<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
VALUE PROSPECTUS SUPPLEMENT
FOR USE IN STATES WHICH DO NOT PERMIT MARKET VALUE ADJUSTMENTS
<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
Dated April 1, 1999
Supplement to the
Prospectus dated February 16, 1999,
as amended February 22, 1999 for
Deferred Combination Variable and Fixed Annuity Contracts
issued by Golden American Life Insurance Company
(the "GoldenSelect VALUE Prospectus")
__________
This supplement should be retained with your
GoldenSelect VALUE Prospectus.
A Fixed Interest Division option may be available through
the group and individual deferred combination variable and
fixed annuity contracts offered by Golden American Life
Insurance Company. The Fixed Interest Division is part of
the Golden American General Account. Interests in the Fixed
Interest Division have not been registered under the
Securities Act of 1933, and neither the Fixed Interest
Division nor the General Account are registered under the
Investment Company Act of 1940.
Interests in the Fixed Interest Division are offered through
an Offering Brochure, dated April 1, 1999. The Fixed
Interest Division is different from the Fixed Account which
is described in the prospectus but which is not available in
your state. When reading through the GoldenSelect VALUE
Prospectus, the Fixed Interest Division should be
counted among the various divisions available for the
allocation of your premiums, in lieu of the Fixed Account.
The Fixed Interest Division may not be available in some
states. Some restrictions may apply.
More complete information relating to the Fixed Interest
Division is found in the Offering Brochure. Please read it
carefully before you send money.
G3770 FID 4/99
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
PROSPECTUS SUPPLEMENT
March 31, 1999
to the
Prospectus dated February 16, 1999
as amended February 22, 1999 and March 17, 1999 for
Deferred Combination Variable and Fixed Annuity Contracts
(the "GOLDENSELECT/R/ VALUE Prospectus")
CORRECTION OF ERROR
The Developing World Series of the GCG Trust in the
GOLDENSELECT/R/ VALUE Prospectus is managed by Baring International
Investment Limited, an affiliate of Golden American Life Insurance
Company. The GOLDENSELECT/R/ VALUE Prospectus incorrectly shows
another manager for the Developing World Series on the cover page.
Please retain this supplement with your GOLDENSELECT/R/ VALUE Prospectus.
G3770-Baring 3/99 3/31/99
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
PROSPECTUS SUPPLEMENT
March 17, 1999
to the
Prospectus dated February 16, 1999
as amended February 22, 1999 for
Deferred Combination Variable and Fixed Annuity Contracts
(the "GOLDENSELECT/R/ VALUE Prospectus")
CHANGE OF ADDRESS
Effective March 19, 1999, the address of Golden American Life Insurance
Company, The GCG Trust and Directed Services, Inc., the Trust's Manager and
Distributor, will be 1475 Dunwoody Drive, West Chester, PA 19380.
This supplement should be retained with your GoldenSelect/R/ Prospectus.
G3770-Addr 3/17/99
<PAGE>
<PAGE>
File No. 333-66757, 811-5626
Filed under Rule 497(e)
PROFILE OF
GOLDENSELECT VALUE
FIXED AND VARIABLE ANNUITY CONTRACT
February 16, 1999,
as amended February 22, 1999
--------------------------------------------------------------------
| |
| This Profile is a summary of some of the more important points |
| that you should know and consider before purchasing the |
| Contract. The Contract is more fully described in the full |
| prospectus which accompanies this Profile. Please read |
| the prospectus carefully. |
| |
--------------------------------------------------------------------
1. THE ANNUITY CONTRACT
The Contract offered in this prospectus is a deferred combination
variable and fixed annuity contract between you and Golden American
Life Insurance Company. The Contract provides a means for you to
invest on a tax-deferred basis in (i) one or more of the 21 mutual
fund investment portfolios through our Separate Account B listed on
the next page and/or (ii) in a fixed account of Golden American with
guaranteed interest periods. We set the interest rates in the
fixed account (which will never be less than 3%) periodically.
We currently offer guaranteed interest periods of 6 months,
1, 3, 5, 7 and 10 years. We may credit a different interest rate
for each interest period. The interest you earn in the fixed account
as well as your principal is guaranteed by Golden American as long
as you do not take your money out before the applicable maturity
date for the interest period. We will apply a market value adjustment
if you withdraw your money from the fixed account more than 30 days
before the applicable maturity date. The investment portfolios are
designed to offer a better return than the fixed account. However,
this is NOT guaranteed. You can lose your money.
The Contract, like all deferred variable annuity contracts, has two
phases: the accumulation phase and the income phase. The accumulation
phase is the period between the contract date and the date on which you
start receiving the annuity payments under your Contract. The amounts you
accumulate during the accumulation phase will determine the amount of
annuity payments you will receive. The income phase begins when you
start receiving regular annuity payments from your Contract on the
annuity start date.
You determine (1) the amount and frequency of premium payments, (2) the
investments, (3) transfers between investments, (4) the type of annuity
to be paid after the accumulation phase, (5) the beneficiary who will
receive the death benefits, (6) the type of death benefit, and (7) the
amount and frequency of withdrawals.
2. YOUR ANNUITY PAYMENTS (THE INCOME PHASE)
Annuity payments are the periodic payments you will begin receiving on
the annuity start date. You may choose one of the following annuity
payment options:
<PAGE>
<PAGE>
<TABLE>
<CAPTIONS>
ANNUITY OPTIONS
-----------------------------------------------------------------------
<S> <C> <C>
| Option 1 Income for a Payments are made for a specified |
| fixed period number of years to you |
| or your beneficiary. |
| |
|---------------------------------------------------------------------|
| |
| Option 2 Income for Payments are made for the rest of |
| life with a your life or longer for a specified |
| period certain period such as 10 or 20 years or |
| until the total amount used to buy |
| this option has been repaid. This |
| option comes with an added guarantee |
| that payments will continue to your |
| beneficiary for the remainder of |
| such period if you should die during |
| the period. |
| |
|---------------------------------------------------------------------|
| |
| Option 3 Joint life Payments are made for your life |
| income and the life of another person |
| (usually your spouse). |
| |
|---------------------------------------------------------------------|
| |
| Option 4 Annuity plan Any other annuitization plan that we |
| choose to offer on the annuity start |
| date. |
| |
-----------------------------------------------------------------------
</TABLE>
Annuity payments under Options 1, 2 and 3 are fixed. Annuity payments
under Option 4 may be fixed or variable. Once you elect an annuity
option and begin to receive payments, it cannot be changed.
3. PURCHASE (BEGINNING OF THE ACCUMULATION PHASE)
You may purchase the Contract with an initial payment of $25,000 or
more up to and including age 85. You may make additional payments of
$1,000 or more at any time before you turn age 85. With our prior
consent, you may make premium payments over $1,000,000.
Who may purchase this Contract? The Contract may be purchased by
individuals as part of a personal retirement plan (a "non-qualified
Contract"), or as a Contract that qualifies for special tax treatment
when purchased as either an Individual Retirement Annuity (IRA) or with
funding from another qualified account (each a "qualified Contract").
The Contract is designed for people seeking long-term tax-deferred
accumulation of assets, generally for retirement or other long-term
purposes. The tax-deferred feature is more attractive to people in
high federal and state tax brackets. You should not buy this Contract
if you are looking for a short-term investment or if you cannot risk
getting back less money than you put in.
4. THE INVESTMENT PORTFOLIOS
You can direct your money into either: (1) the fixed account with
guaranteed interest periods of 6 months, and 1, 3, 5, 7 and 10 years,
and/or (2) into any one or more of the following 21 mutual fund
investment portfolios through our Separate Account B. The investment
portfolios are described in the prospectuses for the GCG Trust,
the PIMCO Variable Insurance Trust and the Warburg Pincus Trust.
Keep in mind that any amount you direct into the fixed account earns
a fixed interest rate. But if you invest in any of the following
investment portfolios, depending on market conditions, you may make or
lose money:
<TABLE>
<CAPTION>
THE GCG TRUST
<S> <C> <C>
Equity Income Series Value Equity Series Mid-Cap Growth Series
Fully Managed Series Strategic Equity Series Total Return Series
Capital Appreciation Series Small Cap Series Research Series
Rising Dividends Series Developing World Series Global Fixed Income Series
Real Estate Series Growth & Income Series Limited Maturity Bond Series
Hard Assets Series Growth Series Liquid Asset Series
</TABLE>
THE PIMCO TRUST
PIMCO High Yield Bond Portfolio
PIMCO StocksPLUS Growth and Income Portfolio
THE WARBURG PINCUS TRUST
International Equity Portfolio
2
<PAGE>
<PAGE>
5. EXPENSES
The Contract has insurance features and investment features, and there
are costs related to each. The Company currently does not deduct an
annual contract administrative charge but may in the future charge
an annual contract administrative fee of $30 or 2% of the contract
value, whichever is less. We also collect a mortality and expense risk
charge and an asset-based administrative charge. These 2 charges are
deducted daily directly from the amounts in the investment portfolios.
The asset-based administrative charge is 0.15% annually. The annual
rate of the mortality and expense risk charge is:
<TABLE>
<CAPTION>
Death Benefit
-------------
<S> <C>
Mortality & Expense Risk Charge 0.75%
Asset-Based Administrative Charge 0.15%
--------------------------------- -----
Total 0.90%
</TABLE>
Each investment portfolio has charges for investment management fees
and other expenses. These charges, which vary by investment portfolio,
currently range from 0.61% to 1.80% annually (see table on the next
page) of the portfolio's average daily net asset balance.
If you withdraw money from your Contract, or if you begin receiving
annuity payments, the Company may deduct a premium tax of 0%-3.5% to
pay to your state.
We deduct a surrender charge if you surrender your Contract or withdraw
an amount exceeding the free withdrawal amount. The free withdrawal
amount in any contract year is the greater of (i) any earnings less
previous withdrawals; or (ii) 10% of premium payments paid within the
last 7 years and not previously withdrawn, less any previous withdrawals
taken in the same contract year. The following table shows the schedule
of the surrender charge that will apply. The surrender charge is a
percent of each premium payment.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Complete Years Elapsed 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7+
since premium payment | | | | | | |
Surrender Charge 6% | 6% | 6% | 5% | 4% | 3% | 1% | 0%
</TABLE>
The following table is designed to help you understand the Contract
charges. The "Total Annual Insurance Charges" column includes the
mortality and expense risk charge, the asset-based administrative charge,
and reflects the annual contract administrative charge as 0.04% (based
on an average contract value of $70,000). The "Total Annual Investment
Portfolio Charges" column reflects the portfolio charges for each
portfolio and are based on actual expenses as of December 31, 1997,
except for newly formed portfolios and portfolios that had not commenced
operations as of December 31, 1997 where the charges have been estimated.
The column "Total Annual Charges" reflects the sum of the previous two
columns. The columns under the heading "Examples" show you how much you
would pay under the Contract for a 1-year period and for a 10-year period.
As required by the Securities and Exchange Commission, the examples
assume that you invested $1,000 in a Contract that earns 5% annually
and that you withdraw your money at the end of Year 1 or at the end of
Year 10. For Years 1 and 10, the examples show the total annual
charges assessed during that time. For these examples, the premium tax
is assumed to be 0%.
3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
| EXAMPLES: |
| TOTAL ANNUAL -------- |
| TOTAL ANNUAL INVESTMENT TOTAL TOTAL CHARGES AT THE END OF: |
| INSURANCE PORTFOLIO ANNUAL |
|INVESTMENT PORTFOLIO CHARGES CHARGES CHARGES 1 YEAR 10 YEARS |
| |
|--------------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C> <C> |
|THE GCG TRUST |
|Equity Income 0.94% 0.99% 1.93% $79.84 $223.74 |
|Fully Managed 0.94% 0.99% 1.93% $79.84 $223.74 |
|Capital Appreciation 0.94% 0.99% 1.93% $79.84 $223.74 |
|Rising Dividends 0.94% 0.99% 1.93% $79.84 $223.74 |
|Real Estate 0.94% 0.99% 1.93% $79.84 $223.74 |
|Hard Assets 0.94% 0.99% 1.93% $79.84 $223.74 |
|Value Equity 0.94% 0.99% 1.93% $79.84 $223.74 |
|Strategic Equity 0.94% 0.99% 1.93% $79.84 $223.74 |
|Small Cap 0.94% 0.99% 1.93% $79.84 $223.74 |
|Developing World 0.94% 1.60% 2.54% $87.60 $305.66 |
|Growth & Income 0.94% 1.10% 2.04% $81.40 $244.60 |
|Growth 0.94% 1.10% 2.04% $81.40 $244.60 |
|Mid-Cap Growth 0.94% 0.97% 1.91% $79.28 $221.63 |
|Total Return 0.94% 0.97% 1.91% $79.28 $221.63 |
|Research 0.94% 0.96% 1.90% $79.18 $220.57 |
|Global Fixed Income 0.94% 1.60% 2.54% $85.60 $286.09 |
|Limited Maturity Bond 0.94% 0.61% 1.55% $75.65 $182.79 |
|Liquid Asset 0.94% 0.61% 1.55% $75.65 $182.79 |
| |
|THE PIMCO TRUST |
|PIMCO High Yield Bond 0.94% 0.75% 1.69% $77.06 $198.07 |
|PIMCO StocksPLUS |
| Growth and Income 0.94% 0.65% 1.59% $76.05 $187.18 |
| |
|THE WARBURG PINCUS TRUST |
|International Equity 0.94% 1.36% 2.30% $84.11 $272.43 |
----------------------------------------------------------------------------------------------
</TABLE>
For the newly formed portfolios, the charges have been estimated.
The "Total Annual Investment Portfolio Charges" reflect current
expense reimbursements for the Research and Global Fixed Income
portfolios. The "1 Year" examples above include a 6% surrender charge.
For more detailed information, see the fee table in the prospectus
for the Contract.
6. TAXES
Under a qualified Contract, your premiums are pre-tax contributions and
accumulate on a tax-deferred basis. Premiums and earnings are taxed as
income when you make a withdrawal or begin receiving annuity payments,
presumably when you are in a lower tax bracket.
Under a non-qualified Contract, premiums are paid with after-tax
dollars, and any earnings will accumulate tax-deferred. You will be
taxed on these earnings, but not on premiums, when you withdraw them
from the Contract.
For owners of most qualified Contracts, when you reach age 70 1/2, you
will be required by federal tax laws to begin receiving payments from
your annuity or risk paying a penalty tax. In those cases, we will
calculate and pay you the minimum required distribution amounts. If
you are younger than 59 1/2 when you take money out, in most cases, you
will be charged a 10% federal penalty tax on the amount withdrawn.
4
<PAGE>
<PAGE>
7. WITHDRAWALS
You can withdraw your money at any time during the accumulation phase.
You may elect in advance to take systematic withdrawals described on
page 6. Withdrawals above the free withdrawal amount may be subject to
a surrender charge. We will apply a market value adjustment if you
withdraw your money from the fixed account more than 30 days before the
applicable maturity date. Income taxes and a penalty tax may apply to
amounts withdrawn.
8. PERFORMANCE
The value of your Contract will fluctuate depending on the investment
performance of the portfolio(s) you choose. Since this is a new
Contract, there is no actual performance history to illustrate.
Actual performance information will be shown in an updated prospectus.
Please keep in mind that past or hypothetical performance is not a
guarantee of future results.
9. DEATH BENEFIT
The death benefit applies on the first person to die of the contract
owner, joint owner, or annuitant (if a contract owner is not an
individual). Assuming you are the contract owner, if you die during
the accumulation phase, your beneficiary will receive a death benefit
unless the beneficiary is the surviving spouse and elects to continue
the Contract. The death benefit paid depends on the death benefit you
have chosen. The death benefit value is calculated at the close of the
business day on which we receive due proof of death at our Customer
Service Center. If your beneficiary elects not to take the death
benefit at the time of your death, the death benefit in the future may
be affected. If you die after the annuity start date and you
are the annuitant, your beneficiary will receive the death benefit
under the annuity option then in effect.
Under the Death Benefit, if you die before the annuity start
date, your beneficiary will receive the greatest of:
1) the contract value;
2) the total premium payments made under the Contract after subtracting
any withdrawals; or
3) the cash surrender value.
Note: The amounts could be reduced by premium taxes owed and withdrawals
not previously deducted. Please refer to the Contract for more
details.
10. OTHER INFORMATION
Free Look. If you cancel the Contract within 10 days after you
---------
receive it, you will receive a full refund of the contract value
(including charges and as adjusted for any market value adjustment).
If applicable state law requires a longer free look period, or the
return of the premium paid, the Company will comply. Unless your state
requires us to return your premium payment, you bear the investment
risk during the free look period; therefore, the contract value
returned may be greater or less than your premium payment. Your
contract value will be determined at the close of business on the day
we receive a written request for a refund.
Transfers among Investment Portfolios and the Fixed Account. You can
-----------------------------------------------------------
make transfers among your investment portfolios and your investment
in the fixed account as frequently as you wish without any current tax
implications. The minimum amount for a transfer is $100. Currently
there is no charge for transfers, and we do not limit the number of
transfers. The Company may, in the future, charge a $25 fee for any
transfer after the twelfth transfer in a contract year or limit the
number of transfers allowed. Keep in mind that if you transfer or
otherwise withdraw your money from the fixed account more than 30 days
before the applicable maturity date, we will apply a market value
adjustment. A market value adjustment could increase or decrease your
contract value and/or the amount you transfer or withdraw.
No Probate. In most cases, when you die, the person you choose as
----------
your beneficiary will receive the death benefit without going through
probate.
5
<PAGE>
<PAGE>
Additional Features. This Contract has other features you may be
-------------------
interested in. These include:
Dollar Cost Averaging. This is a program that allows you to
invest a fixed amount of money in the investment portfolios each month,
which may give you a lower average cost per unit over time than a
single one-time purchase. Dollar cost averaging requires regular
investments regardless of fluctuating price levels, and does not
guarantee profits or prevent losses in a declining market. This option
is currently available only if you have $1,200 or more in the Limited
Maturity Bond or the Liquid Asset investment portfolios or in the fixed
account with either a 6-month or 1-year guaranteed interest period.
Transfers from the fixed account under this program will not be subject
to a market value adjustment.
Systematic Withdrawals. During the accumulation phase, you can
arrange to have money sent to you at regular intervals throughout the
year. Within limits these withdrawals will not result in any
withdrawal charge. Withdrawals from your money in the fixed account
under this program are not subject to a market value adjustment. Of
course, any applicable income and penalty taxes will apply on amounts
withdrawn.
Automatic Rebalancing. If your contract value is $10,000 or more,
you may elect to have the Company automatically readjust the money
between your investment portfolios periodically to keep the blend you
select. Investments in the fixed account are not eligible for
automatic rebalancing.
11. INQUIRIES If you need more information after reading this
prospectus, please contact us at:
Customer Service Center
P.O. Box 8794
Wilmington, DE 19899-8794
(800) 366-0066
or after March 19, 1999 at:
Customer Sevice Center
P.O. Box 2700
West Chester, PA 19280
(800) 366-0066
or your registered representative.
6
<PAGE>
<PAGE>
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
February 16, 1999, as amended February 22, 1999
DEFERRED COMBINATION VARIABLE AND
FIXED ANNUITY PROSPECTUS
GOLDENSELECT VALUE
- -----------------------------------------------------------------------
This prospectus describes GOLDENSELECT VALUE, a deferred variable
annuity contract (the "Contract") offered by Golden American Life
Insurance Company (the "Company," "we" or "our"). The Contract is
available in connection with certain retirement plans that qualify for
special federal income tax treatment ("qualified Contracts") as well as
those that do not qualify for such treatment ("non-qualified
Contracts").
The Contract provides a means for you to invest your premium payments
in one or more of 21 mutual fund investment portfolios. You may also
allocate premium payments to our Fixed Account with guaranteed interest
periods. Your contract value will vary daily to reflect the investment
performance of the investment portfolio(s) you select and any interest
credited to your allocations in the Fixed Account. The investment
portfolios available under your Contract are:
<TABLE>
<CAPTION>
<S> <C>
THE GCG TRUST: MANAGER:
Equity Income Series T. Rowe Price Associates, Inc.
Fully Managed Series T. Rowe Price Associates, Inc.
Capital Appreciation Series INVESCO (NY), Inc. through March 31, 1999
A I M Capital Management, Inc., beginning April 1, 1999
Rising Dividends Series Kayne Anderson Investment Management, LLC
Real Estate Series EII Realty Securities, Inc.
Hard Assets Series Baring International Investment Limited (an affiliate)
Value Equity Series Eagle Asset Management, Inc.
Strategic Equity Series A I M Capital Management, Inc.
Small Cap Series Fred Alger Management, Inc.
Developing World Series Montgomery Asset Management, LLC
Growth & Income Series Alliance Capital Management L.P.
Growth Series Janus Capital Corporation
Mid-Cap Growth Series Massachusetts Financial Services Company
Total Return Series Massachusetts Financial Services Company
Research Series Massachusetts Financial Services Company
Global Fixed Income Series Baring International Investment Limited (an affiliate)
Limited Maturity Bond Series ING Investment Management, LLC (an affiliate)
Liquid Asset Series ING Investment Management, LLC (an affiliate)
PIMCO VARIABLE INSURANCE TRUST:
PIMCO High Yield Bond Portfolio Pacific Investment Management Company
PIMCO StocksPLUS Growth Pacific Investment Management Company
and Income Portfolio
WARBURG PINCUS TRUST:
International Equity Portolio Warburg Pincus Asset Management, Inc.
</TABLE>
The above mutual fund investment portfolios are purchased and held by
corresponding divisions of our Separate Account B. We refer to the
divisions as "subaccounts" and the money you place in the Fixed
Account's guaranteed interest periods as "Fixed Interest Allocations"
in this prospectus.
We will credit your Fixed Interest Allocation(s) with a fixed rate of
interest. We set the interest rates periodically. We will not set the
interest rate to be less than a minimum annual rate of 3%. You may
choose guaranteed interest periods of 6 months, and 1, 3, 5, 7 and 10
years. The interest earned on your money as well as your principal is
guaranteed as long as you hold them until the maturity date. If you
take your money out from a Fixed Interest Allocation more than 30 days
before the applicable maturity date, we will apply a market value
adjustment ("Market Value Adjustment"). A Market Value Adjustment
could increase or decrease your contract value and/or the amount you
take out. You bear the risk that you may receive less than your
principal if we take a Market Value Adjustment. For Contracts sold in
some states, not all Fixed Interest Allocations or subaccounts are
available. You have a right to return a Contract within 10 days
after you receive it for a full refund of the contract value (which
may be more or less than the premium payments you paid), or if
required by your state, the original amount of your premium payment.
Longer free look periods apply in some states.
This prospectus provides information that you should know before
investing and should be kept for future reference. A Statement of
Additional Information, dated February 16, 1999, as amended February
22, 1999, has been filed with the Securities and Exchange Commission.
It is available without charge upon request. To obtain a copy of this
document, write to our Customer Service Center at P.O. Box 8794,
Wilmington, DE 19899-8794 or call (800) 366-0066, or access the SEC's
website (http://www.sec.gov). The table of contents of the Statement
of Additional Information ("SAI") is on the last page of this prospectus
and the SAI is made part of this prospectus by reference.
- ------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE GCG TRUST, THE PIMCO TRUST OR THE WARBURG PINCUS TRUST
IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE GCG
TRUST, THE PIMCO TRUST AND THE WARBURG PINCUS TRUST.
<PAGE>
<PAGE>
<PAGE>
<PAGE>
- ------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Index of Special Terms............................................. 1
Fees and Expenses.................................................. 2
Performance Information............................................ 5
Accumulation Unit............................................... 5
Net Investment Factor........................................... 5
Financial Statements............................................ 6
Performance Information......................................... 6
Golden American Life Insurance Company............................. 7
The Trusts......................................................... 7
Golden American Separate Account B................................. 8
The Investment Portfolios.......................................... 8
Investment Objectives........................................... 8
Investment Portfolio Management Fees............................ 10
The Fixed Interest Allocation...................................... 10
Selecting a Guaranteed Interest Period.......................... 11
Guaranteed Interest Rates....................................... 11
Transfers from a Fixed Interest Allocation...................... 11
Withdrawals from a Fixed Interest Allocation.................... 12
Market Value Adjustment......................................... 12
The Annuity Contract............................................... 13
Contract Date and Contract Year................................. 13
Annuity Start Date.............................................. 13
Contract Owner.................................................. 13
Annuitant....................................................... 14
Beneficiary..................................................... 14
Purchase and Availability of the Contract....................... 15
Crediting of Premium Payments................................... 15
Contract Value ................................................. 15
Cash Surrender Value............................................ 16
Surrendering to Receive the Cash Surrender Value................ 16
Addition, Deletion or Substitution of Subaccounts
and Other Changes............................................. 16
The Fixed Account............................................... 16
Other Important Provisions...................................... 17
Withdrawals........................................................ 17
Regular Withdrawals............................................. 17
Systematic Withdrawals.......................................... 17
IRA Withdrawals................................................. 18
Transfers Among Your Investments................................... 18
Dollar Cost Averaging........................................... 19
Automatic Rebalancing........................................... 20
Death Benefit...................................................... 20
Death Benefit During the Accumulation Phase..................... 20
Death Benefit................................................ 20
Death Benefit During the Income Phase........................... 20
Charges and Fees................................................... 20
Charge Deduction Subaccount..................................... 21
Charges Deducted from the Contract Value........................ 21
Surrender Charge............................................. 21
Free Withdrawal Amount....................................... 21
Surrender Charge for Excess Withdrawals...................... 21
Premium Taxes................................................ 22
</TABLE>
(i)
<PAGE>
<PAGE>
- ------------------------------------------------------------------------
TABLE OF CONTENTS (CONTINUED)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Administrative Charge........................................ 22
Excess Transfer Charge....................................... 22
Charges Deducted from the Subaccounts........................... 22
Mortality and Expense Risk Charge............................ 22
Asset-Based Administrative Charge............................ 22
Trust Expenses.................................................. 22
The Annuity Options................................................ 22
Annuitization of Your Contract.................................. 22
Selecting the Annuity Start Date................................ 23
Frequency of Annuity Payments................................... 23
The Annuity Options............................................. 24
Income for a Fixed Period.................................... 24
Income for Life with a Period Certain........................ 24
Joint Life Income............................................ 24
Annuity Plan................................................. 24
Payment When Named Person Dies.................................. 24
Other Contract Provisions.......................................... 24
Reports to Contract Owners...................................... 24
Suspension of Payments.......................................... 25
In Case of Errors in Your Application........................... 25
Assigning the Contract as Collateral............................ 25
Contract Changes-Applicable Tax Law............................. 25
Free Look....................................................... 25
Group or Sponsored Arrangements................................. 25
Selling the Contract............................................ 25
Other Information.................................................. 26
Voting Rights................................................... 26
Year 2000 Problem............................................... 26
State Regulation................................................ 26
Legal Proceedings............................................... 27
Legal Matters................................................... 27
Experts......................................................... 27
Federal Tax Considerations......................................... 27
More Information About Golden American............................. 32
Financial Statements of Golden American Life Insurance Company..... 54
Statement of Additional Information
Table of Contents............................................... 89
Appendix A
Market Value Adjustment Examples................................ A1
Appendix B
Surrender Charge for Excess Withdrawals Example................. B1
</TABLE>
(ii)
<PAGE>
<PAGE>
- -----------------------------------------------------------------------
INDEX OF SPECIAL TERMS
- -----------------------------------------------------------------------
The following special terms are used throughout this prospectus. Refer
to the page(s) listed for an explanation of each term:
<TABLE>
<CAPTION>
<S> <C>
SPECIAL TERM PAGE
Accumulation Unit 5
Annuitant 14
Annuity Start Date 13
Cash Surrender Value 16
Contract Date 13
Contract Owner 13
Contract Value 15
Contract Year 13
Fixed Interest Allocation 10
Free Withdrawal Amount 21
Market Value Adjustment 12
Net Investment Factor 5
Death Benefit 20
</TABLE>
The following terms as used in this prospectus have the same or
substituted meanings as the corresponding terms currently used in the
Contract:
<TABLE>
<CAPTION>
TERM USED IN THIS PROSPECTUS CORRESPONDING TERM USED IN THE CONTRACT
<S> <C>
Accumulation Unit Value Index of Investment Experience
Annuity Start Date Annuity Commencement Date
Contract Owner Owner or Certificate Owner
Contract Value Accumulation Value
Excess Transfer Charge Excess Allocation Charge
Fixed Interest Allocation Fixed Allocation
Free Look Period Right to Examine Period
Guaranteed Interest Period Guarantee Period
Subaccount(s) Division(s)
Net Investment Factor Experience Factor
Regular Withdrawals Conventional Partial Withdrawals
Withdrawals Partial Withdrawals
</TABLE>
1
<PAGE>
<PAGE>
- -----------------------------------------------------------------------
FEES AND EXPENSES
- -----------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES*
Surrender Charge:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Complete Years Elapsed 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7+
since premium payment | | | | | | |
Surrender Charge 6% | 6% | 6% | 5% | 4% | 3% | 1% | 0%
</TABLE>
Transfer Charge................................................. None**
* A Market Value Adjustment may apply to certain transactions, which
may increase or decrease your contract value and/or your transfer
or surrender amount.
** We may in the future charge $25 per transfer if you make more than
12 transfers in a contract year.
ANNUAL CONTRACT ADMINISTRATIVE CHARGE
Administrative Charge........................................... $ 0
(We may in the future charge an annual contract administrative
charge of $30 or 2% of your contract value, whichever is less.)
SEPARATE ACCOUNT ANNUAL CHARGES***
<TABLE>
<CAPTION>
Death Benefit
-------------
<S> <C>
Mortality and Expense Risk Charge...... 0.75%
Asset Based Administrative Charge...... 0.15%
Total Separate Account Expenses........ 0.90%
</TABLE>
***As a percentage of assets in each investment portfolio.
THE GCG TRUST ANNUAL EXPENSES (as a percentage of the average daily net
assets of a portfolio or on the combined average daily net assets of
the indicated groups of portfolios):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
| | | | |
| | | OTHER | TOTAL |
| | | EXPENSES(2) | EXPENSES |
| | MANAGEMENT | AFTER EXPENSE | AFTER EXPENSE |
| PORTFOLIO | FEES(1) | REIMBURSEMENT(3) | REIMBURSEMENT(3) |
| | | | |
|---------------------------------------------------------------------------------------------------------|
<S> <C> <C> <C>
| Equity Income, Fully Managed, Capital | | | |
| Appreciation, Rising Dividends, | | | |
| Real Estate, Hard Assets, Value Equity, | | | |
| Strategic Equity, Small Cap | 0.98% | 0.01% | 0.99% |
| | | | |
|------------------------------------------------|--------------------------------------------------------|
| | | | |
| Growth & Income, Growth | 1.10% | 0.01% | 1.11% |
| | | | |
|------------------------------------------------|--------------------------------------------------------|
| | | | |
| Developing World | 1.75% | 0.05% | 1.80% |
| | | | |
|------------------------------------------------|--------------------------------------------------------|
| | | | |
| Mid-Cap Growth, Total Return | 0.96% | 0.01% | 0.97% |
| | | | |
|------------------------------------------------|--------------------------------------------------------|
| | | | |
| Research | 0.96% | 0.00%(3) | 0.96%(3) |
| | | | |
|------------------------------------------------|--------------------------------------------------------|
| | | | |
| Global Fixed Income | 1.60% | 0.00%(3) | 1.60%(3) |
| | | | |
|------------------------------------------------|--------------------------------------------------------|
| | | | |
| Limited Maturity Bond, Liquid Asset | 0.60% | 0.01% | 0.61% |
| | | | |
-----------------------------------------------------------------------------------------------------------
</TABLE>
Other Expenses are based on actual expenses for fiscal year ended
December 31, 1997, except for newly formed portfolios and portfolios
that had not commenced operations as of December 31, 1997 where the
charges have been estimated.
(1) Fees decline as combined assets increase. See the prospectus for
the GCG Trust for more information.
(2) Other Expenses generally consist of independent trustees fees and
certain expenses associated with investing in international
markets.
(3) Directed Services, Inc. is currently reimbursing expenses and
waiving management fees to maintain Total Expenses at
0.96% for the Research Portfolio and 1.60% for the Global Fixed
Income Portfolio as shown. This agreement will remain in place
through December 31, 1999. Without this Agreement,
2
<PAGE>
<PAGE>
and based on current estimates, Total Expenses for the Research
and Fixed Income portfolios would be 0.97% and 1.65%, respectively.
THE PIMCO TRUST ANNUAL EXPENSES (as a percentage of the average daily
net assets of a portfolio):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
| | | | |
| | ADVISORY | OTHER | TOTAL |
| PORTFOLIO | FEES | EXPENSES | EXPENSES |
| | | AFTER EXPENSE | AFTER EXPENSE |
| | | | REIMBURSEMENT(1) | REIMBURSEMENT(1) |
|------------------------------------------------|--------------------------------------------------------|
<S> <C> <C> <C>
| PIMCO High Yield Bond | 0.50% | 0.25% | 0.75% |
| | | | |
|------------------------------------------------|--------------------------------------------------------|
| | | | |
| PIMCO StocksPLUS Growth and Income | 0.40% | 0.25% | 0.65% |
| | | | |
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) PIMCO has agreed to waive some or all of its other expenses, subject to
potential future reimbursement, to the extent that total Portfolio
operating expenses would exceed 0.75% of average daily net assets due
to payment by the Portfolio of its pro rata portion of Trustee's fees.
Absent this contractual undertaking, the Portfolio's total operating
expenses, based on estimates for the current fiscal year, would be
0.88%
THE WARBURG PINCUS TRUST ANNUAL EXPENSES (as a percentage of the
average daily net assets of a portfolio):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
| | | | |
| | ADVISORY | OTHER | TOTAL |
| PORTFOLIO | FEES | EXPENSES(1) | EXPENSES(1) |
|------------------------------------------------|--------------------------------------------------------|
<S> <C> <C> <C>
| International Equity | 1.00% | 0.36% | 1.36% |
| | | | |
-----------------------------------------------------------------------------------------------------------
</TABLE>
Total Expenses are based on actual expenses for fiscal year ended
December 31, 1997.
(1) As a result of a certain arrangement to offset portions of the
portfolio's transfer agent expense, expenses for the portfolio
were reduced by 0.01% for the fiscal year ended December 31, 1997.
After reflecting this arrangement, Total Expenses (after expense
reimbursement) for the Portfolio were 1.35%
The purpose of the foregoing tables is to assist you in understanding
the various costs and expenses that you will bear directly and
indirectly. See the prospectuses of the GCG Trust, the PIMCO Trust
and the Warburg Pincus Trust for additional information on portfolio
expenses.
Premium taxes (which currently range from 0% to 3.5% of premium
payments) may apply, but are not reflected in the tables above or in
the examples below. See "Charges and Fees -- Charges Deducted from the
Contract Value."
3
<PAGE>
<PAGE>
Examples:
- --------
In the following examples, surrender charges may apply if you choose to
annuitize within the first 7 contract years. The examples are based on
an assumed 5% annual return.
