and Policies of the Portfolio" and "Additional Information."
MANAGEMENT
The organizations that perform services for the Portfolio are listed below
and are described more fully under "Management of the Fund."
<TABLE>
<CAPTION>
NAME SERVICE
- ---- -------
<S> <C>
Investment Adviser and
Smith Barney Mutual Funds Management Inc. ........ Administrator
("SBMFM")
Smith Barney Inc. ................................ Distributor
("Smith Barney")
PNC Bank, National Association.................... Custodian
("PNC")
Transfer and Dividend Paying
First Data Investor Services Group. Inc. ......... Agent
(the "Transfer Agent")
</TABLE>
The Portfolio pays SBMFM, its Investment Adviser, a fee at the annual
percentage rate of 0.55% of the value of the Portfolio's average net assets.
SBMFM, as Administrator of the Portfolio, is paid a fee at the annual
percentage of 0.20% of the value of the Portfolio's average net assets. The
management fees paid by the Portfolio are higher than those fees paid by most
other investment companies, but not necessarily higher than those paid by
funds with similar investment objectives and policies. See "Management of the
Fund."
BUYING SHARES
Shares of the Fund are offered only to Contract owners as set forth in the
specific Contract. In the future, the Fund may establish additional portfolios
which may or may not be available hereunder. See "How to Use the Fund."
REDEEMING SHARES
Shares may be redeemed as described in the applicable Contract prospectus.
See "How to Use the Fund."
SPECIAL CONSIDERATIONS
Investors in the Fund should be aware of the following general observations.
The market value of fixed-income securities, which may constitute a temporary
part of the investments of the Portfolio, may vary inversely in response to
changes in prevailing interest rates. The non-publicly traded and illiquid
securities, which the Portfolio may hold, may have to be sold at lower prices,
or may remain unsold, when the Portfolio desires to dispose of them. The
foreign securities, including securities of developing countries, in which the
Portfolio may invest, may be subject to certain risks in addition to those
inherent in U.S. investments. The Portfolio may make certain investments and
employ certain investment techniques that involve other risks, including
entering into repurchase agreements and lending portfolio securities. These
risks are described under "Investment Goal and Policies of the Portfolio,"
"Special Considerations and Risk Factors" and in the Appendix to this
Prospectus.
1
<PAGE>
EXPENSES OF THE PORTFOLIO
The Portfolio will bear its own expenses. Operating expenses for the
Portfolio generally will consist of all costs not specifically borne by its
Investment Adviser and Administrator or the Fund's distributor, including
organizational costs, investment advisory and administration fees, fees for
necessary professional and brokerage services, fees for any pricing service,
the costs of regulatory compliance and costs associated with maintaining legal
existence and shareholder relations. From time to time, the Investment Adviser
and/or Administrator of the Portfolio may waive all or a portion of the fees
payable to it by the Portfolio, thereby reducing the expenses of the
Portfolio. A detailed description of the expenses involved in investing in a
Contract and the Portfolio is included in the Contract prospectus.
FINANCIAL HIGHLIGHTS
The following information for the fiscal years ended December 31, 1996 and
1995 has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon appears in the Fund's Annual Report dated December 31, 1996.
The information with respect to the four years ended December 31, 1994 has
been audited by other auditors whose report thereon appears in the Fund's
Annual Report dated December 31, 1994. The information set out below should be
read in conjunction with the financial statements and related notes that also
appear in the Fund's Annual Report to Shareholders which is incorporated by
reference into the Statement of Additional Information.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
APPRECIATION PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
- ---------------------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 14.39 $ 11.54 $ 11.80 $ 11.13 $ 10.49 $ 10.00
INCOME (LOSS) FROM
OPERATIONS:
Net investment
income............... .27 0.23 0.20 0.15 0.11 0.01
Net realized and
unrealized gains
(loss) on
investments.......... 2.60 3.04 (0.32) 0.63 0.53 0.48
-------- ------- ------- ------- ------- -------
Total Income (Loss)
From Operations.... 2.87 3.27 (0.12) 0.78 0.64 0.49
-------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net Investment
income............... (0.25) (0.21) (0.14) (0.11) 0.00* --
Net realized gains.... (1.15) (0.21) -- -- -- --
-------- ------- ------- ------- ------- -------
Total
Distributions...... (1.40) (0.42) (0.14) (0.11) -- --
-------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 15.86 $ 14.39 $ 11.54 $ 11.80 $ 11.13 $ 10.49
-------- ------- ------- ------- ------- -------
TOTAL RETURN............ 19.77% 28.84% (1.12)% 7.03% 6.13% 4.90%++
-------- ------- ------- ------- ------- -------
NET ASSETS, END OF YEAR
(000'S)................ $101,232 $94,492 $80,823 $77,843 $53,450 $11,436
-------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. 0.85% 0.97% 0.88% 1.01% 1.00% 0.94%+
Net investment
income............... 1.59 1.65 1.75 1.35 1.61 3.00+
-------- ------- ------- ------- ------- -------
Portfolio Turnover
Rate................... 39% 43% 61% 33% 14% --
-------- ------- ------- ------- ------- -------
Average Commissions Paid
on Equity Security
Transactions(2)........ $ 0.06 $ 0.06 -- -- -- --
-------- ------- ------- ------- ------- -------
</TABLE>
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) As of September 1995 the SEC instituted new guidelines requiring
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
* Amount represents less than $0.01.
2
<PAGE>
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO
Set forth below is a description of the investment goal and policies of the
Portfolio. The investment goal of the Portfolio may not be changed without the
approval of the holders of a majority (as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")) of the outstanding shares of the
Portfolio. There can, of course, be no guarantee that the Portfolio will
achieve its investment goal. Additional information about investment
strategies that the Portfolio may employ and investment policies mentioned
below appears in the Appendix to this Prospectus and in the Statement of
Additional Information. A description of the corporate bond and commercial
paper rating systems of Standard & Poor's Ratings Group ("S&P"), Moody's
Investors Service, Inc. ("Moody's") and other nationally recognized
statistical rating organizations ("NRSROs") is also contained in the Statement
of Additional Information.
GOAL--The Portfolio's goal is long-term appreciation of capital.
INVESTMENT POLICIES--The Portfolio will attempt to achieve its goal by
investing primarily in equity and equity-related securities that are believed
to afford attractive opportunities for appreciation. For example, the
Portfolio may invest in the securities of companies whose earnings are
expected to increase, companies whose securities prices are lower than are
believed justified in relation to their underlying assets or earning power or
companies in which changes are anticipated that would result in improved
operations or profitability. The Portfolio's investments will be broadly
diversified among different industries. In analyzing securities for
investment, SBMFM will consider many different factors, including past growth
records, management capability, future earnings prospects and technological
innovation, as well as general market and economic factors that can influence
the price of securities.
Under normal market conditions, substantially all--but not less than 65%--of
the Portfolio's assets will consist of common stocks, but the Portfolio also
may hold securities convertible into common stocks and warrants. When SBMFM
believes that a conservative or defensive investment posture is warranted or
when opportunities for capital appreciation do not appear attractive, the
Portfolio may invest temporarily in debt obligations, preferred securities or
short-term money market instruments. The Portfolio may, from time to time,
lend its portfolio securities and invest in securities of non-U.S. issuers in
the form of depository receipts representing interests in the common stocks of
foreign issuers.
ADDITIONAL INVESTMENTS
MONEY MARKET INSTRUMENTS
The Portfolio may, as a cash management tool, hold up to 20% of the value of
its total assets in cash and invest in short-term instruments and, for
temporary defensive purposes, may hold cash and invest in short-term
instruments without limitation. Short-term instruments in which the Portfolio
may invest include: U.S. government securities: obligations of banks having at
least $1 billion in assets (including certificates of deposit, time deposits
and bankers' acceptances of U.S. or foreign banks, U.S. savings and loan
associations and similar institutions); commercial paper rated no lower than
A-2 by S&P or Prime-2 by Moody's or the equivalent from another NRSRO or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the two highest rating categories; and repurchase agreements with
respect to any of the foregoing entered into with banks and non-bank dealers
approved by the Fund's Board of Trustees.
Currently, there are six NRSROs: S&P, Moody's, Fitch Investors Services,
Inc., Duff and Phelps Credit Rating Co., IBCA Limited and its affiliate, IBCA,
Inc. and Thomson Bankwatch. A discussion of the ratings categories of the
NRSROs is contained in the Appendix to the Statement of Additional
Information.
U.S. GOVERNMENT SECURITIES
The U.S. government securities in which the Portfolio may invest include:
direct obligations of the United States Treasury (such as Treasury Bills,
Treasury Notes and Treasury Bonds), and obligations issued by U.S.
3
<PAGE>
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as
certificates issued by GNMA); securities that are supported by the right of
the issuer to borrow from the U.S. Treasury (such as securities of Federal
Home Loan Banks); and securities that are supported only by the credit of the
instrumentality (such as bonds issued by FNMA and FHLMC). Treasury Bills have
maturities of less than one year, Treasury Notes have maturities of one to ten
years and Treasury Bonds generally have maturities of greater than ten years
at the date of issuance.
The Portfolio may invest up to 5% of its net assets in U.S. government
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S.
dollar and the currency of one or more foreign countries ("Exchange Rate-
Related Securities"). Exchange Rate-Related Securities are issued in a variety
of forms, depending on the structure of the principal repayment formula. The
principal repayment formula may be structured so that the securityholder will
benefit if a particular foreign currency to which the security is linked is
stable or appreciates against the U.S. dollar. In the alternative, the
principal repayment formula may be structured so that the securityholder
benefits if the U.S. dollar is stable or appreciates against the linked
foreign currency. Finally, the principal repayment formula can be a function
of more than one currency and, therefore, be designed in either of the
aforementioned forms or a combination of those forms.
Investments in Exchange Rate-Related Securities entail special risks. There
is the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an Exchange Rate-Related
Security is linked. If currency exchange rates do not move in the direction or
to the extent anticipated at the time of purchase of the security, the amount
of principal repaid at maturity might be significantly below the par value of
the security, which might not be offset by the interest earned by the
Portfolio over the term of the security. The rate of exchange between the U.S.
dollar and other currencies is determined by the forces of supply and demand
in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. The imposition or
modification of foreign exchange controls by the United States or foreign
governments or intervention by central banks also could affect exchange rates.
Finally, there is no assurance that sufficient trading interest to create a
liquid secondary market will exist for particular Exchange Rate-Related
Securities due to conditions in the debt and foreign currency markets.
Illiquidity in the forward foreign exchange market and the high volatility of
the foreign exchange market may from time to time combine to make it difficult
to sell an Exchange Rate-Related Security prior to maturity without incurring
a significant price loss.
CERTAIN INVESTMENT GUIDELINES
Up to 10% of the total assets of the Portfolio may be invested in securities
with contractual or other restrictions on resale and other instruments that
are not readily marketable, including repurchase agreements with maturities
greater than seven days and time deposits maturing in more than seven calendar
days. The Portfolio may borrow from banks for temporary or emergency purposes,
but not for leverage, in an amount up to 30% of its assets, and may pledge its
assets to the same extent in connection with such borrowings. Whenever
borrowings from banks exceed 5% of the value of the assets of the Portfolio,
the Portfolio will not make any additional investments. Except for the
limitations on borrowing, the investment guidelines set forth in this
paragraph may be changed at any time without shareholder consent by vote of
the Board of Trustees of the Fund. A complete list of investment restrictions
that identifies additional restrictions that cannot be changed without the
approval of a majority of the Portfolio's outstanding shares is contained in
the Statement of Additional Information.
SPECIAL CONSIDERATIONS AND RISK FACTORS
This section describes certain investments of the Portfolio and related
risks. Further information concerning investments of the Portfolio and related
risks may be found in the Appendix to this Prospectus and in the Statement of
Additional Information.
4
<PAGE>
FIXED-INCOME SECURITIES
The market value of fixed-income obligations of the Portfolio will be
affected by general changes in interest rates, which will result in increases
or decreases in the value of fixed-income obligations held by the Portfolio.
The market value of the Portfolio's fixed-income obligations can be expected
to vary inversely in relation to changes in prevailing interest rates. In
addition, fixed-income securities in which the Portfolio may invest may not
yield as high a level of current income as might be achieved by investing in
securities with less liquidity and safety and longer maturities.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
The Portfolio may purchase securities that are not publicly traded. The sale
of securities that are not publicly traded is typically restricted under
federal securities laws. As a result, the Portfolio may be forced to sell
these securities at less than fair market value or may not be able to sell
them when its Investment Adviser believes it desirable to do so. The
Portfolio's investments in illiquid securities are subject to the risk that
should the Portfolio desire to sell any of these securities when a ready buyer
is not available at a price that the Portfolio deems representative of their
value, the value of the Portfolio's net assets could be adversely affected.
FOREIGN SECURITIES
The Portfolio may invest in obligations of companies and governments of
foreign nations, which involve certain risks in addition to the usual risks
inherent in U.S. investments. These risks include those resulting from
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers and the lack of uniform accounting, auditing and financial
reporting standards or of other regulatory practices and requirements
comparable to those applicable to U.S. companies. The performance of the
Portfolio investing in foreign securities may be adversely affected by
fluctuations in value of one or more foreign currencies relative to the U.S.
dollar. Moreover, securities of many foreign companies may be less liquid and
their prices more volatile than those of securities of comparable U.S.
companies. In addition, with respect to certain foreign countries, there is
the possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Portfolio,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that could reduce the return on such securities.
Changes in foreign currency exchange rates may affect the value of portfolio
securities and the appreciation or depreciation of investments. Investment in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions
on U.S. exchanges, and the expense of maintaining securities with foreign
custodians.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities on behalf of the Portfolio will be
placed by its Investment Adviser with broker-dealers that the Adviser selects,
including Smith Barney and other affiliated brokers. The Portfolio may utilize
Smith Barney or a Smith Barney-affiliated broker in connection with a purchase
or sale of securities when the Portfolio's Investment Adviser believes that
the broker's charge for the transaction does not exceed usual and customary
levels.
NET ASSET VALUE
The value of an individual share of the Portfolio is the net asset value of
that share. The net asset value per share of the Portfolio will be calculated
separately on each day, Monday through Friday, except on days when the New
York Stock Exchange, Inc. (the "NYSE") is closed. The NYSE is currently
scheduled to be closed on New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving
5
<PAGE>
and Christmas, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. Net asset value
per share of the Portfolio is determined as of the close of regular trading on
the NYSE (currently 4:00 p.m., New York time).
Net asset value per share is computed by dividing the value of the
Portfolio's net assets by the total number of its shares outstanding.
Generally, the Portfolio's investments are valued at market value or, in the
absence of a market value with respect to any portfolio securities, at fair
value as determined by or under the direction of the Fund's Board of Trustees.
A security that is primarily traded on a U.S. or foreign exchange (including
securities traded through the National Market System) is valued at the last
sale price on that exchange or, if there were no sales during the day, at the
current quoted bid price. Portfolio securities that are primarily traded on
foreign exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed
the value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Fund's Board
of Trustees or its delegates. Over-the-counter securities that are not traded
through the National Market System and securities listed or traded on certain
foreign exchanges whose operations are similar to the U.S. over-the-counter
market are valued on the basis of the mean between the bid and asked prices at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost when the Fund's Board
of Trustees determines that this constitutes fair value. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.
HOW TO USE THE FUND
INVESTING IN THE FUND
Shares of the Fund are currently offered exclusively to Contract owners. To
find out which insurance companies offer Contracts that are eligible to invest
in the Fund, call the Fund at (800) 451-2010. For further information, see the
description provided in the Contract prospectus.
SALES CHARGES AND SURRENDER CHARGES
The Fund does not assess any sales charge, either when it sells or when it
redeems shares of the Portfolio. However, surrender charges that may be
assessed under the Contract are described in the Contract prospectus.
Mortality and expense risk fees and other charges are also described in the
Contract prospectus.
REDEEMING AND EXCHANGING SHARES
The Fund will redeem shares in response to full or partial surrenders of a
Contract. Generally, payment upon redemption will be made within three
business days after receiving a valid redemption request (unless redemption is
suspended or payment is delayed as permitted in accordance with SEC
regulations). The Fund will use the net asset value at the close of trading on
the NYSE on the day the notice of surrender or transfer is received. If the
request is received after the close of trading on the NYSE, the shares will be
redeemed at the net asset value at the close of the next business day. The
value of any redeemed shares may be more or less than their original purchase
price.
A detailed description of how to surrender the Contract is included in the
Contract prospectus.
6
<PAGE>
DIVIDENDS AND TAXES
DIVIDENDS
NET INVESTMENT INCOME. Dividends and distributions will be automatically
reinvested, without a sales charge, in the shareholder's account at net asset
value in additional shares of the Portfolio, unless the shareholder instructs
the Portfolio to pay all dividends and distributions in cash. Net investment
income, including dividends on stocks and interest on bonds or other
securities the Fund holds, is distributed to the shareholders of the Portfolio
annually.
CAPITAL GAINS. Distributions of any net realized capital gains of the
Portfolio will be paid annually shortly after the close of the fiscal year in
which they are earned.
TAXES
In the opinion of counsel to the Fund, the Portfolio will be treated as a
separate taxpayer with the result that, for federal income tax purposes, the
amounts of investment income and capital gains earned will be determined on a
portfolio (rather than on a Fund-wide) basis.
The Fund intends that the Portfolio will separately meet the requirements
for qualification each year as a "regulated investment company" within the
meaning of the Internal Revenue Code of 1986, as amended (the "Code"). In
order to qualify as a regulated investment company, the Portfolio must meet
certain income and diversification tests, including the requirement that it
derive less than 30% of its gross income in each taxable year from the sale or
other disposition of (a) stock or securities held for less than three months;
(b) options, futures or forward contracts (other than options, futures or
forward contracts on foreign currencies) held for less than three months and
(c) foreign currencies (or options, futures or forward contracts on such
foreign currencies) held for less than three months but only if such
currencies (or options, futures or forward contracts) are not directly related
to the Portfolio's principal business of investing in stock or securities (or
options or futures with respect to stock or securities). As a regulated
investment company and provided certain distribution requirements are met, the
Portfolio will not be subject to federal income tax on its net investment
income and net capital gains that it distributes to its shareholders.
Dividends paid by the Portfolio from taxable investment income and
distributions of short-term capital gains will be treated as ordinary income
in the hands of the shareholders for federal income tax purposes, whether
received in cash or reinvested in additional shares. Distributions of net
long-term capital gains will be treated as long-term capital gains in the
hands of the shareholders, if certain notice and designation requirements are
satisfied, whether paid in cash or reinvested in additional shares, regardless
of the length of time the investor has held shares of the Portfolio. The Fund
has been informed that the separate accounts represented by the Contracts
should, for federal income tax purposes, be considered the shareholders of the
Portfolio.
To comply with regulations under Section 817(h) of the Code, the Portfolio
will be required to diversify its investments so that on the last day of each
calendar quarter no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section 817(h)
of the Code, obligations of the United States Treasury and each U.S.
government agency or instrumentality are treated as securities of separate
issuers.
The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a variable contract
owner's control of the investments of a separate account may cause the
variable contract owner, rather than the insurance company, to be treated as
the owner of the assets held by the separate account. If the variable contract
owner is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be included
currently in the variable
7
<PAGE>
contract owner's gross income. It is not known what standards will be set
forth in such pronouncements or when, if at all, these pronouncements may be
issued.
In the event that rules or regulations are adopted, there can be no
assurance that the Portfolio will be able to operate as currently described in
this Prospectus, or that the Fund will not have to change the investment goal
or investment policies of the Portfolio. While the Portfolio's investment goal
is fundamental and may be changed only by a vote of a majority of the
Portfolio's outstanding shares, the Fund's Board of Trustees reserves the
right to modify the investment policies of the Portfolio as necessary to
prevent any such prospective rules and regulations from causing a Contract
owner to be considered the owner of the shares of the Portfolio.
Reference is made to the Contract prospectus for information regarding the
federal income tax treatment of distribution.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund and the
Portfolio rests with the Fund's Board of Trustees. The Trustees approve all
significant agreements between the Fund and the persons or companies that
furnish services to the Fund and the Portfolio, including agreements with the
Investment Adviser and Administrator of the Portfolio and with the Fund's
custodian, transfer agent and distributor. The day-to-day operations of the
Portfolio are delegated to the Investment Adviser and Administrator of the
Portfolio. The identities and backgrounds of the Trustees and officers of the
Fund, together with certain additional information about them, are contained
in the Statement of Additional Information. The Fund requires no employees
other than its executive officers, none of whom devotes full time to the
affairs of the Fund.
INVESTMENT ADVISER AND ADMINISTRATOR
The assets of each Portfolio of the Fund are managed separately. Subject to
the supervision and direction of the Fund's Board of Trustees, the Investment
Adviser of the Portfolio manages the Portfolio in accordance with its goal and
stated investment policies, makes investment decisions for the Portfolio,
places orders to purchase and sell securities on behalf of the Portfolio and
employs professional portfolio managers and securities analysts who provide
research services to the Portfolio.
SBMFM, located at 388 Greenwich Street, New York, New York 10013, provides
investment advisory and management services to investment companies affiliated
with Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned
subsidiary of Travelers Group Inc. ("Travelers"), a diversified financial
services holding company engaged through its subsidiary principally in four
business segments: Investment Services. Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services. SBMFM renders
investment advice to investment companies that had aggregate assets under
management as of March 1, 1997, in excess of $80 billion.
PORTFOLIO MANAGEMENT
Harry D. Cohen is a Vice President and Investment Officer of the Fund and a
Managing Director of Smith Barney. Prior to July 1993, Mr. Cohen served as
Executive Vice President of Shearson Lehman Brothers Inc.
The Fund's management discussion and analysis, and additional performance
information regarding the portfolios of the Fund during the fiscal year ended
December 31, 1996, is included in the Annual Report, dated December 31, 1996.
A copy of the Annual Report may be obtained upon request without charge from a
Smith Barney Financial Consultant or by writing or calling of the Fund at the
address or phone number listed on the cover page of this Prospectus.
8
<PAGE>
CUSTODIAN AND TRANSFER AGENT
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103,
acts as custodian of the Portfolio's investment generally.
The Transfer Agent, FIRST DATA INVESTOR SERVES GROUP, INC., is located at
Exchange Place, Boston, Massachusetts 02109.
DISTRIBUTOR
SMITH BARNEY, a subsidiary of Holdings, located at 388 Greenwich Street, New
York, New York 10013, serves as distributor of the Fund's shares, for which it
receives no separate fee from the Fund. Insurance companies offering the
Contracts pay Smith Barney for the services it provides and the expenses it
bears in distributing the Contracts, including payment of commissions for
sales. Insurance companies offering the Contracts will bear certain additional
costs in connection with the offering of the Fund's shares, including the
costs of printing and distributing prospectuses, statements of additional
information and sales literature.
ADDITIONAL INFORMATION
FORMATION
The Fund was organized on May 13, 1991, under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Fund registered with the SEC as a diversified, open-end
management investment company, as defined in the 1940 Act. The Fund commenced
operations on October 16, 1991, under the name Shearson Series Fund. On July
30, 1993 and October 14, 1994, the Fund changed its name to Smith Barney
Shearson Series Fund and Smith Barney Series Fund, respectively.
SHARES OF BENEFICIAL INTEREST
The Fund offers shares of beneficial interest of separate series with a par
value of $0.001 per share. Shares of ten series have been authorized, which
represent the interests in ten portfolios. When matters are submitted for
shareholder vote, shareholders of each portfolio will have one vote for each
full share owned and proportionate, fractional votes for fractional shares
held.
For a discussion of the rights of Contract owners concerning the voting of
shares, please refer to the Contract prospectus.
Generally, shares of the Fund vote by individual portfolio on all matters
except (a) matters affecting only the interests of more than one of the
portfolios, in which case shares of the affected portfolios would be entitled
to vote, or (b) when the 1940 Act requires that shares of the portfolios be
voted in the aggregate. All shares of the Fund vote together as one series for
the election of Trustees. There will normally be no meetings of shareholders
for the purpose of electing Trustees unless less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Any Trustee may be removed from the office upon the vote of
shareholders holding at least two-thirds of the Fund's outstanding shares at a
meeting called for that purpose. The Trustees are required to call such a
meeting upon the written request of shareholders holding at least 10% of the
Fund's outstanding shares. In addition, shareholders who meet certain criteria
will be assisted by the Fund in communicating with other shareholders in
seeking the holding of such a meeting.
The Fund sends each owner of a Contract a semi-annual report and an annual
report, each of which includes a list of the investment securities held by the
Portfolio at the end of the period covered. Contract owners may make inquiries
regarding the Fund and the Portfolio, including the current performance of the
Portfolio, from a Smith Barney Financial Consultant.
9
<PAGE>
THE PORTFOLIO'S PERFORMANCE
TOTAL RETURN
From time to time, the Portfolio may advertise its "average annual total
return" over various periods of time. Such total return figure shows average
percentage change in value of an investment in the Portfolio from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the Portfolio's shares and
assume that any income dividends and/or capital gains distributions made by
the Portfolio during the period were reinvested in shares of the Portfolio.
Figures will be given for recent one-, five- and ten-year periods (if
applicable), and may be given for other periods as well (such as from
commencement of the Portfolio's operations, or on a year-by-year basis). When
considering average annual total figures for periods longer than one year, it
is important to note that the Portfolio's annual total return for any one year
in the period might have been greater than the average for the entire period.
A Portfolio also may use "aggregate" total return figures for various periods,
representing the cumulative change in value of an investment in the Portfolio
for the specific period (again reflecting changes in the Portfolio's share
prices and assuming reinvestment of dividends and distributions). Aggregate
total returns may be shown by means of schedules, charts or graphs and may
indicate subtotals of the various components of total return (i.e., change in
value of initial investment, income dividends and capital gains
distributions).
It is important to note that total return figures are based on historical
earnings and are not intended to indicate future performance. The Statement of
Additional Information describes the method used to determine the Portfolio's
total return. Shareholders may make inquiries regarding the Portfolio,
including total return figures, of a Smith Barney Financial Consultant.
In reports or other communications to shareholders or in advertising
material, the Portfolio may compare its performance with that of other mutual
funds as listed in the rankings prepared by Lipper Analytical Services, Inc.
or similar independent services that monitor the performance of mutual funds
or with other appropriate indices of investment securities, such as the S&P
500, the Consumer Price Index, Dow Jones Industrial Average or NASDAQ, or with
investment or savings vehicles. The performance information also may include
evaluations of the Portfolio published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Barron's, Business Week, Forbes, Fortune, Institutional Investor, Investor's
Business Daily, Kiplinger's Personal Finance Magazine, Money, Morningstar
Mutual Fund Values, Mutual Fund Forecaster, The New York Times, Stranger's
Investment Advisor, USA Today, U.S. News & World Report and The Wall Street
Journal. Such comparative performance information will be stated in the same
terms in which the comparative data or indices are stated. Any such
advertisement also would include the standard performance information required
by the SEC as described above. For these purposes, the performance of the
Portfolio, as well as the performance of other mutual funds or indices, does
not reflect sales charges, the inclusion of which would reduce the Portfolio's
performance.
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
10
<PAGE>
APPENDIX
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment goal, the Portfolio may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained
in the Statement of Additional Information.
In the future, the Fund may desire to employ additional investment
strategies, including such hedging strategies as entering into futures
contracts and related options. The Fund will do so only upon 60 days' notice
to shareholders of the Portfolio and in conformity with its investment
restrictions.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions on portfolio securities, in each case with banks which are the
issuers of instruments acceptable for purchase by the Portfolio and with
certain dealers listed on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase agreement, the
Portfolio would acquire an underlying debt obligation for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Portfolio to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Portfolio's holding
period. This arrangement results in a fixed rate of return that is not subject
to market fluctuations during the Portfolio's holding period. The value of the
underlying securities will be monitored by the Portfolio's investment adviser
to ensure that it at least equals at all times the total amount of the
repurchase obligation, including interest. The Portfolio bears a risk of loss
in the event that the other party to a repurchase agreement defaults on its
obligations and the Portfolio is delayed or prevented from exercising its
rights to dispose of the collateral securities, including the risk of a
possible decline in the value of the underlying securities during the period
while the Portfolio seeks to assert these rights. The Portfolio's investment
adviser, acting under the supervision of the Fund's Board of Trustees, reviews
on an ongoing basis the value of the collateral and the creditworthiness of
those banks and dealers with which the Portfolio enters into repurchase
agreements to evaluate potential risks. A repurchase agreement is considered
to be a loan collateralized by the underlying securities under the 1940 Act.
LENDING OF SECURITIES. The Portfolio may lend its portfolio securities to
brokers, dealers and other financial organizations. By lending its securities,
the Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in short-
term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. Loans of
portfolio securities, if and when made, by the Portfolio may not exceed 33
1/3% of the Portfolio's total assets, taken at value. Loans of the Portfolio's
securities will be collateralized by cash, letters of credit or U.S.
government securities, which are maintained at all times in an amount equal to
the current market value of the loaned securities. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Portfolio.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE FUND'S OFFICIAL SALES LITERATURE IN CONNECTION
WITH THE OFFERING OF THE FUND'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, THE OFFER MAY NOT LAWFULLY BE MADE.
A-1
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is a stock company domiciled in
Wilmington, Delaware
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
GRANITE PRIMELITE
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
SEPARATE ACCOUNT B
("Account B")
(or the "Account")
OF
GOLDEN AMERICAN LIFE INSURANCE COMPANY
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THE INFORMATION
CONTAINED HEREIN SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE
GOLDEN AMERICAN LIFE INSURANCE COMPANY DEFERRED VARIABLE ANNUITY CONTRACT
WHICH IS REFERRED TO HEREIN.
THE PROSPECTUS SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR OUGHT TO
KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS, SEND A WRITTEN REQUEST TO
GOLDEN AMERICAN LIFE INSURANCE COMPANY, CUSTOMER SERVICE CENTER, P.O. BOX 8794,
WILMINGTON, DE 19899-8794 OR TELEPHONE 1-800-366-0066.
DATE OF PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION:
May 1, 1997
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Description of Golden American Life Insurance Company. . . . . . . 1
Safekeeping of Assets. . . . . . . . . . . . . . . . . . . . . . . 1
The Administrator. . . . . . . . . . . . . . . . . . . . . . . . . 1
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . 2
Distribution of Contracts. . . . . . . . . . . . . . . . . . . . . 2
Performance Information. . . . . . . . . . . . . . . . . . . . . . 2
IRA Partial Withdrawal Option. . . . . . . . . . . . . . . . . . . 9
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 9
Financial Statements of Separate Account B . . . . . . . . . . . . 10
Financial Statements of The Managed Global Account of Separate
Account D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Financial Statements of Golden American Life Insurance Company . . 10
Appendix - Description of Bond Ratings . . . . . . . . . . . . . . A-1
<PAGE>
INTRODUCTION
This Statement of Additional Information provides background information
regarding Account B.
DESCRIPTION OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company ("Golden American") is a stock life
insurance company organized under the laws of the State of Delaware. Prior
to December 30, 1993, Golden American was a Minnesota corporation. From
January 2, 1973 through December 31, 1987, the name of the company was St.
Paul Life Insurance Company. On December 31, 1987, after all of St. Paul
Life Insurance Company's business was sold, the name was changed to Golden
American. On March 7, 1988, all of the stock of Golden American was
acquired by The Golden Financial Group, Inc. ("GFG"), a financial services
holding company. On October 19, 1990, GFG merged with and into MBL
Variable, Inc. ("MBLV"), a wholly owned direct subsidiary of The Mutual
Benefit Life Insurance Company ("MBL"). On January 1, 1991, MBLV became
a wholly owned indirect subsidiary of MBL and Golden American became a
wholly owned direct subsidiary of MBL. Golden American's name had been
changed to MB Variable Life Insurance Company in the state of Minnesota
but subsequently has been changed back to Golden American. In a transaction
that closed on September 30, 1992, Golden American was acquired by a
subsidiary of Bankers Trust Company ("Bankers Trust"). On August 13, 1996,
Equitable of Iowa Companies acquired all of the interest in Golden American
and Directed Services, Inc. As of December 31, 1996, Golden American had
approximately $140.5 million in stockholders' equity and approximately $1.7
billion in total assets, including approximately $1.2 billion of separate
account assets. Golden American is authorized to do business in
all jurisdictions except New York. Golden American offers variable annuities
and variable life insurance. Golden American has formed a subsidiary,
First Golden American Life Insurance Company of New York ("First Golden"),
who will write variable life and annuity business in the state of New
York. The initial capitalization of First Golden was $25 million.
SAFEKEEPING OF ASSETS
Golden American acts as its own custodian for Account B.
THE ADMINISTRATOR
Effective January 1, 1994, 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
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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 in 1996, 1995 and 1994 were $464,734, $749,741 and
$816,264, respectively.
Prior to 1994, Golden American had arranged with BT Variable, Inc. ("BT
Variable"), an affiliate, to perform services related to the development
and administration of its products. For the year 1993 and the period
from September 30, 1992 to December 31, 1992, fees earned by BT Variable
from Golden American for these services aggregated $2,701,000 and $209,000,
respectively. The agreement was terminated as of January 1, 1994.
In addition, BT Variable provided to Golden American certain of its
personnel to perform management, administrative and clerical services
and the use of certain of its facilities. BT Variable charged Golden
American for such expenses and all other general and administrative costs,
first on the basis of direct charges when identifiable, and second
allocated based on the estimated amount of time spent by BT Variable's
employees on behalf of Golden American. For the year 1993 and the period
from September 30, 1992 to December 31, 1992, BT Variable allocated to
Golden American $1,503,000 and $450,000, respectively. The agreement was
terminated on January 1, 1994.
INDEPENDENT AUDITORS
Ernst & Young LLP, 801 Grand Avenue, Des Moines, Iowa 50309, independent
auditors, will perform annual audits of Golden American and the Account.
DISTRIBUTION OF CONTRACTS
Prior to 1994, Golden American had entered into agreements with DSI to perform
services related to the management of its investments and the distribution
of its products. For the year 1993, Golden American incurred $311,000 for
such services. The agreement was terminated as of January 1, 1994.
DSI acts as the principal underwriter (as defined in the Securities Act of
1933 and the Investment Company Act of 1940, as amended) of the variable
insurance products issued by Golden American which, as of December 31, 1994,
are sold primarily through two broker/dealer institutions. For the years
ended 1996, 1995 and 1992, commissions paid by Golden American to DSI
aggregated $27,065,000, $8,440,000 and $17,569,000, respectively.
Golden American provided to DSI certain of its personnel to perform
management, administrative and clerical services and the use of certain
facilities. Golden American charged DSI for such expenses and all other
general and administrative costs,
2
<PAGE>
first on the basis of direct charges when
identifiable, and the remainderallocated 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. For the years
ended December 31, 1994 and 1993, expenses allocated to DSI were $1,983,000
and $2,013,000, respectively. 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 $2,267,000 and $987,000 for 1996 and 1995,
respectively.
PERFORMANCE INFORMATION
Performance information for the divisions of Account B, including the yield
and effective yield of the Smith Barney Money Market Division, the yield of
the remaining divisions, and the total return of all divisions, may appear
in reports or promotional literature to current or prospective owners.
Negative values are denoted by minus signs ("-"). Performance information
for measures other than total return do not reflect sales load which can be
a maximum level of 6.5% of premium, and any applicable premium tax that can
range from 0% to 3.5%. As described in the prospectus, two death benefit
options are available. The following performance values reflect the election
at issue of the Annual Rachet Enhanced Death Benefit Option providing values
reflecting the highest aggregate contract charges. If one of the other death
benefit options had been elected, the historical performance values would be
higher than those represented in the examples.
SEC STANDARD MONEY MARKET DIVISION YIELDS
Current yield for the Smith Barney Money Market Division will be based on the
change in the value of a hypothetical investment (exclusive of capital changes)
over a particular 7-day period, less a pro-rata share of division expenses
accrued over that period (the "base period"), and stated as a percentage of
the investment at the start of the base period (the "base period return"). The
base period return is then annualized by multiplying by 365/7, with the
resulting yield figure carried to at least the nearest hundredth of one
percent. Calculation of "effective yield" begins with the same "base period
return" used in the calculation of yield, which is then annualized to reflect
weekly compounding pursuant to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN) +1) ^ (365/7)] - 1
There is no current yield and effective yield provided because as of the date
of the Prospectus the Smith Barney Money Market Division had not accepted any
assets under the terms of the Prospectus.
3
<PAGE>
SEC STANDARD 30-DAY YIELD FOR NON-MONEY MARKET DIVISIONS
Quotations of yield for the remaining divisions will be based on all investment
income per Unit (accumulation value divided by the index of investment
experience) earned during a particular 30-day period, less expenses accrued
during the period ("net investment income"), and will be computed by dividing
net investment income by the valueof an accumulation unit on the last day of
the period, according to the following formula:
YIELD = 2 [ ( a - b +1)^(6) - 1]
-----
cd
Where:
[a] equals the net investment income earned during the
period by the Portfolio attributable to shares owned by a
division
[b] equals the expenses accrued for the period (net of
reimbursements)
[c] equals the average daily number of Units outstanding
during the period based on the index of investment
experience
[d] equals the value (maximum offering price) per index of
investment experience on the last day of the period
Yield on divisions of Account B is earned from the increase in net asset
value of shares of the Portfolio in which the Division invests and from
dividends declared and paid by the Portfolio, which are automatically
reinvested in shares of the Portfolio.
SEC STANDARD AVERAGE ANNUAL TOTAL RETURN FOR NON-MONEY MARKET DIVISIONS
Quotations of average annual total return for any division will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in a contract over a period of one, five and 10 years (or, if less,
up to the life of the division), calculated pursuant to the formula:
P(1+T)^(n)=erv
Where:
(1) [P] equals a hypothetical initial premium payment of
$1,000
(2) [T] equals an average annual total return
(3) [n] equals the number of years
(4) [ERV] equals the ending redeemable value of a
hypothetical $1,000 initial premium payment made at the
beginning of the period (or fractional portion thereof)
4
<PAGE>
All total return figures reflect the deduction of the maximum sales load, the
administrative charges, and the mortality and expense risk charges. The
Securities and Exchange Commission (the "SEC")
requires that an assumption be made that the contract owner surrenders the
entire contract at the end of the one, five and 10 year periods (or, if less,
up to the life of the security) for which performance is required to be
calculated. This assumption may not be consistent with the typical contract
owner's intentions in purchasing a contract and may adversely affect returns.
Quotations of total return may simultaneously be shown for other periods, as
well as quotations of total return that do not take into account certain
contractual charges such as sales load.
NON-STANDARD AVERAGE ANNUAL TOTAL RETURN FOR NON-MONEY MARKET DIVISIONS
Quotations of non-standard average annual total return for any division will
be expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a contract over a period of one, five and 10
years (or, if less, up to the life of the division), calculated pursuant to
the formula:
[P(1+T)^(n)] = ERV
Where:
(1) [P] equals a hypothetical initial premium payment of
$1,000
(2) [T] equals an average annual total return
(3) [n] equals the number of years
(4) [ERV] equals the ending redeemable value of a
hypothetical $1,000 initial premium payment made at the
beginning of the period (or fractional portion thereof)
assuming certain loading and charges are zero.
All total return figures reflect the deduction of the mortality and expense
risk charge and the administrative charges, but not the deduction of the
maximum sales load and the annual contract fee.
There are no current total returns provided because as of the date of the
Prospectus the Divisions had not accepted any assets under the terms of
the Prospectus.
5
<PAGE>
Performance information for a division may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, or other indices that measure performance of a
pertinent group of securities so that investors may compare a division's
results with those of a group of securities widely regarded by investors
as representative of the securities markets in general; (ii) other groups
of variable annuity separate accounts or other investment products tracked
by Lipper Analytical Services, a widely used independent research firm which
ranks mutual funds and other investment companies by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank such investment companies on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the
contract. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs
and expenses.
Performance information for any division reflects only the performance of a
hypothetical contract under which accumulation value is allocated to a
division during a particular time period on which the calculations are based.
Performance information should be considered in light of the investment
objectives and policies, characteristics and quality of the portfolio of the
Portfolio in which the Account B divisions invest, and the market conditions
during the given time period, and should not be considered as a
representation of what may be achieved in the future.
Reports and promotional literature may also contain other information
including the ranking of any division derived from rankings of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services or by other rating services, companies, publications, or
other persons who rank separate accounts or other investment products on
overall performance or other criteria.
PUBLISHED RATINGS
From time to time, the rating of Golden American as an insurance company by
A.M. Best may be referred to in advertisements or in reports to contract
owners. Each year the A.M. Best Company reviews the financial status of
thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. Best's ratings range from A+ + to F. An
A++ and A+ ratings mean, in the opinion of A.M. Best, that the insurer has
demonstrated the strongest ability to meet its respective policyholder and
other contractual obligations.
6
<PAGE>
INDEX OF INVESTMENT EXPERIENCE
The calculation of the Index of Investment Experience ("IIE") is discussed in
the prospectus for the Contracts under Measurement of Investment Experience.
The following illustrations show a calculation of a new IIE and the purchase
of Units (using hypothetical examples). Note that the examples below are
calculated for a Contract issued with the Annual Ratchet Enhanced Death Benefit
Option. The mortality and expense risk charge associated with the Standard
Death Benefit is lower than that used in the examples and would result in
higher IIE's or Accumulation Values.
<TABLE>
<CAPTION>
<S> <C>
1. IIE, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.00
2. Value of securities, beginning of period. . . . . . . . . . . . . . . . . . $ 10.00
3. Change in value of securities . . . . . . . . . . . . . . . . . . . . . . . $ 0.10
4. Gross investment return (3) divided by (2). . . . . . . . . . . . . . . . . 0.01
5. Less daily mortality and expense charge . . . . . . . . . . . . . . . . . . 0.00003425
6. Less asset based administrative charge. . . . . . . . . . . . . . . . . . . 0.00000411
7. Net investment return (4) minus (5) minus (6) . . . . . . . . . . . . . . . 0.00996164
8. Net investment factor (1.000000) plus (7) . . . . . . . . . . . . . . . . . 1.00996164
9. IIE, end of period (1) multiplied by (8). . . . . . . . . . . . . . . . . . $ 10.09961644
ILLUSTRATION OF PURCHASE OF UNITS (ASSUMING NO STATE PREMIUM TAX)
Example 2.
1. Initial Premium Payment . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000
2. IIE on effective date of purchase (see Example 1) . . . . . . . . . . . . . $ 10.00
3. Number of Units purchased [(1) divided by (2)] . . . . . . . . . . . . . . 100
4. IIE for valuation date following purchase
(see Example 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.09961644
5. Accumulation Value in account for valuation date following
purchase [(3) multiplied by (4)]. . . . . . . . . . . . . . . . . . . . . . $ 1,009.96
</TABLE>
IRA PARTIAL WITHDRAWAL OPTION
If the contract owner has an IRA contract and will attain age 70 1/2 in the
current calendar year, distributions will be made in accordance with the
requirements of Federal tax law. This option is available to assure that the
required minimum distributions from qualified plans under the Internal Revenue
Code (the "Code") are made. Under the Code, distributions must begin no later
than April 1st of the calendar year following the calendar year in which the
contract owner attains age 70 1/2. If the required minimum distribution is
not withdrawn, there may be a penalty tax in an amount equal to 50% of
7
<PAGE>
the
difference between the amount required to be withdrawn and the amount actually
withdrawn. Even if the IRA Partial Withdrawal Option is not elected,
distributions must nonetheless be made in accordance with the requirements of
Federal tax law.
Golden American notifies the contract owner of these regulations with a letter
mailed on January 1st of the calendar year in which the contract owner reaches
age 70 1/2 which explains the IRA Partial Withdrawal Option and supplies an
election form. If electing this option, the owner specifies whether the
withdrawal amount will be based on a life expectancy calculated on a single
life basis (contract owner's life only) or, if the contract owner is married,
on a joint life basis (contract owner's and spouse's lives combined). The
contract owner selects the payment mode on a monthly, quarterly or annual
basis. If the payment mode selected on the election form is more frequent
than annually, the payments in the first calendar year in which the option is
in effect will be based on the amount of payment modes remaining when Golden
American receives the completed election form. Golden American calculates the
IRA Partial Withdrawal amount each year based on the minimum distribution
rules. We do this by dividing the accumulation value by the life expectancy.
In the first year withdrawals begin, we use the accumulation value as of the
date of the first payment. Thereafter, we use the accumulation value on
December 31st of each year. The life expectancy is recalculated each year.
Certain minimum distribution rules govern payouts if the designated beneficiary
is other than the contract owner's spouse and the beneficiary is more than ten
years younger than the contract owner.
OTHER INFORMATION
A Registration statement has been filed with the SEC under the Securities Act
of 1933 as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of
the information set forth in the registration statement, amendments and
exhibits thereto has been included in this Statement of Additional Information.
Statements contained in this Statement of Additional Information concerning the
content of the Contracts and other legal instruments are intended to be
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the SEC.
8
<PAGE>
FINANCIAL STATEMENTS OF SEPARATE ACCOUNT B
The audited financial statements of Separate Account B are listed below and are
included in this Statement of Additional Information:
Report of Independent Auditors
Audited Financial Statements
Statement of Assets and Liability as of December 31, 1996
Statements of Operations for the Year ended December 31, 1996
Statements of Changes in Net Assets for the Years Ended
December 31, 1995 and 1996
Notes to Financial Statements
FINANCIAL STATEMENTS OF
THE MANAGED GLOBAL ACCOUNT OF SEPARATE ACCOUNT D
Since the Managed Global Account of Separate Account D is the Accounting
predecessor of the Managed Global Divison of Accuout B, the audited financial
statements of The Managed Global Account of Separate Account D listed below
appear in the Annual Report of The Managed Global Account of Separate Account
D which was filed with the SEC and are included in this Statement of Additional
Information:
Report of Independent Auditors
Financial Statements -- Audited
Statement of Assets and Liability as of December 31, 1995
Statements of Operations for the Year Ended December 31, 1995
Statements of Changes in Net Assets for the Years Ended
December 31, 1995 and 1994
Statement of Investments as of December 31, 1995
Notes to Audited Financial Statements
FINANCIAL STATEMENTS OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
The audited financial statements of Golden American Life Insurance Company
listed below are prepared in accordance with generally accepted accounting
principles ("GAAP") and appear in the Annual Report of the Golden American
Life Insurance Company which was filed with the SEC and are included in
this Statement of Additional Information.