If you surrender your Contract at the end of the applicable time
period, you would pay the following expenses for each $1,000 invested:
<TABLE>
<CAPTION>
WITH ADMIN. CHARGE WITHOUT ADMIN. CHARGE
<S> <C> <C> <C> <C>
THE GCG TRUST 1 YEAR 3 YEARS 1 YEAR 3 YEARS
---------------------- ----------------------
Equity Income................ $79.48 $120.23 $79.19 $119.39
Fully Managed................ $79.48 $120.23 $79.19 $119.39
Capital Appreciation......... $79.48 $120.23 $79.19 $119.39
Rising Dividends............. $79.48 $120.23 $79.19 $119.39
Real Estate.................. $79.48 $120.23 $79.19 $119.39
Hard Assets.................. $79.48 $120.23 $79.19 $119.39
Value Equity................. $79.48 $120.23 $79.19 $119.39
Strategic Equity............. $79.48 $120.23 $79.19 $119.39
Small Cap.................... $79.48 $120.23 $79.19 $119.39
Developing World............. $87.60 $144.66 $87.31 $143.83
Growth & Income.............. $81.40 $126.09 $81.11 $125.26
Growth....................... $81.40 $126.09 $81.11 $125.26
Mid-Cap Growth............... $79.28 $119.62 $78.99 $118.78
Total Return................. $79.28 $119.62 $78.99 $118.78
Research..................... $79.18 $119.32 $78.89 $118.47
Global Fixed Income.......... $85.60 $138.69 $85.31 $137.85
Limited Maturity Bond........ $75.65 $108.56 $75.36 $107.72
Liquid Asset................. $75.65 $108.56 $75.36 $107.72
THE PIMCO TRUST
PIMCO High Yield Bond........ $77.06 $112.88 $76.78 $112.03
PIMCO StocksPLUS Growth
and Income................. $76.05 $109.80 $75.77 $108.95
THE WARBURG PINCUS TRUST
International Equity......... $84.11 $134.29 $83.83 $133.45
</TABLE>
4
<PAGE>
<PAGE>
If you do not surrender your Contract or if you annuitize on the
annuity start date, you would pay the following expenses for each
$1,000 invested:
<TABLE>
<CAPTION>
WITH ADMIN. CHARGE WITHOUT ADMIN. CHARGE
<S> <C> <C> <C> <C>
THE GCG TRUST 1 YEAR 3 YEARS 1 YEAR 3 YEARS
---------------------- ----------------------
Equity Income................ $19.48 $60.23 $19.19 $59.39
Fully Managed................ $19.48 $60.23 $19.19 $59.39
Capital Appreciation......... $19.48 $60.23 $19.19 $59.39
Rising Dividends............. $19.48 $60.23 $19.19 $59.39
Real Estate.................. $19.48 $60.23 $19.19 $59.39
Hard Assets.................. $19.48 $60.23 $19.19 $59.39
Value Equity................. $19.48 $60.23 $19.19 $59.39
Strategic Equity............. $19.48 $60.23 $19.19 $59.39
Small Cap.................... $19.48 $60.23 $19.19 $59.39
Developing World............. $27.60 $84.66 $27.31 $83.83
Growth & Income.............. $21.40 $66.09 $21.11 $65.26
Growth....................... $21.40 $66.09 $21.11 $65.26
Mid-Cap Growth............... $19.28 $59.62 $18.99 $58.78
Total Return................. $19.28 $59.62 $18.99 $58.78
Research..................... $19.18 $59.32 $18.89 $58.47
Global Fixed Income.......... $25.60 $78.69 $25.31 $77.85
Limited Maturity Bond........ $15.65 $48.56 $15.36 $47.72
Liquid Asset................. $15.65 $48.56 $15.36 $47.72
THE PIMCO TRUST
PIMCO High Yield Bond........ $17.06 $52.88 $16.78 $52.03
PIMCO StocksPLUS Growth
and Income................. $16.05 $49.80 $15.77 $48.95
THE WARBURG PINCUS TRUST
International Equity......... $24.11 $74.29 $23.83 $73.45
</TABLE>
The examples above for both surrender and not surrender in columns one and
two reflect the annual administrative charge of 0.04% of assets (based on
an average contract value of $70,000). The examples above for both
surrender and not surrender in columns three and four show the expenses
without the annual administrative charge of 0.04% of assets (based on
an average contract value of $70,000). Currently we waive the 0.04%
annual adminstrative charge.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN SUBJECT TO THE TERMS OF YOUR CONTRACT.
- -----------------------------------------------------------------------
PERFORMANCE INFORMATION
- -----------------------------------------------------------------------
ACCUMULATION UNIT
We use accumulation units to calculate the value of a Contract. Each
subaccount of Separate Account B has its own accumulation unit value.
The accumulation units are valued each business day that the New York
Stock Exchange is open for trading. Their values may increase or
decrease from day to day according to a Net Investment Factor, which
is primarily based on the investment performance of the applicable
investment portfolio. Shares in the investment portfolios are valued
at their net asset value.
THE NET INVESTMENT FACTOR
The Net Investment Factor is an index number which reflects charges
under the Contract and the investment performance of the investment
portfolio. The Net Investment Factor is calculated as follows:
(1) We take the net asset value of the investment portfolio at
the end of each business day.
5
<PAGE>
<PAGE>
(2) We add to (1) the amount of any dividend or capital gains
distribution declared for the investment portfolio and reinvested
in such portfolio. We subtract from that amount a charge for our
taxes, if any.
(3) We divide (2) by the net asset value of the investment portfolio
at the end of the preceding business day.
(4) We then subtract the applicable daily mortality and expense risk
charge and the daily asset based administrative charge from each
subaccount.
Calculations for the investment portfolios are made on a per share
basis.
FINANCIAL STATEMENTS
The unaudited financial statements of Separate Account B for the period ended
September 30, 1998 and the audited financial statements of Golden American
Separate Account B for the years ended December 31, 1997 and 1996 are
included in the Statement of Additional Information. The unaudited
financial statements of Golden American for the period ended September 30,
1998 and the audited financial statements for the years ended December 31,
1997, 1996, and 1995 are included in this prospectus.
PERFORMANCE INFORMATION
From time to time, we may advertise or include in reports to contract
owners performance information for the subaccounts of Separate Account B,
including the average annual total return performance, yields and other
nonstandard measures of performance. Such performance data will be
computed, or accompanied by performance data computed, in accordance
with standards defined by the SEC.
Except for the Liquid Asset subaccount, quotations of yield for the
subaccounts will be based on all investment income per unit (contract
value divided by the accumulative unit) earned during a given 30-day
period, less expenses accrued during such period. Information on
standard total average annual return performance will include average
annual rates of total return for 1, 3, 5 and 10 year periods, or lesser
periods depending on how long the subaccount of Separate Account B has
been in existence. We may show other total returns for periods less
than one year. Total return figures will be based on the actual
historic performance of the subaccounts of Separate Account B,
assuming an investment at the beginning of the period, withdrawal of
the investment at the end of the period, and the deduction of all
applicable portfolio and contract charges. We may also show rates of
total return on amounts invested at the beginning of the period with no
withdrawal at the end of the period. Total return figures which assume
no withdrawals at the end of the period will reflect all recurring
charges, but will not reflect the surrender charge. In addition, we
may present historic performance data for the mutual fund
investment portfolios since their inception reduced by some or all of
the fees and charges under the Contract. Such adjusted historic
performance includes data that precedes the inception dates of the
subaccounts of Separate Account B. This data is designed to show the
performance that would have resulted if the Contract had been in
existence during that time.
Current yield for the Liquid Asset subaccount is based on income
generated over a given 7-day period, less expenses accrued, and then
"annualized" (i.e., assuming that the 7-day yield would be received for
52 weeks). We calculate "effective yield" for the Liquid Asset
subaccount in a manner similar to that used to calculate yield, but when
annualized, the income earned by the investment is assumed to be
reinvested. The "effective yield" will thus be slightly higher than
the "yield" because of the compounding effect of earnings. We
calculate quotations of yield for the remaining subaccounts on all
investment income per accumulation unit earned during a given 30-day
period, after subtracting fees and expenses accrued during the period.
We may compare performance information for a subaccount to: (i) the
Standard & Poor's 500 Stock Index, Dow Jones Industrial Average,
Donoghue Money Market Institutional Averages, or any other applicable
market indices, (ii) other variable annuity separate accounts or other
investment products tracked by Lipper Analytical Services (a widely
used independent research firm which ranks mutual funds and other
investment companies), or any other rating service, and (iii) the
Consumer Price Index (measure for inflation) to assess the real rate of
return from an investment in the Contract. Our reports and promotional
literature may also contain other information including the ranking of
any subaccount based on rankings of
6
<PAGE>
<PAGE>
variable annuity separate accounts or other investment products tracked
by Lipper Analytical Services or by similar rating services.
Performance information reflects only the performance of a hypothetical
contract and should be considered in light of other factors, including
the investment objective of the investment portfolio and market conditions.
Please keep in mind that past performance is not a guarantee of future
results.
- -----------------------------------------------------------------------
GOLDEN AMERICAN LIFE INSURANCE COMPANY
- -----------------------------------------------------------------------
Golden American Life Insurance Company is a Delaware stock life
insurance company, which was originally incorporated in Minnesota on
January 2, 1973. Golden American is a wholly owned subsidiary of
Equitable of Iowa Companies, Inc. ("Equitable of Iowa") which is a
wholly owned subsidiary of ING Groep N.V. ("ING"), a global financial
services holding company with over $307.6 billion in assets as of
December 31, 1997. Golden American is authorized to sell insurance
and annuities in all states, except New York, and the District of
Columbia. In May 1996, Golden American established a subsidiary,
First Golden American Life Insurance Company of New York, which is
authorized to sell annuities in New York and Delaware. Golden
American's financial statements appear in this prospectus.
Equitable of Iowa is the holding company for Golden American, Directed
Services, Inc., the investment manager of the GCG Trust, and other
interests. Equitable of Iowa and another ING affiliate own ING
Investment Management, LLC, a portfolio manager of the GCG Trust. ING
also owns Baring International Investment Limited, another portfolio
manager of the GCG Trust.
Our principal office is located at 1001 Jefferson Street, Wilmington,
Delaware 19801. As of March 20, 1999, our principal office will be
located at 1475 Dunwoody Drive, West Chester, Pennsylvania 19380.
For more information, see "More Information About Golden American."
- -----------------------------------------------------------------------
THE TRUSTS
- -----------------------------------------------------------------------
The GCG Trust is a mutual fund whose shares are available to separate
accounts funding variable annuity and variable life insurance policies
offered by Golden American. The GCG Trust also sells its shares to
separate accounts of other insurance companies, both affiliated and not
affiliated with Golden American. Pending SEC approval, shares of the
GCG Trust may also be sold to certain qualified pension and retirement
plans.
The PIMCO Trust is also a mutual fund whose shares are available to
separate accounts of insurance companies, including Golden American,
for both variable annuity contracts and variable life insurance
policies and qualified pension and retirement plans. The principal
address of the PIMCO Trust is 840 Newport Center Drive, Suite 300,
Newport Center, CA 92660.
The Warburg Pincus Trust is also a mutual fund whose shares are
available to separate accounts of life insurance companies, including
Golden American and Equitable life Insurance Company of Iowa, and to
certain qualified and retirement plans. The principal address of the
Warburg Pincus Trust is 466 Lexington Avenue, New York, NY 10017.
In the event that, due to differences in tax treatment or other
considerations, the interests of contract owners of various contracts
participating in the Trusts conflict, we, the Boards of Trustees of the
GCG Trust, the PIMCO Trust and the Warburg Pincus Trust, Directed
Services, Inc., Pacific Investment Management Company, Warburg Pincus
Asset Management, Inc. and any other insurance companies
participating in the Trusts will monitor events to identify and resolve
any material conflicts that may arise.
YOU WILL FIND COMPLETE INFORMATION ABOUT THE GCG TRUST, THE PIMCO
TRUST AND THE WARBURG PINCUS TRUST IN THE ACCOMPANYING TRUSTS'
PROSPECTUSES. YOU SHOULD READ THEM CAREFULLY BEFORE INVESTING.
7
<PAGE>
<PAGE>
- -----------------------------------------------------------------------
GOLDEN AMERICAN SEPARATE ACCOUNT B
- -----------------------------------------------------------------------
Golden American Separate Account B ("Account B") was established as a
separate account of the Company on July 14, 1988. It is registered
with the Securities and Exchange Commission as a unit investment trust
under the Investment Company Act of 1940. Account B is a separate
investment account used for our variable annuity contracts. We own all
the assets in Account B but such assets are kept separate from our
other accounts.
Account B purchases shares of the mutual fund investment portfolios
of the GCG Trust, PIMCO Trust and the Warburg Pincus Trust. Each
investment portfolio has its own distinct investment objectives
and policies. Income, gains and losses, realized or unrealized,
of a portfolio are credited to or charged against the corresponding
subaccount of Account B without regard to any other income, gains
or losses of the Company. Assets equal to the reserves and other
contract liabilities with respect to each are not chargeable with
liabilities arising out of any other business of the Company. They
may, however, be subject to liabilities arising from the subaccounts
whose assets we attribute to other variable annuity contracts supported
by Account B. If the assets in Account B exceed the required reserves
and other liabilities, we may transfer the excess to our general account.
We are obligated to pay all benefits and make all payments provided
under the Contracts.
We currently offer other variable annuity contracts that invest in
Account B but are not discussed in this prospectus. Account B may also
invest in other investment portfolios which are not available under your
Contract.
- -----------------------------------------------------------------------
THE INVESTMENT PORTFOLIOS
- -----------------------------------------------------------------------
During the accumulation phase, you may allocate your premium payments
and contract value to any of the 21 investment portfolios listed below.
You bear the entire investment risk for amounts you allocate to the
investment portfolios and may lose your principal.
INVESTMENT OBJECTIVES
The investment objective of each investment portfolio is set forth below.
You should understand that there is no guarantee that any portfolio will
meet its investment objectives. Meeting objectives depends on various
factors, including, in certain cases, how well the portfolio managers
anticipate changing economic and market conditions. More detailed
information about the investment portfolios can be found in the
prospectuses for the GCG Trust, the PIMCO Trust and the Warburg
Pincus Trust. You should read these prospectuses before investing.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO INVESTMENT OBJECTIVE
- -------------------- ----------------------------------------------------
<S> <C>
Equity Income Seeks to provide substantial dividend income as
well as long-term growth of capital. This portfolio
was formerly named Multiple Allocation.
Invests primarily in common stocks of established
companies.
----------------------------------------------------
Fully Managed Seeks high total investment return over the long
term, consistent with the preservation of
capital and with prudent investment risk.
Pursues an active asset allocation strategy whereby
investments are allocated among debt securities,
equity securities and money market instruments.
----------------------------------------------------
Capital Appreciation Seeks long-term capital growth.
Invests in common stocks and preferred stock
that are allocated by the portfolio manager
among growth and value categories. Securities
eligible for the value category may include real
estate stocks.
----------------------------------------------------
Rising Dividends Seeks capital appreciation, with dividend income
as a secondary objective.
Invests in equity securities that meet the
following four criteria: consistent dividend
increases; substantial dividend increases;
reinvested profits; and an under-leveraged
balance sheet.
----------------------------------------------------
8
<PAGE>
<PAGE>
Real Estate Seeks capital appreciation, with current income
as a secondary objective.
Invests in publicly traded real estate equity
securities.
----------------------------------------------------
Hard Assets Seeks long-term capital appreciation.
Invests in equity and debt securities of
companies engaged in the exploration,
development, production, management, and
distribution of hard assets. This is a non-
diversified portfolio.
----------------------------------------------------
Value Equity Seeks capital appreciation with a secondary
objective of dividend income.
Invests primarily in equity securities of U.S.
and foreign issuers indicate above financial
soundness and high intrinsic value.
----------------------------------------------------
Strategic Equity Seeks long-term capital appreciation.
Invests primarily in equity securities based on
various equity market timing techniques.
----------------------------------------------------
Small Cap Seeks long-term capital appreciation.
Invests primarily in equity securities of
companies that have a total market
capitalization within the range of companies in
the Russell 2000 Growth Index.
----------------------------------------------------
Developing World Seeks capital appreciation.
Invests primarily in equity securities of
companies in developing or emerging countries.
----------------------------------------------------
Mid-Cap Growth Seeks long-term growth of capital.
Invests primarily in equity securities with
medium market capitalization.
----------------------------------------------------
Research Seeks long-term growth of capital and future
income.
Invests primarily in common stocks or securities
convertible into common stocks of companies
believed to have better than average prospects
for long-term growth.
----------------------------------------------------
Total Return Seeks above-average income consistent with
prudent employment of capital.
Invests primarily in equity securities.
----------------------------------------------------
Growth & Income Seeks long-term total return.
Invests primarily in equity and debt securities,
focusing on small-and mid-cap
companies that offer potential appreciation,
current income, or both.
----------------------------------------------------
Growth Seeks capital appreciation.
Invests primarily in mid-cap growth companies
with favorable relationships between
price/earnings ratios and growth rates. Mid-cap
companies are those with market capitalizations
ranging from $750 million to approximately $2.0
billion. This portfolio was formerly named
Value + Growth.
----------------------------------------------------
Global Fixed Income Seeks high total return.
Invests in both domestic and foreign debt
securities and related foreign currency
transactions. The total return will be sought
through a combination of current income, capital
gains and gains in currency positions.
----------------------------------------------------
Limited Maturity Seeks highest current income consistent with low
Bond risk to principal and liquidity. Also seeks to
enhance its total return through capital appreciation
when market factors indicate that capital appreciation
may be available without significant risk
to principal.
Invests primarily in diversified limited
maturity debt securities with average maturity
dates of five years or shorter and in no cases
more than seven years.
----------------------------------------------------
Liquid Asset Seeks high level of current income consistent
with the preservation of capital and liquidity.
Invests in obligations of the U.S. Government
and its agencies and instrumentali-ties, bank
obligations, commercial paper and short-term
corporate debt securities.
All securities will mature in less than 1 year.
----------------------------------------------------
9
<PAGE>
<PAGE>
PIMCO High Yield Seeks to maximize total return.
Bond
Invests in at least 65% of its assets in a
diversified portfolio of junk bonds rated at
least B by Moody's Investor Services, Inc. or
Standard & Poor's Rating Services or, if
unrated, determined to be of comparable quality.
----------------------------------------------------
PIMCO StocksPLUS Seeks total return that exceeds the total return
Growth and Income of the S&P 500.
Invests primarily in common stocks, options,
futures, options on futures and swaps consistent
with strategy to exceed the performance of the
Standard & Poor's 500 Composite Stock Price Index.
----------------------------------------------------
International Equity Seeks long-term capital appreciation.
Invests primarily in a broadly diversified portfolio
of equity securities of companies that have their
principal business activities outside of the United
States.
----------------------------------------------------
</TABLE>
INVESTMENT PORTFOLIO MANAGEMENT FEES
Directed Services, Inc. serves as the overall manager of the GCG Trust,
PIMCO serves as the overall adviser of the PIMCO Trust and Warburg Pincus
Asset Management, Inc. serves as the investment adviser of the Warburg
Pincus Trust. Directed Services, PIMCO and Warburg Pincus Asset provide
or procure, at their own expense, the services necessary for the operation
of the portfolios. See the cover page of this prospectus for the names
of the corresponding portfolio managers. Directed Services, PIMCO and
Warburg Pincus Asset do not bear the expense of brokerage fees and other
transactional expenses for securities, taxes(if any) paid by a portfolio,
interest on borrowing, fees and expenses of the independent trustees,
and extraordinary expenses, such as litigation or indemnification expenses.
The GCG Trust pays Directed Services for its services a monthly
fee based on the annual rates of the average daily net assets of the
investment portfolios. Directed Services (and not the GCG Trust) in turn
pays each portfolio manager a monthly fee for managing the assets of
the portfolios.
The PIMCO Trust pays PIMCO a monthly advisory fee and a monthly
administrative fee of 0.25% based on the average daily net assets of
each of the investment portfolios for managing the assets of the portfolios
and for administering the PIMCO Trust.
The Warburg Pincus Trust pays Warburg Pincus Asset Management a monthly
advisory fee based on the average daily net assets of the portfolio.
More detailed information about each portfolio's management fees can be
found in the prospectuses for each Trust. You should read these
prospectuses before investing.
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THE FIXED INTEREST ALLOCATION
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You may allocate premium payments and transfer your contract value to
the guaranteed interest periods of our Fixed Account at any time during
the accumulation period. Every time you allocate money to the Fixed
Account, we set up a Fixed Interest Allocation for the guaranteed
interest period you select. We currently offer guaranteed interest
periods of 6 months, 1, 3, 5, 7, and 10 years, although we may not
offer all these periods in the future. You may select one or more
guaranteed interest periods at any one time. We will credit your Fixed
Interest Allocation with a guaranteed interest rate for the interest
period you select, so long as you do not withdraw money from that Fixed
Interest Allocation before the end of the guaranteed interest period.
Each guaranteed interest period ends on its maturity date which is the
last day of the month in which the interest period is scheduled to expire.
If you surrender, withdraw, transfer or annuitize your investment in a
Fixed Interest Allocation before the end of the guaranteed interest
period, we will apply a Market Value Adjustment to the transaction.
A market value adjustment could increase or decrease the amount you
surrender, withdraw, transfer or annuitize, depending on current
interest rates at the time of the transaction. YOU BEAR THE RISK THAT
YOU MAY RECEIVE LESS THAN YOUR PRINCIPAL IF WE TAKE A MARKET VALUE
ADJUSTMENT.
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Assets supporting amounts allocated to the Fixed Account are available
to fund the claims of all classes of our customers, contract owners and
other creditors. Interests under your Contract relating to the Fixed
Account are registered under the Securities Act of 1933, but the Fixed
Account is not registered under the 1940 Act.
SELECTING A GUARANTEED INTEREST PERIOD
You may select one or more Fixed Interest Allocations with specified
guaranteed interest periods. A guaranteed interest period is the
period that a rate of interest is guaranteed to be credited to your
Fixed Interest Allocation. We may at any time decrease or increase the
number of guaranteed interest periods offered. In addition, we may
offer DCA Fixed Interest Allocations, which are 6-month and 1-year Fixed
Interest Allocations available exclusively in connection with our dollar
cost averaging program. For more information, see "Transfers Among Your
Investments - Dollar Cost Averaging."
Your contract value in the Fixed Account is the sum of your Fixed
Interest Allocations and the interest credited, as adjusted for any
withdrawals, transfers or other charges we may impose, including any
Market Value Adjustment. Your Fixed Interest Allocation will be
credited with the guaranteed interest rate in effect for the guaranteed
interest period you selected when we receive and accept your premium or
reallocation of contract value. We will credit interest daily at a
rate which yields the quoted guaranteed interest rate.
GUARANTEED INTEREST RATES
Each Fixed Interest Allocation will have an interest rate that is
guaranteed as long as you hold it until its maturity date. We do not
have a specific formula for establishing the guaranteed interest rates
for the different guaranteed interest periods. The determination may
be influenced by the interest rates on fixed income investments in
which we may invest with the amounts we receive under the Contracts.
We will invest these amounts primarily in investment-grade fixed income
securities (i.e., rated by Standard & Poor's rating system to be
suitable for prudent investors) although we are not obligated to invest
according to any particular strategy, except as may be required by
applicable law. You will have no direct or indirect interest in these
investments. We will also consider other factors in determining the
guaranteed interest rates, including regulatory and tax requirements,
sales commissions and administrative expenses borne by us, general
economic trends and competitive factors. We cannot predict the level
of future interest rates but no Fixed Interest Allocation will ever
have a guaranteed interest rate of less than 3% per year.
We may from time to time in our discretion offer interest rate specials
for new premiums that are higher than the then current base interest
rate. Renewal rates for such rate specials will be based on the base
interest rate and not on the special rates initially declared.
TRANSFERS FROM A FIXED INTEREST ALLOCATION
You may transfer your contract value in a Fixed Interest Allocation to
one or more new Fixed Interest Allocations with new guaranteed interest
periods, or to any of the subaccounts of Account B. Unless you tell
us the Fixed Interest Allocations from which such transfers will be
made, we will transfer amounts from your Fixed Interest Allocations
starting with the guaranteed interest period nearest its maturity
date, until we have honored your transfer request.
The minimum amount that you can transfer to or from any Fixed Interest
Allocation is $100. If a transfer request would reduce the contract
value remaining in a Fixed Interest Allocation to less than $100, we
will treat such transfer request as a request to transfer the entire
contract value in such Fixed Interest Allocation. Transfers from a
Fixed Interest Allocation may be subject to a Market Value Adjustment.
If you have a special Fixed Interest Allocation offered only with dollar
cost averaging, cancelling dollar cost averaging will cause a transfer
which is subject to a Market Value Adjustment.
On the maturity date of a guaranteed interest period, you may transfer
amounts from the applicable Fixed Interest Allocation to the subaccounts
and/or to new Fixed Interest Allocations with guaranteed interest periods
of any length we are offering at that time. You may not, however, transfer
amounts to any Fixed Interest Allocation with a guaranteed interest period
that extends beyond the annuity start date.
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At least 30 calendar days before a maturity date of any of your Fixed
Interest Allocations, or earlier if required by state law, we will send
you a notice of the guaranteed interest periods that are available. You
must notify us which subaccount(s) or new guaranteed interest period(s) you
have selected before the maturity date of your Fixed Interest Allocations.
If we do not receive timely instructions from you, we will
transfer the contract value in the maturing Fixed Interest Allocation to a
new Fixed Interest Allocation with a guaranteed interest period that is the
same as the expiring guaranteed interest period. If such guaranteed
interest period is not available or would go beyond the annuity start date,
we will transfer your contract value in the maturing Fixed Interest
Allocation to the next shortest guaranteed interest period which does not
go beyond the annuity start date. If no such guaranteed interest period
is available, we will transfer the contract value to a subaccount specially
designated by the Company for such purpose. Currently we use the Liquid
Asset subaccount for such purpose.
WITHDRAWALS FROM A FIXED INTEREST ALLOCATION
During the accumulation phase, you may withdraw a portion of your
contract value in any Fixed Interest Allocation. You may make
systematic withdrawals of only the interest earned during the prior
month, quarter or year, depending on the frequency chosen, from a Fixed
Interest Allocation under our systematic withdrawal option. Systematic
withdrawals from a Fixed Interest Allocation are not permitted if such
Fixed Interest Allocation is currently participating in the dollar cost
averaging program. A withdrawal from a Fixed Interest Allocation may
be subject to a Market Value Adjustment and, in some cases, a surrender
charge. See "Charges and Fees." Withdrawals may have federal income tax
consequences, including a 10% penalty tax.
If you tell us the Fixed Interest Allocation from which your withdrawal
will be made, we will assess the withdrawal against that Fixed Interest
Allocation. If you do not, we will not assess your withdrawal against
any Fixed Interest Allocations unless the withdrawal exceeds the contract
value in the subaccounts in which you are invested. If there is no
contract value in those subaccounts, we will deduct your withdrawal from
your Fixed Interest Allocations starting with the guaranteed interest
periods nearest their maturity dates until we have honored your request.
MARKET VALUE ADJUSTMENT
We will apply a Market Value Adjustment (i) whenever you withdraw or
transfer money from a Fixed Interest Allocation (unless made within 30
days before the maturity date of the applicable guaranteed interest
period, or under the systematic withdrawal or dollar cost averaging
programs) and (ii) if on the annuity start date a guaranteed interest
period for any Fixed Interest Allocation does not end on or within 30
days of the annuity start date. A Market Value Adjustment may
decrease, increase or have no effect on your contract value.
We determine the Market Value Adjustment by multiplying the amount you
withdraw, transfer or apply to an income plan by the following factor:
( 1+I )N/365
(---------) -1
(1+J+.0050)
Where,
o "I" is the Index Rate for the affected Fixed Interest Allocation
as of the first day of its guaranteed interest period;
o "J" is equal to the following:
(1) If calculated for a Fixed Interest Allocation of 1 year or
more, then "J" is the Index Rate for a new Fixed Interest
Allocation with a guaranteed interest period equal to the
time remaining (rounded up to the next full year except in
Pennsylvania) in the guaranteed interest period;
(2) If calculated for a Fixed Interest Allocation of 6 months,
then "J" is the Index Rate for a new Fixed Interest
Allocation with a guaranteed interest period of 6 months; and
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o "N" is the remaining number of days in the guaranteed interest
period at the time of calculation.
The Index Rate is the average of the Ask Yields for U.S. Treasury
Strips as quoted by a national quoting service for a period equal to
the applicable guaranteed interest period. The average currently is
based on the period starting from the 22nd day of the calendar month of
the Index Rate determination and ending the 21st day of the calendar
month immediately before the month of determination. We currently
calculate the Index Rate once each calendar month but have the right to
calculate it more frequently. The Index Rate will
always be based on a period of at least 28 days. If the Ask Yields are
no longer available, we will determine the Index Rate by using a suitable
and approved, if required, replacement method.
A Market Value Adjustment may be positive, negative or result in no
change. In general, if interest rates are rising, you bear the risk
that any Market Value Adjustment will likely be negative and reduce
your contract value. On the other hand, if interest rates are falling,
it is more likely that you will receive a positive Market Value
Adjustment that increases your contract value. In the event of a full
surrender, transfer or annuitization from a Fixed Interest Allocation,
we will add or subtract any Market Value Adjustment from the amount
surrendered, transferred or annuitized. In the event of a partial
withdrawal, transfer or annuitization, we will add or subtract any
Market Value Adjustment from the total amount withdrawn, transferred or
annuitized in order to provide the amount requested. If a negative
Market Value Adjustment exceeds your contract value in the Fixed
Interest Allocation, we will consider your request to be a full
surrender, transfer or annuitization.
Several examples which illustrate how the Market Value Adjustment
works are included in Appendix A.
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THE ANNUITY CONTRACT
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The Contract described in this prospectus is a deferred combination
variable and fixed annuity contract. The Contract provides a means for
you to invest in one or more of the available mutual fund portfolios of
the GCG Trust, the PIMCO Trust and the Warburg Pincus Trust funded by
Golden American Separate Account B. It also provides a means for you
to invest in a Fixed Interest Allocation through the Fixed Account.
CONTRACT DATE AND CONTRACT YEAR
The date the Contract became effective is the contract date. Each 12-
month period following the contract date is a contract year.
ANNUITY START DATE
The annuity start date is the date you start receiving annuity payments
under your Contract. The Contract, like all deferred variable annuity
contracts, has two phases: the accumulation phase and the income phase.
The accumulation phase is the period between the contract date and the
annuity start date. The income phase begins when you start receiving
regular annuity payments from your Contract on the annuity start date.
CONTRACT OWNER
You are the contract owner. You are also the annuitant unless another
annuitant is named in the application. You have the rights and options
described in the Contract. One or more persons may own the Contract.
If there are multiple owners named, the age of the oldest owner will
determine the applicable death benefit.
The death benefit becomes payable when you die. In the case of a sole
contract owner who dies before the income phase begins, we will pay the
beneficiary the death benefit when due. The sole contract owner's
estate will be the beneficiary if no beneficiary has been designated or
the beneficiary has predeceased the contract owner. In the case of a
joint owner of the Contract dying before the income phase begins, we
will designate the surviving contract owner as the beneficiary. This
will override any previous beneficiary designation.
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If the contract owner is a trust and a beneficial owner of the trust
has been designated, the beneficial owner will be treated as the
contract owner for determining the death benefit. If a beneficial
owner is changed or added after the contract date, this will be treated
as a change of contract owner for determining the death benefit.
JOINT OWNER. For non-qualified Contracts only, joint owners may be
named in a written request before the Contract is in effect. Joint
owners may independently exercise transfers and other transactions
allowed under the Contract. All other rights of ownership must be
exercised by both owners. Joint owners own equal
shares of any benefits accruing or payments made to them. All rights
of a joint owner end at death of that owner if the other joint owner
survives. The entire interest of the deceased joint owner in the
Contract will pass to the surviving joint owner. The age of the older
owner will determine the applicable death benefit.
ANNUITANT
The annuitant is the person designated by you to be the measuring life
in determining annuity payments. The annuitant's age determines when
the income phase must begin and the amount of the annuity payments to
be paid. You are the annuitant unless you choose to name another
person. The annuitant may not be changed after the Contract is in
effect.
The contract owner will receive the annuity benefits of the Contract if
the annuitant is living on the annuity start date. If the annuitant
dies before the annuity start date, and a contingent annuitant has been
named, the contingent annuitant becomes the annuitant (unless the
contract owner is not an individual, in which case the death benefit
becomes payable). If there is no contingent annuitant when the
annuitant dies before the annuity start date, the contract owner will
become the annuitant. The contract owner may designate a new annuitant
within 60 days of the death of the annuitant.
If there is no contingent annuitant when the annuitant dies before the
annuity start date and the contract owner is not an individual, we will
pay the designated beneficiary the death benefit then due. If a
beneficiary has not been designated, or if there is no designated
beneficiary living, the contract owner will be the beneficiary. If the
annuitant was the sole contract owner and there is no beneficiary
designation, the annuitant's estate will be the beneficiary.
Regardless of whether a death benefit is payable, if the annuitant dies
and any contract owner is not an individual, distribution rules under
federal tax law will apply. You should consult your tax advisor for
more information if you are not an individual.
BENEFICIARY
The beneficiary is named by you in a written request. The beneficiary
is the person who receives any death benefit proceeds and who becomes
the successor contract owner if the contract owner (or the annuitant if
the contract owner is other than an individual) dies before the annuity
start date. We pay death benefits to the primary beneficiary (unless
there are joint owners, in which case death proceeds are payable to the
surviving owner(s)).
If the beneficiary dies before the annuitant or the contract owner, the
death benefit proceeds are paid to the contingent beneficiary, if any.
If there is no surviving beneficiary, we pay the death benefit proceeds
to the contract owner's estate.
One or more persons may be a beneficiary or contingent beneficiary. In
the case of more than one beneficiary, we will assume any death benefit
proceeds are to be paid in equal shares to the surviving beneficiaries.
You have the right to change beneficiaries during the annuitant's
lifetime unless you have designated an irrevocable beneficiary. When
an irrevocable beneficiary has been designated, you and the irrevocable
beneficiary may have to act together to exercise some of the rights and
options under the Contract.
CHANGE OF CONTRACT OWNER OR BENEFICIARY. During the annuitant's
lifetime, you may transfer ownership of a non-qualified Contract. A
change in ownership may affect the amount of the death benefit and the
guaranteed death benefit. You may also change the beneficiary. All
requests for changes must be in writing and submitted to our Customer
Service Center in good order. The change will be effective as of the
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day you sign the request. The change will not affect any payment made
or action taken by us before recording the change.
PURCHASE AND AVAILABILITY OF THE CONTRACT
You may purchase the Contract with an initial payment of $25,000 or more
up to and including age 85. You may make additional payments of $1,000
or more at any time before you turn age 85. Under certain circumstances,
we may waive the minimum premium payment requirement. You may make premium
payments over $1,000,000 with our prior consent.
We will issue a Contract only if both the annuitant and the contract
owner are not older than age 85.
CREDITING OF PREMIUM PAYMENTS
We will allocate your initial premium within 2 business days after
receipt, if the application and all information necessary for
processing the Contract are complete. Subsequent premium payments
received in good order will be credited to a Contract within 1 business
day. We may retain premium payments for up to 5 business days while
attempting to complete an incomplete application. If the application
cannot be completed within this period, we will inform you of the
reasons for the delay. We will also return the premium payment
immediately unless you direct us to hold the premium payment until the
application is completed. Once the completed application is received,
we will allocate the payment within 2 business days. We will make
inquiry to discover any missing information related to subsequent
payments. For any subsequent premium payments, the payment will be
credited at the accumulation unit value next determined after receipt
of your premium payment.
Once we allocate your premium payment to the subaccount(s) selected by you,
we convert the premium payment into accumulation units. We divide the
amount of the premium payment allocated to a particular subaccount by
the value of an accumulation unit for the subaccount to determine the
number of accumulation units of the subaccount to be held in Account B
with respect to the Contract. The net investment results of each
subaccount vary primarily with its investment performance.
In some states, we may require that an initial premium designated for a
subaccount of Account B or the Fixed Account be allocated to a subaccount
specially designated by the Company (currently, the Liquid Asset
subaccount) during the free look period. After the free look period, we
will convert your contract value (your initial premium plus any
earnings less any expenses) into accumulation units of the subaccounts
you previously selected. The accumulation units will be allocated
based on the accumulation unit value next computed for each subaccount.
Initial premiums designated for Fixed Interest Allocations will be
allocated to a Fixed Interest Allocation with the guaranteed interest
period you have chosen; however, in the future we may allocate those
premiums to the specially designated subaccount during the free look
period.
CONTRACT VALUE
We determine your contract value on a daily basis beginning on the
contract date. Your contract value is the sum of (a) the contract
value in the Fixed Interest Allocations, and (b) the contract value in
each subaccount in which you are invested.
CONTRACT VALUE IN FIXED INTEREST ALLOCATIONS. The contract value in
your Fixed Interest Allocation(s) is the sum of premium payments
allocated to the Fixed Interest Allocation(s) under the Contract, plus
credited interest, minus any transfers and withdrawals, contract fees,
premium taxes and any Market Value Adjustment.
CONTRACT VALUE IN THE SUBACCOUNTS. On the contract date, the contract
value in the subaccount in which you are invested is equal to the
initial premium paid and designated to be allocated to the subaccount.