Report of Independent Auditors
Audited Financial Statements -- GAAP
Consolidated Balance Sheets -- Post-Acquisition as of December 31,
1996 and Pre-Acquisition as of December 31, 1995
Consolidated Statements of Income -- Post-Acquisition for the period
August 14, 1996 through December 31, 1996 and Pre-Acquisition
for the period January 1, 1996 through August 13, 1996 and for
the years ended December 31, 1995 and 1994
Consolidated Statements of Changes in Stockholder's Equity -- Post-
Acquisition for the period August 14, 1996 through December 31,
1996 and Pre-Acquisition for the period January 1, 1996 through
August 13, 1996 and for the years ended December 31, 1995 and
1994
Consolidated Statements of Cash Flows -- Post-Acquisition for the
period August 14, 1996 through December 31, 1996 and Pre-
Acquisition for the period January 1, 1996 through August 13,
1996 and for the years ended December 31, 1995 and 1994
Notes to Consolidated Financial Statements -- December 31, 1996
9
<PAGE>
Financial Statements
Golden American Life Insurance Company
Separate Account B
Periods ended December 31, 1996 and 1995
with Report of Independent Auditors
Golden American Life Insurance Company
Separate Account B
Financial Statements
Periods ended December 31, 1996 and 1995
Contents
Report of Independent Auditors
Audited Financial Statements
Statement of Assets and Liability
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Report of Independent Auditors
The Board of Directors
Golden American Life Insurance Company
We have audited the accompanying statement of assets and liability of Separate
Account B as of December 31, 1996, and the related statements of operations for
the year then ended and the changes in net assets for each of the two years in
the period then ended. These financial statements are the responsibility of
the Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1996,
by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Separate Account B at December
31, 1996, and the results of their operations for the year then ended and the
changes in their net assets for each of the two years in the period then ended
in conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
Des Moines, Iowa
February 11, 1997
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
____________
<S> <C>
ASSETS
Investments at net asset value:
The GCG Trust Liquid Asset Series,
37,489,519 shares (cost - $37,490) $37,490
The GCG Trust Limited Maturity Bond Series,
5,211,785 shares (cost - $55,124) 54,359
The GCG Trust Natural Resources Series,
2,425,733 shares (cost - $39,320) 43,324
The GCG Trust All-Growth Series,
5,741,919 shares (cost - $75,442) 76,885
The GCG Trust Real Estate Series,
3,172,940 shares (cost - $39,689) 50,704
The GCG Trust Fully Managed Series,
9,081,446 shares (cost - $119,671) 134,496
The GCG Trust Multiple Allocation Series,
21,803,390 shares (cost - $265,203) 270,579
The GCG Trust Capital Appreciation Series,
9,698,486 shares (cost - $123,415) 146,059
The GCG Trust Rising Dividends Series,
7,820,089 shares (cost - $95,887) 123,636
The GCG Trust Emerging Markets Series,
3,824,614 shares (cost - $39,720) 37,175
The GCG Trust Market Manager Series,
422,420 shares (cost - $4,396) 5,584
The GCG Trust Value Equity Series,
3,080,715 shares (cost - $40,413) 42,884
The GCG Trust Strategic Equity Series,
2,557,621 shares (cost - $27,198) 29,873
The GCG Trust Small Cap Series,
2,753,970 shares (cost - $32,401) 33,075
The GCG Trust Managed Global Series,
7,754,689 shares (cost - $81,891) 86,310
Equi-Select Series Trust OTC Portfolio,
315,154 shares (cost - $4,481) 4,356
Equi-Select Series Trust Growth & Income Portfolio,
656,074 shares (cost - $7,989) 8,258
____________
TOTAL INVESTMENTS (cost - $1,089,730) 1,185,047
Accrued investment income 238
____________
TOTAL ASSETS 1,185,285
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1996
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
____________
<S> <C>
LIABILITY
Payable to Golden American Life Insurance Company $712
____________
TOTAL NET ASSETS $1,184,573
============
NET ASSETS
For Variable Annuity Insurance Contracts $1,161,168
Retained in Separate Account B by Golden American
Life Insurance Company 23,405
____________
TOTAL NET ASSETS $1,184,573
============
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996, Except as Noted
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited
Liquid Maturity Natural
Asset Bond Resources
Division Division Division
__________ _________ __________
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS)
Income:
Dividends $1,868 $5,950 $146
Capital gains distributions -- -- 4,557
__________ _________ __________
TOTAL INVESTMENT INCOME 1,868 5,950 4,703
Expenses:
Mortality and expense risk and other charges (405) (629) (382)
Annual administrative charges (16) (21) (22)
Minimum death benefit guarantee charges (8) (2) (6)
Contingent deferred sales charges (1) (2) (4)
Other contract charges -- (5) (4)
Amortization of deferred charges related to:
Deferred sales load (708) (785) (370)
Premium taxes (7) (12) (6)
__________ _________ __________
TOTAL EXPENSES BEFORE WAIVER (1,145) (1,456) (794)
Fees waived by Golden American 7 13 7
__________ _________ __________
NET EXPENSES (1,138) (1,443) (787)
__________ _________ __________
NET INVESTMENT INCOME (LOSS) 730 4,507 3,916
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments -- 314 2,353
Net unrealized appreciation (depreciation)
of investments -- (3,831) 2,704
__________ _________ __________
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $730 $990 $8,973
========== ========= ==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
All- Real Fully
Growth Estate Managed
Division Division Division
__________ _________ __________
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS)
Income:
Dividends $1,662 $2,214 $4,716
Capital gains distributions 252 840 5,610
__________ _________ __________
TOTAL INVESTMENT INCOME 1,914 3,054 10,326
Expenses:
Mortality and expense risk and other charges (955) (396) (1,334)
Annual administrative charges (43) (23) (69)
Minimum death benefit guarantee charges (4) (2) (4)
Contingent deferred sales charges (22) (4) (36)
Other contract charges (2) (2) (4)
Amortization of deferred charges related to:
Deferred sales load (1,044) (413) (1,417)
Premium taxes (28) (9) (37)
__________ _________ __________
TOTAL EXPENSES BEFORE WAIVER (2,098) (849) (2,901)
Fees waived by Golden American 34 9 38
__________ _________ __________
NET EXPENSES (2,064) (840) (2,863)
__________ _________ __________
NET INVESTMENT INCOME (LOSS) (150) 2,214 7,463
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments 2,112 652 2,245
Net unrealized appreciation (depreciation)
of investments (4,894) 8,605 6,614
__________ _________ __________
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ($2,932) $11,471 $16,322
========== ========= ==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Multiple Capital
Alloca- Apprecia- Rising
tion tion Dividends
Division Division Division
__________ _________ __________
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS)
Income:
Dividends $13,260 $1,532 $970
Capital gains distributions 11,463 9,172 822
__________ _________ __________
TOTAL INVESTMENT INCOME 24,723 10,704 1,792
Expenses:
Mortality and expense risk and other charges (2,989) (1,414) (1,088)
Annual administrative charges (153) (73) (62)
Minimum death benefit guarantee charges (18) (2) (2)
Contingent deferred sales charges (30) (19) (30)
Other contract charges (13) (5) (8)
Amortization of deferred charges related to:
Deferred sales load (3,436) (1,439) (1,069)
Premium taxes (62) (41) (17)
__________ _________ __________
TOTAL EXPENSES BEFORE WAIVER (6,701) (2,993) (2,276)
Fees waived by Golden American 69 46 29
__________ _________ __________
NET EXPENSES (6,632) (2,947) (2,247)
__________ _________ __________
NET INVESTMENT INCOME (LOSS) 18,091 7,757 (455)
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments 6,043 4,853 4,125
Net unrealized appreciation (depreciation)
of investments (7,108) 8,839 12,317
__________ _________ __________
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $17,026 $21,449 $15,987
========== ========= ==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Emerging Market Value
Markets Manager Equity
Division Division Division
__________ _________ __________
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS)
Income:
Dividends -- $177 $732
Capital gains distributions -- 272 1,220
__________ _________ __________
TOTAL INVESTMENT INCOME -- 449 1,952
Expenses:
Mortality and expense risk and other charges ($426) -- (441)
Annual administrative charges (22) (1) (21)
Minimum death benefit guarantee charges (2) -- (1)
Contingent deferred sales charges (12) -- (18)
Other contract charges (2) -- (4)
Amortization of deferred charges related to:
Deferred sales load (535) (53) (317)
Premium taxes (7) -- (3)
__________ _________ __________
TOTAL EXPENSES BEFORE WAIVER (1,006) (54) (805)
Fees waived by Golden American 8 1 10
__________ _________ __________
NET EXPENSES (998) (53) (795)
__________ _________ __________
NET INVESTMENT INCOME (LOSS) (998) 396 1,157
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments (2,959) 327 1,290
Net unrealized appreciation (depreciation)
of investments 5,674 245 601
__________ _________ __________
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,717 $968 $3,048
========== ========= ==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Managed
Strategic Small Cap Global
Equity Division Division
Division (a) (b)
__________ __________ __________
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS)
Income:
Dividends $342 -- --
Capital gains distributions 328 -- $396
__________ __________ __________
TOTAL INVESTMENT INCOME 670 -- 396
Expenses:
Mortality and expense risk and other charges (249) ($222) ($302)
Annual administrative charges (15) (21) (49)
Minimum death benefit guarantee charges (2) (1) --
Contingent deferred sales charges (19) (23) (4)
Other contract charges (2) (3) (6)
Amortization of deferred charges related to:
Deferred sales load (112) (101) (386)
Premium taxes (2) (1) (6)
__________ __________ __________
TOTAL EXPENSES BEFORE WAIVER (401) (372) (753)
Fees waived by Golden American 6 3 7
__________ __________ __________
NET EXPENSES (395) (369) (746)
__________ __________ __________
NET INVESTMENT INCOME (LOSS) 275 (369) (350)
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments 161 25 116
Net unrealized appreciation (depreciation)
of investments 2,648 674 4,419
__________ __________ __________
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $3,084 $330 $4,185
========== ========== ==========
<FN>
(a) Commencement of operations, January 3, 1996
(b) Commencement of operations, September 3, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Growth &
OTC Income
Division Division
(c) (c) Combined
__________ _________ __________
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS)
Income:
Dividends -- $10 $33,579
Capital gains distributions $218 10 35,160
__________ _________ __________
TOTAL INVESTMENT INCOME 218 20 68,739
Expenses:
Mortality and expense risk and other charges (6) (12) (11,250)
Annual administrative charges (2) (4) (617)
Minimum death benefit guarantee charges -- -- (54)
Contingent deferred sales charges (1) -- (225)
Other contract charges (1) -- (61)
Amortization of deferred charges related to:
Deferred sales load (4) (4) (12,193)
Premium taxes -- -- (238)
__________ _________ __________
TOTAL EXPENSES BEFORE WAIVER (14) (20) (24,638)
Fees waived by Golden American -- -- 287
__________ _________ __________
NET EXPENSES (14) (20) (24,351)
__________ _________ __________
NET INVESTMENT INCOME (LOSS) 204 -- 44,388
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments 1 1 21,659
Net unrealized appreciation (depreciation)
of investments (125) 269 37,651
__________ _________ __________
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $80 $270 $103,698
========== ========= ==========
<FN>
(c) Commencement of operations, September 23, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Dollars in thousands)
<TABLE>
<CAPTION>
Liquid
Asset
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $45,366
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 1,059
Net realized gain (loss) on investments --
Net unrealized appreciation of investments --
__________
Net increase (decrease) in net assets resulting from operations 1,059
Changes from principal transactions:
Purchase payments 10,242
Contract distributions and terminations (11,794)
Transfer payments from (to) Fixed Accounts and other Divisions (8,292)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (90)
__________
Increase (decrease) in net assets derived from principal
transactions (9,934)
__________
Total increase (decrease) (8,875)
__________
NET ASSETS AT DECEMBER 31, 1995 36,491
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Liquid
Asset
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $730
Net realized gain (loss) on investments --
Net unrealized appreciation (depreciation) of investments --
__________
Net increase (decrease) in net assets resulting from operations 730
Changes from principal transactions:
Purchase payments 14,178
Contract distributions and terminations (15,313)
Transfer payments from (to) Fixed Accounts and other Divisions 1,242
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 148
__________
Increase (decrease) in net assets derived from principal
transactions 255
__________
Total increase (decrease) 985
__________
NET ASSETS AT DECEMBER 31, 1996 $37,476
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited
Maturity
Bond
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $71,573
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) (1,721)
Net realized gain (loss) on investments (138)
Net unrealized appreciation of investments 7,902
__________
Net increase (decrease) in net assets resulting from operations 6,043
Changes from principal transactions:
Purchase payments 7,209
Contract distributions and terminations (9,461)
Transfer payments from (to) Fixed Accounts and other Divisions (7,297)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (230)
__________
Increase (decrease) in net assets derived from principal
transactions (9,779)
__________
Total increase (decrease) (3,736)
__________
NET ASSETS AT DECEMBER 31, 1995 67,837
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited
Maturity
Bond
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $4,507
Net realized gain (loss) on investments 314
Net unrealized appreciation (depreciation) of investments (3,831)
__________
Net increase (decrease) in net assets resulting from operations 990
Changes from principal transactions:
Purchase payments 5,869
Contract distributions and terminations (9,672)
Transfer payments from (to) Fixed Accounts and other Divisions (10,189)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (501)
__________
Increase (decrease) in net assets derived from principal
transactions (14,493)
__________
Total increase (decrease) (13,503)
__________
NET ASSETS AT DECEMBER 31, 1996 $54,334
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Natural
Resources
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $32,746
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) (112)
Net realized gain (loss) on investments 1,545
Net unrealized appreciation of investments 495
__________
Net increase (decrease) in net assets resulting from operations 1,928
Changes from principal transactions:
Purchase payments 2,021
Contract distributions and terminations (3,402)
Transfer payments from (to) Fixed Accounts and other Divisions (6,045)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (258)
__________
Increase (decrease) in net assets derived from principal
transactions (7,684)
__________
Total increase (decrease) (5,756)
__________
NET ASSETS AT DECEMBER 31, 1995 26,990
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Natural
Resources
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $3,916
Net realized gain (loss) on investments 2,353
Net unrealized appreciation (depreciation) of investments 2,704
__________
Net increase (decrease) in net assets resulting from operations 8,973
Changes from principal transactions:
Purchase payments 6,154
Contract distributions and terminations (4,962)
Transfer payments from (to) Fixed Accounts and other Divisions 5,904
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 242
__________
Increase (decrease) in net assets derived from principal
transactions 7,338
__________
Total increase (decrease) 16,311
__________
NET ASSETS AT DECEMBER 31, 1996 $43,301
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
All-Growth
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $70,621
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 2,642
Net realized gain (loss) on investments 1,011
Net unrealized appreciation of investments 10,501
__________
Net increase (decrease) in net assets resulting from operations 14,154
Changes from principal transactions:
Purchase payments 11,312
Contract distributions and terminations (10,713)
Transfer payments from (to) Fixed Accounts and other Divisions 5,721
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 861
__________
Increase (decrease) in net assets derived from principal
transactions 7,181
__________
Total increase (decrease) 21,335
__________
NET ASSETS AT DECEMBER 31, 1995 91,956
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
All-Growth
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) ($150)
Net realized gain (loss) on investments 2,112
Net unrealized appreciation (depreciation) of investments (4,894)
__________
Net increase (decrease) in net assets resulting from operations (2,932)
Changes from principal transactions:
Purchase payments 10,539
Contract distributions and terminations (12,597)
Transfer payments from (to) Fixed Accounts and other Divisions (9,493)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (631)
__________
Increase (decrease) in net assets derived from principal
transactions (12,182)
__________
Total increase (decrease) (15,114)
__________
NET ASSETS AT DECEMBER 31, 1996 $76,842
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Real
Estate
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $36,934
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 521
Net realized gain (loss) on investments 369
Net unrealized appreciation of investments 3,425
__________
Net increase (decrease) in net assets resulting from operations 4,315
Changes from principal transactions:
Purchase payments 1,833
Contract distributions and terminations (4,799)
Transfer payments from (to) Fixed Accounts and other Divisions (3,325)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (145)
__________
Increase (decrease) in net assets derived from principal
transactions (6,436)
__________
Total increase (decrease) (2,121)
__________
NET ASSETS AT DECEMBER 31, 1995 34,813
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Real
Estate
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $2,214
Net realized gain (loss) on investments 652
Net unrealized appreciation (depreciation) of investments 8,605
__________
Net increase (decrease) in net assets resulting from operations 11,471
Changes from principal transactions:
Purchase payments 5,981
Contract distributions and terminations (4,775)
Transfer payments from (to) Fixed Accounts and other Divisions 3,076
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 115
__________
Increase (decrease) in net assets derived from principal
transactions 4,397
__________
Total increase (decrease) 15,868
__________
NET ASSETS AT DECEMBER 31, 1996 $50,681
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Fully
Managed
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $98,837
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 179
Net realized gain (loss) on investments 1,311
Net unrealized appreciation of investments 16,314
__________
Net increase (decrease) in net assets resulting from operations 17,804
Changes from principal transactions:
Purchase payments 9,654
Contract distributions and terminations (13,651)
Transfer payments from (to) Fixed Accounts and other Divisions 4,159
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 524
__________
Increase (decrease) in net assets derived from principal
transactions 686
__________
Total increase (decrease) 18,490
__________
NET ASSETS AT DECEMBER 31, 1995 117,327
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Fully
Managed
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $7,463
Net realized gain (loss) on investments 2,245
Net unrealized appreciation (depreciation) of investments 6,614
__________
Net increase (decrease) in net assets resulting from operations 16,322
Changes from principal transactions:
Purchase payments 16,217
Contract distributions and terminations (17,846)
Transfer payments from (to) Fixed Accounts and other Divisions 2,478
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (67)
__________
Increase (decrease) in net assets derived from principal
transactions 782
__________
Total increase (decrease) 17,104
__________
NET ASSETS AT DECEMBER 31, 1996 $134,431
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Multiple
Allocation
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $297,508
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 14,068
Net realized gain (loss) on investments 4,715
Net unrealized appreciation of investments 26,239
__________
Net increase (decrease) in net assets resulting from operations 45,022
Changes from principal transactions:
Purchase payments 17,072
Contract distributions and terminations (42,733)
Transfer payments from (to) Fixed Accounts and other Divisions (11,292)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (75)
__________
Increase (decrease) in net assets derived from principal
transactions (37,028)
__________
Total increase (decrease) 7,994
__________
NET ASSETS AT DECEMBER 31, 1995 305,502
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Multiple
Allocation
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $18,091
Net realized gain (loss) on investments 6,043
Net unrealized appreciation (depreciation) of investments (7,108)
__________
Net increase (decrease) in net assets resulting from operations 17,026
Changes from principal transactions:
Purchase payments 16,631
Contract distributions and terminations (44,014)
Transfer payments from (to) Fixed Accounts and other Divisions (23,461)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (1,257)
__________
Increase (decrease) in net assets derived from principal
transactions (52,101)
__________
Total increase (decrease) (35,075)
__________
NET ASSETS AT DECEMBER 31, 1996 $270,427
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Capital
Appreciation
Division
____________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $88,346
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 7,594
Net realized gain (loss) on investments 2,221
Net unrealized appreciation of investments 14,531
____________
Net increase (decrease) in net assets resulting from operations 24,346
Changes from principal transactions:
Purchase payments 8,831
Contract distributions and terminations (13,163)
Transfer payments from (to) Fixed Accounts and other Divisions 11,592
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 1,097
____________
Increase (decrease) in net assets derived from principal
transactions 8,357
____________
Total increase (decrease) 32,703
____________
NET ASSETS AT DECEMBER 31, 1995 121,049
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Capital
Appreciation
Division
____________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $7,757
Net realized gain (loss) on investments 4,853
Net unrealized appreciation (depreciation) of investments 8,839
____________
Net increase (decrease) in net assets resulting from operations 21,449
Changes from principal transactions:
Purchase payments 16,081
Contract distributions and terminations (16,095)
Transfer payments from (to) Fixed Accounts and other Divisions 3,299
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 206
____________
Increase (decrease) in net assets derived from principal
transactions 3,491
____________
Total increase (decrease) 24,940
____________
NET ASSETS AT DECEMBER 31, 1996 $145,989
============
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Rising
Dividends
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $50,385
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) (1,130)
Net realized gain (loss) on investments 776
Net unrealized appreciation of investments 16,037
__________
Net increase (decrease) in net assets resulting from operations 15,683
Changes from principal transactions:
Purchase payments 11,422
Contract distributions and terminations (9,800)
Transfer payments from (to) Fixed Accounts and other Divisions 11,423
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 1,229
__________
Increase (decrease) in net assets derived from principal
transactions 14,274
__________
Total increase (decrease) 29,957
__________
NET ASSETS AT DECEMBER 31, 1995 80,342
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Rising
Dividends
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) ($455)
Net realized gain (loss) on investments 4,125
Net unrealized appreciation (depreciation) of investments 12,317
__________
Net increase (decrease) in net assets resulting from operations 15,987
Changes from principal transactions:
Purchase payments 25,572
Contract distributions and terminations (12,639)
Transfer payments from (to) Fixed Accounts and other Divisions 13,857
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 454
__________
Increase (decrease) in net assets derived from principal
transactions 27,244
__________
Total increase (decrease) 43,231
__________
NET ASSETS AT DECEMBER 31, 1996 $123,573
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Emerging
Markets
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $59,746
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) (1,137)
Net realized gain (loss) on investments (7,448)
Net unrealized appreciation of investments 1,603
__________
Net increase (decrease) in net assets resulting from operations (6,982)
Changes from principal transactions:
Purchase payments 7,739
Contract distributions and terminations (7,740)
Transfer payments from (to) Fixed Accounts and other Divisions (14,939)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (937)
__________
Increase (decrease) in net assets derived from principal
transactions (15,877)
__________
Total increase (decrease) (22,859)
__________
NET ASSETS AT DECEMBER 31, 1995 36,887
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Emerging
Markets
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) ($998)
Net realized gain (loss) on investments (2,959)
Net unrealized appreciation (depreciation) of investments 5,674
__________
Net increase (decrease) in net assets resulting from operations 1,717
Changes from principal transactions:
Purchase payments 6,432
Contract distributions and terminations (6,450)
Transfer payments from (to) Fixed Accounts and other Divisions (1,273)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (160)
__________
Increase (decrease) in net assets derived from principal
transactions (1,451)
__________
Total increase (decrease) 266
__________
NET ASSETS AT DECEMBER 31, 1996 $37,153
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Market
Manager
Division
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $2,752
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 144
Net realized gain (loss) on investments 29
Net unrealized appreciation of investments 944
__________
Net increase (decrease) in net assets resulting from operations 1,117
Changes from principal transactions:
Purchase payments 2,140
Contract distributions and terminations (767)
Transfer payments from (to) Fixed Accounts and other Divisions (208)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 172
__________
Increase (decrease) in net assets derived from principal
transactions 1,337
__________
Total increase (decrease) 2,454
__________
NET ASSETS AT DECEMBER 31, 1995 5,206
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Market
Manager
Division
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $396
Net realized gain (loss) on investments 327
Net unrealized appreciation (depreciation) of investments 245
__________
Net increase (decrease) in net assets resulting from operations 968
Changes from principal transactions:
Purchase payments (111)
Contract distributions and terminations (383)
Transfer payments from (to) Fixed Accounts and other Divisions (187)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (14)
__________
Increase (decrease) in net assets derived from principal
transactions (695)
__________
Total increase (decrease) 273
__________
NET ASSETS AT DECEMBER 31, 1996 $5,479
==========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Value
Equity
Division
(a)
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 --
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $478
Net realized gain (loss) on investments 687
Net unrealized appreciation of investments 1,870
__________
Net increase (decrease) in net assets resulting from operations 3,035
Changes from principal transactions:
Purchase payments 8,619
Contract distributions and terminations (776)
Transfer payments from (to) Fixed Accounts and other Divisions 16,429
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 1,140
__________
Increase (decrease) in net assets derived from principal
transactions 25,412
__________
Total increase (decrease) 28,447
__________
NET ASSETS AT DECEMBER 31, 1995 28,447
<FN>
(a) Commencement of operations, January 10, 1995
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Value
Equity
Division
(a)
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $1,157
Net realized gain (loss) on investments 1,290
Net unrealized appreciation (depreciation) of investments 601
__________
Net increase (decrease) in net assets resulting from operations 3,048
Changes from principal transactions:
Purchase payments 15,780
Contract distributions and terminations (3,990)
Transfer payments from (to) Fixed Accounts and other Divisions (376)
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company (48)
__________
Increase (decrease) in net assets derived from principal
transactions 11,366
__________
Total increase (decrease) 14,414
__________
NET ASSETS AT DECEMBER 31, 1996 $42,861
==========
<FN>
(a) Commencement of operations, January 10, 1995
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Strategic
Equity
Division
(b)
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 --
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) ($8)
Net realized gain (loss) on investments (1)
Net unrealized appreciation of investments 28
__________
Net increase (decrease) in net assets resulting from operations 19
Changes from principal transactions:
Purchase payments 3,211
Contract distributions and terminations (172)
Transfer payments from (to) Fixed Accounts and other Divisions 4,796
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 177
__________
Increase (decrease) in net assets derived from principal
transactions 8,012
__________
Total increase (decrease) 8,031
__________
NET ASSETS AT DECEMBER 31, 1995 8,031
<FN>
(b) Commencement of operations, October 3, 1995
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Strategic
Equity
Division
(b)
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $275
Net realized gain (loss) on investments 161
Net unrealized appreciation (depreciation) of investments 2,648
__________
Net increase (decrease) in net assets resulting from operations 3,084
Changes from principal transactions:
Purchase payments 12,046
Contract distributions and terminations (1,671)
Transfer payments from (to) Fixed Accounts and other Divisions 8,149
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 219
__________
Increase (decrease) in net assets derived from principal
transactions 18,743
__________
Total increase (decrease) 21,827
__________
NET ASSETS AT DECEMBER 31, 1996 $29,858
==========
<FN>
(b) Commencement of operations, October 3, 1995
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Small Cap
Division
(c)
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 --
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) --
Net realized gain (loss) on investments --
Net unrealized appreciation of investments --
__________
Net increase (decrease) in net assets resulting from operations --
Changes from principal transactions:
Purchase payments --
Contract distributions and terminations --
Transfer payments from (to) Fixed Accounts and other Divisions --
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company --
__________
Increase (decrease) in net assets derived from principal
transactions --
__________
Total increase (decrease) --
__________
NET ASSETS AT DECEMBER 31, 1995 --
<FN>
(c) Commencement of operations, January 3, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Small Cap
Division
(c)
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) ($369)
Net realized gain (loss) on investments 25
Net unrealized appreciation (depreciation) of investments 674
__________
Net increase (decrease) in net assets resulting from operations 330
Changes from principal transactions:
Purchase payments 17,552
Contract distributions and terminations (1,530)
Transfer payments from (to) Fixed Accounts and other Divisions 16,293
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 411
__________
Increase (decrease) in net assets derived from principal
transactions 32,726
__________
Total increase (decrease) 33,056
__________
NET ASSETS AT DECEMBER 31, 1996 $33,056
==========
<FN>
(c) Commencement of operations, January 3, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Managed
Global
Division
(d)
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 --
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) --
Net realized gain (loss) on investments --
Net unrealized appreciation of investments --
__________
Net increase (decrease) in net assets resulting from operations --
Changes from principal transactions:
Purchase payments --
Contract distributions and terminations --
Transfer payments from (to) Fixed Accounts and other Divisions --
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company --
__________
Increase (decrease) in net assets derived from principal
transactions --
__________
Total increase (decrease) --
__________
NET ASSETS AT DECEMBER 31, 1995 --
<FN>
(d) Commencement of operations, September 3, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Managed
Global
Division
(d)
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) ($350)
Net realized gain (loss) on investments 116
Net unrealized appreciation (depreciation) of investments 4,419
__________
Net increase (decrease) in net assets resulting from operations 4,185
Changes from principal transactions:
Purchase payments 3,524
Contract distributions and terminations (3,844)
Transfer payments from (to) Fixed Accounts and other Divisions 80,286
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 2,115
__________
Increase (decrease) in net assets derived from principal
transactions 82,081
__________
Total increase (decrease) 86,266
__________
NET ASSETS AT DECEMBER 31, 1996 $86,266
==========
<FN>
(d) Commencement of operations, September 3, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
OTC
Division
(e)
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 --
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) --
Net realized gain (loss) on investments --
Net unrealized appreciation of investments --
__________
Net increase (decrease) in net assets resulting from operations --
__________
Changes from principal transactions:
Purchase payments --
Contract distributions and terminations --
Transfer payments from (to) Fixed Accounts and other Divisions --
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company --
__________
Increase (decrease) in net assets derived from principal
transactions --
__________
Total increase (decrease) --
__________
NET ASSETS AT DECEMBER 31, 1995 --
<FN>
(e) Commencement of operations, September 23, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
OTC
Division
(e)
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $204
Net realized gain (loss) on investments 1
Net unrealized appreciation (depreciation) of investments (125)
__________
Net increase (decrease) in net assets resulting from operations 80
Changes from principal transactions:
Purchase payments 1,207
Contract distributions and terminations (36)
Transfer payments from (to) Fixed Accounts and other Divisions 3,248
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 72
__________
Increase (decrease) in net assets derived from principal
transactions 4,491
__________
Total increase (decrease) 4,571
__________
NET ASSETS AT DECEMBER 31, 1996 $4,571
==========
<FN>
(e) Commencement of operations, September 23, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Growth &
Income
Division
(e)
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 --
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) --
Net realized gain (loss) on investments --
Net unrealized appreciation of investments --
__________
Net increase (decrease) in net assets resulting from operations --
Changes from principal transactions:
Purchase payments --
Contract distributions and terminations --
Transfer payments from (to) Fixed Accounts and other Divisions --
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company --
__________
Increase (decrease) in net assets derived from principal
transactions --
__________
Total increase (decrease) --
__________
NET ASSETS AT DECEMBER 31, 1995 --
<FN>
(e) Commencement of operations, September 23, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Growth &
Income
Division
(e)
__________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) --
Net realized gain (loss) on investments $1
Net unrealized appreciation (depreciation) of investments 269
__________
Net increase (decrease) in net assets resulting from operations 270
Changes from principal transactions:
Purchase payments 2,760
Contract distributions and terminations (43)
Transfer payments from (to) Fixed Accounts and other Divisions 5,164
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 124
__________
Increase (decrease) in net assets derived from principal
transactions 8,005
__________
Total increase (decrease) 8,275
__________
NET ASSETS AT DECEMBER 31, 1996 $8,275
==========
<FN>
(e) Commencement of operations, September 23, 1996
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
__________
<S> <C>
NET ASSETS AT JANUARY 1, 1995 $854,814
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) 22,577
Net realized gain (loss) on investments 5,077
Net unrealized appreciation of investments 99,889
__________
Net increase (decrease) in net assets resulting from operations 127,543
Changes from principal transactions:
Purchase payments 101,305
Contract distributions and terminations (128,971)
Transfer payments from (to) Fixed Accounts and other Divisions 2,722
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 3,465
__________
Increase (decrease) in net assets derived from principal
transactions (21,479)
__________
Total increase (decrease) 106,064
__________
NET ASSETS AT DECEMBER 31, 1995 960,878
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1996, Except as Noted
(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
___________
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $44,388
Net realized gain (loss) on investments 21,659
Net unrealized appreciation (depreciation) of investments 37,651
___________
Net increase (decrease) in net assets resulting from operations 103,698
Changes from principal transactions:
Purchase payments 176,412
Contract distributions and terminations (155,860)
Transfer payments from (to) Fixed Accounts and other Divisions 98,017
Addition to (reallocation from) assets retained in the Account
by Golden American Life Insurance Company 1,428
___________
Increase (decrease) in net assets derived from principal
transactions 119,997
___________
Total increase (decrease) 223,695
___________
NET ASSETS AT DECEMBER 31, 1996 $1,184,573
===========
</TABLE>
See accompanying notes.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 - ORGANIZATION
Separate Account B (the "Account") was established on June 14, 1988, by Golden
American Life Insurance Company ("Golden American"), under Minnesota insurance
law to support the operations of variable annuity contracts ("Contracts").
Effective September 30, 1992, Golden American became a wholly-owned subsidiary
of BT Variable, Inc. ("BTV"), an indirect wholly-owned subsidiary of Bankers
Trust Company. Effective December 30, 1993, Golden American was redomesticated
from the State of Minnesota to the State of Delaware. Effective August 13,
1996, Equitable of Iowa Companies acquired all of the outstanding capital stock
of BTV. As of August 14, 1996, BT Variable, Inc.'s name was changed to EIC
Variable, Inc. These transactions had no effect on the accompanying financial
statements. Golden American is primarily engaged in the issuance of variable
insurance products and is licensed as a life insurance company in the District
of Columbia and all states except New York.
Operations of the Account commenced on January 25, 1989. The Account is
registered as a unit investment trust with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended. Golden
American provides for variable accumulation and benefits under the contracts by
crediting annuity considerations to one or more divisions within the Account or
to the Golden American Guaranteed Interest Division, the Golden American Fixed
Interest Division and the Fixed Separate Account, which are not part of the
Account, as directed by the Contractowners. The portion of the Account's assets
applicable to Contracts will not be chargeable with liabilities arising out of
any other business Golden American may conduct, but obligations of the Account,
including the promise to make benefit payments, are obligations of Golden
American. The assets and liabilities of the Account are clearly identified and
distinguished from the other assets and liabilities of Golden American.
At December 31, 1996, the Account had, under GoldenSelect Contracts, seventeen
investment divisions: the Liquid Asset, the Limited Maturity Bond, the Natural
Resources, the All-Growth, the Real Estate, the Fully Managed, the Multiple
Allocation, the Capital Appreciation, the Rising Dividends, the Emerging
Markets, the Market Manager, the Value Equity (commenced operations January,
1995), the Strategic Equity (commenced operations October, 1995), the Small Cap
(commenced operations January, 1996), the Managed Global and the OTC (commenced
operations September, 1996) and the Growth & Income (commenced operations
September, 1996) Divisions ("Divisions"). The Managed Global Division was
formerly the Managed Global Account of Golden American's Separate Account D
from October 12, 1992 until September 3, 1996. The assets in each Division are
invested in shares of a designated series ("Series," which may also be referred
to as "Portfolio") of mutual funds of The GCG Trust or the Equi-Select Series
Trust (the "Trusts"). Effective January, 1997, the name of the Natural
Resource Division was changed to the Hard Assets Division. Effective February,
1997, the Research, the Total Return, and the Value + Growth Divisions
commenced operations. The Account also includes The Fund For Life Division,
which is not included in the accompanying financial statements, and which
ceased to accept new Contracts effective December 31, 1994.
The Market Manager Division was open for investment for only a brief period
during 1994 and 1995. This Division is now closed and contractowners are
not permitted to direct their investments into this Division. Contractowners
with investments in the Market Manager Division were permitted to elect to
update their contracts to DVA PLUS contracts.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies of the
Account:
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investments: Investments are made in shares of a Series or Portfolio of the
Trusts and are valued at the net asset value per share of the respective Series
or Portfolio of the Trusts. Investment transactions in each Series or
Portfolio of the Trusts are recorded on the trade date. Distributions of net
investment income and capital gains of each Series or Portfolio of the Trusts
are recognized on the ex-distribution date. Realized gains and losses on
redemptions of the shares of the Series or Portfolio of the Trusts are
determined on the specific identification basis.
Federal Income Taxes: Operations of the Account form a part of, and are taxed
with, the total operations of Golden American which is taxed as a life
insurance company under the Internal Revenue Code. Earnings and realized
capital gains of the Account attributable to the Contractowners are excluded in
the determination of the federal income tax liability of Golden American.
Reclassification: Certain amounts in the 1995 financial statements have been
reclassified to conform to the 1996 financial statement presentation.
NOTE 3 - CHARGES AND FEES
Contracts currently being sold include the DVA 100, DVA Series 100 and the
DVA PLUS. The DVA PLUS has three different death benefit options referred to
as Standard, Annual Ratchet and 7% Solution. Golden American discontinued
external sales of DVA 80 in May 1991. In December 1995, Golden American also
discontinued external sales of DVA 100, however, they continued to be available
to Golden American employees and agents. Under the terms of the Contracts,
certain charges are allocated to the Contracts to cover Golden American's
expenses in connection with the issuance and administration of the Contracts.
Following is a summary of these charges:
Mortality and Expense Risk and Other Charges
Mortality and Expense Risk Charges: Golden American assumes mortality and
expense risks related to the operations of the Account and, in accordance
with the terms of the Contracts, deducts a daily charge from the assets of
the Account. Daily charges are deducted at annual rates of .80%, .90%,
1.25%, 1.10%, 1.25% and 1.40% of the assets attributable to the DVA 80, DVA
100, DVA Series 100, DVA PLUS-Standard, DVA PLUS-Annual Ratchet and DVA
PLUS-7% Solution, respectively, to cover these risks.
Asset Based Administrative Charges: A daily charge at an annual rate of .10%
is deducted from assets attributable to DVA 100 and DVA Series 100 Contracts.
A daily charge at an annual rate of .15% is deducted from the assets
attributable to DVA PLUS Contracts.
Annual Administrative Charges: An administrative charge of $40 per Contract
year is deducted from the accumulation value of Deferred Annuity Contracts to
cover ongoing administrative expenses. The charge is incurred on the Contract
anniversary date and deducted at the end of the Contract anniversary period.
This charge has been waived for certain offerings of the Contracts.
NOTE 3 - CHARGES AND FEES (Continued)
Minimum Death Benefit Guarantee Charges: For certain Contracts, a minimum
death benefit guarantee charge of up to $1.20 per $1,000 of guaranteed death
benefit per Contract year is deducted from the accumulation value of Deferred
Annuity Contracts on each Contract anniversary date.
Contingent Deferred Sales Charges: Under DVA PLUS Contracts issued subsequent
to September 1995, a contingent deferred sales charge ("Surrender Charge") is
imposed as a percentage of each premium payment if the Contract is surrendered
or an excess partial withdrawal is taken during the seven-year period from the
date a premium payment is received. The Surrender Charge is imposed at a rate
of 7% during the first two complete years after purchase declining to 6%, 5%,
4%, 3% and 1% after the second, third, fourth, fifth and sixth years,
respectively.
Other Contract Charges: Under DVA 80, DVA 100 and DVA Series 100 contracts,
a charge is deducted from the accumulation value for contracts taking more than
one conventional partial withdrawal during a contract year. For DVA 80 and DVA
100 contracts, annual distribution fees are deducted from contract accumulation
values.
Deferred Sales Load: Under contracts offered prior to October 1995, a sales
load of up to 7 1/2% was applicable to each premium payment for sales-related
expenses as specified in the Contracts. For DVA Series 100, the sales load is
deducted in equal annual installments over the period the Contract is in force,
not to exceed 10 years. For DVA 80 and DVA 100 Contracts, although the sales
load is chargeable to each premium when it is received by Golden American, the
amount of such charge is initially advanced by Golden American to
Contractowners and included in the accumulation value and then deducted in
equal installments on each Contract anniversary date over a period of six
years. Upon surrender of the Contract, the unamortized deferred sales load is
deducted from the accumulation value by Golden American. In addition, when
partial withdrawal limits are exceeded, a portion of the unamortized deferred
sales load is deducted.
Premium Taxes: For certain contracts, premium taxes are deducted, where
applicable, from the accumulation value of each Contract. The amount and
timing of the deduction depend on the annuitant's state of residence and
currently ranges up to 3.5% of premiums.
Fees Waived by Golden American: Certain charges and fees for various types of
Contracts are currently waived by Golden American. Golden American reserves
the right to discontinue these waivers at its discretion or to conform with
changes in the law.
NOTE 3 - CHARGES AND FEES (Continued)
The net assets retained in the Account by Golden American in the accompanying
financial statements represent the unamortized deferred sales load and premium
taxes advanced by Golden American, noted above. Net assets retained in the
Account by Golden American are as follows:
<TABLE>
<CAPTION>
Combined
_________________________________
1996 1995
_______________ _______________
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $34,408 $44,008
Sales load advanced 380 5,370
Premium tax advanced 11 51
Net transfer (to) from Separate Account
D, Fixed Account and other Divisions 1,037 (1,956)
Amortization of deferred sales load
and premium tax (12,431) (13,065)
_______________ _______________
Balance at end of period $23,405 $34,408
=============== ===============
</TABLE>
NOTE 4 - PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
Period Ended December 31,
____________________________________________________
1996 1995
_________________________ _________________________
Purchases Sales Purchases Sales
_________________________ _________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
The GCG Trust Liquid
Asset Series $64,148 $63,169 $36,373 $45,249
The GCG Trust Limited
Maturity Bond Series 13,202 23,196 13,148 24,648
The GCG Trust Natural
Resources Series 22,965 11,706 11,278 19,076
The GCG Trust All-Growth
Series 10,482 22,833 21,261 11,424
The GCG Trust Real
Estate Series 12,388 5,777 4,524 10,440
The GCG Trust Fully
Managed Series 22,506 14,263 13,980 13,106
The GCG Trust Multiple
Allocation Series 28,625 62,678 29,322 52,281
The GCG Trust Capital
Appreciation Series 32,609 21,360 28,436 12,469
The GCG Trust Rising
Dividends Series 41,303 14,500 19,522 6,361
The GCG Trust Emerging
Markets Series 11,043 13,496 10,584 27,621
The GCG Trust Market
Manager Series 449 1,388 3,057 832
The GCG Trust Value
Equity Series 20,546 8,015 29,104 3,199
The GCG Trust Strategic
Equity Series 20,731 1,702 8,151 142
The GCG Trust Small
Cap Series 47,577 15,201 -- --
The GCG Trust Managed
Global Series 85,923 4,148 -- --
Equi-Select Series Trust
OTC Portfolio 4,644 164 -- --
Equi-Select Series Trust
Growth & Income Portfolio 8,037 49 -- --
____________ ____________ ____________ ____________
$447,178 $283,645 $228,740 $226,848
============ ============ ============ ============
</TABLE>
NOTE 5 - SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Contractowners transactions shown in the following table reflect gross inflows
("Purchases") and outflows ("Sales") in units for each Division. The activity
includes contractowners electing to update a DVA 100 or DVA Series 100
contracts to a DVA PLUS contract beginning in October 1995. Updates to DVA
PLUS contracts result in both a sale (surrender of the old contract) and a
purchase (acquisition of the new contract). All of the purchase transactions
for the Market Manager Division resulted from such updates.
Contractowner transactions in units were as follows:
<TABLE>
<CAPTION>
Period Ended December 31,
__________________________________________________
1996 1995
________________________ ________________________
Purchases Sales Purchases Sales
________________________ ________________________
<S> <C> <C> <C> <C>
Liquid Asset Division 5,982,248 6,003,930 3,119,370 3,934,332
Limited Maturity Bond Division 829,366 1,824,946 1,096,937 1,842,599
Natural Resources Division 1,374,569 978,096 835,272 1,412,435
All-Growth Division 1,228,512 2,169,543 1,548,525 1,094,131
Real Estate Division 754,585 552,462 322,375 802,601
Fully Managed Division 1,450,300 1,450,120 1,020,546 1,063,678
Multiple Allocation Division 1,330,139 4,486,173 1,057,363 3,678,129
Capital Appreciation Division 2,032,074 1,900,755 1,740,091 1,248,056
Rising Dividends Division 3,448,184 1,678,751 1,883,516 753,983
Emerging Markets Division 1,573,766 1,768,185 1,386,840 3,143,521
Market Manager Division 7,958 106,893 282,507 142,437
Value Equity Division 1,834,937 1,024,120 2,459,134 333,200
Strategic Equity Division 2,083,197 353,766 848,555 45,767
Small Cap Division 4,912,458 2,122,101 -- --
Managed Global Division 8,792,080 716,753 -- --
OTC Division 316,184 26,607 -- --
Growth & Income Division 697,746 35,755 -- --
</TABLE>
NOTE 6 - NET ASSETS
Net assets at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
Limited
Liquid Maturity Natural All-
Asset Bond Resources Growth
Division Division Division Division
____________ _____________ ____________ _____________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Unit transactions $32,438 $42,710 $29,064 $67,465
Accumulated net investment
income (loss) 5,038 12,389 10,233 7,934
Net unrealized appreciation
(depreciation) of
investments -- (765) 4,004 1,443
____________ _____________ ____________ _____________
$37,476 $54,334 $43,301 $76,842
============ ============= ============ =============
</TABLE>
<TABLE>
<CAPTION>
Real Fully Multiple Capital
Estate Managed Allocation Appreciation
Division Division Division Division
____________ _____________ ____________ _____________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Unit transactions $32,124 $100,420 $184,144 $96,189
Accumulated net investment
income (loss) 7,542 19,186 80,907 27,156
Net unrealized appreciation
(depreciation) of
investments 11,015 14,825 5,376 22,644
____________ _____________ ____________ _____________
$50,681 $134,431 $270,427 $145,989
============ ============= ============ =============
</TABLE>
<TABLE>
<CAPTION>
Rising Emerging Market Value
Dividends Markets Manager Equity
Division Division Division Division
____________ _____________ ____________ _____________
(Dollars in thousands)
<S> <C> <C> <C> <C>
Unit transactions $91,082 $48,602 $3,327 $36,655
Accumulated net
investment income (loss) 4,742 (8,904) 964 3,735
Net unrealized appreciation
(depreciation) of
investments 27,749 (2,545) 1,188 2,471
____________ _____________ ____________ _____________
$123,573 $37,153 $5,479 $42,861
============ ============= ============ =============
</TABLE>
NOTE 6 - NET ASSETS - (Continued)
<TABLE>
<CAPTION>
Strategic Managed
Equity Small Cap Global
Division Division Division
____________ _____________ ____________
(Dollars in thousands)
<S> <C> <C> <C>
Unit transactions $26,740 $32,726 $82,081
Accumulated net
investment income (loss) 443 (344) (234)
Net unrealized appreciation
(depreciation) of
investments 2,675 674 4,419
____________ _____________ ____________
$29,858 $33,056 $86,266
============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
Growth &
OTC Income
Division Division Combined
____________ _____________ ____________
(Dollars in thousands)
<S> <C> <C> <C>
Unit transactions $4,491 $8,005 $918,263
Accumulated net
investment income (loss) 205 1 170,993
Net unrealized appreciation
(depreciation) of
investments (125) 269 95,317
____________ _____________ ____________
$4,571 $8,275 $1,184,573
============ ============= ============
</TABLE>
NOTE 7 - UNIT VALUES
Accumulation unit value information (which is based on total assets) for units
outstanding by contract type as of December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Total Unit
Series Units Unit Value Value
_______________________________________________________________________________
(in thousands)
<S> <C> <C> <C>
LIQUID ASSET
Currently payable annuity products:
DVA 80 1,451 $13.984 $20
DVA 100 4,396 13.762 61
Contracts in accumulation period:
DVA 80 463,720 13.984 6,485
DVA 100 1,703,328 13.762 23,441
DVA Series 100 19,543 13.380 262
DVA PLUS - Standard 76,505 13.506 1,033
DVA PLUS - Annual Ratchet 84,960 13.347 1,134
DVA PLUS - 7% Solution 383,231 13.188 5,054
______________
37,490
LIMITED MATURITY BOND
Currently payable annuity products:
DVA 80 22,205 15.839 352
DVA 100 27,295 15.588 425
Contracts in accumulation period:
DVA 80 81,730 15.839 1,295
DVA 100 2,859,817 15.588 44,579
DVA Series 100 32,874 15.156 498
DVA PLUS - Standard 83,927 15.312 1,285
DVA PLUS - Annual Ratchet 46,293 15.130 701
DVA PLUS - 7% Solution 349,417 14.951 5,224
______________
54,359
NATURAL RESOURCES
Currently payable annuity products:
DVA 80 2,262 20.589 46
DVA 100 21,633 20.262 438
Contracts in accumulation period:
DVA 80 209,024 20.589 4,304
DVA 100 1,404,857 20.262 28,466
DVA Series 100 36,118 19.700 712
DVA PLUS - Standard 94,213 19.886 1,873
DVA PLUS - Annual Ratchet 43,232 19.650 850
DVA PLUS - 7% Solution 341,711 19.417 6,635
______________
43,324
</TABLE>
NOTE 7 - UNIT VALUES (Continued)
<TABLE>
<CAPTION>
Total Unit
Series Units Unit Value Value
_______________________________________________________________________________
(in thousands)
<S> <C> <C> <C>
ALL-GROWTH
Currently payable annuity products:
DVA 80 6,691 $14.337 $96
DVA 100 36,473 14.110 515
Contracts in accumulation period:
DVA 80 151,395 14.337 2,170
DVA 100 4,238,780 14.110 59,809
DVA Series 100 23,840 13.718 327
DVA PLUS - Standard 129,648 13.848 1,795
DVA PLUS - Annual Ratchet 146,161 13.684 2,000
DVA PLUS - 7% Solution 752,345 13.521 10,173
______________
76,885
REAL ESTATE
Currently payable annuity products:
DVA 80 7,224 22.048 159
DVA 100 35,685 21.699 774
Contracts in accumulation period:
DVA 80 109,273 22.048 2,409
DVA 100 1,704,684 21.699 36,990
DVA Series 100 14,864 21.097 314
DVA PLUS - Standard 54,229 21.295 1,155
DVA PLUS - Annual Ratchet 42,710 21.043 899
DVA PLUS - 7% Solution 384,928 20.794 8,004
______________
50,704
FULLY MANAGED
Currently payable annuity products:
DVA 80 9,341 18.115 169
DVA 100 90,888 17.828 1,620
Contracts in accumulation period:
DVA 80 159,907 18.115 2,897
DVA 100 5,978,934 17.828 106,595
DVA Series 100 21,625 17.334 375
DVA PLUS - Standard 203,891 17.497 3,568
DVA PLUS - Annual Ratchet 173,475 17.290 2,999
DVA PLUS - 7% Solution 952,517 17.085 16,273
______________
134,496
</TABLE>
NOTE 7 - UNIT VALUES (Continued)
<TABLE>
<CAPTION>
Total Unit
Series Units Unit Value Value
_______________________________________________________________________________
(in thousands)
<S> <C> <C> <C>
MULTIPLE ALLOCATION
Currently payable annuity products:
DVA 80 35,810 $18.595 $666
DVA 100 131,617 18.300 2,409
Contracts in accumulation period:
DVA 80 739,049 18.595 13,742
DVA 100 12,268,326 18.300 224,510
DVA Series 100 99,857 17.792 1,777
DVA PLUS - Standard 289,954 17.960 5,207
DVA PLUS - Annual Ratchet 150,732 17.747 2,675
DVA PLUS - 7% Solution 1,117,238 17.537 19,593
______________
270,579
CAPITAL APPRECIATION
Currently payable annuity products:
DVA 80 14,341 17.816 255
DVA 100 72,413 17.649 1,278
Contracts in accumulation period:
DVA 80 108,583 17.816 1,934
DVA 100 6,632,504 17.649 117,056
DVA Series 100 35,436 17.359 615
DVA PLUS - Standard 162,558 17.463 2,839
DVA PLUS - Annual Ratchet 174,592 17.343 3,028
DVA PLUS - 7% Solution 1,106,359 17.222 19,054
______________
146,059
RISING DIVIDENDS
Currently payable annuity products:
DVA 80 6,467 15.984 103
DVA 100 27,116 15.880 431
Contracts in accumulation period:
DVA 80 122,375 15.984 1,956
DVA 100 5,269,251 15.880 83,674
DVA Series 100 77,854 15.698 1,222
DVA PLUS - Standard 297,973 15.769 4,699
DVA PLUS - Annual Ratchet 355,191 15.694 5,575
DVA PLUS - 7% Solution 1,663,079 15.619 25,976
______________
123,636
</TABLE>
NOTE 7 - UNIT VALUES (Continued)
<TABLE>
<CAPTION>
Total Unit
Series Units Unit Value Value
_______________________________________________________________________________
(in thousands)
<S> <C> <C> <C>
EMERGING MARKETS
Currently payable annuity products:
DVA 80 1,604 $9.915 $16
DVA 100 23,151 9.850 228
Contracts in accumulation period:
DVA 80 125,073 9.915 1,240
DVA 100 2,729,245 9.850 26,884
DVA Series 100 28,101 9.738 274
DVA PLUS - Standard 97,857 9.782 957
DVA PLUS - Annual Ratchet 102,267 9.735 995
DVA PLUS - 7% Solution 679,247 9.688 6,581
______________
37,175
MARKET MANAGER
Contracts in accumulation period:
DVA 100 373,579 14.641 5,469
DVA PLUS - 7% Solution 7,958 14.451 115
______________
5,584
VALUE EQUITY
Currently payable annuity products:
DVA 80 534 14.722 8
DVA 100 8,244 14.664 121
Contracts in accumulation period:
DVA 80 37,810 14.722 557
DVA 100 1,379,397 14.664 20,227
DVA Series 100 27,355 14.562 398
DVA PLUS - Standard 181,354 14.609 2,649
DVA PLUS - Annual Ratchet 249,994 14.567 3,642
DVA PLUS - 7% Solution 1,052,064 14.525 15,282
______________
42,884
STRATEGIC EQUITY
Currently payable annuity products:
DVA 100 37,512 11.830 444
Contracts in accumulation period:
DVA 80 95,398 11.860 1,131
DVA 100 793,292 11.830 9,384
DVA Series 100 35,219 11.778 415
DVA PLUS - Standard 370,536 11.805 4,374
DVA PLUS - Annual Ratchet 231,567 11.785 2,729
DVA PLUS - 7% Solution 968,694 11.764 11,396
______________
29,873
</TABLE>
NOTE 7 - UNIT VALUES (Continued)
<TABLE>
<CAPTION>
Total Unit
Series Units Unit Value Value
_______________________________________________________________________________
(in thousands)
<S> <C> <C> <C>
SMALL CAP
Currently payable annuity products:
DVA 100 13,782 $11.890 $164
Contracts in accumulation period:
DVA 80 85,117 11.914 1,014
DVA 100 908,778 11.890 10,806
DVA Series 100 40,332 11.848 478
DVA PLUS - Standard 198,338 11.860 2,352
DVA PLUS - Annual Ratchet 227,347 11.843 2,692
DVA PLUS - 7% Solution 1,316,663 11.825 15,569
______________
33,075
MANAGED GLOBAL
Currently payable annuity products:
DVA 80 5,665 10.829 61
DVA 100 32,523 10.740 349
Contracts in accumulation period:
DVA 80 89,636 10.829 971
DVA 100 6,049,685 10.740 64,973
DVA Series 100 64,797 10.589 686
DVA PLUS - Standard 226,224 10.620 2,402
DVA PLUS - Annual Ratchet 231,774 10.554 2,446
DVA PLUS - 7% Solution 1,375,023 10.488 14,422
______________
86,310
OTC
Contracts in accumulation period:
DVA 80 2,623 15.932 42
DVA 100 167,020 15.860 2,649
DVA Series 100 5,670 15.735 89
DVA PLUS - Standard 29,878 15.772 471
DVA PLUS - Annual Ratchet 28,223 15.696 443
DVA PLUS - 7% Solution 56,163 15.665 880
______________
4,574
GROWTH & INCOME
Contracts in accumulation period:
DVA 80 8,340 12.542 104
DVA 100 389,432 12.523 4,877
DVA Series 100 2,225 12.489 28
DVA PLUS - Standard 50,199 12.499 627
DVA PLUS - Annual Ratchet 38,037 12.486 475
DVA PLUS - 7% Solution 173,758 12.471 2,167
______________
8,278
</TABLE>
<PAGE>
[GOLDEN AMERICAN LIFE INSURANCE LOGO ]
ANNUAL REPORT
------------------
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
OF
GOLDEN AMERICAN LIFE INSURANCE COMPANY
------------------
DECEMBER 31, 1995
GoldenSelect products are issued by Golden American Life Insurance Company and
distributed by
Directed Services, Inc., both subsidiaries of Bankers Trust Company
<PAGE>
Golden American Life Insurance Company
A SUBSIDIARY OF BANKERS TRUST COMPANY
1001 JEFFERSON STREET, SUITE 400, WILMINGTON, DE 19801 TEL: 302-576-3400
FAX: 302-576-3450
February 21, 1996
Dear Contractholder:
I am pleased to provide you with the 1995 Annual Report for The Managed Global
Account of Separate Account D. This portfolio invests in a wide range of equity,
debt securities and money market instruments worldwide. It has been managed by
Warburg, Pincus Counsellors, Inc. since July, 1994 and seeks high total
investment returns consistent with prudent regard for capital preservation.