On the contract date, we allocate your contract value to each subaccount
and/or a Fixed Interest Allocation specified by you, unless the Contract
is issued in a state that requires the return of premium payments during
the free look period, in which case, the portion of your initial premium
not allocated to a Fixed Interest Allocation will be allocated to a
subaccount specially designated by the Company during the free look period
for this purpose (currently, the Liquid Asset subaccount).
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On each business day after the contract date, we calculate the amount
of contract value in each subaccount as follows:
(1) We take the contract value in the subaccount at the end of the
preceding business day.
(2) We multiply (1) by the subaccount's Net Investment Factor since
the preceding business day.
(3) We add (1) and (2).
(4) We add to (3) any additional premium payments, and then add or
subtract allocations to or from that subaccount.
(5) We subtract from (4) any withdrawals and any related charges, and
then subtract any contract fees and premium taxes.
CASH SURRENDER VALUE
The cash surrender value is the amount you receive when you surrender
the Contract. The cash surrender value will fluctuate daily based on
the investment results of the subaccounts in which you are invested,
and interest credited to Fixed Interest Allocations and any Market
Value Adjustment. We do not guarantee any minimum cash surrender value.
On any date during the accumulation phase, we calculate the cash surrender
value as follows: we start with your contract value, then we deduct any
surrender charge, any charge for premium taxes, and any other charges
incurred but not yet deducted. Finally, we adjust for any Market Value
Adjustment.
SURRENDERING TO RECEIVE THE CASH SURRENDER VALUE
You may surrender the Contract at any time while the annuitant is
living and before the annuity start date. A surrender will be
effective on the date your written request and the Contract are
received at our Customer Service Center. We will determine and pay the
cash surrender value. Once paid, all benefits under the Contract will
be terminated. For administrative purposes, we will transfer your
money to a specially designated subaccount (currently the Liquid Asset
subaccount) prior to processing the surrender. This transfer will have
no effect on your cash surrender value. You may receive the cash
surrender value in a single sum payment or apply it under one or more
annuity options. We will usually pay the cash surrender value within 7
days.
Consult your tax advisor regarding the tax consequences associated with
surrendering your Contract. A surrender made before you reach age 59
1/2 may result in a 10% tax penalty. See "Federal Tax Considerations"
for more details.
ADDITION, DELETION OR SUBSTITUTION OF SUBACCOUNTS AND OTHER CHANGES
We may make additional subaccounts available to you under the Contract.
These subaccounts will invest in investment portfolios we find suitable
for your Contract.
We may amend the Contract to conform to applicable laws or governmental
regulations. If we feel that investment in any of the investment
portfolios has become inappropriate to the purposes of the Contract, we
may, with approval of the SEC (and any other regulatory agency,
if required) substitute another portfolio for existing and future
investments.
We also reserve the right to: (i) deregister Account B under the 1940
Act; (ii) operate Account B as a management company under the 1940 Act
if it is operating as a unit investment trust; (iii) operate Account B
as a unit investment trust under the 1940 Act if it is operating as a
managed separate account; (iv) restrict or eliminate any voting rights
as to Account B; and (v) combine Account B with other accounts.
We will of course provide you with written notice before any of these
changes are effected.
THE FIXED ACCOUNT
The Fixed Account is a segregated asset account which contains the
assets that support a contract owner's Fixed Interest Allocations. See
"The Fixed Interest Allocations" for more information.
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OTHER IMPORTANT PROVISIONS
See "Withdrawals," "Transfers Among Your Investments," "Death Benefit
Choices," "Charges and Fees," "The Annuity Options" and "Other Contract
Provisions" in this prospectus for information on other important
provisions in your Contract.
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WITHDRAWALS
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Any time during the accumulation phase and before the death of the
annuitant, you may withdraw all or part of your money. Keep in mind
that if you request a withdrawal for more than 90% of the cash
surrender value, we will treat it as a request to surrender the
Contract. If any single withdrawal or the sum of withdrawals exceeds
the Free Withdrawal Amount, you will incur a surrender charge. See
"Charges and Fees--Surrender Charge for Excess Withdrawals." You need
to submit to us a written request specifying the Fixed Interest
Allocations or subaccounts from which amounts are to be withdrawn,
otherwise the withdrawal will be made on a pro rata basis from all
of the subaccounts in which you are invested. If there is not enough
contract value in the subaccounts, we will deduct the balance
of the withdrawal from your Fixed Interest Allocations starting with
the guaranteed interest periods nearest their maturity dates until we
have honored your request. We will apply a Market Value Adjustment to
any withdrawal from your Fixed Interest Allocation taken more than 30
days before its maturity date. We will determine the contract value as
of the close of business on the day we receive your withdrawal request
at our Customer Service Center.
The contract value may be more or less than the premium payments made.
For administrative purposes, we will transfer your money to a specially
designated subaccount (currently, the Liquid Asset subaccount) prior to
processing the withdrawal. This transfer will have no effect on the
amount you withdraw.
We offer the following three withdrawal options:
REGULAR WITHDRAWALS
After the free look period, you may make regular withdrawals. Each
withdrawal must be a minimum of $100. A regular withdrawal from a
Fixed Interest Allocation may be subject to a Market Value Adjustment.
SYSTEMATIC WITHDRAWALS
You may choose to receive automatic systematic withdrawals on a
monthly, quarterly, or annual basis from your contract value in the
subaccounts or the Fixed Interest Allocations. You may elect
payments to start as early as 28 days after the contract date. You
select the date on which the withdrawals will be made but this date
cannot be later than the 28th day of the month. If no date is selected,
we will make the withdrawals on the same calendar day of each month as
the contract date. Each withdrawal payment must be at least $100.
The amount of your withdrawal can either be a fixed dollar amount or an
amount based on a percentage of the premiums not previously withdrawn
from the subaccounts in which you are invested. Both options are
subject to the following maximums:
<TABLE>
<CAPTION>
FREQUENCY MAXIMUM PERCENTAGE
--------- ------------------
<C> <C>
Monthly 0.833%
Quarterly 2.50%
Annual 10.00%
</TABLE>
If you select a fixed dollar amount and the amount to be systematically
withdrawn would exceed the applicable maximum percentage of your
premiums not previously withdrawn on the withdrawal date, we will
reduce the amount withdrawn so that it equals such percentage. If you
select a percentage and the amount to be systematically withdrawn based
on that percentage would be less than the minimum of $100, we will
increase the amount to $100 provided it does not exceed the maximum
percentage. If it is below the maximum percentage we will send the
$100. If it is above the maximum percentage we will send the amount
and then cancel the option.
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Systematic withdrawals from Fixed Interest Allocations are limited to
interest earnings during the prior month, quarter, or year, depending
on the frequency you choose. Systematic withdrawals are not subject to
a Market Value Adjustment. A Fixed Interest Allocation may not
participate in both the dollar cost averaging program (see "Transfers
Among Your Investments") and the systematic withdrawal option at the
same time.
You may change the amount or percentage of your systematic withdrawal
once each contract year or cancel this option at any time by sending
satisfactory notice to our Customer Service Center at least 7 days
before the next scheduled withdrawal date. You may elect to have this
option commence in a contract year where a regular withdrawal has been
taken but you may not change the amount or percentage of your
withdrawals in any contract year during which you have previously taken
a regular withdrawal. You may not elect this if you are taking IRA
withdrawals.
IRA WITHDRAWALS
If you have a non-Roth IRA Contract and will be at least age 70 1/2
during the current calendar year, you may elect to have distributions
made to you to satisfy requirements imposed by Federal tax law. IRA
withdrawals provide payout of amounts required to be distributed by the
Internal Revenue Service rules governing mandatory distributions under
qualified plans. We will send you a notice before your distributions
commence. You may elect to take IRA withdrawals at that time, or at a
later date. You may not elect IRA withdrawals and participate in
systematic withdrawals at the same time. If you do not elect to take
IRA withdrawals, and distributions are required by Federal tax law,
distributions adequate to satisfy the requirements imposed by Federal
tax law may be made. Thus, if you are participating in systematic
withdrawals, distributions under that option must be adequate to
satisfy the mandatory distribution rules imposed by federal tax law.
You may choose to receive IRA withdrawals on a monthly, quarterly or
annual basis. Under this option, you may elect payments to start as
early as 28 days after the contract date. You select the day of the
month when the withdrawals will be made, but it cannot be later than
the 28th day of the month. If no date is selected, we will make the
withdrawals on the same calendar day of the month as the contract date.
You may request that we determine for you the amount that is required
to be withdrawn from your Contract each year based on the information
you give us and various choices you make. For information regarding the
calculation and choices you have to make, see the Statement of
Additional Information. The minimum dollar amount you can withdraw is
$100. When we determine the required IRA withdrawal amount for a
taxable year based on the frequency you select, if that amount is less
than $100, we will pay $100. At any time where
the IRA withdrawal amount is greater than the contract value, we will
cancel the Contract and send you the amount of the cash surrender value.
You may change the payment frequency of your IRA withdrawals once each
contract year or cancel this option at any time by sending us
satisfactory notice to our Customer Service Center at least 7 days
before the next scheduled withdrawal date.
An IRA withdrawal in excess of the amount allowed under systematic
withdrawals will be subject to a Market Value Adjustment.
CONSULT YOUR TAX ADVISOR REGARDING THE TAX CONSEQUENCES ASSOCIATED WITH
TAKING WITHDRAWALS. A withdrawal made before the taxpayer reaches age
59 1/2 may result in a 10% penalty tax. See "Federal Tax
Considerations" for more details.
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TRANSFERS AMONG YOUR INVESTMENTS
- -----------------------------------------------------------------------
You may transfer your contract value among the subaccounts in which you
are invested and your Fixed Interest Allocations at the end of the
free look period. We currently do not charge you for transfers made
during a contract year, but reserve the right to charge $25 for each
transfer after the twelfth transfer in a contract year. We also reserve
the right to limit the number of transfers you may make and may otherwise
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modify or terminate transfer privileges if required by our business
judgement or in accordance with applicable law.
Transfers will be based on values at the end of the business day in
which the transfer request is received at our Customer Service Center.
The minimum amount that you may transfer is $100 or, if less, your
entire contract value held in a subaccount or a Fixed Interest Allocation.
To make a transfer, you must notify our Customer Service Center and all
other administrative requirements must be met. Any transfer request
received after 4:00 p.m. eastern time or the close of the New York
Stock Exchange will be effected on the next business day. Account B
and the Company will not be liable for following instructions
communicated by telephone that we reasonably believe to be genuine. We
require personal identifying information to process a request for
transfer made over the telephone.
DOLLAR COST AVERAGING
You may elect to participate in our dollar cost averaging program if you
have at least $1,200 of contract value in the (i) Limited Maturity Bond
subaccount or the Liquid Asset subaccount, or (ii) a Fixed Interest
Allocation with either a 6-month or a 1-year guaranteed interest period.
These subaccounts or Fixed Interest Allocations serve as the source accounts
from which we will, on a monthly basis, automatically transfer a set dollar
amount of money to other subaccount(s) selected by you. We also may offer
DCA Fixed Interest Allocations, which are 6-month and 1-year Fixed
Interest Allocations available exclusively for use with the dollar cost
averaging program. The DCA Fixed Interest Allocations require a minimum
premium payment of $1,200 directed into a DCA Fixed Interest Allocation.
The dollar cost averaging program is designed to lessen the impact of market
fluctuation on your investment. Since we transfer the same dollar amount
to other subaccounts each month, more units of a subaccount are purchased if
the value of its unit is low and less units are purchased if the value of
its unit is high. Therefore, a lower than average value per unit may be
achieved over the long term. However, we cannot guarantee this. When you
elect the dollar cost averaging program, you are continuously investing in
securities regardless of fluctuating price levels. You should consider your
tolerance for investing through periods of fluctuating price levels.
Unless you have a DCA Fixed Interest Allocation, you elect the dollar amount
you want transferred under this program. Each monthly transfer must be at
least $100. If your source account is the Limited Maturity Bond subaccount,
the Liquid Asset subaccount or a 1-year Fixed Interest Allocation, the
maximum amount that can be transferred each month is your contract value in
such source account divided by 12. If your source account is a 6-month
Fixed Interest Allocation, the maximum amount that can be transferred each
month is your contract value in such source account divided by 6. You may
change the transfer amount once each contract year. If you have a DCA
Fixed Interest Allocation, there is no minimum or maximum transfer amount;
we will transfer all your money allocated to that source account into the
subaccount(s) in equal payments over the selected 6-month or 1-year period.
The last payment will include earnings accrued over the course of the
selected period.
Transfers from a Fixed Interest Allocation or a DCA Fixed Interest Allocation
under the dollar cost averaging program are not subject to a Market Value
Adjustment. However, if you terminate the dollar cost averaging program
for a DCA Fixed Interest Allocation and there is money remaining in the
DCA Fixed Interest Allocation, we will transfer the remaining money to the
Liquid Asset subaccount. Such transfer will trigger a Market Value Adjustment
if the transfer is made more than 30 days before the maturity date of the
DCA Fixed Interest Allocation.
If you do not specify the subaccounts to which the dollar amount of the
source account is to be transferred, we will transfer the money to
the subaccounts in which you are invested on a proportional basis. The
transfer date is the same day each month as your contract date. If, on
any transfer date, your contract value in a source account is equal or less
than the amount you have elected to have transferred, the entire amount will
be transferred and the program will end. You may terminate the dollar cost
averaging program at any time by sending satisfactory notice to our Customer
Service Center at least 7 days before the next transfer
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date. A Fixed Interest Allocation or DCA Fixed Interest Allocation may not
participate in the dollar cost averaging program and in systematic
withdrawals at the same time.
We may in the future offer additional subaccounts or withdraw any subaccount
or Fixed Interest Allocation to or from the dollar cost averaging program,
stop offering DCA Fixed Interest Allocations or otherwise modify, suspend or
terminate this program. Of course, such change will not affect any dollar
cost averaging programs currently in operation at the time.
AUTOMATIC REBALANCING
If you have at least $10,000 of contract value invested in the
subaccounts of Account B, you may elect to have your investments in the
subaccounts automatically rebalanced. We will transfer funds under your
Contract on a quarterly, semi-annual, or annual calendar basis among
the subaccounts to maintain the investment blend of your selected
subaccounts. The minimum size of any allocation must be in full
percentage points. Rebalancing does not affect any amounts that you
have allocated to the Fixed Account. The program may be used in
conjunction with the systematic withdrawal option only if withdrawals
are taken pro rata. Automatic rebalancing is not available if you
participate in dollar cost averaging. Automatic rebalancing will not
take place during the free look period.
To participate in automatic rebalancing send satisfactory notice to our
Customer Service Center. We will begin the program on the last
business day of the period in which we receive the notice. You may
cancel the program at any time. The program will automatically
terminate if you choose to reallocate your contract value among the
subaccounts or if you make an additional premium payment or partial
withdrawal on other than a pro rata basis. Additional premium payments
and partial withdrawals effected on a pro rata basis will not cause the
automatic rebalancing program to terminate.
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DEATH BENEFIT
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DEATH BENEFIT DURING THE ACCUMULATION PHASE
During the accumulation phase, a death benefit is payable when either
the annuitant (when contract owner is not an individual), the contract
owner or the first of joint owners dies. Assuming you are the contract
owner, your beneficiary will receive a death benefit unless the
beneficiary is your surviving spouse and elects to continue the
Contract. The death benefit value is calculated at the close of the
business day on which we receive proof of death at our Customer Service
Center. If the beneficiary elects not to take the death benefit
at the time of death, the death benefit in the future may be affected.
The proceeds may be received in a single sum or applied to any of the
annuity options. If we do not receive a request to apply the death
benefit proceeds to an annuity option, we will make a single sum
distribution. We will generally pay death benefit proceeds within 7
days after our Customer Service Center has received sufficient
information to make the payment.
DEATH BENEFIT. You will automatically receive the Death Benefit.
The death benefit under the Contract is the greatest of (i) your
contract value; (ii) total premium payments less any withdrawals; and
(iii) the cash surrender value.
DEATH BENEFIT DURING THE INCOME PHASE
If any contract owner or the annuitant dies after the annuity start
date, the Company will pay the beneficiary any certain benefit
remaining under the annuity in effect at the time.
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CHARGES AND FEES
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We deduct the charges described below to cover our cost and expenses,
services provided and risks assumed under the Contracts. We incur
certain costs and expenses for distributing and administrating the
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Contracts, for paying the benefits payable under the Contracts and for
bearing various risks associated with the Contracts. The amount of a
charge will not always correspond to the actual costs associated. For
example, the surrender charge collected may not fully cover all of the
distribution expenses incurred by us with the service or benefits
provided. In the event there are any profits from fees and charges
deducted under the Contract, we may use such profits to finance the
distribution of contracts.
CHARGE DEDUCTION SUBACCOUNT
You may elect to have all charges against your contract value deducted
directly from a single subaccount designated by the Company. Currently
we use the Liquid Asset subaccount for this purpose. If you do not
elect this option, or if the amount of the charges is greater than the
amount in the designated subaccount, the charges will be deducted as
discussed below. You may cancel this option at any time by sending
satisfactory notice to our Customer Service Center.
CHARGES DEDUCTED FROM THE CONTRACT VALUE
We deduct the following charges proportionately from all subaccounts in
which you are invested. If there is no contract value in those
subaccounts, we will deduct charges from your Fixed Interest Allocations
starting with the guarantee interest periods nearest their maturity
dates until such charges have been paid. The charges we deduct are:
SURRENDER CHARGE. We will deduct a contingent deferred sales charge
(a "surrender charge") if you surrender your Contract or if you take a
withdrawal in excess of the Free Withdrawal Amount during the 7-year
period from the date we receive and accept a premium payment. The
surrender charge is based on a percentage of each premium payment.
This charge is intended to cover sales expenses that we have incurred.
We may in the future reduce or waive the surrender charge in certain
situations and will never charge more than the maximum surrender
charges. The percentage of premium payments deducted at the time of
surrender or excess withdrawal depends on the number of complete years
that have elapsed since that premium payment was made. We determine
the surrender charge as a percentage of each premium payment as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Complete Years Elapsed 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7+
since premium payment | | | | | | |
Surrender Charge 6% | 6% | 6% | 5% | 4% | 3% | 1% | 0%
</TABLE>
We will waive the surrender charge in most states in the following
events: (i) you begin receiving qualified extended medical care on or
after the first contract anniversary for at least 45 days during a 60-
day period and your request for the surrender or withdrawal, together
with all required documentation is received at our Customer Service
Center during the term of your care or within 90 days after the last
day of your care; or (ii) you are first diagnosed by a qualifying medical
professional, on or after the first contract anniversary, as having a
qualifying terminal illness. We have the right to require an examination
by a physician of our choice. If we require such an examination, we will
pay for it. You are required to send us satisfactory written proof of
illness.
See your Contract for more information. The waiver of surrender charge
may not be available in all states.
FREE WITHDRAWAL AMOUNT. The Free Withdrawal Amount in any contract
year is the greater of: (i) any earnings less previous free
withdrawals; or (ii) 10% of premium payments paid within the past 7
years and not previously withdrawn, less any previous free withdrawals
taken in the same contract year.
SURRENDER CHARGE FOR EXCESS WITHDRAWALS. We will deduct a surrender
charge for excess withdrawals. We consider a withdrawal to be an
"excess withdrawal" when the amount you withdraw in any contract year
exceeds the Free Withdrawal Amount. Where you are receiving systematic
withdrawals, any combination of regular withdrawals taken and any
systematic withdrawals expected to be received in a contract year
will be included in determining the amount of the excess withdrawal.
Such a withdrawal will be considered a partial surrender of the Contract
and we will impose a surrender charge and any associated premium tax.
We will deduct such charges from the contract value in proportion to the
contract value in each subaccount or Fixed Interest Allocation from
which the excess withdrawal was taken. In instances where the excess
withdrawal equals the entire contract value in such subaccounts or Fixed
Interest
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Allocations, we will deduct charges proportionately from all
other subaccounts and Fixed Interest Allocations in which you are invested.
ANY WITHDRAWAL FROM A FIXED INTEREST ALLOCATION MORE THAN 30 DAYS BEFORE
ITS MATURITY DATE WILL TRIGGER A MARKET VALUE ADJUSTMENT.
For the purpose of calculating the surrender charge for an excess
withdrawal: a) we treat premiums as being withdrawn on a first-in,
first-out basis; and b) amounts withdrawn which are not considered an
excess withdrawal are not considered a withdrawal of any premium
payments. We have included an example of how this works in Appendix B.
Although we treat premium payments as being withdrawn before earnings
for purpose of calculating the surrender charge for excess withdrawals,
the federal tax law treats earnings as withdrawn first.
PREMIUM TAXES. We may make a charge for state and local premium taxes
depending on the contract owner's state of residence. The tax can
range from 0% to 3.5% of the premium. We have the right to change this
amount to conform with changes in the law or if the contract owner
changes state of residence.
We deduct the premium tax from your contract value on the annuity
start date. However, some jurisdictions impose a premium tax at the
time that initial and additional premiums are paid, regardless of when
the annuity payments begin. In those states we may defer collection of
the premium taxes from your contract value and deduct it on surrender
of the Contract, on excess withdrawals or on the annuity start date.
ADMINISTRATIVE CHARGE. We currently do not charge an annual
administrative charge but may in the future deduct an annual administrative
charge of $30 or 2% of the contract value, whichever is smaller. Such
charge, if any, will be made on each Contract anniversary, or if you
surrender your Contract prior to a Contract anniversary, at the time
we determine the cash surrender value payable to you.
EXCESS TRANSFER CHARGE. We currently do not deduct any charges for
transfers made during a contract year. We have the right, however, to
assess up to $25 for each transfer after the twelfth transfer in a contract
year. If such a charge is assessed, we would deduct the charge from the
subaccounts and the Fixed Interest Allocations from which each such transfer
is made in proportion to the amount being transferred from each subaccount
and Fixed Interest Allocation, unless you have chosen to have all charges
deducted from a single subaccount. The charge will not apply to any
transfers due to the election of dollar cost averaging, auto rebalancing
and transfers we make to and from any subaccount specially designated by
the Company for such purpose.
CHARGES DEDUCTED FROM THE SUBACCOUNTS
MORTALITY AND EXPENSE RISK CHARGE. The amount of the mortality and
expense risk charge for the Death Benefit, on an annual
basis, is equal to 0.75% of the assets in each subaccount. The charge
is deducted on each business day at the rate of .002063% for each day
since the previous business day.
ASSET-BASED ADMINISTRATIVE CHARGE. We will deduct a daily charge
from the assets in each subaccount, to compensate us for a portion of
the administrative expenses under the Contract. The daily charge is at
a rate of .000411% (equivalent to an annual rate of 0.15%) on the
assets in each subaccount.
TRUST EXPENSES
There are fees and charges deducted from each investment portfolio of the
GCG Trust, the PIMCO Trust and the Warburg Pincus Trust. Please read the
respective Trust prospectus for details.
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THE ANNUITY OPTIONS
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ANNUITIZATION OF YOUR CONTRACT
If the annuitant and contract owner are living on the annuity start
date, we will begin making payments to the contract owner under an
income plan. We will make these payments under the annuity option
chosen. You may change annuity option by making a written request to
us at least 30 days before the annuity start date. The amount of the
payments will be determined by applying your contract value adjusted
for any
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applicable Market Value Adjustment on the annuity start date in
accordance with the annuity option you chose.
You may also elect an annuity option on surrender of the Contract for
its cash surrender value or you may choose one or more annuity options
for the payment of death benefit proceeds while it is in effect and
before the annuity start date. If, at the time of the contract owner's
death or the annuitant's death (if the contract owner is not an
individual), no option has been chosen for paying death benefit
proceeds, the beneficiary may choose an annuity option within 60 days.
In all events, payments of death benefit proceeds must comply with the
distribution requirements of applicable federal tax law.
The minimum monthly annuity income payment that we will make is $20.
We may require that a single sum payment be made if the contract value
is less than $2,000 or if the calculated monthly annuity income payment
is less than $20.
For each annuity option we will issue a separate written agreement
putting the annuity option into effect. Before we pay any annuity
benefits, we require the return of your Contract. If your Contract has
been lost, we will require that you complete and return the applicable
lost Contract form. Various factors will affect the level of annuity
benefits, such as the annuity option chosen, the applicable payment
rate used and the investment performance of the portfolios and interest
credited to the Fixed Interest Allocations.
Our current annuity options provide only for fixed payments. Fixed
annuity payments are regular payments, the amount of which is fixed and
guaranteed by us. Some fixed annuity options provide fixed payments
either for a specified period of time or for the life of the annuitant.
The amount of life income payments will depend on the form and duration
of payments you chose, the age of the annuitant or beneficiary (and
gender, where appropriate), the total contract value applied to
purchase a Fixed Interest Allocation, and the applicable payment rate.
Our approval is needed for any option where:
(1) The person named to receive payment is other than the contract
owner or beneficiary;
(2) The person named is not a natural person, such as a corporation; or
(3) Any income payment would be less than the minimum annuity income
payment allowed.
SELECTING THE ANNUITY START DATE
You select the date on which the annuity payments commence. The
annuity start date must be at least 5 years from the contract date but
before the month immediately following the annuitant's 90th birthday,
or 10 years from the contract date, if later. If, on the annuity start
date, a surrender charge remains, the elected annuity option must
include a period certain of at least 5 years.
If you do not select an annuity start date, it will automatically begin
in the month following the annuitant's 90th birthday, or 10 years from
the contract date, if later.
If the annuity start date occurs when the annuitant is at an advanced
age, such as over age 85, it is possible that the Contract will not be
considered an annuity for federal tax purposes. See "Federal Tax
Considerations" and the Statement of Additional Information. For a
Contract purchased in connection with a qualified plan, other than a
Roth IRA, distributions must commence not later than April 1st of the
calendar year following the calendar year in which you attain age 70
1/2. Distributions may be made through annuitization or withdrawals.
Consult your tax advisor.
FREQUENCY OF ANNUITY PAYMENTS
You choose the frequency of the annuity payments. They may be monthly,
quarterly, semi-annually or annually. If we do not receive written
notice from you, we will make the payments monthly. There may be
certain restrictions on minimum payments that we will allow.
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THE ANNUITY OPTIONS
We offer the 4 annuity options shown below. Payments under Options
1, 2 and 3 are fixed. Payments under Option 4 may be fixed or variable.
For a fixed annuity option, the contract value in the subaccounts is
transferred to the Company's general account.
OPTION 1. INCOME FOR A FIXED PERIOD. Under this option, we make
monthly payments in equal installments for a fixed number of years
based on the contract value on the annuity start date. We
guarantee that each monthly payment will be at least the amount stated
in your Contract. If you prefer, you may request that payments be made in
annual, semi-annual or quarterly installments. We will provide you
with illustrations if you ask for them. If the cash surrender value or
contract value is applied under this option, a 10% penalty tax may
apply to the taxable portion of each income payment until the contract
owner reaches age 59 1/2.
OPTION 2. INCOME FOR LIFE WITH A PERIOD CERTAIN. Payment is made
for the life of the annuitant in equal monthly installments and
guaranteed for at least a period certain such as 10 or 20 years. Other
periods certain may be available to you on request. You may choose a
refund period instead. Under this arrangement, income is guaranteed
until payments equal the amount applied. If the person named lives
beyond the guaranteed period, payments continue until his or her death.
We guarantee that each payment will be at least the amount specified in
the Contract corresponding to the person's age on his or her last
birthday before the annuity start date. Amounts for ages not shown in
the Contract are available if you ask for them.
OPTION 3. JOINT LIFE INCOME. This option is available when there
are 2 persons named to determine annuity payments. At least one of the
persons named must be either the contract owner or beneficiary of the
Contract. We guarantee monthly payments will be made as long as at
least one of the named persons is living. There is no minimum number
of payments. Monthly payment amounts are available if you ask for
them.
OPTION 4. ANNUITY PLAN. The contract value can be applied to any
other annuitization plan that we choose to offer on the annuity start
date.
PAYMENT WHEN NAMED PERSON DIES
When the person named to receive payment dies, we will pay any amounts
still due as provided in the annuity agreement between you and Golden
American. The amounts we will pay are determined as follows:
(1) For Option 1, or any remaining guaranteed payments under Option 2,
we will continue payments. Under Options 1 and 2, the discounted
values of the remaining guaranteed payments may be paid in a single
sum. This means we deduct the amount of the interest each
remaining guaranteed payment would have earned had it not been paid
out early. The discount interest rate is never less than 3% for
Option 1 and Option 2 per year. We will, however, base the
discount interest rate on the interest rate used to calculate the
payments for Options 1 and 2 if such payments were not based on the
tables in the Contract.
(2) For Option 3, no amounts are payable after both named persons have
died.
(3) For Option 4, the annuity option agreement will state the amount
we will pay, if any.
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OTHER CONTRACT PROVISIONS
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REPORTS TO CONTRACT OWNERS
We will send you a quarterly report within 31 days after the end of
each calendar quarter. The report will show the contract value, cash
surrender value, and the death benefit as of the end of the calendar
quarter. The report will also show the allocation of your contract
value and the amounts deducted from or added to the contract value
since the last report. We will also send you copies of any shareholder
reports of
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the investment portfolios in which Account B invests, as well
as any other reports, notices or documents we are required by law to
furnish to you.
SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of any
payment or determination of values on any business day (1) when the New
York Stock Exchange is closed; (2) when trading on the New York Stock
Exchange is restricted; (3) when an emergency exists as determined by
the Securities and Exchange Commission so that the sale of securities
held in Account B may not reasonably occur or so that the Company
may not reasonably determine the value of Account B's net assets; or (4)
during any other period when the Securities and Exchange Commission so
permits for the protection of security holders. We have the right to
delay payment of amounts from a Fixed Interest Allocation for up to 6
months.
IN CASE OF ERRORS IN YOUR APPLICATION
If an age or sex given in the application or enrollment form is
misstated, the amounts payable or benefits provided by the Contract
shall be those that the premium payment would have bought at the
correct age or sex.
ASSIGNING THE CONTRACT AS COLLATERAL
You may assign a non-qualified Contract as collateral security for a
loan but understand that your rights and any beneficiary's rights may
be subject to the terms of the assignment. An assignment may have
federal tax consequences. You must give us satisfactory written notice
at our Customer Service Center in order to make or release an
assignment. We are not responsible for the validity of any assignment.
CONTRACT CHANGES -- APPLICABLE TAX LAW
We have the right to make changes in the Contract to continue to
qualify the Contract as an annuity. You will be given advance notice
of such changes.
FREE LOOK
You may cancel your Contract within your 10-day free look period. We
deem the free look period to expire 15 days after we mail the Contract to
you. Some states may require a longer free look period. To cancel, you
need to send your Contract to our Customer Service Center or to the
agent from whom you purchased it. We will refund the contract value
adjusted for any Market Value Adjustment plus any charges we deducted.
The Contract will be void as of the day we receive your Contract and
your request. Some states require that we return the premium paid
rather than the contract value. In these states, your premiums
designated for investment in the subaccounts will be allocated during
the free look period to a subaccount specially designated by the Company
for this purpose (currently, the Liquid Asset subaccount). We may, in
our discretion, require that premiums designated for investment in the
subaccounts from all other states as well as premiums designated for a
Fixed Interest Allocation be allocated to the specially designated
subaccount during the free look period. If you keep your Contract after
the free look period, we will put your money in the subaccount(s) chosen
by you, based on the accumulation unit value next computed for each
subaccount, and/or in the Fixed Interest Allocation chosen by you.
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may reduce any
surrender, administration, and mortality and expense risk charges.
We may also change the minimum initial and additional premium
requirements, or offer an alternative or reduced death benefit.
SELLING THE CONTRACT
Directed Services, Inc. is principal underwriter and distributor of the
Contract as well as for other contracts issued through Account B and
other separate accounts of Golden American. We pay Directed Services
for acting as principal underwriter under a distribution agreement which
in turns pays the writing agent. The principal address of Directed
Services is 1001 Jefferson Street, Wilmington, Delaware 19801.
Directed Services enters into sales agreements with broker-dealers to
sell the Contracts through registered representatives who are licensed
to sell securities and variable insurance products. These broker-dealers
are
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registered with the SEC and are members of the National Association
of Securities Dealers, Inc. DSI receives a maximum of 6.5% commission,
and passes through 100% of the commission to the broker-dealer whose
registered representative sold the contract:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
| UNDERWRITER COMPENSATION |
---------------------------------------------------------------------------------------
| NAME OF PRINCIPAL | AMOUNT OF | OTHER |
| UNDERWITER | COMMISSION TO BE PAID | COMPENSATION |
|------------------------------------------------|-------------------------------------
<S> <C> <C>
| Directed Services, Inc. | Maximum of 6.5% | Reimbursement of any |
| | of any initial | covered expenses incurred |
| | or additional | by registered |
| | premium payments | representatives in |
| | except when combined | connection with |
| | with some annual | the distribution |
| | trail commissions. | of the Contracts. |
|------------------------------------------------|-------------------------------------
</TABLE>
Certain sales agreements may provide for a combination of a certain
percentage of commission at the time of sale and an annual trail commission
(which when combined could exceed the 6.5% of total premium payments).
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OTHER INFORMATION
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VOTING RIGHTS
We will vote the shares of a Trust owned by Account B according to your
instructions. However, if the Investment Company Act of 1940 or any
related regulations should change, or if interpretations of it or
related regulations should change, and we decide that we are permitted
to vote the shares of a Trust in our own right, we may decide to do so.
We determine the number of shares that you have in a subaccount by
dividing the Contract's contract value in that subaccount by the net
asset value of one share of the portfolio in which a subaccount invests.
We count fractional votes. We will determine the number of shares you
can instruct us to vote 180 days or less before a Trust's meeting.
We will ask you for voting instructions by mail at least 10 days before
the meeting. If we do not receive your instructions in time, we will
vote the shares in the same proportion as the instructions received
from all Contracts in that subaccount. We will also vote shares we
hold in Account B which are not attributable to contract owners in
the same proportion.
YEAR 2000 PROBLEM
Like other business organizations and individuals around the world,
Golden American and Account B could be adversely affected if the
computer systems doing the accounts processing or on which Golden
American and/or Account B relies do not properly process and calculate
date-related information related to the end of the year 1999. This is
commonly known as the Year 2000 (or Y2K) Problem. Golden American is
taking steps that it believes are reasonably designed to address the
Year 2000 Problem with respect to the computer systems that it uses and
to obtain satisfactory assurances that comparable steps are being taken
by its and Account B's major service providers. At this time, however,
we cannot guarantee that these steps will be sufficient to avoid any
adverse impact on Golden American and Account B.
STATE REGULATION
We are regulated by the Insurance Department of the State of Delaware.
We are also subject to the insurance laws and regulations of all
jurisdictions where we do business. The variable Contract offered by
this prospectus has been approved where required by those
jurisdictions. We are required to submit annual statements of our
operations, including financial statements, to the Insurance
Departments of the various jurisdictions in which we do business to
determine solvency and compliance with state insurance laws and
regulations.
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LEGAL PROCEEDINGS
The Company, like other insurance companies, may be involved in
lawsuits, including class action lawsuits. In some class action and
other lawsuits involving insurers, substantial damages have been sought
and/or material settlement payments have been made. We believe that
currently there are no pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on the Company or
Account B.
LEGAL MATTERS
The legal validity of the Contracts was passed on by Myles R. Tashman,
Esquire, Executive Vice President, General Counsel and Secretary of
Golden American. Sutherland Asbill & Brennan LLP of Washington, D.C.
has provided advice on certain matters relating to federal securities
laws.
EXPERTS
The audited financial statements of Golden American Life Insurance Company
and Separate Account B appearing or incorporated by reference in the
Statement of Additional Information and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing or incorporated by reference in the Statement
of Additional Information and in the Registration Statement and are
included or incorporated by reference in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
- -----------------------------------------------------------------------
FEDERAL TAX CONSIDERATIONS
- -----------------------------------------------------------------------
The following summary provides a general description of the federal
income tax considerations associated with this Contract and does not
purport to be complete or to cover all tax situations. This discussion
is not intended as tax advice. You should consult your counsel or
other competent tax advisers for more complete information. This
discussion is based upon our understanding of the present federal
income tax laws. We do not make any representations as to the
likelihood of continuation of the present federal income tax laws or as
to how they may be interpreted by the IRS.