Included in the Annual Report is a report of Warburg, Pincus Counsellors, Inc.
Warburg, Pincus' comments reflect their views as of the date written, and are
subject to change at any time.
If you have any questions or would like additional information, please call
Golden American customer service: 1-800-366-0066. We would be pleased to assist
you.
Thank you for your continued support of GoldenSelect products. We look forward
to serving you in 1996 and beyond.
Sincerely.
/s/ Terry L. Kendall
Terry L. Kendall
President
D-1
<PAGE>
MANAGED GLOBAL ACCOUNT
The objective of the GoldenSelect Managed Global Account of Separate Account D
is long-term capital appreciation and international diversification.
The year saw fairly wide divergences in performance among foreign markets. Most
European exchanges recorded solid gains, while many of the emerging markets,
particularly in Asia, suffered losses. Japan, after falling sharply in the
year's first six months, staged a powerful recovery at midyear and finished the
year even.
Japan remains the Account's largest commitment to a single country, at 32% of
the portfolio. The Portfolio Manager is encouraged by developments in the
Japanese economy, and is equally optimistic about the stock market's prospects
in 1996.
Emerging markets, collectively, suffered in 1995, and as a result valuations are
now lower than they have been in several years. The Portfolio Manager sees many
attractive opportunities in emerging markets as 1996 begins, particularly in
Asia, which represents the major focus of the Account's emerging-market
exposure.
As 1996 begins, the Portfolio Manager's outlook on international equity markets
is, in general, positive, and believes that the Account is well-positioned with
regard to its regional and country allocations and its specific holdings.
WARBURG, PINCUS COUNSELLORS, INC.
TOP FIVE HOLDINGS AS OF DECEMBER 31, 1995:
<TABLE>
<S> <C>
1. Banco De Santander S.A., ADR................................................... 4.0%
2. Canon Inc...................................................................... 3.7%
3. East Japan Railway Company..................................................... 3.1%
4. Nippon Telegraph & Telephone Corporation....................................... 3.0%
5. VA Technologie AG.............................................................. 3.0%
</TABLE>
ASSET DISTRIBUTION BY COUNTRY
The following table replaces a pie chart showing asset distribution by country
as a precentage of total investments.
Other............................... 36.4%
Argentina........................... 4.0%
Spain............................... 4.0%
Hong Kong........................... 4.1%
New Zealand......................... 6.0%
France.............................. 6.1%
Great Britain....................... 7.4%
Japan............................... 32.0%
D-2
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost $67,478,262) (Notes 1 and 3)........................................................... $ 70,981,052
Cash............................................................................................................... 78,896
Receivables:
Investment securities sold...................................................................................... 1,336,669
Dividends and interest.......................................................................................... 99,399
Premium payments and reallocations.............................................................................. 20,839
Net unrealized appreciation of forward foreign currency exchange contracts......................................... 351,688
Prepaid expenses and other assets.................................................................................. 9,271
-------------
Total Assets.................................................................................................... 72,877,814
LIABILITIES
Payables:
Investment securities purchased................................................................................. 334,419
Surrenders, withdrawals and reallocations....................................................................... 58,577
Golden American for contract related expenses (Note 2).......................................................... 43,558
Accrued management and organization fees (Note 2).................................................................. 1,684
Accrued expenses................................................................................................... 64,469
-------------
Total Liabilities............................................................................................... 502,707
-------------
Total Net Assets................................................................................................ $ 72,375,107
-------------
-------------
NET ASSETS
For variable annuity contracts..................................................................................... $ 69,499,713
Retained in The Managed Global Account of Separate Account D by Golden American (Note 2)........................... 2,875,394
-------------
Total Net Assets................................................................................................ $ 72,375,107
-------------
-------------
</TABLE>
See Notes to Financial Statements.
D-3
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $3,203).............................................................. $ 92,139
Dividends (net of foreign withholding taxes of $149,639)........................................................... 1,207,385
------------
Total Investment Income......................................................................................... 1,299,524
------------
EXPENSES:
Mortality and expense risk and asset based administrative charges (Note 2)......................................... 739,881
Management and advisory fees (Note 2).............................................................................. 734,700
Custodian fees (Note 2)............................................................................................ 111,693
Accounting fees.................................................................................................... 51,766
Auditing fees...................................................................................................... 23,639
Printing and mailing............................................................................................... 14,268
Board of governors' fees and expenses (Note 2)..................................................................... 5,987
Legal fees......................................................................................................... 3,818
Other.............................................................................................................. 40,556
------------
Total Expenses.................................................................................................. 1,726,308
Less amounts paid by the investment manager pursuant to expense limitation agreement (Note 2)...................... (63,386)
------------
Net Expenses.................................................................................................... 1,662,922
------------
NET INVESTMENT LOSS.................................................................................................. (363,398)
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) from:
Security transactions........................................................................................... (6,119,111)
Forward foreign currency exchange contracts..................................................................... 1,952,175
Foreign currency transactions................................................................................... (4,990)
Net change in unrealized appreciation of:
Securities...................................................................................................... 7,765,310
Forward foreign currency exchange contracts..................................................................... 351,688
Other assets and liabilities denominated in foreign currencies.................................................. 3,323
------------
Net realized and unrealized gain on investments.................................................................... 3,948,395
------------
Net increase in net assets resulting from operations............................................................ $ 3,584,997
------------
------------
</TABLE>
See Notes to Financial Statements.
D-4
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
------------- -------------
INCREASE/(DECREASE) IN NET ASSETS
<S> <C> <C>
OPERATIONS:
Net investment loss................................................................................ $ (363,398) $ (259,767)
Net realized loss on securities, forward foreign currency exchange contracts and foreign currency
transactions.................................................................................... (4,171,926) (1,363,558)
Net unrealized appreciation/(depreciation) of securities, forward foreign currency exchange
contracts and other assets and liabilities denominated in foreign currencies.................... 8,120,321 (11,511,952)
------------- -------------
Net increase/(decrease) in net assets resulting from operations.................................... 3,584,997 (13,135,277)
------------- -------------
CONTRACT RELATED TRANSACTIONS:
Premiums........................................................................................... 6,235,725 22,680,207
Benefits, surrenders and other withdrawals......................................................... (9,881,861) (8,496,158)
Net transfers (to) from Separate Account B, Fixed Account and Golden American...................... (12,563,025) (2,244,552)
Contract related charges and fees (Note 2)......................................................... (1,209,284) (1,073,158)
------------- -------------
Net increase/(decrease) in net assets resulting from contract related transactions................. (17,418,445) 10,866,339
------------- -------------
Net decrease in net assets......................................................................... (13,833,448) (2,268,938)
NET ASSETS:
Beginning of year.................................................................................. 86,208,555 88,477,493
------------- -------------
End of year........................................................................................ $ 72,375,107 $ 86,208,555
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
D-5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR FOR THE DVA 100.
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/95 12/31/94** 12/31/93 12/31/92*
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of year................................. $ 9.091 $ 10.518 $ 10.008 $ 10.000
--------- ----------- --------- -----------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income/(loss) #............................................. (0.044) (0.030) (0.046) 0.022
Net realized and unrealized gain/(loss) on investments..................... 0.612 (1.397) 0.556 (0.014)
--------- ----------- --------- -----------
Total from investment operations........................................... 0.568 (1.427) 0.510 0.008
--------- ----------- --------- -----------
Accumulation unit value, end of year....................................... $ 9.659 $ 9.091 $ 10.518 $ 10.008
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Total return............................................................... 6.25% (13.57)% 5.10% 0.08%++
--------- ----------- --------- -----------
--------- ----------- --------- -----------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)......................................... $ 68,283 $ 83,702 $ 85,702 $ 38,699
Ratio of operating expenses to average net assets.......................... 2.27% 2.31% 2.68% 2.46%+
Decrease reflected in above expense ratio due to expense limitations....... 0.08% 0.09% 0.03% --
Ratio of net investment income/(loss) to average net assets................ (0.50)% (0.31)% (0.44)% 1.78%+
</TABLE>
- ------------------
* These units were available for sale on October 21, 1992.
** On July 1, 1994 Warburg, Pincus Counsellors, Inc. became Portfolio Manager of
the Account. Prior to that date the Account had been advised by another
Portfolio Manager.
+ Annualized
++ Non-annualized
# Per unit numbers have been calculated using the average unit method, which
more appropriately presents the per unit data for the period.
See Notes to Financial Statements.
D-6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR FOR THE DVA 80.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/95 12/31/94** 12/31/93*
----------- ----------- ---------
<S> <C> <C> <C>
Accumulation unit value, beginning of year................................................. $ 9.130 $ 10.541 $ 10.420
----------- ----------- ---------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss #...................................................................... (0.027) (0.011) (0.005)
Net realized and unrealized gain/(loss) on investments..................................... 0.617 (1.400) 0.126
----------- ----------- ---------
Total from investment operations........................................................... 0.590 (1.411) 0.121
----------- ----------- ---------
Accumulation unit value, end of year....................................................... $ 9.720 $ 9.130 $ 10.541
----------- ----------- ---------
----------- ----------- ---------
Total return............................................................................... 6.46% (13.39)% 1.16%++
----------- ----------- ---------
----------- ----------- ---------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)......................................................... $ 1,047 $ 1,877 $ 2,087
Ratio of operating expenses to average net assets.......................................... 2.07% 2.11% 2.48%+
Decrease reflected in above expense ratio due to expense limitations....................... 0.08% 0.09% 0.03%+
Ratio of net investment loss to average net assets......................................... (0.30)% (0.11)% (0.24)%+
</TABLE>
- ------------------
* These units were available for sale on October 14, 1993.
** On July 1, 1994 Warburg, Pincus Counsellors, Inc. became Portfolio Manager of
the Account. Prior to that date the Account had been advised by another
Portfolio Manager.
+ Annualized
++ Non-annualized
# Per unit numbers have been calculated using the average unit method, which
more appropriately presents the per unit data for the period.
See Notes to Financial Statements.
D-7
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
<TABLE>
<CAPTION>
FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR FOR THE DVA SERIES 100.
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/95 12/31/94** 12/31/93*
----------- ----------- ---------
<S> <C> <C> <C>
Accumulation unit value, beginning of year................................................. $ 9.027 $ 10.481 $ 10.536
----------- ----------- ---------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss #...................................................................... (0.076) (0.066) (0.036)
Net realized and unrealized gain/(loss) on investments..................................... 0.607 (1.388) (0.019)
----------- ----------- ---------
Total from investment operations........................................................... 0.531 (1.454) (0.055)
----------- ----------- ---------
Accumulation unit value, end of year....................................................... $ 9.558 $ 9.027 $ 10.481
----------- ----------- ---------
----------- ----------- ---------
Total return............................................................................... 5.87% (13.87)% (0.52)%++
----------- ----------- ---------
----------- ----------- ---------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)......................................................... $ 545 $ 630 $ 688
Ratio of operating expenses to average net assets.......................................... 2.62% 2.66% 3.02%+
Decrease reflected in above expense ratio due to expense limitations....................... 0.08% 0.09% 0.03%+
Ratio of net investment loss to average net assets......................................... (0.85)% (0.66)% (0.79)%+
</TABLE>
- ------------------
* These units were available for sale on April 27, 1993.
** On July 1, 1994 Warburg, Pincus Counsellors, Inc. became Portfolio Manager of
the Account. Prior to that date the Account had been advised by another
Portfolio Manager.
+ Annualized
++ Non-annualized
# Per unit numbers have been calculated using the average unit method, which
more appropriately presents the per unit data for the period.
See Notes to Financial Statements.
D-8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
DVA PLUS- DVA PLUS- DVA PLUS-
STANDARD ANNUAL RATCHET 7% SOLUTION
----------- --------------- -------------
PERIOD PERIOD PERIOD
ENDED ENDED ENDED
12/31/95* 12/31/95* 12/31/95*
----------- --------------- -------------
<S> <C> <C> <C>
Accumulation unit value, beginning of period................................... $ 9.323 $ 9.282 $ 9.240
----------- --------------- -------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss #.......................................................... (0.013) (0.013) (0.013)
Net realized and unrealized gain on investments................................ 0.266 0.262 0.259
----------- --------------- -------------
Total from investment operations............................................... 0.253 0.249 0.246
----------- --------------- -------------
Accumulation unit value, end of period......................................... $ 9.576 $ 9.531 $ 9.486
----------- --------------- -------------
----------- --------------- -------------
Total return................................................................... 2.71%++ 2.69%++ 2.66%++
----------- --------------- -------------
----------- --------------- -------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................................... $ 256 $ 262 $ 1,982
Ratio of operating expenses to average net assets.............................. 2.40%+ 2.55%+ 2.60%+
Decrease reflected in above expense ratio due to expense limitations........... 0.08%+ 0.08%+ 0.08%+
Ratio of net investment loss to average net assets............................. (0.63)%+ (0.78)%+ (0.83)%+
</TABLE>
- ------------------
* These units were available for sale on October 2, 1995.
+ Annualized
++ Non-annualized
# Per unit numbers have been calculated using the average unit method, which
more appropriately presents the per unit data for the period.
See Notes to Financial Statements.
D-9
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------- -----------
COMMON STOCKS -- 93.7%
ARGENTINA -- 3.9%
<S> <C> <C>
2,318 Banco de Galicia Y Buenos Aires
S.A............................. $ 47,809
21,045 Banco Frances del Rio de la Plata
S.A............................. 186,220
19,320 Banco Frances del Rio de la Plata
S.A., ADR....................... 519,225
61,900 Capex S.A., Class A, GDR**........ 897,550
25,600 Telefonica de Argentina S.A.,
ADR............................. 697,600
21,800 Y.P.F. S.A........................ 471,425
-----------
2,819,829
-----------
AUSTRALIA -- 2.6%
71,312 BTR Ltd. Class A.................. 348,227
51,375 Niugini Mining Ltd.+.............. 98,898
274,500 Pasminco Ltd.+.................... 336,637
212,900 Woodside Petroleum Ltd............ 1,088,677
-----------
1,872,439
-----------
AUSTRIA -- 3.0%
17,000 VA Technologie AG+................ 2,159,051
-----------
BRAZIL -- 0.4%
9,000 Panamerican Beverages Inc., Class
A............................... 288,000
-----------
CHINA -- 0.4%
15,000 Jilan Chemical, ADR............... 322,500
-----------
DENMARK -- 0.3%
11,100 International Service Systems AS,
Class B......................... 249,865
-----------
FINLAND -- 1.1%
15,650 Metsa-Serla, Class B.............. 482,070
500 Metra AB, Class B................. 20,688
11,600 Valmet, Class A................... 287,987
-----------
790,745
-----------
FRANCE -- 6.0%
9,507 Bouygues.......................... 956,907
4,000 Cetelem........................... 750,145
47,300 Largardere Groupe................. 868,598
8,351 Scor S.A.......................... 260,703
19,671 Total S.A., Class B............... 1,326,518
4,597 Total S.A., ADS................... 156,298
-----------
4,319,169
-----------
GERMANY -- 2.9%
12,400 Adidas AG......................... 656,318
11,500 Adidas AG, ADR**.................. 302,158
3,400 Deutsche Bank AG.................. 161,156
13,000 SGL Carbon AG..................... 1,006,276
-----------
2,125,908
-----------
GREAT BRITAIN -- 7.2%
173,956 British Airport Authority Ord..... 1,310,242
11,600 Cookson Group PLC................. 55,125
50,000 Govett & Company Ltd., Ord. PLC... 180,148
64,000 Grand Metropolitan PLC Ord........ 460,682
156,223 Prudential Corporation PLC........ 1,005,637
31,232 Reckitt & Colman PLC Ord.......... 345,589
630,000 Singer & Friedlander Group PLC.... 1,061,553
295,400 Takare PLC........................ 825,761
-----------
5,244,737
-----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------- -----------
<S> <C> <C>
HONG KONG -- 4.1%
359,000 Citic Pacific Ltd................. $ 1,228,005
48,737 HSBC Holdings Ltd................. 737,437
141,201 Jardine Matheson Holdings Ltd..... 967,227
-----------
2,932,669
-----------
INDIA -- 3.1%
33,000 Hindalco Industries Ltd., GDR**... 1,126,290
41,400 India Fund (The) Inc.............. 367,425
51,200 Reliance Industries Ltd., GDS..... 716,800
-----------
2,210,515
-----------
INDONESIA -- 2.3%
34,500 Bank International Indonesia
(Foreign)....................... 114,296
99,000 PT Mulia Industrindo Ord.
(Foreign)....................... 279,270
79,500 PT Semen Gresik (Foreign)......... 222,523
10,500 PT Telekomunikas, ADR............. 265,125
410,000 PT Telekomunikas (Foreign)........ 537,940
19,800 PT Tri Polyta Indonesia, ADR...... 272,250
-----------
1,691,404
-----------
ISRAEL -- 1.8%
75,000 Ampal American Israel Corporation,
Class A......................... 393,750
38,500 ECI Telecom, Ltd.................. 878,281
-----------
1,272,031
-----------
JAPAN -- 29.5%
149,000 Canon Inc......................... 2,698,596
22,000 Circle K Japan Company Ltd........ 969,491
170 DDI Corporation................... 1,317,191
458 East Japan Railway Company........ 2,226,789
89,000 Hitachi Ltd....................... 896,465
2,500 Keyence Corporation............... 288,136
75,000 Kirin Beverage Corporation........ 1,009,685
5,000 Kyocera Corporation............... 371,429
11,000 Murata Manufacturing Company
Ltd............................. 404,843
94,000 NEC Corporation................... 1,147,119
27,000 Nippon Communication Systems
Corporation..................... 285,036
267 Nippon Telegraph & Telephone
Corporation..................... 2,161,215
54 NTT Data Communication Systems
Corporation..................... 1,814,818
40,800 Orix Corporation.................. 1,679,419
6,000 Rohm Company...................... 338,789
20,000 Sony Corporation.................. 1,199,031
33,000 TDK Corporation................... 1,684,358
3,000 UNY Company....................... 56,368
21,600 York-Benimaru Company Ltd......... 826,344
-----------
21,375,122
-----------
KOREA -- 2.5%
6,600 Mando Machinery Corporation,
GDR............................. 173,250
40,300 Mando Machinery Corporation,
GDR**........................... 1,057,875
5,800 Samsung Electric, GDR............. 559,700
-----------
1,790,825
-----------
MALAYSIA -- 0.4%
75,000 Westmont BHD...................... 259,873
-----------
MEXICO -- 0.4%
93,000 Gruma S.A., Series B.............. 261,581
-----------
</TABLE>
See Notes to Financial Statements.
D-10
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS --(CONTINUED)
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------- -----------
COMMON STOCKS -- (CONTINUED)
<S> <C> <C>
NEW ZEALAND -- 5.9%
1,313,354 Brierley Investments Ltd.......... $ 1,038,912
266,300 Fletcher Challenge Ltd............ 614,550
502,522 Fletcher Challenge (Forest
Division) Ltd................... 716,182
538,800 Lion Nathan Ltd................... 1,285,678
30,000 Sky City Ltd...................... 622,697
-----------
4,278,019
-----------
NORWAY -- 1.0%
17,100 Norsk Hydro, ADR.................. 716,063
-----------
PAKISTAN -- 0.3%
241,000 Pakistan Telecommunications
Corporation..................... 216,589
-----------
SINGAPORE -- 2.5%
9,000 D.B.S. Land Ltd................... 30,414
119,000 Development Bank of Singapore
Ltd............................. 1,480,665
464,000 I.P.C. Corporation................ 308,349
-----------
1,819,428
-----------
SPAIN -- 4.0%
58,100 Banco de Santander S.A., ADR...... 2,861,425
-----------
SWEDEN -- 3.0%
8,100 Asea AB, Class B.................. 787,983
35,200 Astra AB, Class B................. 1,394,112
-----------
2,182,095
-----------
SWITZERLAND -- 1.5%
615 Brown Boveri & Cie AG, Class A.... 714,744
200 Ciba-Geigy AG..................... 175,195
150 Danza Holding AG.................. 163,920
-----------
1,053,859
-----------
TAIWAN -- 2.5%
1,680,000 GP Taiwan Index Fund.............. 1,325,268
75,511 Tuntex Distinct Corporation,
GDS **.......................... 509,701
-----------
1,834,969
-----------
THAILAND -- 1.1%
146,800 Industrial Finance Corporation of
Thailand (Foreign).............. 498,269
81,400 Thai Military Bank Public Company
Ltd. (Foreign).................. 329,607
-----------
827,876
-----------
Total Common Stocks
(Cost $64,252,583).............. 67,776,586
-----------
WARRANTS -- 0.0%# COST ($20,647)
SWITZERLAND -- 0.0%#
600 Danza Holding AG, Expires
08/02/1996...................... 2,667
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
- -------------- -----------
<S> <C> <C>
CONVERTIBLE CORPORATE BONDS -- 3.8%
JAPAN -- 1.8%
JPY Matasushita Electric Works Ltd.,
111,000,000 2.700% due 05/31/2002........... $ 1,313,724
-----------
TAIWAN -- 2.0%
$1,070,000 President Enterprises Corporation,
Zero coupon due 07/22/2001...... 1,358,900
70,000 Yang Ming Marine Transport
Corporation,
2.000% due 10/06/2001........... 77,175
-----------
1,436,075
-----------
Total Convertible Corporate Bonds
(Cost $2,753,032)............... 2,749,799
-----------
REPURCHASE AGREEMENT -- 0.6% Cost ($452,000)
452,000 Agreement with PNC Securities
Corporation, 5.600% dated
12/29/1995 to be repurchased at
$452,281 on 01/02/1996,
collateralized by $445,000 U.S.
Treasury Notes, 5.750% due
09/30/1997 (value $455,324)..... 452,000
-----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
PRINCIPAL AMOUNT (NOTE 1)
- ------------------------------------------ -----------
<S> <C> <C>
TOTAL INVESTMENTS (COST $67,478,262)
(NOTES 1 AND 3).......... 98.1% 70,981,052
OTHER ASSETS AND LIABILITIES (NET)........ 1.9 1,394,055
--------- -----------
NET ASSETS................................ 100.0% $72,375,107
--------- -----------
--------- -----------
</TABLE>
- ----------------------
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration
to qualified institutional buyers.
+ Non-income producing security.
# Amount is less than 0.1%.
<TABLE>
<S> <C> <C>
GLOSSARY OF TERMS
American Depositary
ADR -- Receipt.
American Depositary
ADS -- Share.
Global Depositary
GDR -- Receipt.
GDS -- Global Depositary Share.
JPY -- Japanese Yen.
</TABLE>
See Notes to Financial Statements.