TYPES OF CONTRACTS: NON-QUALIFIED OR QUALIFIED
The Contract may be purchased on a non-tax-qualified basis or purchased
on a tax-qualified basis. Qualified Contracts are designed for use by
individuals whom premium payments are comprised solely of proceeds from
and/or contributions under retirement plans that are intended to
qualify as plans entitled to special income tax treatment under
Sections 401(a), 403(b), 408, or 408A of the Code. The ultimate effect
of federal income taxes on the amounts held under a Contract, or
annuity payments, depends on the type of retirement plan, on the tax
and employment status of the individual concerned, and on our tax
status. In addition, certain requirements must be satisfied in
purchasing a qualified Contract with proceeds from a tax-qualified plan
and receiving distributions from a qualified Contract in order to
continue receiving favorable tax treatment. Some retirement plans are
subject to distribution and other requirements that are not
incorporated into our Contract administration procedures. Contract
owners, participants and beneficiaries are responsible for determining
that contributions, distributions and other transactions with respect
to the Contract comply with applicable law. Therefore, you should seek
competent legal and tax advice regarding the suitability of a Contract
for your particular situation. The following discussion assumes that
qualified Contracts are purchased with proceeds from and/or
contributions under retirement plans that qualify for the intended
special federal income tax treatment.
TAX STATUS OF THE CONTRACTS
DIVERSIFICATION REQUIREMENTS. The Code requires that the investments
of a variable account be "adequately diversified" in order for the
Contracts to be treated as annuity contracts for federal income tax
purposes. It is intended that Account B, through the subaccounts, will
satisfy these diversification requirements.
In certain circumstances, owners of variable annuity contracts have
been considered for federal income tax purposes to be the owners of the
assets of the separate account supporting their contracts due to their
ability
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to exercise investment control over those assets. When this is
the case, the contract owners have been currently taxed on income and
gains attributable to the separate account assets. There is little
guidance in this area, and some features of the Contracts, such as the
flexibility of a contract owner to allocate premium payments and transfer
contract values, have not been explicitly addressed in published rulings.
While we believe that the Contracts do not give contract owners investment
control over Account B assets, we reserve the right to modify the
Contracts as necessary to prevent a contract owner from being treated as
the owner of the Account B assets supporting the Contract.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity
contract for federal income tax purposes, the Code requires any non-
qualified Contract to contain certain provisions specifying how your
interest in the Contract will be distributed in the event of your
death. The non-qualified Contracts contain provisions that are
intended to comply with these Code requirements, although no
regulations interpreting these requirements have yet been issued. We
intend to review such provisions and modify them if necessary to assure
that they comply with the applicable requirements when such
requirements are clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as
annuity contracts for federal income tax purposes.
TAX TREATMENT OF ANNUITIES
IN GENERAL. We believe that if you are a natural person you will not
be taxed on increases in the value of a Contract until a distribution
occurs or until annuity payments begin. (For these purposes, the
agreement to assign or pledge any portion of the contract value, and,
in the case of a qualified Contract, any portion of an interest in the
qualified plan, generally will be treated as a distribution.)
TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON. The owner of any annuity contract who is not a
natural person generally must include in income any increase in the
excess of the contract value over the "investment in the contract"
(generally, the premiums or other consideration paid for the contract)
during the taxable year. There are some exceptions to this rule and a
prospective contract owner that is not a natural person may wish to
discuss these with a tax adviser. The following discussion generally
applies to Contracts owned by natural persons.
WITHDRAWALS. When a withdrawal from a non-qualified Contract occurs,
the amount received will be treated as ordinary income subject to tax
up to an amount equal to the excess (if any) of the contract value
(unreduced by the amount of any surrender charge) immediately before
the distribution over the contract owner's investment in the Contract
at that time. The tax treatment of market value adjustments is
uncertain. You should consult a tax adviser if you are considering
taking a withdrawal from your Contract in circumstances where a market
value adjustment would apply.
In the case of a surrender under a non-qualified Contract, the amount
received generally will be taxable only to the extent it exceeds the
contract owner's investment in the Contract.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution
from a non-qualified Contract, there may be imposed a federal tax
penalty equal to 10% of the amount treated as income. In general,
however, there is no penalty on distributions:
o made on or after the taxpayer reaches age 59 1/2;
o made on or after the death of a contract owner;
o attributable to the taxpayer's becoming disabled; or
o made as part of a series of substantially equal periodic payments
for the life (or life expectancy) of the taxpayer.
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Other exceptions may be applicable under certain circumstances and
special rules may be applicable in connection with the exceptions
enumerated above. A tax adviser should be consulted with regard to
exceptions from the penalty tax.
ANNUITY PAYMENTS. Although tax consequences may vary depending on
the payment option elected under an annuity contract, a portion of each
annuity payment is generally not taxed and the remainder is taxed as
ordinary income. The non-taxable portion of an annuity payment is
generally determined in a manner that is designed to allow you to
recover your investment in the Contract ratably on a tax-free basis
over the expected stream of annuity payments, as determined when
annuity payments start. Once your investment in the Contract has been
fully recovered, however, the full amount of each annuity payment is
subject to tax as ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from
a Contract because of your death or the death of the annuitant.
Generally, such amounts are includible in the income of recipient as
follows: (i) if distributed in a lump sum, they are taxed in the same
manner as a surrender of the Contract, or (ii) if distributed under a
payment option, they are taxed in the same way as annuity payments.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT. A transfer or
assignment of ownership of a Contract, the designation of an annuitant,
the selection of certain dates for commencement of the annuity phase,
or the exchange of a Contract may result in certain tax consequences to
you that are not discussed herein. A contract owner contemplating any
such transfer, assignment or exchange, should consult a tax advisor as
to the tax consequences.
WITHHOLDING. Annuity distributions are generally subject to
withholding for the recipient's federal income tax liability.
Recipients can generally elect, however, not to have tax withheld from
distributions.
MULTIPLE CONTRACTS. All annuity contracts that are issued by us (or
our affiliates) to the same contract owner during any calendar year are
treated as one annuity contract for purposes of determining the amount
includible in such contract owner's income when a taxable distribution
occurs.
TAXATION OF QUALIFIED CONTRACTS
The Contracts are designed for use with several types of qualified
plans. The tax rules applicable to participants in these qualified
plans vary according to the type of plan and the terms and
contributions of the plan itself. Special favorable tax treatment may
be available for certain types of contributions and distributions.
Adverse tax consequences may result from: contributions in excess of
specified limits; distributions before age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified
commencement and minimum distribution rules; and in other specified
circumstances. Therefore, no attempt is made to provide more than
general information about the use of the Contracts with the various
types of qualified retirement plans. Contract owners, annuitants, and
beneficiaries are cautioned that the rights of any person to any
benefits under these qualified retirement plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms
and conditions of the Contract, but we shall not be bound by the terms
and conditions of such plans to the extent such terms contradict the
Contract, unless the Company consents.
DISTRIBUTIONS. Annuity payments are generally taxed in the same
manner as under a non-qualified Contract. When a withdrawal from a
qualified Contract occurs, a pro rata portion of the amount received is
taxable, generally based on the ratio of the contract owner's
investment in the Contract (generally, the premiums or other
consideration paid for the Contract) to the participant's total accrued
benefit balance under the retirement plan. For Qualified Contracts,
the investment in the Contract can be zero. For Roth IRAs,
distributions are generally not taxed, except as described below.
For qualified plans under Section 401(a) and 403(b), the Code requires
that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the
contract owner (or plan participant) (i) reaches age 70 1/2 or (ii)
retires, and must be made in a specified form or manner. If the plan
participant is a "5 percent owner" (as defined in the Code),
distributions generally must begin no later than April 1 of the
calendar year following the calendar year in which the contract owner
(or plan participant) reaches age 70 1/2. For IRAs described in
Section 408, distributions generally must
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commence no later than April 1 of the calendar year following the
calendar year in which the contract owner (or plan participant) reaches
age 70 1/2. Roth IRAs under Section 408A do not require distributions
at any time before the contract owner's death.
WITHHOLDING. Distributions from certain qualified plans generally
are subject to withholding for the contract owner's federal income tax
liability. The withholding rates vary according to the type of
distribution and the contract owner's tax status. The contract owner
may be provided the opportunity to elect not to have tax withheld from
distributions. "Eligible rollover distributions" from section 401(a)
plans and section 403(b)tax-sheltered annuities are subject to a
mandatory federal income tax withholding of 20%. An eligible rollover
distribution is the taxable portion of any distribution from such a
plan, except certain distributions that are required by the Code or
distributions in a specified annuity form. The 20% withholding does
not apply, however, if the contract owner chooses a "direct rollover"
from the plan to another tax-qualified plan or IRA.
Brief descriptions of the various types of qualified retirement plans
in connection with a Contract follow. We will endorse the Contract as
necessary to conform it to the requirements of such plan.
REQUIRED DISTRIBUTIONS UPON CONTRACT OWNER'S DEATH
We will not allow any payment of benefits provided under the Contract
which do not satisfy the requirements of Section 72(s) of the Code.
If the contract owner dies before the annuity start date, the death
benefit payable to the beneficiary will be distributed as follows: (a)
the death benefit must be completely distributed within 5 years of the
contract owner's date of death; or (b) the beneficiary may elect,
within the 1-year period after the contract owner's date of death, to
receive the death benefit in the form of an annuity from us, provided
that (i) such annuity is distributed in substantially equal
installments over the life of such beneficiary or over a period not
extending beyond the life expectancy of such beneficiary; and (ii) such
distributions begin not later than 1 year after the contract owner's
date of death.
Notwithstanding (a) and (b) above, if the sole contract owner's
beneficiary is the deceased owner's surviving spouse, then such spouse
may elect, within the 1-year period after the contract owner's date of
death, to continue the Contract under the same terms as before the
contract owner's death. Upon receipt of such election from the spouse
at our Customer Service Center: (1) all rights of the spouse as
contract owner's beneficiary under the Contract in effect prior to such
election will cease; (2) the spouse will become the owner of the
Contract and will also be treated as the contingent annuitant, if none
has been named and only if the deceased owner was the annuitant; and
(3) all rights and privileges granted by the Contract or allowed by
Golden American will belong to the spouse as contract owner of the
Contract. This election will be deemed to have been made by the spouse
if such spouse makes a premium payment to the Contract or fails to make
a timely election as described in this paragraph. If the owner's
beneficiary is a nonspouse, the distribution provisions described in
subparagraphs (a) and (b) above, will apply even if the annuitant
and/or contingent annuitant are alive at the time of the contract
owner's death.
If we do not receive an election from a nonspouse owner's beneficiary
within the 1-year period after the contract owner's date of death, then
we will pay the death benefit to the owner's beneficiary in a cash
payment. We will determine the death benefit as of the date we receive
proof of death. We will make payment of the proceeds on or before the
end of the 5-year period starting on the owner's date of death. Such
cash payment will be in full settlement of all our liability under the
Contract.
If the annuitant dies after the annuity start date, we will continue to
distribute any benefit payable at least as rapidly as under the annuity
option then in effect.
If the contract owner dies after the annuity start date, we will
continue to distribute any benefit payable at least as rapidly as under
the annuity option then in effect. All of the contract owner's rights
granted under the Contract or allowed by us will pass to the contract
owner's beneficiary.
If the Contract has joint owners we will consider the date of death of
the first joint owner as the death of the contract owner and the
surviving joint owner will become the contract owner of the Contract.
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CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS
Section 401(a) of the Code permits corporate employers to establish
various types of retirement plans for employees, and permits self-
employed individuals to establish these plans for themselves and their
employees. These retirement plans may permit the purchase of the
Contracts to accumulate retirement savings under the plans. Adverse
tax or other legal consequences to the plan, to the participant, or to
both may result if this Contract is assigned or transferred to any
individual as a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such benefits
before transfer of the Contract. Employers intending to use the
Contract with such plans should seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to contribute to
an individual retirement program known as an "Individual Retirement
Annuity" or "IRA." These IRAs are subject to limits on the amount that
can be contributed, the deductible amount of the contribution, the
persons who may be eligible, and the time when distributions commence.
Also, distributions from certain other types of qualified retirement
plans may be "rolled over" or transferred on a tax-deferred basis into
an IRA. There are significant restrictions on rollover or transfer
contributions from Savings Incentive Match Plans (SIMPLE), under which
certain employers may provide contributions to IRAs on behalf of their
employees, subject to special restrictions. Employers may establish
Simplified Employee Pension (SEP) Plans to provide IRA contributions on
behalf of their employees. Sales of the Contract for use with IRAs may
be subject to special requirements of the IRS.
ROTH IRAS
Effective January 1, 1998, section 408A of the Code permits certain
eligible individuals to contribute to a Roth IRA. Contributions to a
Roth IRA, which are subject to certain limitations, are not deductible,
and must be made in cash or as a rollover or transfer from another Roth
IRA or other IRA. A rollover from or conversion of an IRA to a Roth
IRA may be subject to tax, and other special rules may apply.
Distributions from a Roth IRA generally are not taxed, except that,
once aggregate distributions exceed contributions to the Roth IRA,
income tax and a 10% penalty tax may apply to distributions made (1)
before age 59 1/2 (subject to certain exceptions) or (2) during the
five taxable years starting with the year in which the first
contribution is made to the Roth IRA.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code allows employees of certain Section
501(c)(3) organizations and public schools to exclude from their gross
income the premium payments made, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These
premium payments may be subject to FICA (social security) tax.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax
consequences under the Contracts are not exhaustive, and special rules
are provided with respect to other tax situations not discussed in this
prospectus. Further, the federal income tax consequences discussed
herein reflect our understanding of current law, and the law may change.
Federal estate and state and local estate, inheritance and other tax
consequences of ownership or receipt of distributions under a Contract
depend on the individual circumstances of each contract owner or recipient
of the distribution. A competent tax adviser should be consulted for
further information.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is
always the possibility that the tax treatment of the Contracts could
change by legislation or other means. It is also possible that any
change could be retroactive (that is, effective before the date of the
change). A tax adviser should be consulted with respect to legislative
developments and their effect on the Contract.
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MORE INFORMATION ABOUT GOLDEN AMERICAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL DATA
The following selected financial data prepared in accordance with generally
accepted accounting principles ("GAAP") for Golden American should be read
in conjunction with the financial statements and notes thereto included in
this Prospectus.
On October 24, 1997, PFHI Holding, Inc. ("PFHI"), a Delaware corporation,
acquired all of the outstanding capital stock of Equitable of Iowa Companies
("Equitable of Iowa"), pursuant to a merger agreement among Equitable of
Iowa, PFHI and ING Groep N.V. On August 13, 1996, Equitable of Iowa
acquired all of the outstanding capital stock of BT Variable, Inc., the
parent of Golden American. For GAAP financial statement purposes, the
merger was accounted for as a purchase effective October 25, 1997 and the
change in control of Golden American through the acquisition of BT Variable,
Inc. was accounted for as a purchase effective August 14, 1996. The merger
and acquisition resulted in new bases of accounting reflecting estimated
fair values of assets and liabilities at their respective dates. As a
result, the GAAP financial data presented below for the period subsequent
to October 24, 1997, are presented as the Post-Merger new basis of
accounting, for the period August 14, 1996 through October 24, 1997, are
presented as the Post-Acquisition basis of accounting, and for
August 13, 1996 and prior periods are presented as the Pre-Acquisition
basis of accounting.
<TABLE>
<CAPTION>
SELECTED GAAP BASIS FINANCIAL DATA
(IN THOUSANDS)
POST-MERGER POST-ACQUISITION
------------------------------- | -----------------------------
|
(UNAUDITED) FOR THE PERIOD| FOR THE PERIOD FOR THE PERIOD
FOR THE NINE OCTOBER 25, | JANUARY 1, AUGUST 14,
MONTHS ENDED 1997 THROUGH | 1997 THROUGH 1996 THROUGH
SEPTEMBER 30, DECEMBER 31, | OCTOBER 24, DECEMBER 31,
1998 1997 | 1997 1996
-------------- -------------- |------------ ---------------
|
<S> <C> <C> <C> <C>
Annuity and Interest |
Sensitive Life |
Product Charges ............. $ 26,984 $ 3,834 | $18,288 $ 8,768
Net Income before |
Federal Income Tax .......... $ 9,171 $ (279) | $ (608) $ 570
Net Income (Loss) ............ $ 4,877 $ (425) | $ 729 $ 350
Total Assets ................. $3,776,542 $ 2,445,835 | N/A $1,677,899
Total Liabilities ............ $3,471,107 $ 2,218,522 | N/A $1,537,415
Total Stockholder's Equity ... $ 305,435 $ 227,313 | N/A $ 140,484
</TABLE>
PRE-ACQUISITION
-------------------------------------------------------
FOR THE PERIOD
JANUARY 1, 1996
THROUGH FOR THE FISCAL YEARS ENDED DECEMBER 31,
------------------------------------------
AUGUST 13, 1996 1995 1994 1993 1992(a)
--------------- ------ ------ ------ --------
Annuity and
Interest
Sensitive Life
Product Charges ...... $12,259 $ 18,388 $ 17,519 $ 10,192 $ 694
Net Income before
Federal Income Tax ... $ 1,736 $ 3,364 $ 2,222 $ (1,793) $ (508)
Net Income (Loss) ...... $ 3,199 $ 3,364 $ 2,222 $ (1,793) $ (508)
Total Assets ........... N/A $1,203,057 $1,044,760 $886,155 $320,539
Total Liabilities ...... N/A $1,104,932 $ 955,254 $857,558 $306,197
Total Stockholder's
Equity ............... N/A $ 98,125 $ 89,506 $ 28,597 $ 14,342
(a) Results for 1992 are for the period September 30, 1992 (date of
acquisition) to December 31, 1992.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's
condensed consolidated results of operations. In addition, some analysis
and information regarding financial condition as well as liquidity and
capital resources has also been provided. This analysis should be read
in conjunction with the condensed consolidated financial statements, the
related notes and the Cautionary Statement Regarding Forward-Looking
Statements which appear elsewhere in this report. The Company reports
financial results on a consolidated basis. The condensed consolidated
financial statements include the accounts of Golden American Life
Insurance Company ("Golden American") and its wholly owned subsidiary,
First Golden American Life Insurance Company of New York ("First Golden,"
and collectively with Golden American, the "Company").
BUSINESS ENVIRONMENT. The current business and regulatory environment
remains challenging for the insurance industry. The variable annuity
industry is dominated by a number of large variable product companies with
strong distribution, name recognition and wholesaling capabilities.
Increasing competition from traditional insurance carriers as well as banks
and mutual fund companies offer consumers many choices. However, overall
demand for variable products remains strong for several reasons including:
strong stock market performance over the last four years; relatively low
interest rates; an aging U.S. population that is increasingly concerned
about retirement and estate planning, as well as maintaining their standard
of living in retirement; and potential reductions in government and
employer-provided benefits at retirement as well as lower public
confidence in the adequacy of those benefits.
In 1995, Golden American experienced a significant decline in sales, due to
a number of factors. First, some portfolio managers performed poorly in
1993 and 1994. Second, as more products came to market the cost structure
of the "DVA" deferred variable annuity product became less competitive.
Third, market share was lost because no fixed interest rate options were
available in 1994 during the time of rising interest rates and flat or
declining equity markets. Consequently, the Company took steps to respond
to these business challenges. Several portfolio managers were replaced and
new funds were added to give contractholders more investment options. In
October of 1995, the Company introduced the Combination Deferred Variable
and Fixed Annuity (GoldenSelect DVA Plus) and the GoldenSelect Genesis I
and Genesis Flex life insurance products, and sales increased substantially.
In October of 1997, Golden American introduced three new variable annuity
products (GoldenSelect Access, GoldenSelect ES II and GoldenSelect Premium
Plus), which have contributed significantly to sales.
RESULTS OF OPERATIONS
MERGER. On October 23, 1997, Equitable of Iowa shareholders approved the
Agreement and Plan of Merger ("Merger Agreement") dated as of July 7, 1997,
among Equitable of Iowa, PFHI Holdings, Inc. ("PFHI"), and ING Groep N.V.
("ING"). On October 24, 1997, PFHI, a Delaware corporation, acquired all of
the outstanding capital stock of Equitable of Iowa pursuant to the Merger
Agreement. PFHI is a wholly owned subsidiary of ING, a global financial
services holding company based in The Netherlands. Equitable of Iowa, an Iowa
corporation, in turn owned all the outstanding capital stock of Equitable
Life Insurance Company of Iowa ("Equitable Life") and Golden American and
their wholly owned subsidiaries. Equitable of Iowa also owned all the
outstanding capital stock of Locust Street Securities, Inc., Equitable
Investment Services, Inc., Directed Services, Inc. ("DSI"), Equitable of
Iowa Companies Capital Trust, Equitable of Iowa Companies Capital Trust II
and Equitable of Iowa Securities Network, Inc. In exchange for the
outstanding capital stock of Equitable of Iowa, ING paid total consideration
of approximately $2.1 billion in cash and stock plus the assumption of
approximately $400 million in debt according to the Merger Agreement.
As a result of the merger, Equitable of Iowa was merged into PFHI which
was simultaneously renamed Equitable of Iowa Companies, Inc. ("EIC" or
the "Parent").
For financial statement purposes, the change in control of the Company
through the ING acquisition of EIC, was accounted for as a purchase
effective October 25, 1997. This merger resulted in a new basis of
accounting reflecting estimated fair values of assets and liabilities at
that date. As a result, the Company's financial statements for the period
subsequent to October 24, 1997, are presented on the Post-Merger new basis
of accounting.
The purchase price was allocated to the companies mentioned previously.
Goodwill of $1.4 billion was established for the excess of the merger cost
over the fair value of the assets and liabilities of EIC with $151.1 million
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pushed down to the Company. The allocation of the purchase price to the
Company was $227.6 million. The cost of the acquisition is preliminary as
it relates to estimated expenses, and as a result, the allocation of the
purchase price to the Company may change. Goodwill resulting from the
merger is being amortized over 40 years on a straight-line basis. The
carrying value will be reviewed periodically for any indication of
impairment in value.
CHANGE IN CONTROL - ACQUISITION. On August 13, 1996, Equitable of Iowa
acquired all of the outstanding capital stock of BT Variable, Inc.
("BT Variable") and its wholly owned subsidiaries Golden American and DSI.
Subsequent to the acquisition, the BT Variable, Inc. name was changed to
EIC Variable, Inc. On April 30, 1997, EIC Variable, Inc. was liquidated and
its investments in Golden American and DSI were transferred to Equitable of
Iowa while the remainder of its net assets were contributed to Golden
American. On December 30, 1997, EIC Variable, Inc. was dissolved.
For financial statement purposes, the change in control of Golden American
through the acquisition of BT Variable was accounted for as a purchase
effective August 14, 1996. This acquisition resulted in a new basis of
accounting reflecting estimated fair value of assets and liabilities at
that date. As a result, the Company's financial statements for the period
August 14, 1996 through October 24, 1997, are presented on the
Post-Acquisition basis of accounting and for August 13, 1996 and prior
periods are presented on the Pre-Acquisition basis of accounting.
The purchase price was allocated to the three companies purchased - BT
Variable, DSI, and Golden American. Goodwill of $41.1 million was
established for the excess of the acquisition cost over the fair value of
the assets and liabilities and pushed down to Golden American. At
June 30, 1997, goodwill was increased by $1.8 million to adjust the value
of a receivable existing at that date. The allocation of the purchase
price to Golden American was approximately $139.9 million. Goodwill
resulting from the acquisition was being amortized over 25 years on a
straight-line basis.
THE FIRST NINE MONTHS OF 1998 COMPARED TO THE SAME PERIOD OF 1997
PREMIUMS
(DOLLARS IN MILLIONS)
|POST-
POST-MERGER |ACQUISITION
_____________ |___________
NINE MONTHS ENDED PERCENTAGE DOLLAR |
SEPTEMBER 30 1998 CHANGE CHANGE | 1997
__________________________________________________________________|___________
| | |
Variable annuity | | |
premiums: | | |
Separate account $1,125.3 | 651.6%| $975.5 | $149.8
Fixed account 346.6 | 51.7 | 118.1 | 228.5
________ | _____ | ______ | ______
Total variable | | |
annuity premiums 1,471.9 | 289.1 | 1,093.6 | 378.3
Variable life | | |
premiums 11.4 | (16.2)| (2.2)| 13.6
________ | _____ | ________ | ______
Total premiums $1,483.3 | 278.5%| $1,091.4 | $391.9
======== ===== ======== ======
Variable annuity separate account premiums increased 651.6% during the first
nine months of 1998 and increased 2.5% in the third quarter compared to
second quarter 1998 premiums. These increases resulted from increased
sales of the new Premium Plus product introduced in October of 1997 and
the increased sales levels of the Company's other products. The fixed
account portion of the Company's variable annuity premiums increased
51.7% during the first nine months of 1998 and increased 39.1% in the
third quarter of 1998 compared to the second quarter of 1998. Although
variable life premiums decreased 16.2% during the first nine months of 1998,
third quarter 1998 variable life premiums increased 11.1% over second
quarter 1998 premiums.
Premiums, net of reinsurance, for variable products from four significant
broker/dealers totaled $546.9 million, or 37% of total premiums, for the first
nine months of 1998.
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REVENUES
(DOLLARS IN MILLIONS)
POST-
POST-MERGER |ACQUISITION
_____________ |___________
NINE MONTHS ENDED PERCENTAGE DOLLAR |
SEPTEMBER 30 1998 CHANGE CHANGE | 1997
__________________________________________________________________|___________
Annuity and interest | | |
sensitive life | | |
product charges $27.0 | 69.3%| $11.1 | $15.9
Management fee revenue 3.3 | 61.7 | 1.3 | 2.0
Net investment income 29.3 | 54.6 | 10.3 | 19.0
Realized gains | | |
on investments 0.4 | 658.7 | 0.3 | 0.1
Other income 4.8 | 1,026.6 | 4.4 | 0.4
_____ | _______ | _____ | _____
$64.8 | 73.2%| $27.4 | $37.4
===== ======= ===== =====
Total revenues increased 73.2% in the first nine months of 1998 compared to
the same period in 1997. Annuity and interest sensitive life product
charges increased 69.3% in the first nine months of 1998 due to additional
fees earned from the increasing block of business under management in the
separate accounts and an increase in surrender charges. This increase was
partially offset by the elimination of the unearned revenue reserve related
to in force acquired at the merger date which resulted in lower annuity and
interest sensitive life product charges compared to Post-Acquisition levels.
Golden American provides certain managerial and supervisory services to DSI.
The fee paid to Golden American for these services, which is calculated as a
percentage of average assets in the variable separate accounts, was $3.3
million and $2.0 million for the first nine months of 1998 and 1997,
respectively.
Net investment income increased 54.6% in the first nine months of 1998 due to
the increase in invested assets. The Company had $436,000 of realized gains
on the sale of investments in the first nine months of 1998, compared to
gains of $58,000 in the same period of 1997.
Other income increased $4.4 million to $4.8 million in the first nine months
of 1998 due primarily to income received from a modified coinsurance
agreement with an unaffiliated reinsurer as a result of increased sales.
EXPENSES
Total insurance benefits and expenses increased $17.4 million, or 49.3%, to
$52.6 million in the first nine months of 1998. Interest credited to account
balances increased $47.3 million, or 280.7%, to $64.1 million in the first
nine months of 1998. The extra credit bonus on the new Premium Plus product
introduced in October of 1997 generated a $35.8 million increase in interest
credited during the first nine months of 1998. The remaining increase in
interest credited relates to higher account balances associated with the
Company's fixed account option within its variable products.
Commissions increased $61.8 million, or 267.6%, to $85.0 million in the first
nine months of 1998. Insurance taxes increased $1.0 million, or 58.3%, to
$2.7 million in the first nine months of 1998. Increases and decreases in
commissions and insurance taxes are generally related to changes in the level
of variable product sales. Insurance taxes are impacted by several other
factors which include an increase in FICA taxes primarily due to bonuses.
Most costs incurred as the result of new sales have been deferred, thus
having very little impact on current earnings.
General expenses increased $11.7 million, or 99.6%, to $23.5 million in the
first nine months of 1998. Management expects general expenses to continue
to increase in 1998 as a result of the emphasis on expanding the salaried
wholesaler distribution network. The Company uses a network of wholesalers
to distribute its products and the salaries of these wholesalers are included
in general expenses. The portion of these salaries and related expenses which
varies with sales production levels is deferred, thus having little impact on
current earnings. The increase in general expenses was partially offset by
reimbursements received from Equitable Life, an affiliate, for certain
advisory, computer and other resources and services provided by Golden
American.
35
<PAGE>
<PAGE>
At the merger date, the Company's deferred policy acquisition costs ("DPAC"),
previous balance of present value of in force acquired ("PVIF") and unearned
revenue reserve were eliminated and an asset of $44.3 million representing
PVIF was established for all policies in force at the merger date. During
the third quarter of 1998, PVIF was unlocked by $0.8 million to reflect
changes in the assumptions related to the timing of future gross profits.
PVIF decreased $2.7 million in the second quarter of 1998 to adjust the
value of other receivables and increased $0.2 million in the first quarter
of 1998 as a result of an adjustment to the merger costs. The amortization
of PVIF and DPAC increased $1.4 million, or 23.2%, in the first nine months
of 1998. During the second quarter of 1997, PVIF was unlocked by $2.3
million to reflect narrower current spreads than the gross profit model
assumed. Based on current conditions and assumptions as to the impact of
future events on acquired policies in force, the expected approximate net
amortization is $1.0 million for the remainder of 1998, $4.1 million in
1999, $4.1 million in 2000, $4.0 million in 2001, $3.8 million in 2002 and
$3.5 million in 2003. Certain expense estimates inherent in the cost of the
merger may change resulting in changes of the allocation of the purchase
price. If changes occur, the impact could result in changes to PVIF and
the related amortization and deferred taxes. Actual amortization may vary
based upon changes in assumptions and experience.
Amortization of goodwill during the first nine months of 1998 totaled $2.8
million. Goodwill resulting from the merger is being amortized on a straight-
line basis over 40 years and is expected to approximate $3.8 million annually.
Interest expense on the $25 million surplus note issued in December 1996 was
$1.5 million in the first nine months of 1998 and the same period of 1997.
In addition, Golden American paid interest of $0.2 million on the line of
credit during the first nine months of 1998. Golden American also paid $1.3
million in the first nine months of 1998 to ING America Insurance Holdings,
Inc. ("ING AIH")for interest on the reciprocal loan agreement.
NET INCOME. Net income for the first nine months of 1998 was $4.9 million, an
increase of $4.6 million over net income of $0.3 million in the same period
of 1997.
1997 COMPARED TO 1996
The following analysis combines Post-Merger and Post-Acquisition activity for
1997 and Post-Acquisition and Pre-Acquisition activity for 1996 for comparison
purposes. Such a comparison does not recognize the impact of the purchase
accounting and goodwill amortization except for the periods after August 13,
1996.
PREMIUMS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
POST-MERGER COMBINED POST-ACQUISITION
_________________________________________________________
FOR THE PERIOD | FOR THE YEAR | FOR THE PERIOD
OCTOBER 25, 1997 | ENDED | JANUARY 1, 1997
THROUGH | DECEMBER 31, 1997 | THROUGH
DECEMBER 31, 1997 | COMBINED | OCTOBER 24, 1997
_________________________________________| __________________| ________________
<S> <C> | <C> | <C>
Variable annuity | |
premiums: | |
Separate account $111.0 | $291.2 | $180.2
Fixed account 60.9 | 318.0 | 257.1
______ | ______ | ______
171.9 | 609.2 | 437.3
Variable life premiums 1.2 | 15.6 | 14.4
______ | ______ | ______
Total premiums $173.1 | $624.8 | $451.7
====== ====== ======
</TABLE>
36
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POST-ACQUISITION COMBINED PRE-ACQUISITION
_________________________________________________________
FOR THE PERIOD | FOR THE YEAR | FOR THE PERIOD
AUGUST 14, 1996 | ENDED | JANUARY 1, 1996
THROUGH | DECEMBER 31, 1996 | THROUGH
DECEMBER 31, 1996 | COMBINED | AUGUST 13, 1996
_________________________________________| __________________| ________________
<S> <C> | <C> | <C>
Variable annuity | |
premiums: | |
Separate account $ 51.0 | $182.4 | $131.4
Fixed account 118.3 | 245.3 | 127.0
______ | ______ | ______
169.3 | 427.7 | 258.4
Variable life premiums 3.6 | 14.1 | 10.5
______ | ______ | ______
Total premiums $172.9 | $441.8 | $268.9
====== ====== =======
</TABLE>
Variable annuity separate account and variable life premiums increased 59.6%
and 10.1%, respectively in 1997. During 1997, stock market returns, a
relatively low interest rate environment and flat yield curve have made
returns provided by variable annuities and mutual funds more attractive than
fixed ratem products such as certificates of deposits and fixed annuities.
The fixed account portion of the Company's variable annuity premiums
increased 29.7% in 1997 due to the Company's marketing emphasis on fixed
rates during the second and third quarters. Premiums, net of reinsurance,
for variable products from six significant broker/dealers for the year
ended December 31, 1997, totaled $445.3 million, or 71% of premiums ($298.0
million or 67% from two significant broker/dealers for the year ended
December 31, 1996).
REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
POST-MERGER COMBINED POST-ACQUISITION
__________________________________________________________
FOR THE PERIOD | FOR THE YEAR| FOR THE PERIOD
OCTOBER 25, 1997 | ENDED| JANUARY 1, 1997
THROUGH | DECEMBER 31, 1997| THROUGH
DECEMBER 31, 1997 | COMBINED| OCTOBER 24, 1997
_________________________________________| _________________| __________________
<S> <C> | <C> | <C>
Annuity and interest | |
sensitive life | |
product charges $3.8 | $22.1 | $18.3
Management fee revenue 0.5 | 2.8 | 2.3
Net investment income 5.1 | 26.8 | 21.7
Realized gains (losses) | |
on investments -- | 0.1 | 0.1
Other income 0.3 | 0.7 | 0.4
____ | _____ | _____
$9.7 | $52.5 | $42.8
==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION COMBINED PRE-ACQUISITION
__________________________________________________________
FOR THE PERIOD | FOR THE YEAR| FOR THE PERIOD
AUGUST 14, 1996 | ENDED| JANUARY 1, 1996
THROUGH | DECEMBER 31, 1996| THROUGH
DECEMBER 31, 1996 | COMBINED| AUGUST 13, 1996
_________________________________________| _________________| __________________
<S> <C> | <C> | <C>
Annuity and interest | |
sensitive life | |
product charges $ 8.8 | $21.0 | $12.2
Management fee revenue 0.9 | 2.3 | 1.4
Net investment income 5.8 | 10.8 | 5.0
Realized gains (losses) | |
on investments -- | (0.4)| (0.4)
Other income 0.5 | 0.6 | 0.1
_____ | _____ | _____
$16.0 | $34.3 | $18.3
===== ===== =====
</TABLE>
37
<PAGE>
<PAGE>
Total revenues increased 53.3%, or $18.2 million, to $52.5 million in 1997.
Annuity and interest sensitive life product charges increased 5.2%, or $1.1
million in 1997 due to additional fees earned from the increasing block of
business under management in the Separate Accounts and an increase in the
surrender charge revenues.
Golden American provides certain managerial and supervisory services to DSI.
The fee paid to Golden American for these services, which is calculated as
a percentage of average assets in the variable separate accounts, was $2.8
million for 1997 and $2.3 million for 1996.
Net investment income increased 148.3%, or $16.0 million, to $26.8 million in
1997 from $10.8 million in 1996 due to growth in invested assets. During
1997, the Company had net realized gains on the disposal of investments,
resulting from voluntary sales, of $0.1 million compared to net realized
losses of $0.4 million in 1996.
EXPENSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
POST-MERGER COMBINED POST-ACQUISITION
_______________________________________________________
FOR THE PERIOD| FOR THE YEAR| FOR THE PERIOD
OCTOBER 25, 1997| ENDED| JANUARY 1, 1997
THROUGH| DECEMBER 31, 1997| THROUGH
DECEMBER 31, 1997| COMBINED| OCTOBER 24, 1997
_________________________________________| _________________| _________________
<S> <C> | <C> | <C>
Insurance benefits | |
and expenses: | |
Annuity and interest | |
sensitive life benefits: | |
Interest credited to | |
account balances $7.4 | $26.7 | $19.3
Benefit claims incurred | |
in excess of account | |
balances -- | 0.1 | 0.1
Underwriting, acquisition | |
and insurance expenses: | |
Commissions 9.4 | 36.3 | 26.9
General expenses 3.4 | 17.3 | 13.9
Insurance taxes 0.5 | 2.3 | 1.8
Policy acquisition costs | |
deferred (13.7)| (42.7)| (29.0)
Amortization: | |
Deferred policy | |
acquisition costs 0.9 | 2.6 | 1.7
Present value of in | |
force acquired 0.9 | 6.1 | 5.2
Goodwill 0.6 | 2.0 | 1.4
____ | _____ | _____
$9.4 | $50.7 | $41.3
==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION COMBINED PRE-ACQUISITION
______________________________________________________
FOR THE PERIOD| FOR THE YEAR| FOR THE PERIOD
AUGUST 14, 1996| ENDED| JANUARY 1, 1996
THROUGH| DECEMBER 31, 1996| THROUGH
DECEMBER 31, 1996| COMBINED| AUGUST 13, 1996
_________________________________________| _________________| _________________
<S> <C> | <C> | <C>
Insurance benefits | |
and expenses: | |
Annuity and interest | |
sensitive life benefits: | |
Interest credited to | |
account balances $ 5.7 | $10.1 | $ 4.4
Benefit claims incurred | |
in excess of account | |
balances 1.3 | 2.2 | 0.9
Underwriting, acquisition | |
and insurance expenses: | |
Commissions 9.9 | 26.5 | 16.6
General expenses 5.9 | 15.3 | 9.4
Insurance taxes 0.7 | 1.9 | 1.2
Policy acquisition costs | |
deferred (11.7)| (31.0)| (19.3)
Amortization: | |
Deferred policy | |
acquisition costs 0.2 | 2.6 | 2.4
Present value of in | |
force acquired 2.7 | 3.7 | 1.0
Goodwill 0.6 | 0.6 | --
_____ | _____ | _____
$15.3 | $31.9 | $16.6
===== ===== =====
</TABLE>
38
<PAGE>
<PAGE>
Total insurance benefits and expenses increased 59.3%, or $18.8 million, in
1997 from $31.9 million in 1996. Interest credited to account balances
increased 164.4%, or $16.6 million, in 1997 as a result of higher account
balances associated with the Company's fixed account option within its
variable products.
Commissions increased 37.3%, or $9.8 million, in 1997 from $26.5 million in
1996. Insurance taxes increased 23.3%, or $0.4 million, in 1997 from $1.9
million in 1996.
General expenses increased 12.6%, or $2.0 million, in 1997 from $15.3 million
in 1996 due in part to certain expenses associated with the merger occurring
on October 24, 1997. This increase in general expenses was partially offset
by reimbursements received from Equitable Life, an affiliate, for certain
advisory, computer and other resources and services provided by Golden
American. Management expects general expenses to continue to increase in
1998 as a result of the emphasis on expanding the salaried wholesaler
distribution network.
During the second quarter of 1997, present value of in force acquired ("PVIF")
was unlocked by $2.3 million to reflect narrower current spreads than the
gross profit model assumed. The Company's deferred policy acquisition costs
("DPAC"), previous balance of PVIF and unearned revenue reserve, as of the
merger date, were eliminated and an asset of $44.3 million representing PVIF
was established for all policies in force at the merger date. The
amortization of PVIF and DPAC increased $2.4 million, or 37.1%, in 1997.
Amortization of goodwill for the year ended December 31, 1997 totaled $2.0
million compared to $0.6 million for the year ended December 31, 1996.
Interest expense on the $25 million surplus note issued December 1996 was $2.0
million for the year ended December 31, 1997. Interest on any line of credit
borrowings was charged at the rate of Equitable of Iowa's monthly average
aggregate cost of short-term funds plus 1.00%. During 1997, the Company paid
$0.6 million to Equitable of Iowa for interest on the line of credit.
NET INCOME. Net income on a combined basis for 1997 was $0.3 million, a
decrease of $3.2 million, or 91.4%, from 1996.
1996 COMPARED TO 1995
The following analysis combines the Post-Acquisition and Pre-Acquisition
activity for 1996 in order to compare the results to 1995. Such a comparison
does not recognize the impact of the purchase accounting and goodwill
amortization except for the period after August 13, 1996.
PREMIUMS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
POST-
ACQUISITION | COMBINED | PRE-ACQUISITION
--------------- | ------------ | ----------------------------
FOR THE PERIOD | FOR THE YEAR |
AUGUST 14, 1996 | ENDED | FOR THE PERIOD FOR THE YEAR
THROUGH | DECEMBER 31, | JANUARY 1,1996 ENDED
DECEMBER 31, | 1996 | THROUGH DECEMBER 31,
1996 | COMBINED | AUGUST 13, 1996 1995
--------------- | ------------ | --------------- ------------
<S> <C> | <C> | <C> <C>
Variable annuity premiums.. $169.3 | $427.7 | $258.4 $110.6
Variable life premiums..... 3.6 | 14.1 | 10.5 5.1
------ | ------ | ------ ------
Total premiums............. $172.9 | $441.8 | $268.9 $115.7
====== | ====== | ====== ======
</TABLE>
39
<PAGE>
<PAGE>
Variable annuity premiums increased 286.4%, or $317.1 million, in 1996, and
variable life premiums increased 176.2%, or $9.0 million, in 1996. During
1995, the fund offerings underlying Golden American's variable products were
improved and a fixed account option was added. These changes and the current
environment have contributed to the significant growth in the Company's
variable annuity premiums from 1995. Premiums, net of reinsurance, for
variable products from two significant sellers for the year ended
December 31, 1996, totaled $298.0 million, or 67% of premiums.
REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
POST-
ACQUISITION | COMBINED | PRE-ACQUISITION
--------------- | ------------ | ----------------------------
FOR THE PERIOD | FOR THE YEAR |
AUGUST 14, 1996 | ENDED | FOR THE PERIOD FOR THE YEAR
THROUGH | DECEMBER 31, | JANUARY 1, 1996 ENDED
DECEMBER 31, | 1996 | THROUGH DECEMBER 31,
1996 | COMBINED | AUGUST 13, 1996 1995
--------------- | ------------ | --------------- ------------
<S> <C> <C> <C> <C>
Annuity and interest | |
sensitive life product | |
charges................ $ 8.8 | $21.0 | $12.2 $18.4
Management fee revenue.. 0.9 | 2.3 | 1.4 1.0
Net investment income... 5.8 | 10.8 | 5.0 2.8
Realized gains (losses) | |
on investments......... -- | (0.4) | (0.4) 0.3
Other income............ 0.5 | 0.6 | 0.1 0.1
----- | ----- | ---- ----
$16.0 | $34.3 | $18.3 $22.6
===== | ===== | ==== =====
</TABLE>
Total revenues increased 51.9%, or $11.7 million, to $34.3 million in 1996.
Annuity and interest sensitive life product charges increased 14.4%, or $2.6
million in 1996. The increase is due to additional fees earned from the
increasing block of business under management in the Separate Accounts and an
increase in surrender charge revenues partially offset by a decrease
in the revenue recognition of net distribution fees.
Golden American provides certain managerial and supervisory services to DSI.
The fee for these services, which is calculated as a percentage of average
assets in the variable separate accounts, was $2.3 million for 1996
and $1.0 million for 1995.
Net investment income increased 282.7%, or $8.0 million, to $10.8 million in
1996 from $2.8 million in 1995. This increase resulted from growth in invested
assets. During 1996, the Company had realized losses on the disposal of
investments, resulting from voluntary sales, of $0.4 million compared
to realized gains of $0.3 million in 1995.
40
<PAGE>
<PAGE>
EXPENSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
POST-
ACQUISITION | COMBINED | PRE-ACQUISITION
--------------- | ------------ | -----------------------------
FOR THE PERIOD | FOR THE YEAR | FOR THE PERIOD
AUGUST 14, 1996 | ENDED | JANUARY 1, 1996 FOR THE YEAR
THROUGH | DECEMBER 31, | THROUGH ENDED
DECEMBER 31, | 1996 | AUGUST 13, DECEMBER 31,
1996 | COMBINED | 1996 1995
--------------- | ------------ | --------------- -------------
<S> <C> <C> <C> <C>
Insurance benefits and expenses: | |
Annuity and interest sensitive | |
life benefits: | |
Interest credited to account balances.... $ 5.7 | $10.1 | $ 4.4 $ 1.3
Benefit claims incurred in excess of | |
account balances....................... 1.3 | 2.2 | 0.9 1.8
Underwriting, acquisition, and insurance | |
expenses: | |
Commissions.............................. 9.9 | 26.5 | 16.6 8.0
General expenses......................... 5.9 | 15.3 | 9.4 12.7
Insurance taxes.......................... 0.7 | 1.9 | 1.2 0.9
Policy acquisition costs deferred........ (11.7) | (31.0) | (19.3) (9.8)
Amortization: | |
Deferred policy acquisition costs....... 0.2 | 2.6 | 2.4 2.7
Present value of in force acquired...... 2.7 | 3.7 | 1.0 1.6
Goodwill................................ 0.6 | 0.6 | -- --
------ | ------ | ------ -----
$15.3 | $31.9 | $16.6 $19.2
====== ====== ====== =====
</TABLE>
Total insurance benefits and expenses increased 66.1%, or $12.7 million, in
1996 from $19.2 million in 1995. Interest credited to account balances
increased 663.6%, or $8.8 million, in 1996 as a result of higher account
balances associated with the Company's fixed account option within its
variable products. Benefit claims incurred in excess of account balances
increased 19.4%, or $0.4 million, in 1996 from $1.8 million in 1995.
Commissions increased 230.9%, or $18.5 million, in 1996 from $8.0 million in
1995. Insurance taxes increased 99.3%, or $1.0 million, in 1996 from $1.0
million in 1995.
General expenses increased 21.2%, or $2.6 million, in 1996 from $12.7 million
in 1995.
The Company's deferred policy acquisition costs ("DPAC"), previous balance of
present value of in force acquired ("PVIF") and unearned revenue reserve, as
of the purchase date, were eliminated and an asset of $85.8 million
representing the PVIF was established for all policies in force at the
acquisition date.
Amortization of goodwill during the period from the acquisition date to
December 31, 1996 totaled $0.6 million. Goodwill resulting from the
acquisition was being amortized on a straight-line basis over 25 years.
Net income on a combined basis for 1996 was $3.5 million, an increase of $0.2
million, or 5.5%, from 1995.
FINANCIAL CONDITION
RATINGS. During 1997, the Company's ratings were upgraded by A.M. Best
from A to A+ and by Duff & Phelps from AA to AA+.
41
<PAGE>
<PAGE>
INVESTMENTS. The financial statement carrying value of the Company's total
investment portfolio grew 39.6% in the first nine months of 1998. The
amortized cost basis of the Company's total investment portfolio grew 39.0%
during the same period. The financial statement carrying value and
amortized cost basis of the Company's total investments each increased
65.1% in 1997. All of the Company's investments, other than mortgage loans,
are carried at fair value in the Company's financial statements. As such,
growth in the carrying value of the Company's investment portfolio included
changes in unrealized appreciation and depreciation of fixed maturity and
equity securities as well as growth in the cost basis of these securities.
Growth in the cost basis of the Company's investment portfolio resulted from
the investment of premiums from the sale of the Company's fixed account
option. The Company manages the growth of its insurance operations in order
to maintain adequate capital ratios.
To support the fixed account option of the Company's variable insurance
products, cash flow was invested primarily in fixed maturity and equity
securities and mortgage loans. At September 30, 1998, the Company's
investment portfolio at amortized cost was $722.4 million with a yield of 7.1%
and carrying value of $726.4 million. At December 31, 1997, the Company's
investment portfolio at amortized cost was $519.6 million with a yield of 6.7%
and carrying value of $520.2 million.
Fixed Maturity Securities: At September 30, 1998 the Company had fixed
maturities with an amortized cost of $610.3 million and an estimated fair
value of $618.7 million. At December 31, 1997, the Company had fixed
maturities with an amortized cost of $413.3 million and an estimated fair
value of $414.4 million. The individual securities in the Company's fixed
maturities portfolio (at amortized cost) include investment grade securities
($471.5 million or 77.3% at September 30, 1998, and $368.0 million or 89.1%
at December 31, 1997), which include securities issued by the U.S.
Government, its agencies and corporations that are rated at least BBB- by
Standard & Poor's Rating Services, a Division of the McGraw Hill Cos., Inc.
("Standard & Poor's"), and below investment grade securities ($47.2 million
or 7.7% at September 30, 1998, and $41.4 million or 10.0% at December 31,
1997), which are securities issued by corporations that are rated BB+ to B-
by Standard & Poor's. Securities not rated by Standard & Poor's had a
National Association of Insurance Commissioners ("NAIC") rating of 1, 2 or 3
($90.5 million or 14.8%) or a rating of 4 ($1.1 million or 0.2%) at
September 30, 1998, and 1, 3 or 4 ($3.9 million or 0.9%) at
December 31, 1997.
The Company classifies 100% of its securities as available for sale. On
September 30, 1998, fixed income securities with an amortized cost of
$610.3 million and an estimated fair value of $618.7 million were designated
as available for sale, and on December 31, 1997, fixed income securities with
an amortized cost of $413.3 million and an estimated fair value of $414.4
million were designated as available for sale. At September 30, 1998, and
December 31, 1997, net unrealized appreciation of fixed maturity securities
of $8.4 million and $1.1 million, respectively, was comprised of gross
appreciation of $11.3 million and $1.4 million, respectively, and gross
depreciation of $2.9 million and $0.3 million, respectively. Net unrealized
holding gains on these securities, net of adjustments to DPAC, PVIF and
deferred income taxes, increased stockholder's equity by $3.7 million at
September 30, 1998, and $0.6 million at December 31, 1997.
The Company began investing in below investment grade securities during
1996. At September 30, 1998, and December 31, 1997 the amortized cost
value of the Company's total investment in below investment grade securities
was $55.1 million and $41.4 million, or 7.6% and 8.0%, respectively, of the
Company's investment portfolio. The Company intends to purchase additional
below investment grade securities, but it does not expect the percentage of
its portfolio invested in such securities to exceed 10% of its investment
portfolio. At September 30, 1998, and December 31, 1997, the yield at
amortized cost on the Company's below investment grade portfolio was 8.0%
compared to 6.4%, respectively, and 7.9% compared to 6.3%, respectively,
for the Company's investment grade corporate bond portfolio. The Company
estimates the fair value of its below investment grade portfolio was
$53.8 million, or 97.5% of amortized cost value, at September 30, 1998,
and $41.3 million, or 99.9% of amortized cost value, at December 31, 1997.
Below investment grade securities have different characteristics than
investment grade corporate debt securities. Risk of loss upon default by the
borrower is significantly greater with respect to below investment grade
securities than with other corporate debt securities. Below investment grade
securities are generally unsecured and are often subordinated to other
creditors of the issuer. Also, issuers of below investment grade
securities usually
42
<PAGE>
<PAGE>
have higher levels of debt and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are issuers
of investment grade securities. The Company attempts to reduce the overall
risk in its below investment grade portfolio, as in all of its investments,
through careful credit analysis, strict investment policy guidelines, and
diversification by company and by industry.
The Company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability to
realize its carrying value on any investment has been impaired. For debt
and equity securities, if impairment in value is determined to be other than
temporary (i.e. if it is probable that the Company will be unable to collect
all amounts due according to the contractual terms of the security), the
cost basis of the impaired security is written down to fair value, which
becomes the security's new cost basis. The amount of the write-down is
included in earnings as a realized loss. Future events may occur, or
additional or updated information may be received, which may necessitate
future write-downs of securities in the Company's portfolio. Significant
write-downs in the carrying value of investments could materially adversely
affect the Company's net income in future periods.
During the first nine months of 1998, and during 1997, fixed maturity
securities designated as available for sale with a combined amortized cost
of $91.2 and $49.3 million, respectively, were called or repaid by their
issuers. In total, net pre-tax gains from sales, calls and repayments of
fixed maturity investments amounted to $0.5 million for the first nine
months of 1998, and $0.2 million for the year ended December 31, 1997.
At September 30, 1998, and December 31, 1997 no fixed maturity securities
were deemed to have impairments in value that are other than temporary. The
Company's fixed maturity investment portfolio had a combined yield at
amortized cost of 6.7% at September 30, 1998, and 6.7% at December 31, 1997.
Equity Securities: At September 30, 1998, and December 31, 1997, the
Company owned equity securities with a cost of $14.4 million and $4.4
million, respectively, and an estimated fair value of $10.1 million and
$3.9 million, respectively. At September 30, 1998, net unrealized
depreciation of equity securities of $4.3 million was comprised
entirely of gross depreciation. At December 31, 1997 gross unrealized
depreciation of equity securities totaled $0.5 million. Equity
securities are comprised primarily of the Company's investment in
shares of the mutual funds underlying the Company's registered separate
accounts.
Mortgage Loans: Mortgage loans represented 13.5% at September 30, 1998,
and 16.4% at December 31, 1997, of the Company's investment portfolio
at amoritized cost. Mortgages outstanding were $98.0 million and $85.1
million at September 30, 1998, and December 31, 1997, respectively, with an
estimated fair value of $101.9 million and $86.3 million, respectively. At
September 30, 1998, the Company's mortgage loan portfolio included 57 loans
with an average size of $1.7 million and average seasoning of 0.9 years if
weighted by the number of loans. At December 31, 1997, the Company's
mortgage loan portfolio included 50 loans with an average size of $1.7
million and average seasoning of 1.1 years if weighted by the number of
loans, and 1.2 years if weighted by mortgage loan carrying value. The
Company's mortgage loans are typically secured by occupied buildings in
major metropolitan locations and not speculative developments, and are
diversified by type of property and geographic location. At
September 30, 1998, and December 31, 1997, the yield on
the Company's mortgage loan portfolio was 7.3% and 7.4%, respectively.
At September 30, 1998, and December 31, 1997 no mortgage loans were
delinquent by 90 days or more. The Company's loan investment strategy
is consistent with other life insurance subsidiaries of EIC. EIC's
insurance subsidiaries have experienced an historically low default
rate in their mortgage loan portfolio and have been able to recover 95.9%
of the principal amount of problem mortgages resolved in the last three
years ended December 31, 1997.
At September 30, 1998, and December 31, 1997, the Company had no investments
in default. The Company estimates its total investment portfolio, excluding
policy loans, had a fair value approximately equal to 101.1% and 100.4% of
its amortized cost value for accounting purposes at September 30, 1998, and
December 31, 1997, respectively.
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OTHER ASSETS. Accrued investment income increased $3.0 million during the
first nine months of 1998, and $2.3 million during 1997, due to an increase
in the overall size of the portfolio resulting from the investment of
premiums allocated to the fixed account option of the Company's variable
products.
DPAC represents certain deferred costs of acquiring new insurance
business, principally commissions and other expenses related to the
production of new business subsequent to the merger. The Company's
DPAC and previous balance of PVIF, were eliminated as of the merger and
acquisition dates, and an asset representing PVIF was established for
all policies in force at the merger and acquisition dates. PVIF is
amortized into income in proportion to the expected gross profits of
the in force acquired in a manner similar to DPAC amortization. Any
expenses which vary with the sales of the Company's products are
deferred and amortized. At September 30, 1998, the Company had DPAC and
PVIF balances of $140.8 million and $36.5 million, respectively. At December
31, 1997, the Company had DPAC and PVIF balances of $12.8 million and $43.2
million, respectively. During the third quarter of 1998, PVIF was unlocked by
$0.8 million to reflect changes in the assumptions related to the timing of
future gross profits. PVIF decreased $2.7 million in the second
quarter of 1998 for an adjustment to the value of other receivables and
increased $0.2 million in the first quarter of 1998 for an adjustment
made to the merger costs. During the second quarter of 1997, PVIF was
unlocked by $2.3 million to reflect narrower current spreads than the gross
profit model assumed.
Goodwill totaling $151.1 million and $41.1 million as adjusted, representing
the excess of the acquisition cost over the fair value of net assets acquired,
was established at the merger and acquisition dates, respectively. At
June 30, 1997, goodwill was increased by $1.8 million to adjust the value of
a receivable existing at the acquisition date. Amortization of goodwill
through September 30, 1998 was $2.8 million.
At September 30, 1998 the Company had $2.6 billion of separate account assets
compared to $1.6 billion at December 31, 1997, and 1.2 billion at December 31,
1996. The increase in separate account assets during the first nine months of
1998 is due to growth in sales of the Company's variable annuity products, net
of redemptions and market depreciation.
At September 30, 1998 the Company had total assets of $3.8 billion, a 54.4%
increase from the December 31, 1997 total asset amount of $2.4 billion. The
1997 total asset amount was a 45.8% increase over total assets at December 31,
1996.
LIABILITIES. In conjunction with the volume of variable insurance sales, the
Company's total liabilities increased $1.3 billion, or 56.4%, during the first
nine months of 1998 and totaled $3.5 billion at September 30, 1998. For 1997
liabilities increased $681.1 million, or 44.3%, and totaled $2.2 billion at
December 31, 1997. Future policy benefits for annuity and interest sensitive
life products increased $200.4 million, or 39.7%, to $705.7 million during the
first nine months of 1998 and $220.0 million, or 77.1%, to $505.3 million at
December 31, 1997, reflecting premium growth in the Company's fixed account
option of its variable products. Premium growth net of redemptions, and
market depreciation accounted for the $983.2 million, or 59.7%, increase in
separate account liabilities to $2.6 billion at September 30, 1998. At
December 31, 1997, separate account liabilities increased $438.9 million, or
36.4%, to $1.6 billion from December 31, 1996. As of the merger and
acquisition dates, the Company's existing unearned revenue reserves were
eliminated. This treatment corresponds with the treatment of PVIF.
Golden American maintains a reciprocal loan agreement with ING AIH, a Delaware
corporation and an affiliate of EIC, to facilitate the handling of unusual
and/or unanticipated short-term cash requirements. Under this agreement,
which became effective January 1, 1998, and expires on December 31, 2007,
Golden American and ING AIH can borrow up to $65 million from one another.
Prior to lending funds to ING AIH, Golden American must obtain approval from
the State of Delaware Department of Insurance. At September 30, 1998, $40.0
million was payable to ING AIH under this agreement.
Golden American maintained a line of credit agreement with Equitable of
Iowa to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Under the agreement, which became effective
December 1, 1996 and expired on December 31, 1997, Golden American could
borrow up to $25 million. At December 31, 1997, $24.1 million was
outstanding under this agreement. The outstanding balance was repaid by
a capital contribution.
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On December 17, 1996, Golden American issued a $25 million, 8.25% surplus
note to Equitable of Iowa which matures on December 17, 2026. As a result
of the merger, the surplus note is now payable to EIC.
To enhance short-term liquidity, the Company has established a revolving
note payable effective July 27, 1998, and expiring July 31, 1999, with
SunTrust Bank, Atlanta (the "Bank"). The note was approved by Golden
American's and First Golden's boards of directors on August 5, 1998 and
September 29, 1998, respectively. The total amount the Company may have
outstanding is $85 million, of which Golden American and First Golden have
individual credit sublimits of $75 million and $10 million, respectively.
The terms of the agreement require the Company to maintain the minimum
level of Company Action Level Risk Based Capital as established by
applicable law or regulation. At September 30, 1998, $20.1 million was
payable to the Bank under this note by Golden American.
Other liabilities increased $29.1 million from $17.3 million at December 31,
1997, due primarily to a payable on investments at September 30, 1998.
Equity. Additional paid-in capital increased $87.6 million, or 63.8%, from
December 31, 1996 to $225.0 million at December 31, 1997 primarily due to the
revaluation of net assets as a result of the merger.
The effects of inflation and changing prices on the Company are not material
since insurance assets and liabilities are both primarily monetary and remain
in balance. An effect of inflation, which has been low in recent years, is a
decline in purchasing power when monetary assets exceed monetary liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met by cash flow from variable
insurance premiums, investment income and maturities of fixed maturity
investments, mortgage loans and short term investments. The Company
primarily uses funds for the payment of insurance benefits, commissions,
operating expenses and the purchase of new investments.
The Company's home office operations are currently housed in leased locations
in Wilmington, Delaware, various locations in Pennsylvania, and New York,
New York. The office space in Pennsylvania is being leased on a short term
basis for use in the transition to a new office building. The Company has
entered into agreements with a developer to develop and lease a 65,000 square
foot office building to house the Company's operations, except for New York.
The Company expects to spend approximately $2.9 million on capital needs
during the remainder of 1998.
The Company intends to continue expanding its operations. Future growth in
the Company's operations will require additional capital. The Company
believes it will be able to fund the capital required for projected new
business primarily with future capital contributions from its Parent. It
is ING's policy to ensure adequate capital and surplus is provided for the
Company and, if necessary, additional funds will be contributed in 1998.
During the first nine months of 1998, Golden American received capital
contributions from EIC of $72.5 million. On November 12, 1998, Golden
American received an additional $50 million capital contribution from EIC.
The ability of Golden American to pay dividends to its Parent is restricted
because prior approval of insurance regulatory authorities is required for
payment of dividends to the stockholder which exceed an annual limitation.
During the remainder of 1998, Golden American cannot pay dividends to its
Parent without prior approval of statutory authorities. The Company has
maintained adequate statutory capital and surplus and has not used surplus
relief or financial reinsurance.
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholder unless a notice of
its intention to declare a dividend and amount of the dividend has been filed
not less than thirty days in advance of the proposed declaration. The
superintendent may disapprove the distribution by giving written notice to
First Golden within thirty days after the filing should the superintendent
find that the financial condition of First Golden does not warrant the
distribution.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify
inadequately capitalized insurance companies based upon the type and
mixture of risks inherent in the Company's
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operations. The formula includes components for asset risk, liability risk,
interest rate exposure and other factors. At December 31, 1997, the Company
had complied with the NAIC's risk-based capital reporting requirements.
Amounts reported indicate that the Company has total adjusted capital well
above all required capital levels.
Reinsurance: At September 30, 1998, Golden American had reinsurance treaties
with four unaffiliated reinsurers and one affiliated reinsurer covering a
significant portion of the mortality risks under its variable contracts.
Golden American remains liable to the extent its reinsurers do not meet
their obligations under the reinsurance agreements.
Year 2000 Project: Based on a 1997 study of its computer software and
hardware, the Company has determined its exposure to the Year 2000 change of
the century date issue. Some of the Company's computer programs were
originally written using two digits rather than four to define a particular
year. As a result, these computer programs contain "time sensitive"
software that may recognize "00" as the year 1900 rather than the year 2000,
which could cause system failure or miscalculations resulting in disruptions
to operations. These disruptions could include, but are not limited to, a
temporary inability to record transactions.
The Company has identified one system and some desktop software that will
have date problems. All systems will be upgraded in the fourth quarter of
1998. To a lesser extent, the Company depends on various non-information
technology systems, such as telephone switches, which could also fail or
misfunction as a result of the Year 2000.
The Company has developed a plan to address the Year 2000 issue in a timely
manner. The following schedule details the plan's phases, progress towards
completion and actual or estimated completion dates:
% COMPLETE AS OF ACTUAL/ESTIMATED
PHASES SEPTEMBER 30, 1998 COMPLETION DATES
_______________________________________ __________________ ________________
ASSESSMENT AND DEVELOPMENT of the steps
to be taken to address Year 2000
systems issues 100% 12/31/97
IMPLEMENTATION of steps to address Year
2000 systems issues 76-99% 12/31/98
IMPLEMENTATION of steps to address
Year 2000 desktop software issues 76-99% 12/31/98
TESTING of systems 26-50% 12/31/98
POINT-TO-POINT TESTING of external
interfaces with third party computer
systems that communicate with Company
systems 1-25% 12/31/98
IMPLEMENTATION of tested software
addressing Year 2000 systems issues 51-75% 12/31/98
CONTINGENCY PLAN 1-25% 03/31/99
In addition, the Company's operations could be adversely affected if
significant customers, suppliers and other third parties would be unable to
transact business in the Year 2000 and thereafter. To mitigate the effect of
outside influences and other dependencies relative to the Year 2000, the
Company has identified and contacted these third parties who have assured the
Company that necessary steps are being taken to prepare for the Year 2000.
Management believes the Company's systems are or will be substantially
compliant by Year 2000. Golden American has charged to expense approximately
$140,000 in the first nine months of 1998 related to the Year 2000 project.
The Company anticipates charging to expense an additional $180,000 to
$195,000 in 1998 which
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includes upgrade and internal resources costs. Management expects some
internal resources will be utilized in early 1999 to finalize the
contingency plan.
Despite the Company's efforts to modify or replace "time sensitive" computer
and information systems, the Company could experience a disruption to its
operations as a result of the Year 2000. The Company is currently developing
a contingency plan to address any systems that may malfunction despite the
testing being performed. The contingency plan, which is expected to be
completed by March 31, 1999, will provide for the availability of staff,
prioritize tasks and outline procedures to fix any malfunctioning systems.
The costs and completion date of the Year 2000 project are based on
management's best estimates. These estimates were derived using numerous
assumptions of future events, including the continued availability of
resources, third party Year 2000 compliance and other factors. There is no
guarantee these estimates will be achieved and actual results could
materially differ from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of trained personnel, the ability to locate and correct all relevant
computer codes and other uncertainties.
Surplus Note: On December 17, 1996, Golden American issued a surplus note in
the amount of $25 million to Equitable of Iowa. The note matures on December
17, 2026, and accrues interest of 8.25% per annum until paid. The note and
accrued interest thereon shall be subordinate to payments due to policyholders,
claimant and beneficiary claims, as well as debts owed to all other classes of
debtors of Golden American. Any payment of principal made shall be subject to
the prior approval of the Delaware Insurance Commissioner. On December 17,
1996, Golden American contributed the $25 million to First Golden acquiring
200,000 shares of common stock (100% of shares outstanding) of First Golden.
As a result of the merger, the surplus note is now payable to EIC.
Reciprocal Loan Agreement: Golden American maintains a reciprocal loan
agreement with ING AIH to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Under this agreement, which
became effective January 1, 1998, and expires on December 31, 2007, Golden
American and ING AIH can borrow up to $65 million from one another. Prior
to lending funds to ING AIH, Golden American must obtain approval from the
State of Delaware Department of Insurance. At September 30, 1998, $40.0
million was payable to ING AIH under this agreement.
Revolving Note Payable: To enhance short-term liquidity, the Company has
established a revolving note payable effective July 27, 1998, and expiring
July 31, 1999, with SunTrust Bank, Atlanta (the "Bank"). The note was
approved by Golden American's and First Golden's boards of directors on
August 5, 1998 and September 29, 1998, respectively. The total amount the
Company may have outstanding is $85 million, of which Golden American and
First Golden have individual credit sublimits of $75 million and $10
million, respectively. The note accrues interest at an annual rate equal
to: (1) the cost of funds for the Bank for the period applicable for the
advance plus 0.25% or (2) a rate quoted by the Bank to the Company for the
advance. The terms of the agreement require the Company to maintain the
minimum level of Company Action Level Based Capital as established by
applicable state law or regulation. At September 30, 1998, $20.1 million
was payable to the Bank under this note by Golden American.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or written
statement by the Company or any of its officers, directors or employees is
qualified by the fact that actual results of the Company may differ materially
from such statement, among other risks and uncertainties inherent in the
Company's business due to the following important factors:
(1) Prevailing interest rate levels and stock market performance
which may affect the ability of the Company to sell its products,
the market value and liquidity of the Company's investments and the
lapse rate of the Company's policies, notwithstanding product design
features intended to enhance persistency of the Company's products.
(2) Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the Company's products.
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(3) Changes in the regulation of financial services, including bank
sales and underwriting of insurance products, which may affect
the competitive environment for the Company's products.
(4) Increasing competition in the sale of the Company's products.
(5) Other factors affecting the performance of the Company, including,
but not limited to, market conduct claims, litigation, insurance
industry insolvencies, investment performance of the underlying
portfolios of the variable products, variable product design and
sales volume by significant sellers of the Company's variable products.
(6) To the extent third parties are unable to transact business in the
Year 2000 and thereafter, the Company's operations could be adversely
affected.
OTHER INFORMATION
SEGMENT INFORMATION. During the period since the acquisition by Bankers
Trust, September 30, 1992 to date of this Prospectus, Golden American's
operations consisted of one business segment, the sale of annuity and life
insurance products. Golden American and its affiliate DSI are party to in
excess of 140 sales agreements with broker-dealers, three of whom, Locust
Street Securities, Inc., Vestax Securities Corporation, and Multi-Financial
Securities Corporation, are affiliates of Golden American. Four
broker-dealers, including Locust Street Securities, Inc., are currently
responsible for more than two-thirds of Golden American's product sales
revenues.
REINSURANCE. Golden American reinsures a significant portion of its mortality
risk associated with the Contract's guaranteed death benefit with one or more
appropriately licensed insurance companies. Golden American also, effective
September 1, 1994, entered into a reinsurance agreement on a modified
coinsurance basis with an affiliate of a broker-dealer which distributes
Golden American's products with respect to 25% of the Golden American business
produced by that broker-dealer.
RESERVES. In accordance with the life insurance laws and regulations under
which Golden American operates, it is obligated to carry on its books, as
liabilities, actuarially determined reserves to meet its obligations on
outstanding Contracts. Reserves, based on valuation mortality tables in
general use in the United States, where applicable, are computed to equal
amounts which, together with interest on such reserves computed annually
at certain assumed rates, make adequate provision according to presently
accepted actuarial standards of practice, for the anticipated cash flows
required by the contractual obligations and related expenses of Golden
American.
COMPETITION. Golden American is engaged in a business that is highly
competitive because of the large number of stock and mutual life
insurance companies and other entities marketing insurance products
comparable to those of Golden American. There are approximately 2,350
stock, mutual and other types of insurers in the life insurance
business in the United States, a substantial number of which are
significantly larger than Golden American.
SERVICE AGREEMENTS. Beginning in 1994 and continuing until August 13,
1996, Bankers Trust (Delaware), a subsidiary of Bankers Trust New York
Corporation ("BT New York Corporation"), and Golden American became
parties to a service agreement pursuant to which Bankers Trust
(Delaware) agreed to provide certain accounting, actuarial, tax,
underwriting, sales, management and other services to Golden American.
Expenses incurred by Bankers Trust (Delaware) in relation to this
service agreement were reimbursed by Golden American on an allocated
cost basis. Charges billed to Golden American by Bankers Trust
(Delaware) pursuant to the service agreement for 1996 through its
termination as of August 13, 1996 and 1995 were $0.5 million and $0.8
million, respectively.
Pursuant to a service agreement between Golden American and Equitable
Life, Equitable Life provides certain administrative, financial and
other services to Golden American.
Golden American provides to DSI certain of its personnel to perform
management, administrative and clerical services and the use of certain
facilities. Golden American charges DSI for such expenses and all other
general
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and administrative costs, first on the basis of direct charges
when identifiable, and the remainder allocated based on the estimated
amount of time spent by Golden American's employees on behalf of DSI.
In the opinion of management, this method of cost allocation is
reasonable. In 1995, the service agreement between DSI and Golden
American was amended to provide for a management fee from DSI to Golden
American for managerial and supervisory services provided by Golden
American. This fee, calculated as a percentage of average assets in
the variable separate accounts, was $2.8 million, $2.3 million and $1.0
million for the years of 1997, 1996 and 1995, respectively.
DISTRIBUTION AGREEMENT. Under a distribution agreement, DSI acts as
the principal underwriter (as defined in the Securities Act of 1933 and
the Investment Company Act of 1940, as amended) of the variable insurance
products issued by Golden American. For the years 1997, 1996 and 1995,
commissions paid by Golden American to DSI aggregated $36.4 million, $27.1
million and $8.4 million, respectively.