D-11
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS --(CONTINUED)
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
DECEMBER 31, 1995
DECEMBER 31, 1995, INDUSTRY CLASSIFICATION OF THE FUND WAS AS FOLLOWS
(UNAUDITED):
<TABLE>
<CAPTION>
% OF NET VALUE
INDUSTRY CLASSIFICATION ASSETS (NOTE 1)
- ------------------------------------- ------------- ------------
<S> <C> <C>
LONG TERM INVESTMENTS:
Electric Machinery
Equipment/Electronics.............. 9.6% $6,970,456
Telecommunications................... 8.4 6,073,941
Investment Companies................. 8.0 5,795,435
Banking/Financials................... 7.7 5,539,247
Financial Services................... 7.5 5,461,877
Durable Goods -- Consumer............ 5.5 3,999,903
Transportation....................... 5.2 3,778,127
Oil/Gas Extraction................... 5.2 3,758,981
Computer Software.................... 2.5 1,814,818
Forest Products/Paper................ 2.5 1,812,802
Industrial........................... 2.4 1,707,127
Technology........................... 2.3 1,684,358
Pharmaceuticals...................... 2.2 1,569,307
Metal/Metal Products................. 2.2 1,561,824
Chemicals/Allied Products............ 1.8 1,311,550
Beverages............................ 1.8 1,297,685
Brewery.............................. 1.8 1,285,678
Insurance............................ 1.8 1,266,339
Automobile Parts..................... 1.7 1,231,125
Industrial/Commercial Machinery...... 1.7 1,199,031
Engineering/Construction............. 1.6 1,179,431
Metals -- Diversified................ 1.4 1,006,276
Convenience Stores................... 1.3 969,492
Shoes/Leather........................ 1.3 958,476
Energy............................... 1.2 897,550
Retail -- Grocery.................... 1.2 882,712
Health Care Services................. 1.1 825,761
Food/Kindred Products................ 1.0 722,263
Electronics -- Semiconductor......... 1.0 710,218
Entertainment........................ 0.9 622,697
Textiles............................. 0.7 509,701
Nondurable Goods -- Consumer......... 0.5 345,589
Computer Industry.................... 0.4 308,349
Communication........................ 0.4 285,036
</TABLE>
<TABLE>
<CAPTION>
% OF NET VALUE
INDUSTRY CLASSIFICATION (CONTINUED) ASSETS (NOTE 1)
- ------------------------------------- ------------- ------------
<S> <C> <C>
Capital Goods........................ 0.4% $279,270
Business Services.................... 0.4 249,865
Other................................ 0.9 656,755
----- ------------
TOTAL LONG TERM INVESTMENTS.......... 97.5 70,529,052
REPURCHASE AGREEMENT................. 0.6 452,000
----- ------------
TOTAL INVESTMENTS.................... 98.1 70,981,052
OTHER ASSETS AND LIABILITIES (NET)... 1.9 1,394,055
----- ------------
NET ASSETS........................... 100.0% $72,375,107
-----
----- ------------
------------
</TABLE>
SCHEDULE OF
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO SELL
<S> <C> <C> <C> <C> <C>
CONTRACTS TO DELIVER
- ---------------------------------- IN
EXCHANGE UNREALIZED
EXPIRATION LOCAL FOR U.S. VALUE IN APPRECIATION/
DATE CURRENCY $ U.S. $ (DEPRECIATION)
- ---------- ---------------------- --------- ----------- -------------
03/21/1996 JPY 302,112,500 2,999,915 2,961,061 $ 38,854
03/21/1996 JPY 958,387,500 9,514,420 9,393,333 121,087
03/21/1996 FRF 19,600,000 4,000,000 4,004,659 (4,659)
06/17/1996 JPY 282,690,000 3,000,000 2,803,594 196,406
-------------
Net Unrealized Appreciation of Forward Foreign Currency
Exchange Contracts...................................... $ 351,688
-------------
-------------
</TABLE>
<TABLE>
<S> <C> <C>
GLOSSARY OF TERMS
FRF -- French Franc
JPY -- Japanese Yen
</TABLE>
See Notes to Financial Statements.
D-12
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Managed Global Account of Separate Account D (the 'Account') is registered
with the Securities and Exchange Commission under the Investment Company Act of
1940, as amended, as a non-diversified open-end investment company and meets the
definition of a separate account under federal securities laws. The Account was
established on April 18, 1990, by Golden American Life Insurance Company
('Golden American'), to support the operations of variable annuity contracts
('Contracts'). Golden American, a wholly-owned subsidiary of BT Variable, Inc.
('BTV'), an indirect subsidiary of Bankers Trust Company ('Bankers Trust'), is a
stock life insurance company organized under the laws of the state of Delaware.
Golden American is primarily engaged in the issuance of variable insurance
products and is authorized to do business in the District of Columbia and in all
states except New York.
Operations on the Account commenced on October 21, 1992. Golden American
provides for variable accumulation and benefits under the Contracts by crediting
annuity considerations to the Account at the direction of contractholders. The
assets of the Account are owned by Golden American. The portion of the Account's
assets applicable to Contracts will not be chargeable with liabilities arising
out of any other business Golden American may conduct, but obligations of the
Account, including the promise to make benefit payments, are obligations of
Golden American.
The net assets maintained in the Account provide the basis for the periodic
determination of the amount of benefits under the Contracts. The net assets may
not be less than the reserves and other contract liabilities with respect to the
Account. Golden American has entered into a reinsurance agreement with an
affiliated reinsurer to cover insurance risks under the Contracts. Golden
American remains liable to the extent that the reinsurer does not meet its
obligations under the reinsurance agreement.
The preparation of financial statements in accordance with Generally Accepted
Accounting Principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of the
significant accounting policies consistently followed by the Account in the
preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles.
(A) VALUATION: Domestic and foreign portfolio securities, except as noted below,
for which market quotations are readily available are stated at market value.
Market value is determined on the basis of the last reported sales price in the
principal market where such securities are traded or, if no sales are reported,
the mean between representative bid and asked quotations obtained from a
quotation reporting system or from established market makers.
Long-term debt securities, including those to be purchased under firm commitment
agreements, are normally valued on the basis of quotes obtained from brokers and
dealers or pricing services, which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Under certain circumstances, long-term debt securities having a maturity
of sixty days or less may be valued at amortized cost. Short-term debt
securities are valued at their amortized cost which approximates fair value.
Amortized cost involves valuing a portfolio security instrument at its cost,
initially, and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by, or under the direction of the Board
of Governors.
(B) DERIVATIVE FINANCIAL INSTRUMENTS: The Account may engage in various
portfolio strategies, as described below, to seek to manage its exposure to
equity markets and to manage fluctuations in foreign currency rates. Forward
foreign currency exchange contracts to buy, writing puts and buying calls tend
to increase the Account's exposure to the underlying market or currency. Forward
foreign currency exchange contracts to sell, buying puts and writing calls tend
to decrease the Account's exposure to the underlying market or currency. In some
instances, investments in derivative financial instruments may involve, to
varying degrees, elements of market risk and risks in excess of the amount
recognized in the Statement of Assets and Liabilities. Losses may arise under
these contracts due to the existence of an illiquid secondary market for the
contracts, or if the counterparty does not perform under the contract. An
additional primary risk associated with the use of certain of these contracts
may be caused by an imperfect correlation between movements in the price of the
derivative financial instruments and the price of the underlying securities,
indices or currency.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Account may enter into forward
foreign currency exchange contracts. The Account will enter in forward foreign
currency exchange contracts to hedge against fluctuations in currency exchange
D-13
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
rates. Forward foreign currency exchange contracts are valued at the applicable
forward rate, and are marked to market daily. The change in market value is
recorded by the Account as an unrealized gain or loss. When a contract is
closed, the Account records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Although forward foreign currency exchange contracts limit
the risk of loss due to a decline in the value of the hedged currency, they also
limit any potential gain that might result should the value of the currency
increase. In addition, the Account could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their contracts.
Open contracts at December 31, 1995 and their related unrealized appreciation
(depreciation) are set forth in the Schedule of Forward Foreign Currency
Exchange Contracts which accompanies the Portfolio of Investments. Realized and
unrealized gain/(loss) arriving from forward foreign currency exchange contracts
are included in net realized and unrealized gain/(loss) on forward foreign
currency exchange contracts.
OPTIONS: The Account may engage in option transactions. When the Account writes
an option, an amount equal to the premium received by the Account is reflected
as an asset and an equivalent liability. The amount of the liability is
subsequently marked to market on a daily basis to reflect the current value of
the option written.
When a security is sold through an exercise of an option, the related premium
received (or paid) is deducted from (or added to) the basis of the security
sold. When an option expires (or the Account enters into a closing transaction),
the Account realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the premium paid or received). The Account
did not write options during the year ended December 31, 1995. Realized gains
arising from purchased options are included in the net realized gain/(loss) on
security transactions.
(C) FOREIGN CURRENCY: Assets and liabilities denominated in foreign currencies
and commitments under forward foreign currency exchange contracts are translated
into U.S. dollars at the mean of the quoted bid and asked prices of such
currencies against the U.S. dollar as of the close of business immediately
preceding the time of valuation. Purchases and sales of portfolio securities are
translated at the rates of exchange prevailing when such securities were
acquired or sold. Income and expenses are translated at rates of exchange
prevailing when accrued.
The Account does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain/(loss) from securities.
Reported net realized gains or losses on foreign currency transactions arise
from sales and maturities of short-term securities, sales of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of dividends,
interest and foreign withholding taxes recorded on the Account's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
gains and losses on other assets and liabilities denominated in foreign
currencies arise from changes in the value of assets and liabilities other than
investments in securities at the end of the reporting period, resulting from
changes in the exchange rate.
(D) REPURCHASE AGREEMENTS: The Account may enter into repurchase agreements in
accordance with guidelines approved by the Board of Governors of the Account.
The Account bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the Account is delayed or
prevented from exercising its rights to dispose of the underlying securities
received as collateral including the risk of a possible decline in the value of
the underlying securities during the period while the Account seeks to exercise
its rights. The Account takes possession of the collateral and reviews the value
of the collateral and the creditworthiness of those banks and dealers with which
the Account enters into repurchase agreements to evaluate potential risks. The
market value of the underlying securities received as collateral must be at
least equal to the total amount of the repurchase obligation. In the event of
counterparty default, the Account has the right to use the underlying securities
to offset the loss.
(E) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
recorded on the trade date. Dividend income is recorded on the ex-dividend date.
Interest income (including amortization of premium and discount on securities)
and expenses are accrued daily. Realized gains and losses from investment
transactions are recorded on the identified cost basis which is the same basis
used for federal income tax purposes.
(F) FEDERAL INCOME TAXES: Operations of the Account form a part of, and are
taxed with, the total operations of Golden American, which is taxed as a life
insurance company under the Internal Revenue Code. Earnings and realized capital
gains of the Account attributable to the contractowners are excluded in the
determination of the federal income tax liability of Golden American.
D-14
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
OPERATING EXPENSES: Directed Services, Inc. ('DSI'), a wholly owned subsidiary
of BTV, serves as Manager to the Account pursuant to a Management Agreement.
Under the Management Agreement, DSI has overall responsibility, subject to the
supervision of the Board of Governors, for administrating all operations of the
Account and for monitoring and evaluating the management of the assets of the
Account by the Portfolio Manager. In consideration for these services, the
Account pays DSI a management fee based upon the following annual percentage of
the Account's average daily net assets: 0.40% of the first $500 million and
0.30% of the amount over $500 million. Warburg, Pincus Counsellors, Inc.
('Warburg') serves as the Portfolio Manager of the Account and in that capacity
provides investment advisory services for the Account including asset allocation
and security selection. In consideration for these services, Warburg is paid an
advisory fee by the Account, payable monthly, based on the average daily net
assets of the Account at an annual rate of 0.60% of the first $500 million and
0.50% on the excess thereof. For the year ended December 31, 1995, the Account
incurred management and advisory fees of $293,930 and $440,770, respectively.
The Account bears the expenses of its investment management operations,
including expenses associated with custody of securities, portfolio accounting,
the Board of Governors, legal and auditing services, registration fees and other
related operating expenses. Bankers Trust is the custodian of the assets in the
Account. For the year ended December 31, 1995, the Account incurred $111,693 for
custodian fees. In addition, the Account reimburses Golden American for certain
organization expenses (See Note 4). At December 31, 1995, a total of $1,684 was
payable to DSI and Golden American for management and reimbursement of
organization expenses.
Certain officers and governors of the Account are also officers and/or directors
of the Manager, Golden American, BTV and Bankers Trust.
MORTALITY AND EXPENSE RISK CHARGES: Golden American assumes mortality and
expense risks related to the operations of the Account and, in accordance with
the terms of the Contracts, deducts a daily charge from the assets of the
Account at annual rates of 0.80%, 0.90%, 1.25%, 1.10%, 1.25% and 1.40% of the
assets attributable to DVA 80, DVA 100, DVA Series 100, DVA Plus-Standard, DVA
Plus-Annual Ratchet and DVA Plus-7% Solution, respectively, to cover these
risks. Golden American did not deduct mortality and expense risk charges and
asset based administrative charges from the DVA Plus Contract assets until
November 1995, upon which it received exemptive relief from the Securities and
Exchange Commission.
ASSET BASED ADMINISTRATIVE CHARGE: To compensate Golden American for the
administrative expenses under the Contracts, a daily charge at an annual rate of
0.10% is deducted from assets attributable to the DVA 100 and DVA Series 100
Contracts. A daily charge of 0.15% is deducted from the assets attributable to
DVA Plus Contracts.
OTHER CONTRACT CHARGES: An administrative fee of $40 per Contract year is
deducted from the accumulation value of certain DVA 80 and DVA 100 Contracts.
Under DVA Plus Contracts issued subsequent to September of 1995, an excess
allocation charge of $25 per allocation may be imposed by Golden American after
the twelfth allocation change in a contract year. Under DVA 80, DVA 100 and DVA
Series 100 Contracts ('Previous Contracts'), a partial withdrawal charge of the
lower of 2% of the withdrawal or $25 is deducted from the accumulation for each
additional partial withdrawal in a Contract year. In addition, under the
Previous Contracts, there is an excess allocation charge of $25 for each
allocation change between divisions in excess of the five free changes allowed
per contract year.
DEFERRED SALES LOAD: Under contracts offered prior to October of 1995, a sales
load of up to 6.50% was applicable to each premium payment for sales related
expenses as specified in the Contracts. For DVA Series 100 Contracts, the sales
load is deducted in equal annual installments over the period the Contract is in
force, not to exceed 10 years. For DVA 80 and DVA 100 Contracts, although the
sales load is chargeable to each premium when it is received by Golden American,
the amount of such charge is initially advanced by Golden American to
Contractowners and included in the accumulation value and then deducted in equal
installments on each Contract processing date over a period of six years. For
the year ended December 31, 1995, contract sales loads of $1,124,480 initially
advanced by Golden American to the Account were deducted from contractowners'
accumulation value. Upon surrender of the Contract, the unamortized deferred
sales load is deducted from the accumulation value by Golden American. In
addition, when partial withdrawal limits are exceeded, a portion of the
unamortized deferred sales load is deducted.
CONTINGENT DEFERRED SALES CHARGE: Under DVA Plus Contracts issued subsequent to
September of 1995, a contingent deferred sales charge ('Surrender Charges') is
imposed as a percentage of each premium payment if the Contract is surrendered
or an excess partial withdrawal is taken during the seven year period from the
date a premium payment is received. The Surrender Charges are imposed at a rate
of 7% of the premium payment during the first two complete years after purchase
declining to 6%, 5%, 4%, 3%, and 1% after the second, third, fourth, fifth and
sixth complete years, respectively. For the year ended December 31, 1995, Golden
American collected Surrender Charges in the amount of $15.
D-15
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
The net assets retained in the Account by Golden American in the accompanying
financial statements represent the unamortized deferred sales load, surrender
charges and premium taxes advanced by Golden American reduced to conform with
the Commissioner's Annuity Reserve Valuation Methodology ('CARVM') noted above.
Net Assets Retained in the Account by Golden American are as follows:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/95 12/31/94
------------ ------------
<S> <C> <C>
Balance at beginning of year........................................................... $ 4,533,964 $ 4,668,658
Sales load advanced and additions to surrender charges................................. 379,811 1,338,526
Premium tax advanced................................................................... 2,628 6,823
Net transfer (to) from Separate Account B, Fixed Account and Golden American........... (899,808) (427,829)
Amortization of deferred sales load, surrender charges and premium tax................. (1,141,201) (1,052,214)
------------ ------------
$ 2,875,394 $ 4,533,964
------------ ------------
------------ ------------
</TABLE>
PREMIUM TAXES: Premium taxes are deducted, where applicable, from the
accumulation value of each Contract. The amount and timing of the deduction
depend on the annuitant's state of residence and currently ranges up to 3.5% of
premiums. Premium taxes are generally incurred on the annuity commencement date
and a charge for such premium taxes is then deducted from the accumulation value
on such date. However, some jurisdictions impose a premium tax at the time the
initial and additional premiums are paid, regardless of the annuity commencement
date. In those states, Golden American advances the amount of the charge for
premium taxes to Contractowners and then deducts it from the accumulation value
in equal installments on each contract processing date over a six year period.
Golden American is currently waiving the deduction of the applicable
installments of the charge for premium taxes previously advanced by Golden
American to Contractowners. Golden American reserves the right to deduct the
total amount of the charge for premium taxes previously waived and unrecovered
on the annuity commencement date or upon surrender of the Contract.
EXPENSE LIMITATION: The Account and DSI entered into an agreement to limit the
ordinary operating expenses of the Account, excluding, among other things,
mortality and expense risk charges, asset based administrative charges, interest
expense, and other contractual charges, through December 31, 1995, so that such
expenses do not exceed on an annual basis 1.25% of the first $500 million of the
average daily net assets and 1.05% of the excess over $500 million. For the year
ended December 31, 1995, $63,386 was reimbursed by DSI to the Account pursuant
to this limitation. Such agreement existed under the same terms for the year
ended December 31, 1994.
DSI, a registered broker/dealer, acts as the distributor and principal
underwriter (as defined in the Securities Act of 1933 and the Investment Company
Act of 1940, as amended) of the Contracts issued through the Account. For the
years ended December 31, 1995 and December 31, 1994, fees paid by Golden
American to DSI in connection with sales of the contracts aggregated
approximately $446,000 and $1,343,000, respectively.
3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities, excluding short-term securities,
during the year ended December 31, 1995, were $30,992,571 and $4,817,671,
respectively.
At December 31, 1995, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost and aggregate gross
unrealized depreciation for all securities in which there is an excess of tax
cost over value were $8,320,461 and $4,817,671, respectively.
For the year ended December 31, 1995, the portfolio turnover rate was 44%.
4. ORGANIZATION COSTS
The initial organizational expenses of the Account of approximately $150,000
were paid by Golden American. The Account reimburses Golden American monthly for
such expenses ratably over a period of sixty months from the date of the
Account's commencement of operations. At December 31, 1995, the unamortized
balance of such expenses was $75,090. It is Golden American's intention not to
seek reimbursement for any unpaid amounts should the account cease operations.
D-16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
5. INCREASE/(DECREASE) IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
DVA 100
Units purchased...................................................................... 409,418 2,267,150
Units redeemed....................................................................... (2,561,328) (1,161,000)
------------ ------------
Net Increase/(Decrease)......................................................... (2,151,910) 1,106,150
Units at the beginning of the period................................................... 9,225,615 8,119,465
------------ ------------
Units at the end of the period......................................................... 7,073,705 9,225,615
------------ ------------
------------ ------------
DVA 80
Units purchased...................................................................... 66,593 154,827
Units redeemed....................................................................... (164,429) (147,275)
------------ ------------
Net Increase/(Decrease)......................................................... (97,836) 7,552
Units at the beginning of the period................................................... 205,564 198,012
------------ ------------
Units at the end of the period......................................................... 107,728 205,564
------------ ------------
------------ ------------
DVA Series 100
Units purchased...................................................................... 27,026 55,550
Units redeemed....................................................................... (39,838) (51,428)
------------ ------------
Net Increase/(Decrease)......................................................... (12,812) 4,124
Units at the beginning of the period................................................... 69,795 65,671
------------ ------------
Units at the end of the period......................................................... 56,983 69,795
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/95*
------------
<S> <C> <C>
DVA Plus -- Standard
Units purchased...................................................................... 43,964
Units redeemed....................................................................... (17,239)
------------
Net Increase.................................................................... 26,725
Units at the beginning of the period................................................... 0
------------
Units at the end of the period......................................................... 26,725
------------
------------
DVA Plus -- Annual Ratchet
Units purchased...................................................................... 29,267
Units redeemed....................................................................... (1,811)
------------
Net Increase.................................................................... 27,456
Units at the beginning of the period................................................... 0
------------
Units at the end of the period......................................................... 27,456
------------
------------
DVA Plus -- 7% Solution
Units purchased...................................................................... 209,355
Units redeemed....................................................................... (345)
------------
Net Increase.................................................................... 209,010
Units at the beginning of the period................................................... 0
------------
Units at the end of the period......................................................... 209,010
------------
------------
</TABLE>
- ------------------
* The DVA Plus -- Standard, Annual Ratchet and 7% Solution units were offered
for sale commencing October 2, 1995.
D-17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE MANAGED GLOBAL ACCOUNT
OF
SEPARATE ACCOUNT D
6. SUBSEQUENT EVENT
On August 13, 1996, under the terms of a stock purchase agreement, Equitable
of Iowa Companies acquired all of the interest in BTV from Whitewood Properties
Corp., a subsidiary of Bankers Trust Company. DSI and Golden American are
wholly owned subsidiaries of BTV.
In addition at a special meeting held on August 8, 1996, the contractholders
approved the reorganization of the Account from a separate account of Golden
American register as a management investment company toa newly created division
(the "Division") of Separate Account B, an existing separate account of Golden
American which is registered as a unit investment trust. On the date of
reorganization, which is anticipated to be September 3, 1996, the Account will
transfer all of its assets to the Division. The Division will simultaneously
exchange these assets to the Managed Global Series of the The GCG Trust in
consideration for shares of the Series. The Managed Global Series is a newly
created Series of The GCG Trust. Ths GCG Trust is and existing open-end
management investment company registered under the Investment Company Act of
1940.
If this reorganization, described above, had taken place on December 31, 1995,
the unit values and net assets of the Division would have been the same as
reflected in the Account's financial statements contained herein.