EMPLOYEES. Golden American, as a result of its Service Agreement with
Bankers Trust (Delaware) and EIC Variable, Inc., had very few direct
employees. Instead, various management services were provided by Bankers
Trust (Delaware), EIC Variable, Inc., and Bankers Trust New York
Corporation, as described above under "Service Agreement." The cost of
these services were allocated to Golden American. Since August 14, 1996,
Golden American has looked to Equitable of Iowa and its affiliates for
management services.
Certain officers of Golden American are also officers of DSI, and their
salaries are allocated among both companies. Certain officers of Golden
American are also officers of other Equitable of Iowa subsidiaries. See
"Directors and Executive Officers."
PROPERTIES. Golden American's principal office is located at 1001 Jefferson
Street, Suite 400, Wilmington, Delaware 19801, where all of Golden American's
records are maintained. This office space is leased.
STATE REGULATION. Golden American is subject to the laws of the State
of Delaware governing insurance companies and to the regulations of the
Delaware Insurance Department (the "Insurance Department"). A detailed
financial statement in the prescribed form (the "Annual Statement") is
filed with the Insurance Department each year covering Golden American's
operations for the preceding year and its financial condition as of the
end of that year. Regulation by the Insurance Department includes periodic
examination to determine contract liabilities and reserves so that the
Insurance Department may certify that these items are correct. Golden
American's books and accounts are subject to review by the Insurance
Department at all times. A full examination of Golden American's operations
is conducted periodically by the Insurance Department and under the auspices
of the NAIC.
In addition, Golden American is subject to regulation under the
insurance laws of all jurisdictions in which it operates. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to various matters, including
licensing to transact business, overseeing trade practices, licensing
agents, approving contract forms, establishing reserve requirements,
fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the
form and content of required financial statements and regulating the
type and amounts of investments permitted. Golden American is required
to file the Annual Statement with supervisory agencies in each of the
jurisdictions in which it does business, and its operations and
accounts are subject to examination by these agencies at regular
intervals.
The NAIC has adopted several regulatory initiatives designed to
improve the surveillance and financial analysis regarding the solvency
of insurance companies in general. These initiatives include the
development and implementation of a risk-based capital formula for
determining adequate levels of capital and surplus. Insurance
companies are required to calculate their risk-based capital in
accordance with this formula and to include the results in their Annual
Statement. It is anticipated that these standards will have no
significant effect upon Golden American. For additional information
about the Risk-Based Capital adequacy monitoring system and Golden
American, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
In addition, many states regulate affiliated groups of insurers, such
as Golden American, and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
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payments from insurance subsidiaries may be subject to prior
notice or approval, depending on the size of the transfers and payments
in relation to the financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing
business therein can be assessed (up to prescribed limits) for contract
owner losses incurred by other insurance companies which have become
insolvent. Most of these laws provide that an assessment may be
excused or deferred if it would threaten an insurer's own financial
strength. For information regarding Golden American's estimated
liability for future guaranty fund assessments, see Note 10 of Notes to
Financial Statements.
Although the federal government generally does not directly regulate
the business of insurance, federal initiatives often have an impact on
the business in a variety of ways. Certain insurance products of
Golden American are subject to various federal securities laws and
regulations. In addition, current and proposed federal measures which
may significantly affect the insurance business include regulation of
insurance company solvency, employee benefit regulation, removal of
barriers preventing banks from engaging in the insurance business, tax
law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative
desirability of various personal investment vehicles.
DIRECTORS AND EXECUTIVE OFFICERS
Name (Age) Position(s) with the Company
- ------------------------- -------------------------------------------
Barnett Chernow (49) President and Director
Myles R. Tashman (56) Director, Executive Vice President, General
Counsel and Secretary
Frederick S. Hubbell (47) Director and Chairman
Paul E. Larson (45) Director
James R. McInnis (50) Executive Vice President
Stephen J. Preston (41) Executive Vice President and Chief Actuary
E. Robert Koster (40) Senior Vice President and Chief Financial
Officer
Patricia M. Corbett (33) Treasurer
David L. Jacobson (49) Senior Vice President and Assistant Secretary
William B. Lowe (34) Senior Vice President
Edward M. Syring, Jr. (60) Senior Vice President
Ronald R. Blasdell (45) Senior Vice President
Steven G. Mandel (39) Senior Vice President
Beth B. Neppl (41) Director
Each director is elected to serve for one year or until the next annual
meeting of shareholders or until his or her successor is elected. Some
directors are directors of insurance company subsidiaries of Golden
American's parent, Equitable of Iowa. The principal positions of
Golden American's directors and senior executive officers for the past
five years are listed below:
Mr. Barnett Chernow became President and Director of Golden American
Life Insurance Company ("Golden American") and President of First
Golden American Life Insurance Company of New York ("First Golden") in
April, 1998. From 1993 to 1998, Mr. Chernow served as Executive Vice
President of Golden American. He was elected to serve as Executive
Vice President and Director of First Golden in September, 1996. From 1977
through 1993, he held various positions with Reliance Insurance
Companies and was Senior Vice President and Chief Financial Officer of
United Pacific Life Insurance Company from 1984 through 1993.
Mr. Myles R. Tashman joined Golden American in August, 1994 as Senior
Vice President and was named Executive Vice President, General Counsel
and Secretary effective January 1, 1996. He was elected to serve as a
director of Golden American in January, 1998. From 1986 through 1993,
he was Senior Vice President and General Counsel of United Pacific Life
Insurance Company.
Mr. Frederick S. Hubbell is a Director of Golden American since August,
1996 and Chairman since September, 1996. He also serves as a Director
and Chairman of First Golden, having been first appointed as a Director
in December, 1997 and as Chairman in April, 1998. He was appointed
General Manager of ING Financial Services
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International, North America, in October, 1997 and General Manager,
President and Chief Executive Officer of ING US life and annuities
companies in April 1998. Mr. Hubbell served as Chairman, President and
Chief Executive Officer of Equitable of Iowa from 1991 until October, 1997.
He also has served as Chairman and President of Equitable Life Insurance
Company of Iowa from 1987 until October, 1997.
Mr. Paul E. Larson joined Equitable of Iowa in 1977 and is currently
President of Equitable Life. He was elected to serve as a director of
Golden American in August, 1996. He also served as Executive Vice
President, CFO, and Assistant Secretary of Golden American from
December, 1996 through December, 1997.
Mr. James R. McInnis joined Golden American in December, 1997 as
Executive Vice President. From 1982 through November, 1997, he was with
the Endeavor Group and was President upon leaving.
Mr. E. Robert Koster was elected Senior Vice President and Chief
Financial Officer of Golden American in September, 1998. From August,
1984 to September, 1998 he has held various positions with ING
companies in The Netherlands.
Ms. Patricia M. Corbett was elected Treasurer of Golden American in
December, 1998. She joined Equitable Life in 1987 and is currently
Treasurer and Assistant Vice President of Equitable Life and
USG Annuity & Life Company.
Mr. David L. Jacobson joined Golden American in November, 1993 as
Senior Vice President and Assistant Secretary. From April, 1974
through November, 1993, he held various positions with United
Pacific Life Insurance Company and was Vice President upon leaving.
Mr. Stephen J. Preston joined Golden American in December, 1993 as
Senior Vice President, Chief Actuary and Controller. He currently
serves as Executive Vice President and Chief Actuary. From September,
1993 through November, 1993, he was Senior Vice President and Actuary
for Mutual of America Insurance Company. From July, 1987 through
August, 1993, he held various positions with United Pacific Life
Insurance Company and was Vice President and Actuary upon leaving.
Mr. William B. Lowe joined Equitable Life as Vice President, Sales &
Marketing in January, 1994. He became a Senior Vice President, Sales &
Marketing, of Golden American in August, 1997. He was also President of
Equitable of Iowa Securities Network, Inc. until October, 1998. Prior
to joining Equitable Life, he was an Associate Vice President of
Lincoln Benefit Life from July, 1990 through December, 1993.
Mr. Edward Syring, Jr. joined Golden American in February, 1998 as a
Senior Vice President, Sales & Marketing. Prior to joining Golden
American, he was with Putnam Mutual Funds from April, 1991 through
February, 1995.
Mr. Steven G. Mandel joined Golden American in October, 1988 and was
elected Senior Vice President in June, 1998. Prior to joining
Golden American, he was with Monarch Resources Inc. from June, 1982 to
October, 1988.
Mr. Ronald R. Blasdell joined Golden American in February, 1994 and was
elected Senior Vice President in June, 1998. Prior to joining
Golden American, he was with United Pacific Life Insurance Company, from
November, 1988 to November, 1993. From July, 1975 through November,
1988, he was with Colonial Penn Group, Inc.
Ms. Beth B. Neppl joined Equitable Life as Vice President, Human Resources
in December, 1987. Ms. Neppl was elected to serve as a direcotr of Golden
American in August, 1996. Prior to joining Equitable Life she was a Human
Resources Officer with Northwest Bank Iowa from May, 1985 to December, 1987.
51
<PAGE>
<PAGE>
COMPENSATION TABLES AND OTHER INFORMATION
The following sets forth information with respect to the Chief
Executive Officer of Golden American as well as the annual salary and
bonus for the five other most highly compensated executive officers for the
fiscal year ended December 31, 1997. Certain executive officers of
Golden American are also officers of DSI. The salaries of such
individuals are allocated between Golden American and DSI pursuant
to an arrangement among these companies. Throughout 1995 and until
August 13, 1996, Terry L. Kendall served as a Managing Director at
Bankers Trust New York Corporation. Compensation amounts for Terry L.
Kendall which are reflected throughout these tables prior to August 14,
1996 were not charged to Golden American, but were instead absorbed by
Bankers Trust New York Corporation.
EXECUTIVE COMPENSATION TABLE
The following table sets forth information with respect to the annual
salary and bonus for Golden American's Chief Executive Officer and the
five other most highly compensated executive officers for the fiscal
year ended December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------------------
RESTRICTED SECURITIES
NAME AND STOCK AWARDS UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (/1/) OPTIONS (/2/) OPTIONS COMPENSATION
- ------------------ ---- -------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Terry L. Kendall,...... 1997 $362,833 $ 80,365 $ 644,844 16,000 $ 10,000(/4/)
President and Chief 1996 $288,298 $400,000 $ 11,535(/5/)
Executive Officer(/3/) 1995 $250,000 $400,000 8,000 $ 6,706(/5/)
Paul R. Schlaack,..... 1997 $351,000 $249,185 $1,274,518 19,000 $ 15,000
Chairman, Director 1996 $327,875 $249,185 $ 245,875 19,000 $ 15,000
and Vice President 1995 $311,750 $165,890 $ 19,594 23,000 $ 9,000(/4/)
Paul E. Larson,....... 1997 $327,667 $128,540 $ 971,036 16,000 $ 15,000
Executive Vice 1996 $267,791 $128,540 $ 319,935 26,000 $ 15,000
President, Chief 1995 $242,833 $ 70,760 $ 73,396 20,000 $ 12,000(/4/)
Financial Officer
and Assistant Secretary
Barnett Chernow,....... 1997 $234,167 $ 31,859 $ 277,576 4,000 $ 5,000(/4/)
Executive Vice 1996 $207,526 $150,000 $ 7,755(/5/)
President 1995 $190,000 $165,000 $ 15,444(/5/)(/6/)
Edward C. Wilson,...... 1997 $ 80,383 $137,700 5,000
Executive Vice 1996 $190,582 $327,473
President
Myles R. Tashman,...... 1997 $181,417 $ 25,000 $ 165,512 5,000 $ 5,000(/4/)
Executive Vice 1996 $176,138 $ 90,000 $ 5,127(/5/)
President, General 1995 $160,000 $ 25,000
Counsel and Secretary
</TABLE>
________________
(1) The amount shown relates to bonuses paid in 1997, 1996 and 1995.
$50,000 of Mr. Wilson's bonus paid in 1996 represents a signing bonus.
(2) Restricted stock awards granted to executive officers vested on October
24, 1997 with the change in control of Equitable of Iowa.
(3) Awards comprised of qualified and non-qualified stock options. All
options were granted with an exercise price equal to the then fair
market value of the underlying stock. All options vested with the
change in control of Equitable of Iowa and were cashed out for the
difference between $68.00 and the exercise price.
(4) For 1997, this compensation includes payment to each named executive
as perquisite payments which are classified as taxable income and are
required to be applied to specific business expenses of the named
executive.
52
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<PAGE>
(5) Contributions were made by the Company on behalf of the employee
to PartnerShare, the deferred compensation plan sponsored by Bankers
Trust New York Corporation and its affiliates for the benefit of all
Bankers Trust employees, in February of the current year to employees
on record as of December 31 of the previous year, after the employee
completes one year of service with the company. This contribution
could be in the form of deferred compensation and/or a cash payment.
In 1996, Mr. Kendall received $9,000 of deferred compensation and
$2,535 of cash payment from the plan; Mr. Chernow received $6,000
of deferred compensation and $1,755 of cash payment from the plan;
Mr. Tashman received $4,000 of deferred compensation and $1,127 of
cash payment from the plan; Mr. Wilson was not eligible for
contributions to the Partnershare Plan in 1996. In 1995, Mr.
Kendall received $2,956 of deferred compensation and $3,750 of cash
payment from the plan; Mr. Chernow received $1,013 of deferred
compensation and $1,267 of cash payment from the plan; Mr. Wilson
and Mr. Tashman were not eligible for contributions to the
PartnerShare Plan in 1995.
(6) Amount shown for 1995 represents relocation expenses paid on behalf
of the employee.
OPTION GRANTS IN LAST FISCAL YEAR (1997)
On October 24, 1997, in conjunction with the acquisition of Equitable of
Iowa, all outstanding options vested and were cashed out for the
difference between $68.00 and the exercise price. The table below
represents the options granted in 1997.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION
UNDERLYING EMPLOYEES TERM (/4/)
OPTIONS IN FISCAL EXERCISE EXPIRATION -------------------
NAME GRANTED (/1/) YEAR PRICE (/2/) DATE (/3/) 5% 10%
- ---- ------------- ---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Terry L. Kendall........ 16,000 5.26 $47.875 2/12/2007 $481,733 $1,220,807
Pual R. Schlaack........ 8,000 6.25 $47.875 2/12/2007 $572,058 $1,449,708
Paul E. Larsen.......... 8,000 6.25 $47.875 2/12/2007 $782,817 $1,983,811
Barnett Chernow......... 4,000 1.32 $47.875 2/12/2007 $120,433 $ 305,202
Edward C. Wilson........ 5,000 1.64 $47.875 2/12/2007 $150,542 $ 381,502
Myles Tashman........... 5,000 1.64 $47.875 2/12/2007 $150,542 $ 381,502
</TABLE>
________________
(1) Stock options granted on February 12, 1997 by Equitable of Iowa
to the officers of Golden American had a five-year vesting period
with 20% exercisable after 3rd year, an additional 30% after 4th year,
and the final 50% after 5th year. The options vested with the change
of control of Equitable of Iowa.
(2) The exercise price was equal to the fair market value of the Common
Stock on the date of grant.
(3) Incentive Stock Options had a term of ten years. They were subject
to earlier termination in certain events related to termination of
employment.
(4) Total dollar gains based on indicated rates of appreciation of share
price over a ten-year term.
Directors of Golden American receive no additional compensation for
serving as a director.
53
<PAGE>
<PAGE>
UNAUDITED FINANCIAL STATEMENTS OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
For the Nine Months Ended September 30, 1998
54
<PAGE>
<PAGE>
Golden American Life Insurance Company
Condensed Consolidated Statements of Income (Unaudited):
POST-MERGER POST-ACQUISITION
_____________________________________
For the Nine | For the Nine
Months ended | Months ended
September 30, 1998|September 30, 1997
__________________|__________________
(Dollars in thousands)
|
Revenues: |
Annuity and interest sensitive life |
product charges $26,984 | $15,937
Management fee revenue 3,257 | 2,014
Net investment income 29,296 | 18,955
Realized gains on investments 436 | 58
Other income 4,805 | 427
__________________|__________________
64,778 | 37,391
|
Insurance benefits and expenses: |
Annuity and interest sensitive life |
benefits: |
Interest credited to account balances 64,110 | 16,840
Benefit claims incurred in excess of |
account balances 862 | 118
Underwriting, acquisition and |
insurance expenses: |
Commissions 84,958 | 23,113
General expenses 23,480 | 11,762
Insurance taxes 2,680 | 1,693
Policy acquisition costs deferred (133,616)| (25,464)
Amortization: |
Deferred policy acquisition costs 4,014 | 1,433
Present value of in force acquired 3,252 | 4,465
Goodwill 2,834 | 1,261
__________________|__________________
52,574 | 35,221
Interest expense 3,033 | 1,827
__________________|__________________
55,607 | 37,048
__________________|__________________
9,171 | 343
|
Income taxes 4,294 | 1
__________________|__________________
Net income $4,877 | $342
=====================================
See accompanying notes.
55
<PAGE>
<PAGE>
Condensed Consolidated Balance Sheets (Unaudited):
POST-MERGER
____________________________________
September 30, 1998|December 31, 1997
__________________|_________________
(Dollars in thousands,
except per share data)
|
ASSETS |
Investments: |
Fixed maturities, available for sale, |
at fair value (cost: 1998 - $610,316; |
1997 - $413,288) $618,650 | $414,401
Equity securities, at fair value |
(cost: 1998 - $14,437; 1997 - $4,437) 10,092 | 3,904
Mortgage loans 98,045 | 85,093
Policy loans 10,217 | 8,832
Short-term investments 11,886 | 14,460
__________________|_________________
Total investments 748,890 | 526,690
|
Cash and cash equivalents 18,951 | 21,039
Due from affiliates 1,114 | 827
Accrued investment income 9,395 | 6,423
Deferred policy acquisition costs 140,845 | 12,752
Present value of in force acquired 36,502 | 43,174
Current income taxes recoverable 502 | 272
Deferred income tax asset 31,633 | 36,230
Property and equipment, less allowances for |
depreciation of $583 in 1998 and $97 |
in 1997 4,550 | 1,567
Goodwill, less accumulated amortization of |
$3,463 in 1998 and $630 in 1997 147,664 | 150,497
Other assets 7,153 | 755
Separate account assets 2,629,343 | 1,646,169
__________________|_________________
Total assets $3,776,542 | $2,446,395
==================|=================
|
LIABILITIES AND STOCKHOLDER'S EQUITY |
Policy liabilities and accruals: |
Future policy benefits: |
Annuity and interest sensitive life |
products $705,673 | $505,304
Unearned revenue reserve 2,968 | 1,189
Other policy claims and benefits 89 | 10
__________________|__________________
708,730 | 506,503
Reciprocal loan with affiliate 40,000 | --
Line of credit with affiliate -- | 24,059
Surplus note 25,000 | 25,000
Revolving note payable 20,082 | --
Due to affiliates 1,552 | 80
Other liabilities 46,400 | 17,271
Separate account liabilities 2,629,343 | 1,646,169
__________________|__________________
3,471,107 | 2,219,082
|
Commitments and contingencies |
|
Stockholder's equity: |
Common stock, par value $10 per share, |
authorized, issued and outstanding |
250,000 shares 2,500 | 2,500
Additional paid-in capital 297,640 | 224,997
Accumulated comprehensive income 842 | 241
Retained earnings (deficit) 4,453 | (425)
__________________|__________________
Total stockholder's equity 305,435 | 227,313
__________________|__________________
Total liabilities and stockholder's |
equity $3,776,542 | $2,446,395
=====================================
See accompanying notes.
56
<PAGE>
<PAGE>
Condensed Consolidated Statements of Cash Flows (Unaudited):
POST-MERGER POST-ACQUISITION
_____________________________________
For the Nine | For the Nine
Months ended | Months ended
September 30, 1998|September 30, 1997
__________________|__________________
(Dollars in thousands)
|
NET CASH USED IN OPERATING ACTIVITIES ($22,666)| ($1,659)
|
INVESTING ACTIVITIES |
Sale, maturity or repayment of |
investments: |
Fixed maturities - available for sale 92,707 | 35,590
Mortgage loans on real estate 3,145 | 5,017
Short-term investments - net 2,575 | 11,153
__________________|__________________
98,427 | 51,760
|
Acquisition of investments: |
Fixed maturities - available for sale (291,687)| (146,376)
Equity securities (10,000)| (4,864)
Mortgage loans on real estate (16,390)| (38,058)
Policy loans - net (1,385)| (3,682)
__________________|__________________
(319,462)| (192,980)
Purchase of property and equipment (3,470)| (659)
__________________|__________________
Net cash used in investing activities (224,505)| (141,879)
|
FINANCING ACTIVITIES |
Proceeds from reciprocal loan agreement |
borrowings 242,847 | --
Repayment of reciprocal loan agreement |
borrowings (202,847)| --
Proceeds from revolving note payable 20,082 | --
Proceeds from line of credit borrowings -- | 86,522
Repayment of line of credit borrowings (24,059)| (69,562)
Receipts from annuity and interest |
sensitive life policies credited to |
policyholder account balances 350,385 | 232,635
Return of policyholder account balances |
on annuity and interest sensitive life |
policies (50,370)| (12,674)
Net reallocations to Separate Accounts (163,455)| (81,561)
Contribution from parent 72,500 | 1,011
__________________|__________________
Net cash provided by financing activities 245,083 | 156,371
__________________|__________________
|
Increase (decrease) in cash and cash |
equivalents ($2,088)| $12,833
|
Cash and cash equivalents at beginning |
of period 21,039 | 5,839
__________________|__________________
Cash and cash equivalents at end of period $18,951 | $18,672
==================|==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW |
INFORMATION |
|
Cash paid during the period for: |
Interest $3,493 | --
Income taxes 80 | $283
|
Non-cash financing activities: |
Non-cash adjustment to paid in capital |
for adjusted merger costs 143 | --
Contribution of property, plant and |
equipment from EIC Variable, Inc. net |
of $353 of accumulated depreciation -- | 110
|
See accompanying notes.
57
<PAGE>
<PAGE>
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. This form is being filed with the reduced disclosure
format specified in General Instruction H (1)(a) and (b) of Form 10-Q.
Accordingly, the financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. All
adjustments were of a normal recurring nature, unless otherwise noted in
Management's Discussion and Analysis and the Notes to Financial Statements.
Operating results for the nine months ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Golden American Life
Insurance Company Annual Report on Form 10-K for the year ended December 31,
1997.
CONSOLIDATION
The condensed consolidated financial statements include Golden American Life
Insurance Company ("Golden American") and its wholly owned subsidiary, First
Golden American Life Insurance Company of New York ("First Golden," and
collectively with Golden American, the "Company"). All significant
intercompany accounts and transactions have been eliminated.
ORGANIZATION
On October 24, 1997, PFHI Holdings, Inc. ("PFHI"), a Delaware corporation,
acquired all of the outstanding capital stock of Equitable of Iowa Companies
("Equitable") pursuant to the terms of an Agreement and Plan of Merger dated
as of July 7, 1997, among Equitable, PFHI, and ING Groep N.V. ("ING"). PFHI
is a wholly owned subsidiary of ING, a global financial services holding
company based in The Netherlands. As a result of the merger, Equitable was
merged into PFHI which was simultaneously renamed Equitable of Iowa
Companies, Inc. ("EIC" or the "Parent"), a Delaware corporation.
On August 13, 1996, Equitable acquired all of the outstanding capital stock
of EIC Variable, Inc. (formerly known as BT Variable, Inc.) and its wholly
owned subsidiaries, Golden American and Directed Services, Inc. ("DSI"), from
Whitewood Properties Corporation.
For financial statement purposes, the ING merger was accounted for as a
purchase effective October 25, 1997, and the change in control of Golden
American through the acquisition of BT Variable, Inc. was accounted for as a
purchase effective August 14, 1996. The merger and acquisition resulted in
new bases of accounting reflecting estimated fair values of assets and
liabilities at their respective dates. As a result, the Company's financial
statements for the period subsequent to October 24, 1997, are presented on
the Post-Merger new basis of accounting, for the period August 14, 1996
through October 24, 1997, are presented on the Post-Acquisition basis of
accounting, and for August 13, 1996 and prior periods are presented on the
Pre-Acquisition basis of accounting.
FAIR VALUES
Estimated fair values of investment grade public bonds 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.
STATUTORY
Net income (loss) for Golden American as determined in accordance with
statutory accounting practices was $(32,198,000) and $510,000 for the nine
months ended September 30, 1998 and 1997, respectively. Total statutory
capital and surplus was $112,356,000 at September 30, 1998 and $76,914,000 at
December 31, 1997.
58
<PAGE>
<PAGE>
RECLASSIFICATION
Certain amounts in the September 30, 1997 and December 31, 1997 financial
statements have been reclassified to conform to the September 30, 1998
financial statement presentation.
NOTE 2 -- COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement had no
impact on the Company's net income or stockholder's equity. SFAS No. 130
requires unrealized gains or losses on the Company's available for sale
securities (net of deferred income taxes, deferred policy acquisition costs
and present value of in force acquired), which prior to adoption were
reported separately in stockholder's equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
During the third quarter and first nine months of 1998, total comprehensive
income for the Company amounted to $2,426,000 and $5,478,000, respectively
($2,385,000 and $2,016,000, respectively, for the same periods of 1997).
Included in these amounts are total comprehensive income for First Golden of
$601,000 and $1,174,000 for the third quarter and first nine months of 1998,
respectively ($551,000 and $879,000, respectively, for the same periods of
1997).
NOTE 3 -- RELATED PARTY TRANSACTIONS
DSI acts as the principal underwriter (as defined in the Securities Act of
1933 and the Investment Company Act of 1940, as amended) of the variable
insurance products issued by the Company. DSI is authorized to enter into
agreements with broker/dealers to distribute the Company's variable insurance
products and appoint the broker/dealers as agents. As of September 30, 1998,
the Company's variable insurance products are sold primarily through four
broker/dealer institutions. The Company paid commissions and expenses to DSI
totaling $32,104,000 in the third quarter and $82,548,000 for the first nine
months of 1998 ($8,849,000 and $23,113,000, respectively, for the same
periods of 1997).
Golden American provides certain managerial and supervisory services to DSI.
The fee paid by DSI for these services was calculated as a percentage of
average assets in the variable separate accounts. For the quarter and nine
months ended September 30, 1998, the fee was $1,234,000 and $3,257,000
($736,000 and $2,014,000, respectively, for the same periods of 1997).
Golden American provides certain advisory, computer and other resources and
services to Equitable Life Insurance Company of Iowa ("Equitable Life").
Revenues for these services, which reduce general expenses incurred by Golden
American, totaled $1,524,000 in the third quarter and $5,091,000 for the
first nine months of 1998 ($954,000 and $2,694,000, respectively, for the
same periods of 1997).
The Company has a service agreement with Equitable Life in which Equitable
Life provides administrative and financial related services. The Company
incurred expenses of $261,000 in the third quarter and $575,000 for the first
nine months of 1998 under this agreement.
First Golden provides resources and services to DSI. Revenues for these
services, which reduce general expenses incurred by the Company, totaled
$19,000 in the third quarter and $57,000 for the first nine months of 1998.
59
<PAGE>
<PAGE>
Golden American maintains a reciprocal loan agreement with ING America
Insurance Holdings, Inc. ("ING AIH"), a Delaware corporation and affiliate of
EIC, to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Under this agreement which became effective January 1,
1998, and expires December 31, 2007, Golden American and ING AIH can borrow
up to $65,000,000 from one another. Prior to lending funds to ING AIH,
Golden American must obtain the approval of the State of Delaware Department
of Insurance. Interest on any Golden American borrowings is charged at the
rate of ING AIH's cost of funds for the interest period plus 0.15%. Interest
on any ING AIH borrowings is charged at a rate based on the prevailing
interest rate of U.S. commercial paper available for purchase with a similar
duration. Under this agreement, Golden American incurred interest expense of
$505,000 in the third quarter and $1,269,000 for the first nine months of
1998. At September 30, 1998, $40,000,000 was payable to ING AIH under this
agreement.
Effective January 1, 1998, the Company has an asset management agreement with
ING Investment Management LLC ("ING-IM"), an affiliated company, in which ING-
IM provides asset management services. Under the agreement, the Company
records a fee based on the value of the assets under management. The fee is
payable quarterly. For the third quarter and first nine months of 1998, the
Company incurred fees of $341,000 and $1,013,000, respectively, under this
agreement.
Golden American maintained a line of credit agreement with Equitable to
facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Under this agreement which became effective December 1, 1996,
and expired December 31, 1997, Golden American could borrow up to
$25,000,000. Interest on any borrowings was charged at the rate of
Equitable's monthly average aggregate cost of short-term funds plus 1.00%.
Under this agreement, Golden American incurred interest expense of $211,000
for the first nine months of 1998 ($165,000 and $279,000 in the third quarter
and first nine months of 1997, respectively). The outstanding balance was
paid by a capital contribution.
For the nine months ended September 30, 1998, the Company had premiums, net
of reinsurance, for variable products from four affiliates, Locust Street
Securities, Inc., Vestax Securities Corporation, DSI and Multi-Financial
Securities Corporation of $92,900,000, $30,100,000, $10,700,000 and
$10,100,000, respectively.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
REINSURANCE: At September 30, 1998, Golden American had reinsurance treaties
with four unaffiliated reinsurers and one affiliated reinsurer covering a
significant portion of the mortality risks under its variable contracts.
Golden American remains liable to the extent its reinsurers do not meet their
obligations under the reinsurance agreements. At September 30, 1998, the
Company has a net receivable of $6,539,000 for reserve credits, reinsurance
claims or other receivables from these reinsurers comprised of $257,000 for
claims recoverable from reinsurers, $451,000 for a payable for reinsurance
premiums, and $6,733,000 for a receivable from an unaffiliated reinsurer.
Included in the accompanying financial statements are net considerations to
reinsurers of $1,293,000 in the third quarter and $3,259,000 for the first
nine months of 1998 compared to $467,000 and $1,318,000, respectively, for
the same periods in 1997. Also included in the accompanying financial
statements are net policy benefits of $1,272,000 and $2,096,000 in the third
quarter and first nine months of 1998, respectively ($142,000 and $571,000,
respectively, for the same periods of 1997).
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.
INVESTMENT COMMITMENTS: At September 30, 1998, outstanding commitments to
fund mortgage loans on real estate totaled $25,290,000.
60
<PAGE>
<PAGE>
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. The
associated cost for a particular insurance company can vary significantly
based upon its fixed account premium volume by line of business and state
premiums as well as its potential for premium tax offset. The Company has
established an undiscounted reserve to cover such assessments and regularly
reviews information regarding known failures and revises its estimates of
future guaranty fund assessments. Accordingly, the Company accrued and
charged to expense an additional $208,000 in the third quarter and $598,000
for the first nine months of 1998. At September 30, 1998, the Company has an
undiscounted reserve of $1,910,000 to cover estimated future assessments (net
of related anticipated premium tax credits) and has established an asset
totaling $261,000 for assessments paid which may be recoverable through
future premium tax offsets. The Company believes this reserve is sufficient
to cover expected future guaranty fund assessments based upon previous
premium levels and known insolvencies at this time.
LITIGATION: The Company, like other insurance companies, may be named or
otherwise involved in lawsuits, including class action lawsuits. In some
class action and other lawsuits involving insurers, substantial damages have
been sought and/or material settlement payments have been made. The Company
currently believes no pending or threatened lawsuits exist that are
reasonably likely to have a material adverse impact on the Company.
VULNERABILITY FROM CONCENTRATIONS: 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. Substantial changes in tax laws that would make these products
less attractive to consumers and extreme fluctuations in interest rates or
stock market returns which may result in higher lapse experience than assumed
could have a severe impact on the Company's financial condition. A
significant portion of the Company's sales is generated by four
broker/dealers.
The Company has various concentrations in its investment portfolio. The
composition of the Company's fixed maturity securities has changed
significantly from December 31, 1997. The following percentages relate to
holdings at September 30, 1998, and December 31, 1997. Fixed maturity
investments included investments in basic industrials (25% in 1998, 30% in
1997), conventional mortgage-backed securities (24% in 1998, 13% in 1997),
financial companies (20% in 1998, 24% in 1997), asset-backed securities (11%
in 1998, 0% in 1997), various government bonds or agency mortgage-backed
securities (7% in 1998, 17% in 1997) and public utilities (6% in 1998, 7% in
1997).
REVOLVING NOTE PAYABLE: To enhance short-term liquidity, the Company has
established a revolving note payable effective July 27, 1998, and expiring
July 31, 1999, with SunTrust Bank, Atlanta (the "Bank"). The note was
approved by Golden American's and First Golden's boards of directors on
August 5, 1998 and September 29, 1998, respectively. The total amount the
Company may have outstanding is $85,000,000, of which Golden American and
First Golden have individual credit sublimits of $75,000,000 and $10,000,000,
respectively. The note accrues interest at an annual rate equal to: (1) the
cost of funds for the Bank for the period applicable for the advance plus
0.25% or (2) a rate quoted by the Bank to the Company for the advance. The
terms of the agreement require the Company to maintain the minimum level of
Company Action Level Risk Based Capital as established by applicable state
law or regulation. During the quarter and nine months ended September 30,
1998, the Company paid interest expense of $6,000. At September 30, 1998,
$20,082,000 was payable to the Bank under this note by Golden American.
61
<PAGE>
<PAGE>
YEAR 2000 PROJECT: Based on a 1997 study of its computer software and
hardware, the Company has determined its exposure to the Year 2000 change of
the century date issue. Some of the Company's computer programs were
originally written using two digits rather than four to define a particular
year. As a result, these computer programs contain "time sensitive"
software that may recognize "00" as the year 1900 rather than the year 2000,
which could cause system failure or miscalculations resulting in disruptions
to operations. These disruptions could include, but are not limited to, a
temporary inability to record transactions.
The Company has identified one system and some desktop software that will
have date problems. All systems will be upgraded in the fourth quarter of
1998. To a lesser extent, the Company depends on various non-information
technology systems, such as telephone switches, which could also fail or
misfunction as a result of the Year 2000.
The Company has developed a plan to address the Year 2000 issue in a timely
manner. The following schedule details the plan's phases, progress towards
completion and actual or estimated completion dates:
% Complete as of Actual/Estimated
Phases September 30, 1998 Completion Dates
______________________________________________________________________________
ASSESSMENT AND DEVELOPMENT of the steps
to be taken to address Year 2000
systems issues 100% 12/31/97
IMPLEMENTATION of steps to address Year
2000 systems issues 76-99% 12/31/98
IMPLEMENTATION of steps to address
Year 2000 desktop software issues 76-99% 12/31/98
TESTING of systems 26-50% 12/31/98
POINT-TO-POINT TESTING of external
interfaces with third party computer
systems that communicate with Company
systems 1-25% 12/31/98
IMPLEMENTATION of tested software
addressing Year 2000 systems issues 51-75% 12/31/98
CONTINGENCY PLAN 1-25% 03/31/99
In addition, the Company's operations could be adversely affected if
significant customers, suppliers and other third parties would be unable to
transact business in the Year 2000 and thereafter. To mitigate the effect of
outside influences and other dependencies relative to the Year 2000, the
Company has identified and contacted these third parties who have assured the
Company that necessary steps are being taken to prepare for the Year 2000.
Management believes the Company's systems are or will be substantially
compliant by Year 2000. Golden American has charged to expense approximately
$140,000 in the first nine months of 1998 related to the Year 2000 project.
The Company anticipates charging to expense an additional $180,000 to
$195,000 in 1998 which includes upgrade and internal resources costs.
Management expects some internal resources will be utilized in early 1999 to
finalize the contingency plan.
Despite the Company's efforts to modify or replace "time sensitive" computer
and information systems, the Company could experience a disruption to its
operations as a result of the Year 2000. The Company is currently developing
a contingency plan to address any systems that may malfunction despite the
testing being performed. The contingency plan, which is expected to be
completed by March 31, 1999, will provide for the availability of staff,
prioritize tasks and outline procedures to fix any malfunctioning systems.
62
<PAGE>
<PAGE>
The costs and completion date of the Year 2000 project are based on
management's best estimates. These estimates were derived using numerous
assumptions of future events, including the continued availability of
resources, third party Year 2000 compliance and other factors. There is no
guarantee these estimates will be achieved and actual results could
materially differ from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of trained personnel, the ability to locate and correct all relevant
computer codes and other uncertainties.