D-18
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Contractowners and Board of Governors
The Managed Global Account of Separate Account D
We have audited the accompanying statement of assets and liabilities of The
Managed Global Account of Separate Account D, including the portfolio of
investments, as of December 31, 1995, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended and the financial highlights for each of
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Account's management. Our responsibility is to
express an opinion on these financial statements and financial highlights 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 and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification by examination of securities
held by the custodian as of December 31, 1995 and confirmation of securities not
held by the custodian by correspondence with others. 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 and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Managed Global Account of Separate Account D at December 31, 1995, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the indicated periods in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
New York, New York
February 9, 1996
except for Note 6, as to which the date is August 27, 1996
D-19
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, 1996 and 1995, and the related
consolidated statements of income, changes in stockholder's equity, and cash
flows for the post-acquisition period from August 14, 1996 to December 31, 1996
and the pre-acquisition period from January 1, 1996 to August 13, 1996 and for
each of the years ended December 31, 1995 and 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Golden
American Life Insurance Company at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the post-
acquisition period from August 14, 1996 to December 31, 1996 and the pre-
acquisition period from January 1, 1996 to August 13, 1996 and for each of
the years ended December 31, 1995 and 1994, in conformity with generally
accepted accounting principles.
s/Ernst & Young LLP
Des Moines, Iowa
February 11, 1997
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
POST-ACQUISITION | PRE-ACQUISITION
___________________ | _________________
December 31, 1996 | December 31, 1995
___________________ | _________________
<S> <C> | <C>
ASSETS |
|
Investments: |
Fixed maturities, available for sale, |
at fair value (cost: 1996 - $275,153; |
1995 - $48,671) $275,563 | $49,629
Equity securities, at fair value |
(cost: 1996 - $36; 1995 - $27) 33 | 29
Mortgage loans on real estate 31,459 | --
Policy loans 4,634 | 2,021
Short-term investments 12,631 | 15,614
___________________ | _________________
Total investments 324,320 | 67,293
|
Cash and cash equivalents 5,839 | 5,046
|
Accrued investment income 4,139 | 768
|
Deferred policy acquisition costs 11,468 | 67,314
|
Present value of in force acquired 83,051 | 6,057
|
Property and equipment, less allowances |
for depreciaition of $63 in 1996 and |
$86 in 1995 699 | 490
|
Goodwill, less accumulated amortization |
of $589 in 1996 38,665 | --
|
Other assets 2,471 | 7,136
|
Separate account assets 1,207,247 | 1,048,953
___________________ | _________________
Total assets $1,677,899 | $1,203,057
=================== | =================
</TABLE>
See accompanying notes.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
POST-ACQUISITION | PRE-ACQUISITION
___________________ | _________________
December 31, 1996 | December 31, 1995
___________________ | _________________
<S> <C> | <C>
LIABILITIES AND STOCKHOLDER'S |
EQUITY |
|
Policy liabilities and accruals: |
Future policy benefits: |
Annuity and interest sensitive life |
products $285,287 | $33,673
Unearned revenue reserve 2,063 | 6,556
___________________ | _________________
287,350 | 40,229
|
Deferred income taxes 365 | --
Surplus note 25,000 | --
Due to affiliates 1,504 | 675
Other liabilities 15,949 | 15,075
Separate account liabilities 1,207,247 | 1,048,953
___________________ | _________________
1,537,415 | 1,104,932
|
Commitments and contingencies |
|
Stockholder's equity: |
Common stock, par value $10 per share, |
authorized, issued and outstanding |
250,000 shares 2,500 | 2,500
Redeemable preferred stock, par value |
$5,000 per share, 50,000 shares |
authorized (1995 - 10,000 shares |
issued and outstanding) -- | 50,000
Additional paid-in capital 137,372 | 45,030
Unrealized appreciation (depreciation) |
of securities at fair value 262 | 658
Retained earnings (deficit) 350 | (63)
___________________ | _________________
Total stockholder's equity 140,484 | 98,125
___________________ | _________________
Total liabilities and stockholder's |
equity $1,677,899 | $1,203,057
=================== | =================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-ACQUISITION | PRE-ACQUISITION
__________________| ________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
__________________| ________________
|
<S> <C> | <C>
Revenues: |
Annuity and interest sensitive life |
product charges $8,768 | $12,259
Management fee revenue 877 | 1,390
Net investment income 5,795 | 4,990
Realized gains (losses) on investments 42 | (420)
Other income 486 | 70
__________________| ________________
15,968 | 18,289
|
|
Insurance benefits and expenses: |
Annuity and interest sensitive life benefits: |
Interest credited to account balances 5,741 | 4,355
Benefit claims incurred in excess of |
account balances 1,262 | 915
Underwriting, acquisition and insurance |
expenses: |
Commissions 9,866 | 16,549
General expenses 5,906 | 9,422
Insurance taxes 672 | 1,225
Policy acquisition costs deferred (11,712)| (19,300)
Amortization: |
Deferred policy acquisition costs 244 | 2,436
Present value of in force acquired 2,745 | 951
Goodwill 589 | --
__________________| ________________
15,313 | 16,553
|
Interest expense 85 | --
__________________| ________________
15,398 | 16,553
__________________| ________________
570 | 1,736
|
Income taxes 220 | (1,463)
__________________| ________________
|
Net income $350 | $3,199
==================| ================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
PRE-ACQUISITION
____________________________________
For the For the
year ended year ended
December 31, December 31,
1995 1994
____________________________________
<S> <C> <C>
Revenues:
Annuity and interest sensitive life
product charges $18,388 $17,519
Management fee revenue 987 --
Net investment income 2,818 560
Realized gains (losses) on investments 297 65
Other income 63 --
__________________ ________________
22,553 18,144
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances 1,322 40
Benefit claims incurred in excess of
account balances 1,824 (5)
Underwriting, acquisition and insurance
expenses:
Commissions 7,983 16,978
General expenses 12,650 12,921
Insurance taxes 952 373
Policy acquisition costs deferred (9,804) (23,119)
Amortization:
Deferred policy acquisition costs 2,710 4,608
Present value of in force acquired 1,552 2,164
Goodwill -- --
__________________ ________________
19,189 13,960
Interest expense -- 1,962
__________________ ________________
19,189 15,922
__________________ ________________
3,364 2,222
Income taxes -- --
__________________ ________________
Net income $3,364 $2,222
================== ================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
PRE-ACQUISITION
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 $2,500 $28,336 $62 ($2,301) $28,597
Issuance of 10,000
shares of preferred
stock -- $50,000 -- -- -- 50,000
Contribution of
capital -- -- 8,750 -- -- 8,750
Net income for 1994 -- -- -- -- 2,222 2,222
Unrealized deprecia-
tion of securities
at fair value -- -- -- (63) -- (63)
__________________________________________________________
Balance at
December 31, 1994 2,500 50,000 37,086 (1) (79) 89,506
Contribution of
capital -- -- 7,944 -- -- 7,944
Net income for 1995 -- -- -- -- 3,364 3,364
Preferred stock
dividends -- -- -- -- (3,348) (3,348)
Unrealized apprecia-
tion of securities
at fair value -- -- -- 659 -- 659
__________________________________________________________
Balance at
December 31, 1995 2,500 50,000 45,030 658 (63) 98,125
Net income for the
period January 1, 1996
to August 13, 1996 -- -- -- -- 3,199 3,199
Preferred stock
dividends -- -- -- -- (719) (719)
Unrealized deprecia-
tion of securities
at fair value -- -- -- (1,175) -- (1,175)
__________________________________________________________
Balance at
August 13, 1996 $2,500 $50,000 $45,030 ($517) $2,417 $99,430
==========================================================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY - CONTINUED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
POST-ACQUISITION
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at
August 14, 1996 $2,500 $50,000 $87,372 -- -- $139,872
Contribution of
preferred stock
to additional
paid-in capital -- (50,000) 50,000 -- -- --
Net income for period
August 14, 1996 to
December 31, 1996 -- -- -- -- $350 350
Unrealized apprecia-
tion of securities
at fair value -- -- -- $262 -- 262
__________________________________________________________
Balance at
December 31, 1996 $2,500 $ -- $137,372 $262 $350 $140,484
==========================================================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-ACQUISITION | PRE-ACQUISITION
___________________| ___________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
___________________| ___________________
|
<S> <C> | <C>
OPERATING ACTIVITIES |
Net income $350 | $3,199
Adjustments to reconcile net income |
to net cash provided by (used in) |
operations: |
Adjustments related to annuity and |
interest sensitive life products: |
Change in annuity and interest |
sensitive life product reserves 5,106 | 4,472
Change in unearned revenues 2,063 | 2,084
Increase in accrued investment income (877)| (2,494)
Policy acquisition costs deferred (11,712)| (19,300)
Amortization of deferred policy |
acquisition costs 244 | 2,436
Amortization of present value of in |
force acquired 2,745 | 951
Change in other assets, other |
liabilities and accrued income taxes (96)| 4,672
Provision for depreciation and |
amortization 1,242 | 703
Provision for deferred income taxes 220 | (1,463)
Realized (gains) losses on investments (42)| 420
___________________| ___________________
Net cash provided by (used in) |
operating activities (757)| (4,320)
|
|
INVESTING ACTIVITIES |
Sale, maturity or repayment of |
investments: |
Fixed maturities - available for sale 47,453 | 55,091
Fixed maturities - held for investment -- | --
Equity securities -- | --
Mortgage loans on real estate 40 | --
Short-term investments - net 2,629 | 354
___________________| ___________________
50,122 | 55,445
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-ACQUISITION | PRE-ACQUISITION
__________________| _________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
__________________| _________________
|
<S> <C> | <C>
INVESTING ACTIVITIES - CONTINUED |
Acquisition of investments: |
Fixed maturities - available for sale ($147,170)| ($184,589)
Fixed maturities - held for investment -- | --
Equity securities (5)| --
Mortgage loans on real estate (31,499)| --
Policy loans - net (637)| (1,977)
Short-term investments - net -- | --
__________________| _________________
(179,311)| (186,566)
Funds held in escrow pursuant to |
an Exchange Agreement -- | --
Purchase of property and equipment (137)| --
__________________| _________________
Net cash used in investing activities (129,326)| (131,121)
|
FINANCING ACTIVITIES |
Retirement of short-term debt -- | --
Proceeds from issuance of surplus note 25,000 | --
Receipts from annuity and interest |
sensitive life policies credited |
to policyholder account balances 116,819 | 149,750
Return of policyholder account balances |
on annuity and interest sensitive |
life policies (3,315)| (2,695)
Net reallocations (to) from Separate |
Accounts (10,237)| (8,286)
Contributions of capital by parent -- | --
Issuance of preferred stock -- | --
Dividends paid on preferred stock -- | (719)
__________________| _________________
Net cash provided by financing |
activities 128,267 | 138,050
__________________| _________________
Increase (decrease) in cash and |
cash equivalents (1,816)| 2,609
|
Cash and cash equivalents at |
beginning of period 7,655 | 5,046
__________________| _________________
Cash and cash equivalents at end |
of period $5,839 | $7,655
==================| =================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
PRE-ACQUISITION
________________________________
For the For the
year ended year ended
December 31, December 31,
1995 1994
________________________________
<S> <C> <C>
OPERATING ACTIVITIES
Net income $3,364 $2,222
Adjustments to reconcile net income
to net cash provided by (used in)
operations:
Adjustments related to annuity and
interest sensitive life products:
Change in annuity and interest
sensitive life product reserves 4,664 (1,370)
Change in unearned revenues 4,949 1,594
Increase in accrued investment income (676) (24)
Policy acquisition costs deferred (9,804) (23,119)
Amortization of deferred policy
acquisition costs 2,710 4,608
Amortization of present value of in
force acquired 1,552 2,164
Change in other assets, other
liabilities and accrued income taxes 4,686 (4,543)
Provision for depreciation and
amortization (142) 13
Provision for deferred income taxes -- --
Realized (gains) losses on investments (297) (65)
______________ ______________
Net cash provided by (used in)
operating activities 11,006 (18,520)
INVESTING ACTIVITIES
Sale, maturity or repayment of
investments:
Fixed maturities - available for sale 24,026 --
Fixed maturities - held for investment -- 321
Equity securities -- 313
Mortgage loans on real estate -- --
Short-term investments - net -- 1,299
______________ ______________
24,026 1,933
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
PRE-ACQUISITION
________________________________
For the For the
year ended year ended
December 31, December 31,
1995 1994
________________________________
<S> <C> <C>
INVESTING ACTIVITIES - CONTINUED
Acquisition of investments:
Fixed maturities - available for sale ($61,723) --
Fixed maturities - held for investment -- ($857)
Equity securities (10) (7)
Mortgage loans on real estate -- --
Policy loans - net (1,508) (369)
Short-term investments - net (1,681) --
______________ ______________
(64,922) (1,233)
Funds held in escrow pursuant to
an Exchange Agreement (1,242) (1,382)
Purchase of property and equipment -- --
______________ ______________
Net cash used in investing activities (42,138) (682)
FINANCING ACTIVITIES
Retirement of short-term debt -- (40,000)
Proceeds from issuance of surplus note -- --
Receipts from annuity and interest
sensitive life policies credited
to policyholder account balances 29,501 --
Return of policyholder account balances
on annuity and interest sensitive
life policies (1,543) --
Net reallocations (to) from Separate
Accounts -- --
Contributions of capital by parent 7,944 8,750
Issuance of preferred stock -- 50,000
Dividends paid on preferred stock (3,348) --
______________ ______________
Net cash provided by financing
activities 32,554 18,750
______________ ______________
Increase (decrease) in cash and
cash equivalents 1,422 (452)
Cash and cash equivalents at
beginning of period 3,624 4,076
______________ ______________
Cash and cash equivalents at end
of period $5,046 $3,624
============== ==============
</TABLE>
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
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") collectively the
"Company". First Golden was capitalized by Golden American on December 17,
1996. All significant intercompany accounts and transactions have been
eliminated.
ORGANIZATION
Golden American 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, First Golden became licensed to sell insurance products
in the state of New York. The Company's products are marketed by
broker/dealers, financial institutions and insurance agents. The Company's
primary customers are individuals and families.
On August 13, 1996, Equitable of Iowa Companies ("Equitable") acquired all of
the outstanding capital stock of BT Variable, Inc. ("BT Variable") and its
wholly-owned subsidiaries, Golden American and Directed Services, Inc. ("DSI")
from Whitewood Properties Corporation ("Whitewood") pursuant to the terms of a
Stock Purchase Agreement between Equitable and Whitewood (the "Purchase
Agreement"). See Note 5 for additional information.
For financial statement purposes, the change in control of Golden American
through the acquisition of BT Variable was accounted for as a purchase
acquisition effective August 14, 1996. This acquisition resulted in a new
basis of accounting reflecting estimated fair values of assets and liabilities
at that date. As a result, the Company's financial statements for periods
subsequent to August 13, 1996, are presented on the Post-Acquisition new basis
of accounting, while the financial statements for August 13, 1996 and prior
periods are presented on the Pre-Acquisition historical cost basis of
accounting.
INVESTMENTS
Fixed Maturities: Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
requires fixed maturity securities to be designated as either "available for
sale", "held for investment" or "trading". Sales of fixed maturities
designated as "available for sale" are not restricted by SFAS No. 115.
Available for sale securities are reported at fair value and unrealized gains
and losses on these securities are included directly in stockholder's equity,
after adjustment for related changes in deferred policy acquisition costs,
present value of in force acquired, policy reserves and deferred income taxes.
At December 31, 1996 and 1995, all of the Company's fixed maturity securities
are designated as available for sale although the Company is not precluded
from designating fixed maturity securities as held for investment or trading at
some future date. Securities the Company has the positive intent and ability
to hold to maturity are designated as "held for investment". Held for
investment securities are reported at cost adjusted for amortization of
premiums and discounts. Changes in the fair value of these securities, except
for declines that are other than temporary, are not reflected in the Company's
financial statements. Sales of securities designated as held for investment
are severely restricted by SFAS No. 115. Securities that are bought and held
principally for the purpose of selling them in the near term are designated as
trading securities. Unrealized gains and losses on trading securities are
included in current earnings. Transfers of securities between categories are
restricted and are recorded at fair value at the time of the transfer.
Securities that are determined to have a decline in value that is other than
temporary are written down to estimated fair value which becomes the security's
new cost basis by a charge to realized losses in the Company's Statements of
Income. Premiums and discounts are amortized/accrued utilizing the scientific
interest method which results in a constant yield over the security's expected
life. Amortization/accrual of premiums and discounts on mortgage-backed
securities incorporates a prepayment assumption to estimate the securities'
expected lives.
Equity Securities: Equity securities are reported at estimated fair value if
readily marketable or at cost if not 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 that are determined to have a decline in value that
is other than temporary are written down to estimated fair value which becomes
the security's new cost basis by a charge to realized losses in the Company's
Statement of Income.
Mortgage loans: Mortgage loans on real estate are reported at cost adjusted
for amortization of premiums and accrual of discounts. If the value of any
mortgage loan is determined to be impaired (i.e., when it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement), the carrying value of the mortgage
loan is reduced to the present value of expected future cash flows from the
loan, discounted at the loan's effective interest rate, or to the loan's
observable market price, or the fair value of the underlying collateral. The
carrying value of impaired loans is reduced by the establishment of a valuation
allowance which is adjusted at each reporting date for significant changes in
the calculated value of the loan. Changes in this valuation allowance are
charged or credited to income.
Other investments: Policy loans are reported at unpaid principal. Short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts.
Fair Values: Estimated fair values, as reported herein, of publicly traded
fixed maturity securities are as reported by an independent pricing service.
Fair values of conventional mortgage-backed securities not actively traded in
a liquid market are estimated using a third party pricing system. This pricing
system uses a matrix calculation assuming a spread over U.S. Treasury bonds
based upon the expected average lives of the securities. Fair values of
private placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Estimated fair values of equity securities which consists of the
Company's investment in its registered separate accounts are based upon the
quoted fair value of the securities comprising the individual portfolios
underlying the separate accounts. Realized gains and losses are determined
on the basis of specific identification and average cost methods for manager
initiated and issuer initiated disposals, respectively.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company considers
all demand deposits and interest-bearing accounts not related to the investment
function to be cash equivalents. All interest-bearing accounts classified as
cash equivalents have original maturities of three months or less.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally commissions and
other expenses related to the production of new business, have been deferred.
Acquisition costs for variable annuity and 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, or "unlocked", when the Company revises its estimate of
current or future gross profits to be realized from a group of products.
Deferred policy acquisition costs are adjusted to reflect the pro forma impact
of unrealized gains and losses on fixed maturity securities the Company has
designated as "available for sale" under SFAS No. 115.
PRESENT VALUE OF IN FORCE ACQUIRED
As a result of the acquisition of Golden American, a portion of the acquisition
cost was allocated to the right to receive future cash flows from the existing
insurance contracts. This allocated cost represents the present value of in
force acquired ("PVIF") which reflects the value of those purchased policies
calculated by discounting actuarially determined expected cash flows at the
discount rate determined by the purchaser. Interest is imputed on the
unamortized balance of PVIF at rates of 7.70% to 7.80%. Amortization of PVIF
is charged to expense in proportion to expected gross profits. This
amortization is adjusted retrospectively, or "unlocked", when the Company
revises its estimate of current or future gross profits to be realized from
the insurance contracts acquired. PVIF is adjusted to reflect the pro forma
impact of unrealized gains (losses) on available for sale fixed maturities.
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements at the Golden
American headquarters, office furniture and equipment and capitalized computer
software and are not considered to be significant to the Company's overall
operations. Property and equipment are reported at cost less allowances for
depreciation. Depreciation expense is computed primarily on the basis of
straight-line method over the estimated useful lives of the assets.
GOODWILL
Goodwill was established as a result of the acquisition discussed above and is
being amortized over 25 years on a straight line basis. See Note 5 for
additional information.
FUTURE POLICY BENEFITS
Future policy benefits for fixed interest divisions of the variable products,
are established utilizing the retrospective deposit accounting method. Policy
reserves represent the premiums received plus accumulated interest, less
mortality and administration charges. Interest credited to these policies
ranged from 4.00% to 7.25% during 1996.
The unearned revenue reserve represents unearned distribution fees discussed
below. These distribution fees have been deferred and are amortized over the
life of the contract in proportion to its expected gross profits.
SEPARATE ACCOUNTS
Assets and liabilities of the separate accounts reported in the accompanying
balance sheets represent funds that are separately administered principally
for variable annuity and variable life contracts. Contractholders, rather
than the Company, bear the investment risk for variable products. At the
direction of the contractholders, the separate accounts invest the premiums
from the sale of variable annuity and variable life products in shares of
specified mutual funds. The assets and liabilities of the separate accounts
are clearly identified and segregated from other assets and liabilities of
the Company. The portion of the separate account assets applicable to
variable annuity and variable life contracts cannot be charged with liabilities
arising out of any other business the Company may conduct.
Variable separate account assets carried at fair value of the underlying
investments generally represent contractholder investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable annuity and variable life contracts invested in the
separate accounts. Net investment income and realized and unrealized capital
gains and losses related to separate account assets are not reflected in the
accompanying Statement of Income.
Product charges recorded by the Company from variable annuity and variable
life products consist of charges applicable to each contract for mortality and
expense risk, cost of insurance, contract administration and surrender charges.
In addition, some variable annuity and all variable life contracts provide for
a distribution fee collected for a limited number of years after each premium
deposit. Revenue recognition of collected distribution fees is amortized over
the life of the contract in proportion to its expected gross profits. The
balance of unrecognized revenue related to the distribution fees is reported as
an unearned revenue reserve.
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred tax assets or liabilities are adjusted to
reflect the pro forma impact of unrealized gains and losses on equity securities
and fixed maturity securities the Company has designated as available for sale
under SFAS No. 115. Changes in deferred tax assets or liabilities resulting
from this SFAS No. 115 adjustment are charged or credited directly to
stockholder's equity. Deferred income tax expenses or credits reflected in the
Company's Statement of Income are based on the changes in the deferred tax
asset or liability from period to period (excluding the SFAS No. 115
adjustment).
DIVIDEND RESTRICTIONS
Golden American's ability to pay dividends to its parent is restricted because
prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limitation. During 1997,
Golden American could pay dividends to its parent of approximately $2,186,000
without prior approval of statutory authorities. The Company has maintained
adequate statutory capital and surplus and has not used surplus relief or
financial reinsurance, which have come under scrutiny by many state insurance
departments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the preparation period. Actual results
could differ from those estimates.
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and present value of in force acquired, (4) fair values of
assets and liabilities recorded as a result of 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 preceding
are inherently subject to change and are reassessed periodically. Changes in
estimates and assumptions could materially impact the financial statements.
RECLASSIFICATION
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform to the 1996 financial statement presentation.
2. BASIS OF FINANCIAL REPORTING
________________________________________________________________________________
The financial statements of the Company differ from related statutory-basis
financial statements principally as follows: (1) acquisition costs of acquiring
new business are deferred and amortized over the life of the policies rather
than charged to operations as incurred; (2) an asset representing the present
value of future cash flows from insurance contracts acquired was established as
a result of an acquisition and is amortized and charged to expense; (3) future
policy benefit reserves for the fixed interest divisions of the variable
products are based on full account values, rather than the greater of cash
surrender value or amounts derived from discounting methodologies utilizing
statutory interest rates; (4) reserves are reported before reduction for
reserve credits related to reinsurance ceded and a receivable is established,
net of an allowance for uncollectible amounts, for these credits rather than
presented net of these credits; (5) fixed maturity investments are designated
as "available for sale" and valued at fair value with unrealized
appreciation/depreciation, net of adjustments to deferred income taxes
(if applicable) and deferred policy acquisition costs, credited/charged directly
to stockholder's equity rather than valued at amortized cost; (6) the carrying
value of fixed maturity securities is reduced to fair value by a charge to
realized losses in the Statements of Income when declines in carrying value are
judged to be other than temporary, rather than through the establishment of a
formula-determined statutory investment reserve (carried as a liability),
changes in which are charged directly to surplus; (7) deferred income taxes
are provided for the difference between the financial statement and income tax
bases of assets and liabilities; (8) net realized gains or losses attributed
to changes in the level of interest rates in the market are recognized when the
sale is completed rather than deferred and amortized over the remaining life of
the fixed maturity security; (9) a liability is established for anticipated
guaranty fund assessments, net of related anticipated premium tax credits,
rather than capitalized when assessed and amortized in accordance with
procedures permitted by insurance regulatory authorities; (10) revenues for
variable annuity and variable life products consist of policy charges for the
cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed rather than premiums received;
and (11) assets and liabilities are restated to fair values when a change in
ownership occurs, with provisions for goodwill and other intangible assets,
rather than continuing to be presented at historical cost.
Net income (loss) for Golden American, as determined in accordance with
statutory accounting practices was $(9,188,000) in 1996, $(4,117,000) in 1995
and $(11,260,000) in 1994. Total statutory capital and surplus was
$80,430,000 at December 31, 1996 and $66,357,000 at December 31, 1995.
3. INVESTMENT OPERATIONS
________________________________________________________________________________
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
<TABLE>
<CAPTION>
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the
period | period
August 14, | January 1, For the For the
1996 through| 1996 through year ended year ended
December 31,| August 13, December 31, December 31,
1996 | 1996 1995 1994
____________| _________________________________________
(Dollars in thousands)
<S> <C> | <C> <C> <C>
Fixed maturities $5,083 | $4,507 $1,610 $142
Equity securities 103 | -- -- 1
Mortgage loans on real |
estate 203 | -- -- --
Policy loans 78 | 73 56 11
Short-term investments 441 | 341 899 226
Other, net 2 | 22 148 99
Funds held in escrow -- | 145 166 83
____________| _________________________________________
Gross investment income 5,910 | 5,088 2,879 562
Less investment expenses (115)| (98) (61) (2)
____________| _________________________________________
Net investment income $5,795 | $4,990 $2,818 $560
============| =========================================
</TABLE>
Realized gains (losses) are as follows:
<TABLE>
<CAPTION>
REALIZED*
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the
period | period
August 14, | January 1,
1996 through| 1996 through Year ended Year ended
December 31,| August 13, December 31, December 31,
1996 | 1996 1995 1994
____________| _________________________________________
(Dollars in thousands)
<S> <C> | <C> <C> <C>
Fixed maturities: |
Available for sale $42 | ($420) $297
Held for investment -- | -- -- $2
Equity securities -- | -- -- 63
____________| _________________________________________
Realized gains (losses) |
on investments $42 | ($420) $297 $65
=======================================================
<FN>
*See Note 6 for the income tax effects attributable to realized gains and
losses on investments.
</TABLE>
The change in unrealized appreciation (depreciation) on securities at fair
value is as follows:
<TABLE>
<CAPTION>
UNREALIZED
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the
period | period
August 14, | January 1,
1996 through| 1996 through Year ended Year ended
December 31,| August 13, December 31, December 31,
1996** | 1996 1995 1994
____________| _________________________________________
(Dollars in thousands)
<S> <C> | <C> <C> <C>
Fixed maturities: |
Available for sale $410 | ($2,087) $958 ($65)
Held for investment -- | -- 90 --
Equity securities (3)| 1 3 (63)
____________| _________________________________________
Unrealized appreciation |
(depreciation) of |
securities $407 | ($2,086) $1,051 ($128)
=======================================================
<FN>
**On August 13, 1996, all fixed maturities and equity securities in the
Company's investment portfolio were marked to market.
</TABLE>
At December 31, 1996 and December 31, 1995, amortized cost, gross unrealized
gains and losses and estimated fair values of fixed maturity securities, all of
which are designated as available for sale, are as follows:
<TABLE>
<CAPTION>
POST-ACQUISITION
_______________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $70,902 $122 ($247) $70,777
Other 3,082 2 (4) 3,080
Public utilities 35,893 193 (38) 36,048
Investment grade corporate 134,487 586 (466) 134,607
Below investment grade
corporate 25,921 249 (56) 26,114
Mortgage-backed securities 4,868 69 -- 4,937
___________ ___________ ___________ ___________
Total $275,153 $1,221 ($811) $275,563
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
_______________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities - Other $13,334 $176 $13,510
Public utilities 5,276 26 5,302
Investment grade corporate 27,042 700 ($31) 27,711
Mortgage-backed securities 3,019 87 -- 3,106
___________ ___________ ___________ ___________
Total $48,671 $989 ($31) $49,629
=========== =========== =========== ===========
</TABLE>
At December 31, 1996, net unrealized investment gains on fixed maturities
designated as available for sale totaled $410,000. This appreciation caused
an increase to stockholder's equity of $265,000 at December 31, 1996 (net of
deferred income taxes of $145,000). No fixed maturity securities were
designated as held for investment at December 31, 1996 or 1995. Short-term
investments with maturities of 30 days or less have been excluded from the
above schedules. Amortized cost approximates fair value for these securities.
Amortized cost and estimated fair value of fixed maturities designated as
available for sale, by contractual maturity, at December 31, 1996, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
POST-ACQUISITION
_____________________________
Estimated
Amortized Fair
December 31, 1996 Cost Value
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due within one year $15,908 $15,930
Due after one year through five years 122,958 123,487
Due after five years through ten years 60,517 60,432
_____________ _____________
199,383 199,849
Mortgage-backed securities 75,770 75,714
_____________ _____________
Total $275,153 $275,563
============= =============
</TABLE>
An analysis of sales, maturities and principal repayments of the Company's
fixed maturities portfolio is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
For the period August 14,
1996 through
December 31, 1996:
Scheduled principal
repayments, calls and
tenders $1,612 $1,612
Sales 45,799 $115 ($73) 45,841
______________________________________________________
Total $47,411 $115 ($73) $47,453
======================================================
For the period January 1,
1996 through August 13,
1996:
Scheduled principal
repayments, calls and
tenders $1,801 $1,801
Sales 53,710 $152 ($572) 53,290
______________________________________________________
Total $55,511 $152 ($572) $55,091
======================================================
Year ended December 31,
1995:
Scheduled principal
repayments, calls and
tenders $20,279 $305 ($16) $20,568
Sales 3,450 8 -- 3,458
______________________________________________________
Total $23,729 $313 ($16) $24,026
======================================================
Year ended December 31,
1994:
Scheduled principal
repayments, tenders
(available for sale only)
and calls - held for
investment $319 $2 $ -- $321
______________________________________________________
Total $319 $2 $ -- $321
======================================================
</TABLE>
Investment Valuation Analysis: The company analyzes its investment portfolio
at least quarterly in order to determine if the carrying value of any of its
investments has been impaired. The carrying value of debt and equity
securities is written down to fair value by a charge to realized losses when
an impairment in value appears to be other than temporary. During 1996 and
1995, no investments were identified as having an impairment other than
temporary.
Investments on Deposit: At December 31, 1996 and 1995, affidavits of deposits
covering bonds with a par value of $6,605,000 and $2,695,000, respectively,
were on deposit with regulatory authorities pursuant to certain statutory
requirements.
Investment Diversifications: The Company's investment policies related to its
investment portfolio require diversification by asset type, company and
industry and set limits on the amount which can be invested in an individual
issuer. Such policies are at least as restrictive as those set forth by
regulatory authorities. Fixed maturity investments included investments in
various government bonds and government or agency mortgage-backed securities
(27% in 1996 and 1995), public utilities (13% in 1996, 11% in 1995), basic
industrials (30% in 1996, 20% in 1995) and financial companies (18% in 1996,
30% in 1995). Mortgage loans on real estate have been analyzed by
geographical location and 17% of all mortgage loans are in Georgia. There are
no other concentrations of mortgage loans in any state exceeding ten percent in
1996. Mortgage loans on real estate have also been analyzed by collateral type
with significant concentrations identified in office buildings (36% in 1996),
industrial buildings (31% in 1996) and multi-family residential buildings
(27% in 1996). Equity securities and investments accounted for by the equity
method are not significant to the Company's overall investment portfolio.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of stockholder's
equity at December 31, 1996.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
________________________________________________________________________________
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of estimated fair value of all financial instruments, including both
assets and liabilities recognized and not recognized in a Company's balance
sheet, unless specifically exempted. SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments"
requires additional disclosures about derivative financial instruments. Most
of the Company's investments, insurance liabilities and debt fall within the
standards' definition of a financial instrument. Although the Company's
insurance liabilities are specifically exempted from this disclosure
requirement, estimated fair value disclosure of these liabilities is also
provided in order to make the disclosures more meaningful. Accounting,
actuarial and regulatory bodies are continuing to study the methodologies to be
used in developing fair value information, particularly as it relates to such
things as liabilities for insurance contracts. Accordingly, care should be
exercised in deriving conclusions about the Company's business or financial
condition based on the information presented herein.
The Company closely monitors the composition and yield of its invested assets,
the duration and interest credited on insurance liabilities and resulting
interest spreads and timing of cash flows. These amounts are taken into
consideration in the Company's overall management of interest rate risk, which
attempts to minimize exposure to changing interest rates through the matching
of investment cash flows with amounts expected to be due under insurance
contracts. As discussed below, the Company has used discount rates in its
determination of fair values for its liabilities which are consistent with
market yields for related assets. The use of the asset market yield is
consistent with management's opinion that the risks inherent in its asset and
liability portfolios are similar. This assumption, however, might not result
in values consistent with those obtained through an actuarial appraisal of the
Company's business or values that might arise in a negotiated transaction.
The following compares carrying values as shown for financial reporting
purposes with estimated fair values.
<TABLE>
<CAPTION>
December 31 1996
_______________________________________________________________________________
(Dollars in thousands)
Estimated
Carrying Fair
Value Value
____________ ____________
<S> <C> <C>
ASSETS
Balance sheet financial assets:
Fixed maturities available for sale $275,563 $275,563
Equity securities 33 33
Mortgage loans on real estate 31,459 30,979
Short-term investments 12,631 12,631
Cash and cash equivalents 5,839 5,839
Other receivables 4,214 4,214
Separate account assets 1,207,247 1,207,247
___________________________
1,536,986 1,536,506
Deferred policy acquisition costs 11,468 --
Present value of in force acquired 83,051 --
Goodwill 38,665 --
Deferred income taxes on fair value adjustments -- 7,741
Non-financial assets 3,095 3,095
___________________________
Total assets $1,673,265 $1,547,342
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Balance sheet financial liabilities:
Future policy benefits (net of related policy
loans):
Annuity products $280,076 $253,012
Interest sensitive life products 2,640 2,368
___________________________
282,716 255,380
Surplus note 25,000 28,878
Separate account liabilities 1,207,247 1,119,158
___________________________
1,514,963 1,403,416
Non-financial liabilities 17,818 17,818
___________________________
Total liabilities 1,532,781 1,421,234
Stockholder's equity 140,484 126,108
___________________________
Total liabilities and stockholder's equity $1,673,265 $1,547,342
===========================
</TABLE>
The following methods and assumptions were used by the Company in estimating
fair values.
Fixed maturities: Estimated fair values of publicly traded securities are
as reported by an independent pricing service. Estimated fair values of
conventional mortgage-backed securities not actively traded in a liquid market
are estimated using a third party pricing system. This pricing system uses a
matrix calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities.
Equity securities: Estimated fair values of equity securities, which consist
of the Company's investment in the portfolios underlying its separate accounts,
are based upon the quoted fair value of the individual securities comprising
the individual portfolios underlying the separate accounts. For equity
securities not actively traded, estimated fair values are based upon values of
issues of comparable yield and quality.
Mortgage loans on real estate: Fair values are estimated by discounting
expected cash flows, using interest rates currently offered for similar loans.
Short-term investments, cash and cash equivalents, and other receivables:
Carrying values reported in the Company's historical cost basis balance sheet
approximate estimated fair value for these instruments, due to their short-
term nature.
Deferred policy acquisition costs, present value of in force acquired and
goodwill: For historical cost purposes, the recovery of policy acquisition
costs and present value of in force acquired is based on the realization, among
other things, of future interest spreads and gross premiums on in force
business. Because these cash flows are considered in the computation of the
future policy benefit cash flows, the deferred policy acquisition cost and
present value of in force acquired balances do not appear on the estimated fair
value balance sheet. Goodwill does not appear in the estimated fair value
balance sheet because no cash flows are related to this asset.
Separate account assets: Separate account assets represent the estimated
fair values of the underlying securities in the Company's historical cost and
estimated fair value basis balance sheets.
Future policy benefits: Estimated fair values of the Company's liabilities
for future policy benefits for the fixed interest division of the variable
products are based upon discounted cash flow calculations. Cash flows of
future policy benefits are discounted using the market yield rate of the assets
supporting these liabilities. Estimated fair values are presented net of the
estimated fair value of corresponding policy loans due to the interdependent
nature of the cash flows associated with these items.
Surplus note: Estimated fair value of the Company's surplus note was based
upon discounted future cash flows using a discount rate approximating the
Company's return on invested assets.
Separate account liabilities: Separate account liabilities are reported at
full account value in the Company's historical cost balance sheet. Estimated
fair values of separate account liabilities are based upon assumptions using
an estimated long-term average market rate of return to discount future cash
flows. The reduction in fair values for separate account liabilities reflect
the present value of future revenue from product charges, distribution fees
or surrender charges.
Deferred income taxes on fair value adjustments: Deferred income taxes
have been reported at the statutory rate for the differences (except for those
attributed to permanent differences) between the carrying value and estimated
fair value of assets and liabilities set forth herein.
Non-financial assets and liabilities: Values are presented at historical
cost. Non-financial assets consist primarily of property and equipment,
receivable from the Separate Accounts and restricted stock assets. Non-
financial liabilities consist primarily of outstanding checks, guaranty fund
assessments payable, payables for investments and suspense accounts.
At December 31, 1995, the carrying amounts reported for the financial
instruments consisting primarily of short-term investments, policy loans, the
adjustable principal amount promissory note and insurance and annuity reserves
approximate fair value.
SFAS No. 107 and SFAS No. 119 require disclosure of estimated fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheets, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, 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. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The above presentation should not be viewed as
an appraisal as there are several factors, such as the fair value associated
with customer or agent relationships and other intangible items, which have not
been considered. In addition, interest rates and other assumptions might be
modified if an actual appraisal were to be performed. Accordingly, the
aggregate estimated fair value amounts presented herein are limited by each of
these factors and do not purport to represent the underlying value of the
Company.
5. 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, pursuant to the terms of the Purchase Agreement dated as of
May 3, 1996 between Equitable and Whitewood. In exchange for the outstanding
capital stock of BT Variable, Equitable paid the sum of $93,000,000 in cash
to Whitewood in accordance with the terms of the Purchase Agreement. Equitable
also paid the sum of $51,000,000 in cash to Bankers Trust to retire certain
debt owed by BT Variable to Bankers Trust pursuant to a revolving credit
arrangement. Subsequent to the acquisition, the BT Variable, Inc. name was
changed to EIC Variable, Inc.
Accounting Treatment: The acquisition was accounted for as a purchase
resulting in a new basis of accounting, reflecting estimated fair values for
assets and liabilities at August 13, 1996. The purchase price was allocated
to the three companies purchased - BT Variable, DSI and Golden American.
Goodwill was established for the excess of the acquisition cost over the fair
value of the net assets acquired and pushed down to Golden American. The
acquisition cost is preliminary with respect to the final settlement of taxes
with Bankers Trust and estimated expenses and, as a result, goodwill may
change. The allocation of the purchase price to Golden American was
approximately $139,872,000. The amount of goodwill relating to the
acquisition was $39,254,000 at the acquisition date and is being amortized
over 25 years on a straight line basis. The carrying value of goodwill will
be reviewed periodically for any indication of impairment in value.
Pro Forma Information (Unaudited): The following pro forma information is
presented as if the acquisition had occurred on January 1, 1995. The
information is combined to reflect the purchase accounting in the pre-
acquisition periods of January 1, 1996 through August 13, 1996 and for the
year ended December 31, 1995. This information is intended for informational
purposes only and may not be indicative of the Company's future results of
operations.
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995
___________________________________________________________________
(Dollars in thousands) (Unaudited)
<S> <C> <C>
Revenues $35,955 $25,149
Net income 799 1,093
</TABLE>
The primary pro forma effects are revised amortization of deferred policy
acquisition costs, present value of in force acquired, unearned revenue,
goodwill and the elimination of deferred tax benefits.
Present Value of In Force Acquired: As part of the acquisition, a portion of
the acquisition cost was allocated to the right to receive future cash flows
from the insurance contracts existing with Golden American at the date of
acquisition. This allocated cost represents the present value of in force
acquired ("PVIF") which reflects the value of those purchased policies
calculated by discounting the actuarially determined expected future cash
flows at the discount rate determined by Equitable.
An analysis of the PVIF asset is as follows:
<TABLE>
<CAPTION>
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________
For the | For the
period | period
August | January
14, 1996 | 1, 1996 Year Year
through | through ended ended
December | August December December
31, 1996 | 13, 1996 31, 1995 31, 1994
____________| _________________________________
(Dollars in thousands)
<S> <C> | <C> <C> <C>
Beginning balance $85,796 | $6,057 $7,620 $9,784
Imputed interest 2,465 | 273 548 696
Amortization (5,210)| (1,224) (2,100) (2,860)
Adjustment for unrealized gains |
on available for sale securities -- | 11 (11) --
____________| _________________________________
Ending balance $83,051 | $5,117 $6,057 $7,620
============ =================================
</TABLE>
Pre-Acquisition PVIF represents the remaining value assigned to in force
contracts when Bankers Trust purchased Golden American from Mutual Benefit on
September 30, 1992. See Note 8, contingent liability for additional
information.
Interest is imputed on the unamortized balance of PVIF at rates of 7.70% to
7.80% for the period August 14, 1996 through December 31, 1996. PVIF is
charged to expense and adjusted for the unrealized gains (losses) on available
for sale securities. Based on current conditions and assumptions as to the
future events on acquired policies in force, the expected approximate net
amortization for the next five years, relating to the balance of the PVIF as of
December 31, 1996, is as follows:
<TABLE>
<CAPTION>
Year Amount
_________________________________________________
(Dollars in thousands)
<S> <C>
1997 $9,664
1998 10,109
1999 9,243
2000 7,919
2001 6,798
</TABLE>
6. INCOME TAXES
________________________________________________________________________________
The Company files a federal income tax return separate from its parent company.
Under the Internal Revenue Service Code, a newly acquired insurance company
must file a separate return for 5 years. Deferred income taxes have been
established based upon the temporary differences, the reversal of which will
result in taxable or deductible amounts in future years when the related asset
or liability is recovered or settled.
At December 31, 1995 and 1994, Golden American had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $22,600,000 and
$17,400,000, respectively. As a result of the election made in connection with
the acquisition, the Company will be treated as a new taxpayer commencing on
August 14, 1996. For the period August 14, 1996 through December 31, 1996, the
Company incurred a NOL of $4,725,000.
INCOME TAX EXPENSE
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
____________________________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996| August 13, 1996
_________________| _________________
(Dollars in thousands)
<S> <C> | <C>
Taxes provided in consolidated |
statements of income - deferred $220 | ($1,463)
|
Taxes provided in consolidated |
statement of changes in |
stockholder's equity on |
unrealized gains - deferred 145 | --
_________________| _________________
$365 | ($1,463)
=================| =================
</TABLE>
Income tax expense (credits) attributed to realized gains and losses on
investments amounted to $15,000 and $(147,000) and for the periods August 14,
1996 through December 31, 1996, and January 1, 1996 through August 13, 1996,
respectively. The effective tax rate on income before income taxes and equity
income (loss) is different from the prevailing federal income tax rate as
follows:
<TABLE>
<CAPTION>
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the
period | period
August 14, | January 1,
1996 through| 1996 through Year ended Year ended
December 31,| August 13, December 31, December 31,
1996 | 1996 1995 1994
____________| _________________________________________
(Dollars in thousands)
<S> <C> | <C> <C> <C>
Income before income |
taxes $570 | $1,736 $3,364 $2,222
Income tax at federal |
statutory rate 200 | 607 1,177 778
Tax effect (decrease) of: |
Realization of NOL |
carryforwards -- | (1,214) -- --
Dividends received |
deduction -- | -- (350) (368)
Other items 20 | -- 17 (210)
Valuation allowance -- | (856) (844) (200)
____________| _________________________________________
Income tax expense |
(benefit) $220 | ($1,463) $ -- $ --
============| =========================================
</TABLE>
DEFERRED INCOME TAXES
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
___________________________________
December 31, 1996 | 1995
____________________________________________________________ | ________________
(Dollars in thousands)
<S> <C> | <C>
Deferred tax assets: |
Future policy benefits $19,102 | $15,520
Deferred policy acquisition costs 1,985 | 3,666
Goodwill 5,918 | --
Net operating loss carryforwards 1,653 | 7,891
Other 235 | 57
________________ | ________________
28,893 | 27,134
Deferred tax liabilities: |
Net unrealized appreciation of available |
for sale fixed maturity securities 145 | --
Deferred policy acquisition costs -- | 23,560
Unamortized cost assigned to present |
value of in force acquired 29,068 | 2,120
Other 45 | 598
________________ | ________________
29,258 | 26,278
|
Valuation allowance, for deferred tax assets -- | (856)
________________ | ________________
Deferred income tax liability $365 | $ --
================ | ================
</TABLE>
7. RELATED PARTY TRANSACTIONS
________________________________________________________________________________
DSI acts as the principal underwriter (as defined in the Securities Act of
1933 and the Investment Company Act of 1940, as amended) of the variable
insurance products issued by Golden American which as of December 31, 1996
are sold primarily through two broker/dealer institutions. For the periods
August 14, 1996, through December 31, 1996 and January 1, 1996 through August
13, 1996, Golden American paid commissions to DSI totaling $9,995,000 and
$17,070,000, respectively. For the years ended December 31, 1995, and 1994,
commissions paid by Golden American to DSI aggregated $8,440,000 and
$17,569,000, respectively.
Golden American charged DSI for various expenses and all other general and
administrative costs, first on the basis of direct charges when identifiable,
with the remainder allocated based on the estimated amount of time spent by
Golden American's employees on behalf of DSI. For the year ended December
31, 1994 expenses allocated to DSI were $1,983,000.
Golden American provides certain managerial and supervisory services to DSI.
In 1996 and 1995, this fee was calculated as a percentage of average assets
in the variable separate accounts. For the periods August 14, 1996 through
December 31, 1996 and January 1, 1996 through August 13, 1996 the fee was
$877,000 and $1,390,000, respectively. This fee was $987,000 for 1995.
On August 14, 1996, the Company began purchasing investment management
services from an affiliate. Payments for these services totaled $72,000
through December 31, 1996. On August 14, 1996, all employees of Golden
American, except wholesalers, became statutory employees of Equitable Life
Insurance Company, an affiliate.
Surplus Note: On December 17, 1996, Golden American issued a surplus note in
the amount of $25,000,000 to Equitable. The note matures on December 17, 2026
and will accrue interest of 8.25% per annum until paid. The note and accrued
interest thereon shall be subordinate to payments due to policyholders,
claimant and beneficiary claims, as well as debts owed to all other classes of
debtors of Golden American. Any payment of principal made shall be subject to
the prior approval of the Delaware Insurance Commissioner. On December 17,
1996, Golden American contributed the $25,000,000 to First Golden acquiring
200,000 shares of common stock (100% of outstanding stock) of First Golden.
Line of Credit: Golden American maintains a line of credit agreement with
Equitable to facilitate the handling of unusual and/or unanticipated short-
term cash requirements. Under the current agreement, which became effective
December 1, 1996 and expires on December 31, 1997, Golden American can borrow
up to $25,000,000. Interest on any borrowings is charged at the rate of
Equitable's monthly average aggregate cost of short-term funds plus 1.00%.
For the period August 14 through December 31, 1996, the Company paid $85,000
of interest under this agreement. At December 31, 1996, no amounts were
outstanding under this agreement.
Short-term Debt: All short-term debt was repaid as of December 30, 1994.
Interest paid during 1994 was $1,962,000. The repayment of amounts under this
loan had been guaranteed by Bankers Trust.
Stockholder's Equity: On September 23, 1996, EIC Variable, Inc. (formally
known as BT Variable, Inc.) contributed $50,000,000 of Preferred Stock to the
Company's additional paid-in capital.
8. COMMITMENTS AND CONTINGENCIES
________________________________________________________________________________
Contingent Liability: In a transaction that closed on September 30, 1992,
Bankers Trust Company ("Bankers Trust") acquired from Mutual Benefit Life
Insurance Company in Rehabilitation ("Mutual Benefit"), in accordance with
the terms of an Exchange Agreement, all of the issued and outstanding capital
stock of Golden American and DSI and certain related assets for consideration
with an aggregate value of $13,200,000 and contributed them to BT Variable.
The transaction involved settlement of pre-existing claims of Bankers Trust
against Mutual Benefit. The ultimate value of these claims has not yet been
determined by the Superior Court of New Jersey and, prior to August 13, 1996,
was contingently supported by a $5,000,000 note payable from Golden American
and a $6,000,000 letter of credit from Bankers Trust. Bankers Trust had
estimated that the contingent liability due from Golden American amounted to
$439,000 at August 13, 1996 and December 31, 1995. At August 13, 1996 the
balance of the escrow account established to fund the contingent liability was
$4,293,000 ($4,150,000 at December 31, 1995).
On August 13, 1996, Bankers Trust made a cash payment to Golden American in
an amount equal to the balance of the escrow account less the $439,000
contingent liability discussed above. In exchange, Golden American
irrevocably assigned to Bankers Trust all of Golden American's rights to
receive any amounts to be disbursed from the escrow account in accordance with
the terms of the Exchange Agreement. Bankers Trust also irrevocably agreed to
make all payments becoming due under the Golden American note and to indemnify
Golden American for any liability arising from the note.
Reinsurance: At December 31, 1996, Golden American had reinsurance treaties
with reinsurers covering a significant portion of the mortality risks under its
variable contracts with unaffiliated reinsurers. Golden American remains
liable to the extent its reinsurers do not meet their obligations under the
reinsurance agreements. Reinsurance in force for life mortality risks were
$58,368,000 and $24,709,000 at December 31, 1996 and 1995. Included in the
accompanying financial statements are net considerations to reinsurers of
$875,000, $600,000, $2,800,000 and $2,400,000 and net policy benefits
recoveries of $654,000, $1,267,000, $3,500,000 and $1,900,000 for the periods
August 14, 1996 through December 31, 1996, and January 1, 1996 through August
13, 1996 and the years ended 1995 and 1994, 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 $10,000 and $56,000 for the periods August 14, 1996 through December
31, 1996 and January 1, 1996 through December 31, respectively. In 1995 and
1994, net income was reduced by $109,000 and $27,000, respectively.
Guaranty Fund Assessments: Assessments are levied on the Company by life and
health guaranty associations in most states in which the Company is licensed
to cover losses of policyholders of insolvent or rehabilitated insurers. In
some states, these assessments can be partially recovered through a reduction
in future premium taxes. The Company cannot predict whether and to what extent
legislative initiatives may affect the right to offset. Based upon information
currently available from the National Organization of Life and Health Insurance
Guaranty Associations (NOLHGA), the Company believes that it is probable these
insolvencies will result in future assessments which could be material to the
Company's financial statements if the Company's reserve is not sufficient. The
Company regularly reviews its reserve for these insolvencies and updates its
reserve based upon the Company's interpretation of information from the NOLHGA
annual report. The associated cost for a particular insurance company can vary
significantly based upon its fixed account premium volume by line of business
and state premiums levels as well as its potential for premium tax offset.
Accordingly, the Company accrued and charged to expense an additional $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, 1996, the
Company has an undiscounted reserve of $771,000 to cover estimated future
assessments (net of related anticipated premium tax credits) and has
established an asset totaling $3,000 for assessments paid which may be
recoverable through future premium tax offsets. The Company believes this
reserve is sufficient to cover expected future insurance guaranty fund
assessments, based upon previous premium levels, and known insolvencies at this
time.
Litigation: In the ordinary course of business, the Company is engaged in
litigation, none of which management believes is material.
Vulnerability from Concentrations: The Company has various concentrations in
its investment portfolio (see Note 3 for further information). The Company's
asset growth, net investment income and cash flow are primarily generated from
the sale of variable products and associated future policy benefits and
separate account liabilities. A significant portion of the Company's sales are
generated by two broker/dealers. Substantial changes in tax laws that would
make these products less attractive to consumers, extreme fluctuations in
interest rates or stock market returns which may result in higher lapse
experience than assumed, could cause a severe impact to the Company's financial
condition.
Other Commitments: At December 31, 1996, outstanding commitments to fund
mortgage loans on real estate totaled $14,250,000.
<PAGE>
APPENDIX: DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc. ("Moody's) description of its bond
ratings:
Aaa: Judged to be the best quality; they carry the smallest degree of
investment risk.
Aa: Judged to be of high quality by all standards; together with the
Aaa group, they comprise what are generally known as high grade bonds.
A: Possess many favorable investment attributes and are to be considered
as "upper medium grade obligations."
Baa: Considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured; interest payments and principal security
appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of
time.
Ba: Judged to have speculative elements; their future cannot be
considered as well assured.
B: Generally lack characteristics of the desirable investment.
Caa: Are of poor standing; such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca: Speculative in a high degree; often in default.
C: Lowest rate class of bonds; regarded as having extremely poor
prospects.
Moody's also applies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; 2 indicates a mid-range ranking; and 3 indicates a ranking toward
the lower end of the category.
Excerpts from Standard & Poor's Rating Group ("Standard & Poor's") description
of its bond ratings:
AAA: Highest grade obligations; capacity to pay interest and repay
principal is extremely strong.
A - 1
<PAGE>
AA: Also qualify as high grade obligations; a very strong capacity to
pay interest and repay principal and differs from AAA issues only in
small degree.
A: Regarded as upper medium grade; they have a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions
than debt in higher rated categories.
BBB: Regarded as having an adequate capacity to pay interest and repay
principal; whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity than in higher rated categories -- this group
is the lowest which qualifies for commercial bank investment.
BB, B,
CCC,
CC: Predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with terms of the obligation: BB
indicates the lowest degree of speculation and CC the highest.
Standard & Poor's applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
A-2