63
<PAGE>
<PAGE>
_____________________________________________________________________________
FINANCIAL STATEMENTS OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
For the years ended December 31, 1997, 1996 and 1995
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Golden American Life Insurance Company
We have audited the accompanying consolidated balance sheets of Golden
American Life Insurance Company as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholder's equity,
and cash flows for the periods from October 25, 1997 through December 31,
1997, January 1, 1997 through October 24, 1997, August 14, 1996 through
December 31, 1996, and January 1, 1996 through August 13, 1996, and the year
ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Golden American Life Insurance Company at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for the
periods from October 25, 1997 through December 31, 1997, January 1, 1997
through October 24, 1997, August 14, 1996 through December 31, 1996, and
January 1, 1996 through August 13, 1996, and the year ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Des Moines, Iowa
February 12, 1998
64
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
______________________________________
December 31, 1997 | December 31, 1996
___________________| _________________
<S> <C> | <C>
ASSETS |
|
Investments: |
Fixed maturities, available for sale, |
at fair value (cost: 1997 - $413,288; |
1996 - $275,153) $414,401 | $275,563
Equity securities, at fair value |
(cost: 1997 - $4,437; 1996 - $36) 3,904 | 33
Mortgage loans on real estate 85,093 | 31,459
Policy loans 8,832 | 4,634
Short-term investments 14,460 | 12,631
___________________| _________________
Total investments 526,690 | 324,320
|
Cash and cash equivalents 21,039 | 5,839
|
Due from affiliates 827 | --
|
Accrued investment income 6,423 | 4,139
|
Deferred policy acquisition costs 12,752 | 11,468
|
Present value of in force acquired 43,174 | 83,051
|
Current income taxes recoverable 272 | --
|
Deferred income tax asset 36,230 | --
|
Property and equipment, less allowances |
for depreciation of $97 in 1997 and |
$63 in 1996 1,567 | 699
|
Goodwill, less accumulated amortization |
of $630 in 1997 and $589 in 1996 150,497 | 38,665
|
Other assets 195 | 2,471
|
Separate account assets 1,646,169 | 1,207,247
___________________| _________________
Total assets $2,445,835 | $1,677,899
===================| =================
</TABLE>
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
______________________________________
December 31, 1997 | December 31, 1996
___________________| _________________
<S> <C> | <C>
LIABILITIES AND STOCKHOLDER'S EQUITY |
|
Policy liabilities and accruals: |
Future policy benefits: |
Annuity and interest sensitive life |
products $505,304 | $285,287
Unearned revenue reserve 1,189 | 2,063
Other policy claims and benefits 10 | --
___________________| _________________
506,503 | 287,350
|
Deferred income tax liability -- | 365
Line of credit with affiliate 24,059 | --
Surplus note 25,000 | 25,000
Due to affiliates 80 | 1,504
Other liabilities 16,711 | 15,949
Separate account liabilities 1,646,169 | 1,207,247
___________________| _________________
2,218,522 | 1,537,415
|
Commitments and contingencies |
|
Stockholder's equity: |
Common stock, par value $10 per share, |
authorized, issued and outstanding |
250,000 shares 2,500 | 2,500
Additional paid-in capital 224,997 | 137,372
Unrealized appreciation (depreciation) |
of securities at fair value 241 | 262
Retained earnings (deficit) (425)| 350
___________________| _________________
Total stockholder's equity 227,313 | 140,484
___________________| _________________
Total liabilities and stockholder's |
equity $2,445,835 | $1,677,899
===================| =================
</TABLE>
See accompanying notes.
65
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
___________________________________
For the period | For the period
October 25, 1997 | January 1, 1997
through | through
December 31, 1997 |October 24, 1997
__________________|________________
|
<S> <C> | <C>
Revenues: |
Annuity and interest sensitive life |
product charges $3,834 | $18,288
Management fee revenue 508 | 2,262
Net investment income 5,127 | 21,656
Realized gains (losses) on investments 15 | 151
Other income 236 | 426
__________________|________________
9,720 | 42,783
|
|
Insurance benefits and expenses: |
Annuity and interest sensitive life benefits: |
Interest credited to account balances 7,413 | 19,276
Benefit claims incurred in excess of |
account balances -- | 125
Underwriting, acquisition and insurance |
expenses: |
Commissions 9,437 | 26,818
General expenses 3,350 | 13,907
Insurance taxes 450 | 1,889
Policy acquisition costs deferred (13,678)| (29,003)
Amortization: |
Deferred policy acquisition costs 892 | 1,674
Present value of in force acquired 948 | 5,225
Goodwill 630 | 1,398
__________________|________________
9,442 | 41,309
|
Interest expense 557 | 2,082
__________________|________________
9,999 | 43,391
__________________|________________
Income (loss) before income taxes (279)| (608)
|
Income taxes 146 | (1,337)
__________________|________________
|
Net income (loss) ($425)| $729
==================|================
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
____________________________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
__________________| ________________
|
<S> <C> | <C>
Revenues: |
Annuity and interest sensitive life |
product charges $8,768 | $12,259
Management fee revenue 877 | 1,390
Net investment income 5,795 | 4,990
Realized gains (losses) on investments 42 | (420)
Other income 486 | 70
__________________| ________________
15,968 | 18,289
|
|
Insurance benefits and expenses: |
Annuity and interest sensitive life benefits: |
Interest credited to account balances 5,741 | 4,355
Benefit claims incurred in excess of |
account balances 1,262 | 915
Underwriting, acquisition and insurance |
expenses: |
Commissions 9,866 | 16,549
General expenses 5,906 | 9,422
Insurance taxes 672 | 1,225
Policy acquisition costs deferred (11,712)| (19,300)
Amortization: |
Deferred policy acquisition costs 244 | 2,436
Present value of in force acquired 2,745 | 951
Goodwill 589 | --
__________________| ________________
15,313 | 16,553
|
Interest expense 85 | --
__________________| ________________
15,398 | 16,553
__________________| ________________
Income (loss) before income taxes 570 | 1,736
|
Income taxes 220 | (1,463)
__________________| ________________
|
Net income (loss) $350 | $3,199
==================| ================
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
__________________
For the year ended
December 31, 1995
__________________
<S> <C>
Revenues:
Annuity and interest sensitive life
product charges $18,388
Management fee revenue 987
Net investment income 2,818
Realized gains (losses) on investments 297
Other income 63
__________________
22,553
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances 1,322
Benefit claims incurred in excess of
account balances 1,824
Underwriting, acquisition and insurance
expenses:
Commissions 7,983
General expenses 12,650
Insurance taxes 952
Policy acquisition costs deferred (9,804)
Amortization:
Deferred policy acquisition costs 2,710
Present value of in force acquired 1,552
Goodwill --
__________________
19,189
Interest expense --
__________________
19,189
__________________
Income (loss) before income taxes 3,364
Income taxes --
__________________
Net income (loss) $3,364
==================
</TABLE>
See accompanying notes.
66
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
PRE-ACQUISITION
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 $2,500 $50,000 $37,086 ($1) ($79) $89,506
Contribution of
capital -- -- 7,944 -- -- 7,944
Net income -- -- -- -- 3,364 3,364
Preferred stock
dividends -- -- -- -- (3,348) (3,348)
Unrealized apprecia-
tion of securities
at fair value -- -- -- 659 -- 659
__________________________________________________________
Balance at
December 31, 1995 2,500 50,000 45,030 658 (63) 98,125
Net income -- -- -- -- 3,199 3,199
Preferred stock
dividends -- -- -- -- (719) (719)
Unrealized deprecia-
tion of securities
at fair value -- -- -- (1,175) -- (1,175)
__________________________________________________________
Balance at
August 13, 1996 $2,500 $50,000 $45,030 ($517) $2,417 $99,430
==========================================================
</TABLE>
<TABLE>
<CAPTION>
POST-ACQUISITION
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance at
August 14, 1996 $2,500 $50,000 $87,372 -- -- $139,872
Contribution of
preferred stock
to additional
paid-in capital -- (50,000) 50,000 -- -- --
Net income -- -- -- -- $350 350
Unrealized apprecia-
tion of securities
at fair value -- -- -- $262 -- 262
__________________________________________________________
Balance at
December 31, 1996 2,500 -- 137,372 262 350 140,484
Contribution of
capital -- -- 1,121 -- -- 1,121
Net income -- -- -- -- 729 729
Unrealized apprecia-
tion of securities
at fair value -- -- -- 1,543 -- 1,543
__________________________________________________________
Balance at
October 24, 1997 $2,500 -- $138,493 $1,805 $1,079 $143,877
==========================================================
POST-MERGER
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
Balance at
October 25, 1997 $2,500 -- $224,997 -- -- $227,497
Net loss -- -- -- -- ($425) (425)
Unrealized apprecia-
tion of securities
at fair value -- -- -- $241 -- 241
__________________________________________________________
Balance at
December 31, 1997 $2,500 -- $224,997 $241 ($425) $227,313
==========================================================
</TABLE>
See accompanying notes.
67
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
________________________________________
For the period | For the period
October 25, 1997 | January 1, 1997
through | through
December 31, 1997 | October 24, 1997
___________________| ___________________
<S> <C> | <C>
OPERATING ACTIVITIES |
Net income (loss) ($425)| $729
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) |
operations: |
Adjustments related to annuity and |
interest sensitive life products: |
Change in annuity and interest |
sensitive life product reserves 7,361 | 19,177
Change in unearned revenues 1,189 | 3,292
Decrease (increase) in accrued |
investment income 1,205 | (3,489)
Policy acquisition costs deferred (13,678)| (29,003)
Amortization of deferred policy |
acquisition costs 892 | 1,674
Amortization of present value of in |
force acquired 948 | 5,225
Change in other assets, other |
liabilities and accrued income taxes 4,205 | (8,944)
Provision for depreciation and |
amortization 1,299 | 3,203
Provision for deferred income taxes 146 | 316
Realized (gains) losses on investments (15)| (151)
___________________| ___________________
Net cash provided by (used in) |
operating activities 3,127 | (7,971)
|
INVESTING ACTIVITIES |
Sale, maturity or repayment of |
investments: |
Fixed maturities - available for sale 9,871 | 39,622
Mortgage loans on real estate 1,644 | 5,828
Short-term investments - net -- | 11,415
___________________| ___________________
11,515 | 56,865
Acquisition of investments: |
Fixed maturities - available for sale (29,596)| (155,173)
Equity securities (1)| (4,865)
Mortgage loans on real estate (14,209)| (44,481)
Policy loans - net (328)| (3,870)
Short-term investments - net (13,244)| --
___________________| ___________________
(57,378)| (208,389)
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
________________________________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
___________________| ___________________
<S> <C> | <C>
OPERATING ACTIVITIES |
Net income (loss) $350 | $3,199
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) |
operations: |
Adjustments related to annuity and |
interest sensitive life products: |
Change in annuity and interest |
sensitive life product reserves 5,106 | 4,472
Change in unearned revenues 2,063 | 2,084
Decrease (increase) in accrued |
investment income (877)| (2,494)
Policy acquisition costs deferred (11,712)| (19,300)
Amortization of deferred policy |
acquisition costs 244 | 2,436
Amortization of present value of in |
force acquired 2,745 | 951
Change in other assets, other |
liabilities and accrued income taxes (96)| 4,672
Provision for depreciation and |
amortization 1,242 | 703
Provision for deferred income taxes 220 | (1,463)
Realized (gains) losses on investments (42)| 420
___________________| ___________________
Net cash provided by (used in) |
operating activities (757)| (4,320)
|
|
INVESTING ACTIVITIES |
Sale, maturity or repayment of |
investments: |
Fixed maturities - available for sale 47,453 | 55,091
Mortgage loans on real estate 40 | --
Short-term investments - net 2,629 | 354
___________________| ___________________
50,122 | 55,445
Acquisition of investments: |
Fixed maturities - available for sale (147,170)| (184,589)
Equity securities (5)| --
Mortgage loans on real estate (31,499)| --
Policy loans - net (637)| (1,977)
Short-term investments - net -- | --
___________________| ___________________
(179,311)| (186,566)
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
PRE-ACQUISITION
_________________
For the year
ended
December 31, 1995
_________________
<S> <C>
OPERATING ACTIVITIES
Net income (loss) $3,364
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operations:
Adjustments related to annuity and
interest sensitive life products:
Change in annuity and interest
sensitive life product reserves 4,664
Change in unearned revenues 4,949
Decrease (increase) in accrued
investment income (676)
Policy acquisition costs deferred (9,804)
Amortization of deferred policy
acquisition costs 2,710
Amortization of present value of in
force acquired 1,552
Change in other assets, other
liabilities and accrued income taxes 4,686
Provision for depreciation and
amortization (142)
Provision for deferred income taxes --
Realized (gains) losses on investments (297)
_________________
Net cash provided by (used in)
operating activities 11,006
INVESTING ACTIVITIES
Sale, maturity or repayment of
investments:
Fixed maturities - available for sale 24,026
Mortgage loans on real estate --
Short-term investments - net --
_________________
24,026
Acquisition of investments:
Fixed maturities - available for sale (61,723)
Equity securities (10)
Mortgage loans on real estate --
Policy loans - net (1,508)
Short-term investments - net (1,681)
_________________
(64,922)
</TABLE>
See accompanying notes.
68
<PAGE>
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS -(CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
________________________________________
For the period | For the period
October 25, 1997 | January 1, 1997
through | through
December 31, 1997 | October 24, 1997
___________________| ___________________
<S> <C> | <C>
INVESTING ACTIVITIES-CONTINUED
Funds held in escrow pursuant to |
an Exchange Agreement -- | --
Purchase of property and equipment ($252)| ($875)
___________________| ___________________
Net cash used in investing activities (46,115)| (152,399)
|
FINANCING ACTIVITIES |
Proceeds from issuance of surplus note -- | --
Proceeds from line of credit borrowings 10,119 | 97,124
Repayment of line of credit borrowings (2,207)| (80,977)
Receipts from annuity and interest |
sensitive life policies credited |
to policyholder account balances 62,306 | 261,549
Return of policyholder account balances |
on annuity and interest sensitive |
life policies (6,350)| (13,931)
Net reallocations to Separate |
Accounts (17,017)| (93,069)
Contributions of capital by Parent -- | 1,011
Dividends paid on preferred stock -- | --
___________________| ___________________
Net cash provided by financing |
activities 46,851 | 171,707
___________________| ___________________
Increase (decrease) in cash and |
cash equivalents 3,863 | 11,337
|
Cash and cash equivalents at |
beginning of period 17,176 | 5,839
___________________| ___________________
Cash and cash equivalents at end |
of period $21,039 | $17,176
===================| ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $295 $1,912
Income taxes -- 283
Non-cash financing activities:
Contribution of property, plant and equipment
from EIC Variable, Inc. net of $353 of
accumulated depreciation -- 110
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
_____________________________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
__________________| _________________
<S> <C> | <C>
INVESTING ACTIVITIES - CONTINUED |
Funds held in escrow pursuant to |
an Exchange Agreement -- | --
Purchase of property and equipment ($137)| --
__________________| _________________
Net cash used in investing activities (129,326)| ($131,121)
|
FINANCING ACTIVITIES |
Proceeds from issuance of surplus note 25,000 | --
Proceeds from line of credit borrowings -- | --
Repayment of line of credit borrowings -- | --
Receipts from annuity and interest |
sensitive life policies credited |
to policyholder account balances 116,819 | 149,750
Return of policyholder account balances |
on annuity and interest sensitive |
life policies (3,315)| (2,695)
Net reallocations to Separate |
Accounts (10,237)| (8,286)
Contributions of capital by Parent -- | --
Dividends paid on preferred stock -- | (719)
__________________| _________________
Net cash provided by financing |
activities 128,267 | 138,050
__________________| _________________
Increase (decrease) in cash and |
cash equivalents (1,816)| 2,609
|
Cash and cash equivalents at |
beginning of period 7,655 | 5,046
__________________| _________________
Cash and cash equivalents at end |
of period $5,839 | $7,655
==================| =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest -- --
Income taxes -- --
Non-cash financing activities:
Contribution of property, plant and equipment
from EIC Variable, Inc. net of $353 of
accumulated depreciation -- --
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
PRE-ACQUISITION
_________________
For the year
ended
December 31, 1995
_________________
<S> <C>
INVESTING ACTIVITIES - CONTINUED
Funds held in escrow pursuant to
an Exchange Agreement ($1,242)
Purchase of property and equipment --
_________________
Net cash used in investing activities (42,138)
FINANCING ACTIVITIES
Proceeds from issuance of surplus note --
Proceeds from line of credit borrowings --
Repayment of line of credit borrowings --
Receipts from annuity and interest
sensitive life policies credited
to policyholder account balances 29,501
Return of policyholder account balances
on annuity and interest sensitive
life policies (1,543)
Net reallocations to Separate
Accounts --
Contributions of capital by Parent 7,944
Dividends paid on preferred stock (3,348)
_________________
Net cash provided by financing
activities 32,554
_________________
Increase (decrease) in cash and
cash equivalents 1,422
Cash and cash equivalents at
beginning of period 3,624
_________________
Cash and cash equivalents at end
of period $5,046
=================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest --
Income taxes --
Non-cash financing activities:
Contribution of property, plant and equipment
from EIC Variable, Inc. net of $353 of
accumulated depreciation --
</TABLE>
See accompanying notes.
69
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include Golden American Life Insurance
Company ("Golden American") and its wholly owned subsidiary, First Golden
American Life Insurance Company of New York ("First Golden," and with Golden
American collectively, the "Company"). All significant intercompany accounts
and transactions have been eliminated.
ORGANIZATION
Golden American, a wholly owned subsidiary of Equitable of Iowa Companies,
Inc., offers variable insurance products and is licensed as a life insurance
company in the District of Columbia and all states except New York. On January
2, 1997 and December 23, 1997, First Golden became licensed to sell insurance
products in New York and Delaware, respectively. The Company's products are
marketed by broker/dealers, financial institutions and insurance agents. The
Company's primary customers are individuals and families.
On October 24, 1997, PFHI Holding, Inc. ("PFHI"), a Delaware corporation,
acquired all of the outstanding capital stock of Equitable of Iowa Companies
("Equitable"), pursuant to the terms of the Agreement and Plan of Merger
("Merger Agreement") among Equitable, PFHI, and ING Groep N.V. ("ING"). PFHI
is a wholly owned subsidiary of ING, a global financial services holding
company based in The Netherlands. As a result of the merger, Equitable was
merged into PFHI which was simultaneously renamed Equitable of Iowa Companies,
Inc. ("EIC" or the "Parent"), a Delaware corporation. See Note 5 for
additional information regarding the merger.
On August 13, 1996, Equitable acquired all of the outstanding capital stock of
EIC Variable, Inc. (formerly known as BT Variable, Inc.) and its wholly owned
subsidiaries, Golden American and Directed Services, Inc. ("DSI") from
Whitewood Properties Corporation ("Whitewood") pursuant to the terms of a
Stock Purchase Agreement between Equitable and Whitewood (the "Purchase
Agreement"). On April 30, 1997, EIC Variable, Inc. was liquidated and its
investments in Golden American and DSI were transferred to Equitable, while
the remainder of its net assets were contributed to Golden American. On
December 30, 1997, EIC Variable, Inc. was dissolved. See Note 6 for additional
information regarding the acquisition.
For financial statement purposes, the merger was accounted for as a purchase
effective October 25, 1997 and the change in control of Golden American through
the acquisition of BT Variable was accounted for as a purchase effective August
14, 1996. The merger and acquisition resulted in new bases of accounting
reflecting estimated fair values of assets and liabilities at their respective
dates. As a result, the Company's financial statements for the period
subsequent to October 24, 1997, are presented on the Post-Merger new basis of
accounting, for the period August 14, 1996 through October 24, 1997, are
presented on the Post-Acquisition basis of accounting, and for August 13, 1996
and prior periods are presented on the Pre-Acquisition basis of accounting.
INVESTMENTS
FIXED MATURITIES: Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
requires fixed maturity securities to be designated as either "available for
sale," "held for investment" or "trading." Sales of fixed maturities
designated as "available for sale" are not restricted by SFAS No. 115.
Available for sale securities are reported at fair value and unrealized gains
and losses on these securities are included directly in stockholder's
equity, after adjustment for related changes in deferred policy acquisition
costs ("DPAC"), present value of in force acquired ("PVIF"), policy reserves
and deferred income
70
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
taxes. At December 31, 1997 and 1996, all of the Company's
fixed maturity securities are designated as available for sale although the
Company is not precluded from designating fixed maturity securities as held
for investment or trading at some future date.
Securities determined to have a decline in value that is other than temporary
are written down to estimated fair value which becomes the security's new cost
basis by a charge to realized losses in the Company's Statement of Income.
Premiums and discounts are amortized/accrued utilizing the scientific interest
method which results in a constant yield over the security's expected life.
Amortization/accrual of premiums and discounts on mortgage-backed securities
incorporates a prepayment assumption to estimate the securities' expected
lives.
EQUITY SECURITIES: Equity securities are reported at estimated fair value if
readily marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income taxes, if any) is
included directly in stockholder's equity. Equity securities determined to
have a decline in value that is other than temporary are written down to
estimated fair value which becomes the security's new cost basis by a charge
to realized losses in the Company's Statement of Income.
MORTGAGE LOANS: Mortgage loans on real estate are reported at cost adjusted
for amortization of premiums and accrual of discounts. If the value of any
mortgage loan is determined to be impaired (i.e., when it is probable the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement), the carrying value of the mortgage loan is
reduced to the present value of expected future cash flows from the loan,
discounted at the loan's effective interest rate, or to the loan's observable
market price, or the fair value of the underlying collateral. The carrying
value of impaired loans is reduced by the establishment of a valuation
allowance which is adjusted at each reporting date for significant changes in
the calculated value of the loan. Changes in this valuation allowance are
charged or credited to income.
OTHER INVESTMENTS: Policy loans are reported at unpaid principal. Short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts.
FAIR VALUES: Estimated fair values, as reported herein, of publicly traded
fixed maturity securities are as reported by an independent pricing service.
Fair values of conventional mortgage-backed securities not actively traded
in a liquid market are estimated using a third party pricing system. This
pricing system uses a matrix calculation assuming a spread over U.S. Treasury
bonds based upon the expected average lives of the securities. Fair values
of private placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S.
Treasury bonds. Estimated fair values of equity securities which consists of
the Company's investment in its registered separate accounts are based upon
the quoted fair value of the securities comprising the individual portfolios
underlying the separate accounts. Realized gains and losses are determined on
the basis of specific identification and average cost methods for manager
initiated and issuer initiated disposals, respectively.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all demand deposits and interest-bearing accounts not related
to the investment function to be cash equivalents. All interest-bearing
accounts classified as cash equivalents have original maturities of three
months or less.
71
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally commissions and
other expenses related to the production of new business, have been deferred.
Acquisition costs for variable annuity and variable life products are being
amortized generally in proportion to the present value (using the assumed
crediting rate) of expected future gross profits. This amortization is
"unlocked" when the Company revises its estimate of current or future gross
profits to be realized from a group of products. DPAC is adjusted to reflect
the pro forma impact of unrealized gains and losses on fixed maturity
securities the Company has designated as "available for sale" under SFAS No.
115.
PRESENT VALUE OF IN FORCE ACQUIRED
As a result of the merger and the acquisition, a portion of the acquisition
cost related to each transaction was allocated to the right to receive
future cash flows from existing insurance contracts. This allocated cost
represents the PVIF which reflects the value of those purchased policies
calculated by discounting actuarially determined expected future cash flows
at the discount rate determined by the purchaser. Amortization of PVIF is
charged to expense in proportion to expected gross profits. This
amortization is "unlocked" when the Company revises its estimate of current
or future gross profits to be realized from the insurance contracts acquired.
PVIF is adjusted to reflect the pro forma impact of unrealized gains (losses)
on available for sale fixed maturities. See Notes 5 and 6 for additional
information on PVIF resulting from the merger and acquisition.
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements, office
furniture and equipment and capitalized computer software and are not
considered to be significant to the Company's overall operations. Property
and equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily on the basis of the straight-line
method over the estimated useful lives of the assets.
GOODWILL
Goodwill was established as a result of the merger discussed previously and is
being amortized over 40 years on a straight-line basis. Goodwill established
as a result of the acquisition discussed above was being amortized over 25
years on a straight-line basis. See Notes 5 and 6 for additional information
on the merger and acquisition.
FUTURE POLICY BENEFITS
Future policy benefits for fixed interest divisions of the variable products
are established utilizing the retrospective deposit accounting method. Policy
reserves represent the premiums received plus accumulated interest, less
mortality and administration charges. Interest credited to these policies
ranged from 3.30% to 8.25% during 1997. The unearned revenue reserve
represents unearned distribution fees discussed below. These distribution
fees have been deferred and are amortized over the life of the contract in
proportion to its expected gross profits.
SEPARATE ACCOUNTS
Assets and liabilities of the separate accounts reported in the accompanying
balance sheets represent funds that are separately administered principally
for variable annuity and variable life contracts. Contractholders, rather than
the Company, bear the investment risk for variable products. At the direction
of the Contractholders, the separate accounts invest the premiums from the
sale of variable annuity and variable life products in shares of specified
mutual funds. The assets and liabilities of the separate accounts are clearly
identified and segregated from other assets and liabilities of the Company.
The portion of the separate account assets applicable to variable annuity and
variable life contracts cannot be charged with liabilities arising out of any
other business the Company may conduct.
72
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
Variable separate account assets carried at fair value of the underlying
investments generally represent Contractholder investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable annuity and variable life contracts invested in the
separate accounts. Net investment income and realized and unrealized capital
gains and losses related to separate account assets are not reflected in the
accompanying Statements of Income.
Product charges recorded by the Company from variable annuity and variable
life products consist of charges applicable to each contract for mortality
and expense risk, cost of insurance, contract administration and surrender
charges. In addition, some variable annuity and all variable life contracts
provide for a distribution fee collected for a limited number of years after
each premium deposit. Revenue recognition of collected distribution fees is
amortized over the life of the contract in proportion to its expected gross
profits. The balance of unrecognized revenue related to the distribution
fees is reported as an unearned revenue reserve.
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred tax assets or
liabilities are adjusted to reflect the pro forma impact of unrealized gains
and losses on equity securities and fixed maturity securities the Company has
designated as available for sale under SFAS No. 115. Changes in deferred tax
assets or liabilities resulting from this SFAS No. 115 adjustment are charged
or credited directly to stockholder's equity. Deferred income tax expenses
or credits reflected in the Company's Statement of Income are based on the
changes in the deferred tax asset or liability from period to period
(excluding the SFAS No. 115 adjustment).
DIVIDEND RESTRICTIONS
The Company's ability to pay dividends to its parent is restricted because
prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limitation. During 1998,
Golden American cannot pay dividends to its parent without prior approval of
statutory authorities. The Company has maintained adequate statutory capital
and surplus and has not used surplus relief or financial reinsurance, which
have come under scrutiny by many state insurance departments.
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholders unless a notice of
its intention to declare a dividend and amount of the dividend has been filed
not less than thirty days in advance of the proposed declaration. The
superintendent may disapprove the distribution by giving written notice to
First Golden within thirty days after the filing should the superintendent
find that the financial condition of First Golden does not warrant the
distribution.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and present value of in force acquired, (4) fair values of
assets and liabilities recorded as a result of merger and acquisition
transactions, (5) asset valuation
73
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
allowances, (6) guaranty fund assessment
accruals, (7) deferred tax benefits (liabilities) and (8) estimates for
commitments and contingencies including legal matters, if a liability is
anticipated and can be reasonably estimated. Estimates and assumptions
regarding all of the preceding are inherently subject to change and are
reassessed periodically. Changes in estimates and assumptions could
materially impact the financial statements.
2. BASIS OF FINANCIAL REPORTING
The financial statements of the Company differ from related statutory-basis
financial statements principally as follows: (1) acquisition costs of
acquiring new business are deferred and amortized over the life of the
policies rather than charged to operations as incurred; (2) an asset
representing the present value of future cash flows from insurance
contracts acquired was established as a result of the merger/acquisition and
is amortized and charged to expense; (3) future policy benefit reserves for
the fixed interest divisions of the variable products are based on full
account values, rather than the greater of cash surrender value or amounts
derived from discounting methodologies utilizing statutory interest rates;
(4) reserves are reported before reduction for reserve credits related to
reinsurance ceded and a receivable is established, net of an allowance for
uncollectible amounts, for these credits rather than presented net of these
credits; (5) fixed maturity investments are designated as "available for
sale" and valued at fair value with unrealized appreciation/depreciation,
net of adjustments to deferred income taxes (if applicable), present value of
in force acquired and deferred policy acquisition costs, credited/charged
directly to stockholder's equity rather than valued at amortized cost;
(6) the carrying value of fixed maturity securities is reduced to fair value
by a charge to realized losses in the Statement of Income when declines in
carrying value are judged to be other than temporary, rather than through the
establishment of a formula-determined statutory investment reserve (carried as
a liability), changes in which are charged directly to surplus; (7) deferred
income taxes are provided for the difference between the financial statement
and income tax bases of assets and liabilities; (8) net realized gains or
losses attributed to changes in the level of interest rates in the market are
recognized when the sale is completed rather than deferred and amortized over
the remaining life of the fixed maturity security; (9) a liability is
established for anticipated guaranty fund assessments, net of related
anticipated premium tax credits, rather than capitalized when assessed and
amortized in accordance with procedures permitted by insurance regulatory
authorities; (10) revenues for variable annuity and variable life products
consist of policy charges for the cost of insurance, policy administration
charges, amortization of policy initiation fees and surrender charges assessed
rather than premiums received; (11) the financial statements of Golden
American's wholly owned subsidiary are consolidated rather than recorded at
the equity in net assets; (12) surplus notes are reported as liabilities
rather than as surplus; and (13) assets and liabilities are restated to fair
values when a change in ownership occurs, with provisions for goodwill and
other intangible assets, rather than continuing to be presented at historical
cost.
Net loss for Golden American as determined in accordance with statutory
accounting practices was $428,000 in 1997, $9,188,000 in 1996 and $4,117,000
in 1995. Total statutory capital and surplus was $76,914,000 at December 31,
1997 and $80,430,000 at December 31, 1996.
74
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
3. INVESTMENT OPERATIONS
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
_______________________________________________________
For the period| For the period For the period
October 25, 1997| January 1, 1997 August 14, 1996
through| through through
December 31, 1997| October 24, 1997 December 31, 1996
__________________| ___________________________________
(Dollars in thousands)
<S> <C> | <C> <C>
Fixed maturities $4,443 | $18,488 $5,083
Equity securities 3 | -- 103
Mortgage loans on real |
estate 879 | 3,070 203
Policy loans 59 | 482 78
Short-term investments 129 | 443 441
Other, net (154)| 24 2
Funds held in escrow -- | -- --
__________________| ___________________________________
Gross investment income 5,359 | 22,507 5,910
Less investment expenses (232)| (851) (115)
__________________| ___________________________________
Net investment income $5,127 | $21,656 $5,795
==================| ===================================
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
_____________________________________
For the period |
January 1, 1996 | For the year
through | ended
August 13, 1996 | December 31, 1995
__________________| _________________
(Dollars in thousands)
<S> <C> | <C>
Fixed maturities $4,507 | $1,610
Equity securities -- | --
Mortgage loans on real |
estate -- | --
Policy loans 73 | 56
Short-term investments 341 | 899
Other, net 22 | 148
Funds held in escrow 145 | 166
__________________| _________________
Gross investment income 5,088 | 2,879
Less investment expenses (98)| (61)
__________________| _________________
Net investment income $4,990 | $2,818
==================| =================
</TABLE>
Realized gains (losses) on investments are as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
_______________________________________________________
For the period| For the period For the period
October 25, 1997| January 1, 1997 August 14, 1996
through| through through
December 31, 1997| October 24, 1997 December 31, 1996
__________________| ___________________________________
(Dollars in thousands)
<S> <C> | <C> <C>
Fixed maturities, |
available for sale $25 | $151 $42
Mortgage loans (10)| -- --
__________________| ___________________________________
Realized gains (losses) |
on investments $15 | $151 $42
=======================================================
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
_____________________________________
For the period |
January 1, 1996 | For the year
through | ended
August 13, 1996 | December 31, 1995
__________________| _________________
(Dollars in thousands)
<S> <C> | <C>
Fixed maturities, |
available for sale ($420)| $297
Mortgage loans -- | --
__________________| _________________
Realized gains (losses) |
on investments ($420)| $297
=====================================
</TABLE>
75
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
The change in unrealized appreciation (depreciation) on securities at
fair value is as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
_______________________________________________________
For the period | For the period For the period
October 25, 1997 | January 1, 1997 August 14, 1996
through | through through
December 31, | October 24, December 31,
1997 | 1997 1996
__________________| ___________________________________
(Dollars in thousands)
<S> <C> | <C> <C>
Fixed maturities: |
Available for sale $1,113 | $4,607 $410
Held for investment -- | -- --
Equity securities (533)| (465) (3)
__________________| ___________________________________
Unrealized appreciation |
(depreciation) of |
securities $580 | $4,142 $407
=======================================================
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
_____________________________________
For the period |
January 1, 1996 | For the year
through | ended
August 13, 1996 | December 31, 1995
__________________| _________________
(Dollars in thousands)
<S> <C> | <C>
Fixed maturities: |
Available for sale ($2,087)| $958
Held for investment -- | 90
Equity securities 1 | 3
__________________| _________________
Unrealized appreciation |
(depreciation) of |
securities ($2,086)| $1,051
=====================================
</TABLE>
At December 31, 1997 and December 31, 1996, amortized cost, gross unrealized
gains and losses and estimated fair values of fixed maturity securities, all
of which are designated as available for sale, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_______________________________________________
(Dollars in thousands)
December 31, 1997 POST-MERGER
______________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $62,988 $155 ($10) $63,133
Other 5,705 5 (1) 5,709
Foreign governments 2,062 -- (9) 2,053
Public utilities 25,899 49 (4) 25,944
Investment grade corporate 219,526 926 (32) 220,420
Below investment grade
corporate 41,355 186 (210) 41,331
Mortgage-backed securities 55,753 78 (20) 55,811
_______________________________________________
Total $413,288 $1,399 ($286) $414,401
===============================================
December 31, 1996 POST-ACQUISITION
______________________________________________________________________________
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $70,902 $122 ($247) $70,777
Other 3,082 2 (4) 3,080
Public utilities 35,893 193 (38) 36,048
Investment grade corporate 134,487 586 (466) 134,607
Below investment grade
corporate 25,921 249 (56) 26,114
Mortgage-backed securities 4,868 69 -- 4,937
_______________________________________________
Total $275,153 $1,221 ($811) $275,563
===============================================
</TABLE>
76
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
At December 31, 1997, net unrealized investment gains on fixed maturities
designated as available for sale totaled $1,113,000. This appreciation caused
an increase to stockholder's equity of $587,000 at December 31, 1997 (net of
deferred income taxes of $316,000, an adjustment of $35,000 to DPAC and PVIF
of $175,000). Short-term investments with maturities of 30 days or less have
been excluded from the above schedules. Amortized cost approximates fair value
for these securities.
Amortized cost and estimated fair value of fixed maturities designated as
available for sale, by contractual maturity, at December 31, 1997, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
POST-MERGER
_____________________________
Estimated
Amortized Fair
December 31, 1997 Cost Value
_____________________________________________________________________________
(Dollars in thousands)
<S> <C> <C>
Due within one year $26,261 $26,239
Due after one year through five years 198,249 198,781
Due after five years through ten years 70,037 70,437
_____________ _____________
294,547 295,457
Mortgage-backed securities 118,741 118,944
_____________ _____________
Total $413,288 $414,401
============= =============
</TABLE>
An analysis of sales, maturities and principal repayments of the Company's
fixed maturities portfolio is as follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
______________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C>
For the period October 25,
1997 through
December 31, 1997:
Scheduled principal
repayments, calls and
tenders $6,708 $2 -- $6,710
Sales 3,138 23 -- 3,161
______________________________________________________
Total $9,846 $25 -- $9,871
======================================================
For the period January 1,
1997 through October 24,
1997:
Scheduled principal
repayments, calls and
tenders $25,419 -- -- $25,419
Sales 14,052 $153 ($2) 14,203
______________________________________________________
Total $39,471 $153 ($2) $39,622
======================================================
For the period August 14,
1996 through
December 31, 1996:
Scheduled principal
repayments, calls and
tenders $1,612 -- -- $1,612
Sales 45,799 $115 ($73) 45,841
______________________________________________________
Total $47,411 $115 ($73) $47,453
======================================================
For the period January 1,
1996 through August 13,
1996:
Scheduled principal
repayments, calls and
tenders $1,801 -- -- $1,801
Sales 53,710 $152 ($572) 53,290
______________________________________________________
Total $55,511 $152 ($572) $55,091
======================================================
Year ended December 31,
1995:
Scheduled principal
repayments, calls and
tenders $20,279 $305 ($16) $20,568
Sales 3,450 8 -- 3,458
______________________________________________________
Total $23,729 $313 ($16) $24,026
======================================================
</TABLE>
77
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
INVESTMENT VALUATION ANALYSIS: The Company analyzes its investment portfolio
at least quarterly in order to determine if the carrying value of any of its
investments has been impaired. The carrying value of debt and equity
securities is written down to fair value by a charge to realized losses when
an impairment in value appears to be other than temporary. During 1997 and
1996, no investments were identified as having an impairment other than
temporary.
INVESTMENTS ON DEPOSIT: At December 31, 1997 and 1996, affidavits of deposits
covering bonds with a par value of $6,605,000 were on deposit with regulatory
authorities pursuant to certain statutory requirements.
INVESTMENT DIVERSIFICATIONS: The Company's investment policies related to its
investment portfolio require diversification by asset type, company and
industry and set limits on the amount which can be invested in an individual
issuer. Such policies are at least as restrictive as those set forth by
regulatory authorities. The following percentages relate to holdings at
December 31, 1997 and December 31, 1996. Fixed maturity investments included
investments in basic industrials (30% in 1997 and 1996), financial companies
(24% in 1997, 18% in 1996), various government bonds and government or agency
mortgage-backed securities (17% in 1997 and 27% in 1996) and public utilities
(7% in 1997, 13% in 1996). Mortgage loans on real estate have been analyzed
by geographical location with concentrations by state identified as Utah (13%
in 1997, 4% in 1996), California (12% in 1997, 7% in 1996), and Georgia (11%
in 1997, 17% in 1996). There are no other concentrations of mortgage loans in
any state exceeding ten percent at December 31, 1997 and 1996. Mortgage loans
on real estate have also been analyzed by collateral type with significant
concentrations identified in office buildings (43% in 1997, 36% in 1996),
industrial buildings (33% in 1997, 31% in 1996), retail facilities (15% in
1997, 6% in 1996) and multi-family residential buildings (9% in 1997, 27% in
1996). Equity securities and investments accounted for by the equity method
are not significant to the Company's overall investment portfolio.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholder's equity at December 31, 1997.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of estimated fair value of all financial instruments,
including both assets and liabilities recognized and not recognized in a
Company's balance sheet, unless specifically exempted. SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments," requires additional disclosures about derivative financial
instruments. Most of the Company's investments, investment contracts and debt
fall within the standards' definition of a financial instrument. Fair values
for the Company's insurance contracts other than investment contracts are not
required to be disclosed. In cases where quoted market prices are not
available, estimated fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. Accounting, actuarial and regulatory bodies are continuing to study
the methodologies to be used in developing fair value information,
particularly as it relates to such things as liabilities for insurance
contracts. Accordingly, care should be exercised in deriving conclusions
about the Company's business or financial condition based on the information
presented herein.
The Company closely monitors the composition and yield of its invested assets,
the duration and interest credited on insurance liabilities and resulting
interest spreads and timing of cash flows. These amounts are taken into
consideration in the Company's overall management of interest rate risk, which
attempts to minimize exposure to changing interest rates through the matching
of investment cash flows with amounts expected to be due under insurance
contracts. As discussed be-
78
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
low, the Company has used discount rates in its
determination of fair values for its liabilities which are consistent with
market yields for related assets. The use of the asset market yield is
consistent with management's opinion that the risks inherent in its asset and
liability portfolios are similar. This assumption, however, might not result
in values consistent with those obtained through an actuarial appraisal of the
Company's business or values that might arise in a negotiated transaction.
The following compares carrying values as shown for financial reporting
purposes with estimated fair values:
<TABLE>
<CAPTION>
December 31 1997 1996
_______________________________________________________________________________
(Dollars in thousands) |
Estimated | Estimated
Carrying Fair | Carrying Fair
Value Value | Value Value
___________ ___________| ___________ ___________
<S> <C> <C> | <C> <C>
ASSETS |
Fixed maturities, available |
for sale $414,401 $414,401 | $275,563 $275,563
Equity securities 3,904 3,904 | 33 33
Mortgage loans on real estate 85,093 86,348 | 31,459 30,979
Policy loans 8,832 8,832 | 4,634 4,634
Short-term investments 14,460 14,460 | 12,631 12,631
Cash and cash equivalents 21,039 21,039 | 5,839 5,839
Separate account assets 1,646,169 1,646,169 | 1,207,247 1,207,247
|
LIABILITIES |
Annuity products 493,181 431,859 | 280,076 253,012
Surplus note 25,000 28,837 | 25,000 28,878
Separate account liabilities 1,646,169 1,443,458 | 1,207,247 1,119,158
|
</TABLE>
The following methods and assumptions were used by the Company in estimating
fair values.
FIXED MATURITIES: Estimated fair values of publicly traded securities are as
reported by an independent pricing service. Estimated fair values of
conventional mortgage-backed securities not actively traded in a liquid market
are estimated using a third party pricing system. This pricing system uses a
matrix calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities.
EQUITY SECURITIES: Estimated fair values of equity securities, which consist
of the Company's investment in the portfolios underlying its separate accounts,
are based upon the quoted fair value of the individual securities comprising
the individual portfolios underlying the separate accounts. For equity
securities not actively traded, estimated fair values are based upon values of
issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE: Fair values are estimated by discounting
expected cash flows, using interest rates currently offered for similar
loans.
POLICY LOANS: Carrying values approximate the estimated fair value for
policy loans.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: Carrying values
reported in the Company's historical cost basis balance sheet approximate
estimated fair value for these instruments, due to their short-term nature.
SEPARATE ACCOUNT ASSETS: Separate account assets are based upon the quoted
fair values of the individual securities in the separate accounts.
79
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
ANNUITY PRODUCTS: Estimated fair values of the Company's liabilities for
future policy benefits for the fixed interest division of the variable annuity
products and for supplemental contracts without life contingencies are based
upon discounted cash flow calculations. Cash flows of future policy benefits
are discounted using the market yield rate of the assets supporting these
liabilities.
SURPLUS NOTE: Estimated fair value of the Company's surplus note was based
upon discounted future cash flows using a discount rate approximating the
Company's return on invested assets.
SEPARATE ACCOUNT LIABILITIES: Separate account liabilities are reported at
full account value in the Company's historical cost balance sheet.
Estimated fair values of separate account liabilities are based upon
assumptions using an estimated long-term average market rate of return to
discount future cash flows. The reduction in fair values for separate
account liabilities reflect the present value of future revenue from product
charges, distribution fees or surrender charges.
5. MERGER
TRANSACTION: On October 23, 1997, Equitable shareholders approved the Merger
Agreement dated as of July 7, 1997, among Equitable, PFHI and ING. On October
24, 1997, PFHI, a Delaware corporation, acquired all of the outstanding
capital stock of Equitable pursuant to the Merger Agreement. PFHI is a wholly
owned subsidiary of ING, a global financial services holding company based in
The Netherlands. Equitable, an Iowa corporation, in turn, owned all the
outstanding capital stock of Equitable Life Insurance Company of Iowa
("Equitable Life") and Golden American and their wholly owned subsidiaries.
Equitable also owned all the outstanding capital stock of Locust Street
Securities, Inc. ("LSSI"), Equitable Investment Services, Inc., DSI, Equitable
of Iowa Companies Capital Trust, Equitable of Iowa Companies Capital Trust II
and Equitable of Iowa Securities Network, Inc. In exchange for the
outstanding capital stock of Equitable, ING paid total consideration of
approximately $2.1 billion in cash and stock plus the assumption of
approximately $400 million in debt according to the Merger Agreement.
As a result of the merger, Equitable was merged into PFHI which was
simultaneously renamed Equitable of Iowa Companies, Inc. ("EIC" or the
"Parent"), a Delaware corporation. All costs of the merger, including
expenses to terminate certain benefit plans, were paid by the Parent.
ACCOUNTING TREATMENT: The merger was accounted for as a purchase resulting
in a new basis of accounting, reflecting estimated fair values for assets
and liabilities at October 24, 1997. The purchase price was allocated to EIC
and its subsidiaries. Goodwill was established for the excess of the merger
cost over the fair value of the net assets and pushed down to EIC and its
subsidiaries including Golden American and First Golden. The merger cost is
preliminary with respect to estimated expenses and, as a result, the PVIF and
related amortization and deferred taxes may change. The allocation of the
purchase price to the Company was approximately $227,497,000. The amount of
goodwill allocated to the Company relating to the merger was $151,127,000 at
the merger date and is being amortized over 40 years on a straight-line basis.
The carrying value of goodwill will be reviewed periodically for any
indication of impairment in value. The Company's DPAC, previous balance of
PVIF and unearned revenue reserve, as of the merger date, were eliminated
and an asset of $44,297,000 representing PVIF was established for all policies
in force at the merger date.
PRESENT VALUE OF IN FORCE ACQUIRED: As part of the merger, a portion of the
acquisition cost was allocated to the right to receive future cash flows from
insurance contracts existing with the Company at the date of merger. This
allocated cost represents the present value of in force acquired reflecting
the value of those purchased policies calculated by discounting the
actuarially determined expected future cash flow at the discount rate
determined by ING.
80
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
An analysis of the PVIF asset is as follows:
<TABLE>
<CAPTION>
POST-MERGER
________________________
For the period
October 25, 1997
through
December 31, 1997
________________________
(Dollars in thousands)
<S> <C>
Beginning balance $44,297
Imputed interest 1,004
Amortization (1,952)
Adjustment for unrealized gains
on available for sale securities (175)
________________________
Ending balance $43,174
========================
</TABLE>
Interest is imputed on the unamortized balance of PVIF at a rate of 7.03% for
the period October 25, 1997 through December 31, 1997. The amortization of
PVIF net of imputed interest is charged to expense. PVIF is also adjusted for
the unrealized gains (losses) on available for sale securities; such changes
are included directly in stockholder's equity. Based on current conditions
and assumptions as to the impact of future events on acquired policies in
force, the expected approximate net amoritization for the next five years,
relating to the PVIF as of December 31, 1997, is $6,200,000 in 1998,
$6,000,000 in 1999, $5,600,000 in 2000, $5,000,000 in 2001 and $4,200,000 in
2002. Actual amortization may vary based upon final purchase price allocation
and changes in assumptions and experience.
6. ACQUISITION
TRANSACTION: On August 13, 1996, Equitable acquired all of the outstanding
capital stock of BT Variable from Whitewood, a wholly owned subsidiary of
Bankers Trust Company ("Bankers Trust"), pursuant to the terms of the
Purchase Agreement dated as of May 3, 1996 between Equitable and Whitewood.
In exchange for the outstanding capital stock of BT Variable, Equitable paid
the sum of $93,000,000 in cash to Whitewood in accordance with the terms of
the Purchase Agreement. Equitable also paid the sum of $51,000,000 in cash to
Bankers Trust to retire certain debt owed by BT Variable to Bankers Trust
pursuant to a revolving credit arrangement. Subsequent to the acquisition,
the BT Variable, Inc. name was changed to EIC Variable, Inc. At April 30,
1997, EIC Variable, Inc. was liquidated and its investments in Golden American
and DSI were transferred to Equitable, while the remainder of its net assets
were contributed to Golden American. On December 30, 1997, EIC Variable, Inc.
was dissolved.
ACCOUNTING TREATMENT: The acquisition was accounted for as a purchase
resulting in a new basis of accounting, which reflected estimated fair
values for assets and liabilities at August 13, 1996. The purchase price
was allocated to the three companies purchased - BT Variable, DSI and Golden
American. Goodwill was established for the excess of the acquisition cost
over the fair value of the net assets acquired and pushed down to Golden
American. The allocation of the purchase price to the Company was
approximately $139,872,000. The amount of goodwill relating to the
acquisition was $41,113,000 and was amortized over 25 years on a straight-line
basis until the October 24, 1997 merger with ING. The Company's DPAC,
previous balance of PVIF and unearned revenue reserve, as of the merger
date, were eliminated and an asset of $85,796,000 representing PVIF was
established for all policies in force at the acquisition date.
81
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
PRESENT VALUE OF IN FORCE ACQUIRED: As part of the acquisition, a portion of
the acquisition cost was allocated to the right to receive future cash flows
from the insurance contracts existing with the Company at the date of
acquisition. This allocated cost represents the present value of in force
acquired reflecting the value of those purchased policies calculated by
discounting the actuarially determined expected future cash flows at the
discount rate determined by Equitable.
An analysis of the PVIF asset is as follows:
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
_________________________________________________
For the For the | For the
period period | period
January August | January For the
1, 1997 14, 1996 | 1, 1996 year
through through | through ended
October December | August December
24, 1997 31, 1996 | 13, 1996 31, 1995
_______________________| ________________________
(Dollars in thousands)
<S> <C> <C> | <C> <C>
Beginning balance $83,051 $85,796 | $6,057 $7,620
Imputed interest 5,138 2,465 | 273 548
Amortization (10,363) (5,210)| (1,224) (2,100)
Adjustment for unrealized |
gains (losses) on available |
for sale securities (373) -- | 11 (11)
_______________________| ________________________
Ending balance $77,453 $83,051 | $5,117 $6,057
=================================================
</TABLE>
Pre-Acquisition PVIF represents the remaining value assigned to in force
contracts when Bankers Trust purchased Golden American from Mutual Benefit
Life Insurance Company in Rehabilitation ("Mutual Benefit") on September
30, 1992.
Interest was imputed on the unamortized balance of PVIF at rates of 7.70%
to 7.80% for the period August 14, 1996 through October 24, 1997. The
amortization of PVIF net of imputed interest was charged to expense. PVIF
was also adjusted for the unrealized gains (losses) on available for sale
securities; such changes were included directly in stockholder's equity.
7. INCOME TAXES
The Company will file a consolidated federal income tax return with its wholly
owned life insurance subsidiary. Under the Internal Revenue Code, a newly
acquired insurance company cannot file as part of its parent's consolidated
tax return for 5 years.
At December 31, 1997, Golden American has net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $8,697,000.
Approximately $5,094,000 and $3,603,000 of these NOL carryforwards are
available to offset future taxable income of the Company through the years
2011 and 2012, respectively.
82
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
INCOME TAX EXPENSE
Income tax expense (benefit) included in the consolidated financial statements
is as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION PRE-ACQUISITION
_____________________________________________________________________
For the | For the For the | For the
period | period period | period
October 25, | January 1, August 14, | January 1,
1997 | 1997 1996 | 1996 For the
through | through through | through year ended
December 31, | October 24, December 31, | August 13, December 31,
1997 | 1997 1996 | 1996 1995
_____________| __________________________| __________________________
(Dollars in thousands)
<S> <C> | <C> <C> | <C> <C>
Current -- | $12 -- | -- --
Deferred $146 | (1,349) $220 | ($1,463) --
_____________| __________________________| __________________________
$146 | ($1,337) $220 | ($1,463) --
=====================================================================
</TABLE>
The effective tax rate on income (loss) before income taxes is different from
the prevailing federal income tax rate. A reconciliation of this difference
is as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the For the | For the
period | period period | period
October | January August | January
25, 1997 | 1, 1997 14, 1996 | 1, 1996 For the
through | through through | through year ended
December | October December | August December
31, 1997 | 24, 1997 31, 1996 | 13, 1996 31, 1995
___________| ____________________| ____________________
(Dollars in thousands)
<S> <C> | <C> <C> | <C> <C>
Income (loss) | |
before income taxes ($279)| ($608) $570 | $1,736 $3,364
===========| ====================| ====================
Income tax | |
(benefit) at federal | |
statutory rate ($98)| ($213) $200 | $607 $1,177
Tax effect (decrease) of: | |
Realization of NOL | |
carryforwards -- | -- -- | (1,214) --
Dividends received | |
deduction -- | -- -- | -- (350)
Goodwill amortization 220 | -- -- | -- --
Compensatory stock | |
option and restricted | |
stock expense -- | (1,011) -- | -- --
Other items 24 | (113) 20 | -- 17
Valuation allowance -- | -- -- | (856) (844)
___________| ____________________| ____________________
Income tax expense | |
(benefit) $146 | ($1,337) $220 | ($1,463) $--
=======================================================
</TABLE>
83
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
DEFERRED INCOME TAXES
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
___________________________________
December 31 1997 | 1996
____________________________________________________________ | ________________
(Dollars in thousands)
<S> <C> | <C>
Deferred tax assets: |
Future policy benefits $27,399 | $19,102
Deferred policy acquisition costs 4,558 | 1,985
Goodwill 17,620 | 5,918
Net operating loss carryforwards 3,044 | 1,653
Other 1,548 | 235
________________ | ________________
54,169 | 28,893
Deferred tax liabilities: |
Unrealized appreciation (depreciation) |
of securities at fair value (130) | (145)
Fixed maturity securities (1,665) | --
Present value of in force acquired (15,172) | (29,068)
Other (972) | (45)
________________ | ________________
(17,939) | (29,258)
________________ | ________________
Deferred income tax asset (liability) $36,230 | ($365)
===================================
</TABLE>
The Company is required to establish a "valuation allowance" for any portion
of the deferred tax assets that management believes will not be realized. In
the opinion of management, it is more likely than not that the Company will
realize the benefit of the deferred tax assets, and, therefore, no such
valuation allowance has been established.
8. RETIREMENT PLANS
DEFINED BENEFIT PLANS
In 1997, the Company was allocated their share of the pension liability
associated with their employees. The Company's employees are covered by the
employee retirement plan of an affiliate, Equitable Life. The benefits are
based on years of service and the employee's average annual compensation
during the last five years of employment. Further, Equitable Life sponsors a
defined contribution plan that is qualified under Internal Revenue Code
Section 401(k). The Company's funding and accounting policies are consistent
with the funding requirements of Federal law and regulations.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheet:
<TABLE>
<CAPTION>
POST-MERGER
______________________
December 31, 1997
______________________
(Dollars in thousands)
<S> <C>
Accumulated benefit obligation $579
======================
Plan assets at fair value, primarily bonds, common
stocks, mortgage loans and short-term investments --
Projected benefit obligation for service rendered to date $956
______________________
Pension liability $956
======================
</TABLE>
84
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
POST-MERGER POST-ACQUISITION
_____________________________________
For the period | For the period
October 25, 1997 | January 1, 1997
through | through
December 31, 1997 | October 24, 1997
__________________| _________________
(Dollars in thousands)
<S> <C> | <C>
Service cost-benefits earned |
during the period $114 | $568
Interest cost on projected |
benefit obligation 10 | 15
Net amortization and deferral -- | 1
__________________| _________________
Net periodic pension cost $124 | $58
=====================================
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
were 7.25% and 5.00%, respectively, at December 31, 1997. The average
expected long term rate of return on plan assets was 9.00% in 1997.
9. RELATED PARTY TRANSACTIONS
DSI acts as the principal underwriter (as defined in the Securities Act of
1933 and the Investment Company Act of 1940, as amended) of the variable
insurance products issued by the Company which as of December 31, 1997 are
sold primarily through six broker/dealer institutions. For the periods
October 25, 1997, through December 31, 1997 and January 1, 1997 through
October 24, 1997, the Company paid commissions to DSI totaling $9,931,000
and $26,419,000, respectively ($9,995,000 for the period August 14, 1996
through December 31, 1996 and $17,070,000 for the period January 1, 1996
through August 13, 1996). For the year ended December 31, 1995 commissions
paid by Golden American to DSI aggregated $8,440,000.
Golden American provides certain managerial and supervisory services to DSI.
Beginning in 1995, this fee was calculated as a percentage of average assets
in the variable separate accounts. For the periods October 25, 1997 through
December 31, 1997 and January 1, 1997 through October 24, 1997, the fee was
$508,000 and $2,262,000, respectively. For the periods August 14, 1996
through December 31, 1996 and January 1, 1996 through August 13, 1996 the
fee was $877,000 and $1,390,000, respectively. This fee was $987,000 for 1995.
The Company has a service agreement with Equitable Investment Services, Inc.
("EISI"), an affiliate, in which EISI provides investment management
services. Payments for these services totaled $200,000, $768,000 and
$72,000 for the periods October 25, 1997 through December 31, 1997,
January 1, 1997 through October 24, 1997 and August 14, 1996 through
December 31, 1996, respectively.
Golden American has a guaranty agreement with Equitable Life. In
consideration of an annual fee, payable June 30, Equitable Life guarantees
to Golden American that it will make funds available, if needed, to Golden
American to pay the contractual claims made under the provisions of Golden
American's life insurance and annuity contracts. The agreement is not, and
nothing contained therein or done pursuant thereto by Equitable Life shall
be deemed to constitute, a direct or indirect guaranty by Equitable Life
of the payment of any debt or other obligation, indebtedness or liability,
of any kind or character whatsoever, of Golden American. The agreement
does not guarantee the value of the underlying assets held in separate
accounts in which funds of variable life insurance and variable annuity
policies have been invested. The calculation of the annual fee is based
on risk based capital. As Golden American's risk based capital level was
above required amounts, no annual fee was payable.
85
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
Golden American provides certain advisory, computer and other resources and
services to Equitable Life. Revenues for these services which reduced general
expenses incurred by Golden American totaled $1,338,000 and $2,992,000 for
the periods October 25, 1997 through December 31, 1997 and January 1, 1997
through October 24, 1997, respectively. No services were provided by Golden
American in 1996.
The Company has a service agreement with Equitable Life in which Equitable
Life provides administrative and financial related services. For the period
October 25, 1997 through December 31, 1997 and January 1, 1997 through
October 24, 1997, the Company incurred expenses of $13,000 and $16,000,
respectively, under this agreement.
The Company had premiums, net of reinsurance, for variable products from six
significant broker/dealers for the year ended December 31, 1997, that
totaled $445,300,000, or 71% of premiums ($298,000,000 or 67% from two
significant broker/dealers for the year ended December 31, 1996). Included in
these amounts are premiums for 1997 of $26.2 million from LSSI, an affiliate.
SURPLUS NOTE: On December 17, 1996, Golden American issued an 8.25% surplus
note in the amount of $25,000,000 to Equitable. The note matures on December
17, 2026. The note and accrued interest thereon shall be subordinate to
payments due to policyholders, claimant and beneficiary claims, as well as
debts owed to all other classes of debtors of Golden American. Any payment of
principal made shall be subject to the prior approval of the Delaware
Insurance Commissioner. Golden American incurred interest totaling $344,000
and $1,720,000 for the period October 25, 1997 through December 31, 1997 and
January 1, 1997 through October 24, 1997, respectively. On December 17, 1996,
Golden American contributed the $25,000,000 to First Golden acquiring 200,000
shares of common stock (100% of outstanding stock) of First Golden.
RECIPROCAL LOAN AGREEMENT: Golden American maintains a reciprocal loan
agreement with ING America Insurance Holdings, Inc. ("ING America"), a
Delaware corporation, and affiliate of EIC, to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Under this
agreement, which became effective January 1, 1998 and expires December 31,
2007, Golden American and ING America can borrow up to $65,000,000 from one
another. Interest on any Golden American borrowings is charged at the rate of
ING America's cost of funds for the interest period plus 0.15%. Interest
on any ING America borrowings is charged at a rate based on the prevailing
interest rate of U.S. commercial paper available for purchase with a similar
arrangement.
LINE OF CREDIT: Golden American maintained a line of credit agreement with
Equitable to facilitate the handling of unusual and/or unanticipated
short-term cash requirements. Under this agreement which became effective
December 1, 1996 and expired December 31, 1997, Golden American could borrow
up to $25,000,000. Interest on any borrowings was charged at the rate of
Equitable's monthly average aggregate cost of short-term funds plus 1.00%.
Under this agreement, the Company incurred interest expense of $213,000 for
the period October 25, 1997 through December 31, 1997, $362,000 for the
period January 1, 1997 through October 24, 1997, and $85,000 for the period
August 14, 1996 through December 31, 1996. At December 31, 1997, $24,059,000
was outstanding under this agreement. The outstanding balance was repaid
by a capital contribution.
STOCKHOLDER'S EQUITY: On September 23, 1996, EIC Variable, Inc. contributed
$50,000,000 of Preferred Stock to the Company's additional paid-in capital.
86
<PAGE>
<PAGE>
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
10. COMMITMENTS AND CONTINGENCIES
CONTINGENT LIABILITY: In a transaction that closed on September 30, 1992,
Bankers Trust acquired from Mutual Benefit, in accordance with the terms of an
Exchange Agreement, all of the issued and outstanding capital stock of Golden
American and DSI and certain related assets for consideration with an
aggregate value of $13,200,000 and contributed them to BT Variable. The
transaction involved settlement of pre-existing claims of Bankers Trust
against Mutual Benefit. The ultimate value of these claims has not yet been
determined by the Superior Court of New Jersey and, prior to August 13, 1996,
was contingently supported by a $5,000,000 note payable from Golden American
and a $6,000,000 letter of credit from Bankers Trust. Bankers Trust had
estimated that the contingent liability due from Golden American amounted to
$439,000 at August 13, 1996. At August 13, 1996 the balance of the escrow
account established to fund the contingent liability was $4,293,000.
On August 13, 1996, Bankers Trust made a cash payment to Golden American in
an amount equal to the balance of the escrow account less the $439,000
contingent liability discussed above. In exchange, Golden American
irrevocably assigned to Bankers Trust all of Golden American's rights to
receive any amounts to be disbursed from the escrow account in accordance
with the terms of the Exchange Agreement. Bankers Trust also irrevocably
agreed to make all payments becoming due under the Golden American note and
to indemnify Golden American for any liability arising from the note.
REINSURANCE: At December 31, 1997, the Company had reinsurance treaties with
five unaffiliated reinsurers covering a significant portion of the mortality
risks under its variable contracts. The Company remains liable to the extent
its reinsurers do not meet their obligations under the reinsurance agreements.
Reinsurance in force for life mortality risks were $96,686,000 and $58,368,000
at December 31, 1997 and 1996. At December 31, 1997, the Company has a net
payable of $11,000 for reserve credits, reinsurance claims or other
receivables from these reinsurers comprised of $240,000 for claims
recoverable from reinsurers and a payable of $251,000 for reinsurance
premiums. Included in the accompanying financial statements are net
considerations to reinsurers of $326,000, $1,871,000, $875,000, $600,000
and $2,800,000 and net policy benefits recoveries of $461,000, $1,021,000,
$654,000, $1,267,000 and $3,500,000 for the periods October 25, 1997 through
December 31, 1997, January 1, 1997 through October 24, 1997, August 14, 1996
through December 31, 1996, and January 1, 1996 through August 13, 1996 and
the year ended 1995, respectively.
Effective June 1, 1994, Golden American entered into a modified coinsurance
agreement with an unaffiliated reinsurer. The accompanying financial
statements are presented net of the effects of the treaty which increased
income by $265,000, $335,000, $10,000 and $56,000 for the periods October
25, 1997 through December 31, 1997, January 1, 1997 through October 24, 1997,
August 14, 1996 through December 31, 1996 and January 1, 1996 through
August 13, 1996, respectively. In 1995, net income was reduced by $109,000.
GUARANTY FUND ASSESSMENTS: Assessments are levied on the Company by life and
health guaranty associations in most states in which the Company is licensed
to cover losses of policyholders of insolvent or rehabilitated insurers. In
some states, these assessments can be partially recovered through a reduction
in future premium taxes. The Company cannot predict whether and to what
extent legislative initiatives may affect the right to offset. Based upon
information currently available from the National Organization of Life and
Health Insurance Guaranty Associations (NOLHGA), the Company believes that
it is probable these insolvencies will result in future assessments which
could be material to the Company's financial statements if the Company's
reserve is not sufficient. The Company regularly reviews its reserve for
these insolvencies and updates its reserve based upon the Company's
interpretation of information from the NOLHGA annual report. The associated
cost for a particular insurance company can vary significantly based upon
its fixed account premium volume by line of business and
89
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1997
state premium levels
as well as its potential for premium tax offset. Accordingly, the Company
accrued and charged to expense an additional $141,000 for the period October
25, 1997 through December 31, 1997, $446,000 for the period January 1, 1997
through October 24, 1997, $291,000 for the period August 14, 1996 through
December 31, 1996 and $480,000 for the period January 1, 1996 through August
13, 1996. At December 31, 1997, the Company has an undiscounted reserve of
$1,358,000 to cover estimated future assessments (net of related anticipated
premium tax credits) and has established an asset totaling $238,000 for
assessments paid which may be recoverable through future premium tax offsets.
The Company believes this reserve is sufficient to cover expected future
insurance guaranty fund assessments, based upon previous premiums, and known
insolvencies at this time.
LITIGATION: In the ordinary course of business, the Company is engaged in
litigation, none of which management believes is material.
VULNERABILITY FROM CONCENTRATIONS: The Company has various concentrations in
its investment portfolio (see Note 3 for further information). The Company's
asset growth, net investment income and cash flow are primarily generated from
the sale of variable products and associated future policy benefits and
separate account liabilities. A significant portion of the Company's sales is
generated by six broker/dealers. Substantial changes in tax laws that would
make these products less attractive to consumers, extreme fluctuations in
interest rates or stock market returns which may result in higher lapse
experience than assumed, could cause a severe impact to the Company's
financial condition.
OTHER COMMITMENTS: At December 31, 1997, outstanding commitments to fund
mortgage loans on real estate totaled $1,825,000.
YEAR 2000 (UNAUDITED): Based on a study of its computer software and
hardware, the Company has determined its exposure to the Year 2000 change of
the century date issue. Management believes the Company's systems are or
will be substantially compliant by Year 2000 and has engaged external
consultants to validate this assumption. Golden American has spent
approximately $2,000 in 1997 related to the external consultants' analysis.
The projected cost to the Company for the external consultants' analysis is
approximately $130,000 to $170,000. The only system known to be affected by
this issue is a system maintained by an affiliate who will incur the related
costs to make the system compliant. To mitigate the effect of outside
influences and other dependencies relative to the Year 2000, the Company will
be contacting significant customers, suppliers and other third parties. To
the extent these third parties would be unable to transact business in the
Year 2000 and thereafter, the Company's operations could be adversely
affected.
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STATEMENT OF ADDITIONAL INFORMATION
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
Introduction............................................ 1
Description of Golden American Life Insurance Company... 1
Safekeeping of Assets................................... 1
The Administrator....................................... 1
Independent Auditors.................................... 2
Distribution of Contracts............................... 2
Performance Information................................. 3
IRA Withdrawal Option................................... 9
Other Information....................................... 9
Financial Statements of Separate Account B.............. 10
Appendix -- Description of Bond Ratings................. A-1
</TABLE>
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PLEASE TEAR OFF, COMPLETE AND RETURN THE FORM BELOW TO ORDER A FREE
STATEMENT OF ADDITIONAL INFORMATION FOR THE CONTRACTS OFFERED UNDER
THE PROSPECTUS. 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
G3770 VALUE 3/99
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APPENDIX A
MARKET VALUE ADJUSTMENT EXAMPLES
EXAMPLE #1: FULL SURRENDER -- EXAMPLE OF A NEGATIVE MARKET VALUE
ADJUSTMENT
Assume $100,000 was allocated to a Fixed Interest Allocation with a
guarantee interest period of 10 years, a guaranteed interest rate of 7.5%,
an initial Index Rate ("I") of 7%; that a full surrender is
requested 3 years into the guaranteed interest period; that the then Index
Rate for a 7 year guaranteed interest period ("J") is 8%; and that no
prior transfers or partial withdrawals affecting this Fixed Interest
Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. The contract value of the Fixed Interest Allocation on the date of
surrender is $124,230
( $100,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
3. Market Value Adjustment = $124,230 X
(( 1.07 / 1.0850 ) ^ ( 2,555 / 365 ) - 1 ) = $11,535
Therefore, the amount paid to you on full surrender ignoring any
surrender charge is $112,695 ( $124,230 - $11,535 ).
EXAMPLE #2: FULL SURRENDER -- EXAMPLE OF A POSITIVE MARKET VALUE
ADJUSTMENT
Assume $100,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, a guaranteed interest rate of 7.5%,
an initial Index Rate ("I") of 7%; that a full surrender is
requested 3 years into the guaranteed interest period; that the then Index
Rate for a 7 year guaranteed interest period ("J") is 6%; and that no
prior transfers or partial withdrawals affecting this Fixed Interest
Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. The contract value of the Fixed Interest Allocation on the date of
surrender is $124,230
( $100,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
3. Market Value Adjustment = $124,230 X
(( 1.07 / 1.0650 ) ^ ( 2,555 / 365 ) - 1 ) = $4,141
Therefore, the amount paid to you on full surrender ignoring any
surrender charge is $128,371 ( $124,230 + $4,141 ).
EXAMPLE #3: WITHDRAWAL -- EXAMPLE OF A NEGATIVE MARKET VALUE
ADJUSTMENT
Assume $200,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, a guaranteed interest rate of 7.5%,
an initial Index Rate ("I") of 7%; that a partial withdrawal of
$112,695 is requested 3 years into the guaranteed interest period; that
the then Index Rate ("J") for a 7 year guaranteed interest period is 8%;
and that no prior transfers or partial withdrawals affecting this
Fixed Interest Allocation have been made.
First calculate the amount that must be withdrawn from the Fixed
Interest Allocation to provide the amount requested.
1. The contract value of the Fixed Interest Allocation on the date of
withdrawal is $248,459
( $200,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
3. Amount that must be withdrawn =
(( $112,695 / ( 1.07 / 1.0850 ) ^ ( 2,555 / 365 )) = $124,230
A1
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Then calculate the Market Value Adjustment on that amount
4. Market Value Adjustment = $124,230 X
(( 1.07 / 1.0850 ) ^ ( 2,555 / 365 ) - 1 ) = $11,535
Therefore, the amount of the withdrawal paid to you is
$112,695, as requested. The Fixed Interest Allocation will be reduced
by the amount of the withdrawal, $112,695, and also reduced by the
Market Value Adjustment of $11,535, for a total reduction in the
Fixed Interest Allocation of $124,230.
EXAMPLE #4: WITHDRAWAL -- EXAMPLE OF A POSITIVE MARKET VALUE
ADJUSTMENT
Assume $200,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, a guaranteed interest rate of 7.5%,
an initial Index Rate of 7%; that a partial withdrawal of $128,371
requested 3 years into the guaranteed interest period; that the then Index
Rate ("J") for a 7 year guaranteed interest period is 6%; and that no
prior transfers or withdrawals affecting this Fixed Interest
Allocation have been made.
First calculate the amount that must be withdrawn from the Fixed
Interest Allocation to provide the amount requested.
1. The contract value of Fixed Interest Allocation on the date of
surrender is $248,459
( $200,000 X 1.075 ^ 3 )
2. N = 2,555 ( 365 X 7 )
3. Amount that must be withdrawn =
(( $128,371 / ( 1.07 / 1.0650 ) ^ ( 2,555 / 365 )) = $124,230
Then calculate the Market Value Adjustment on that amount
4. Market Value Adjustment = $124,230 X
(( 1.07 / 1.0650 ) ^ ( 2,555 / 365 ) - 1 ) = $4,141
Therefore, the amount of the partial withdrawal paid to you is
$128,371, as requested. The Fixed Interest Allocation will be reduced
by the amount of the partial withdrawal, $128,371, but increased by the
Market Value Adjustment of $4,141, for a total reduction in the
Fixed Interest Allocation of $124,230.
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APPENDIX B
SURRENDER CHARGE FOR EXCESS WITHDRAWALS EXAMPLE
The following assumes you made an initial premium payment of $25,000
and additional premium payments of $25,000 in each of the second and
third contract years, for total premium payments under the Contract of
$75,000. It also assumes a withdrawal at the beginning of the fifth
contract year of 30% of the contract value of $90,000.
In this example, $15,000 (maximum of $15,000 or $75,000 x .10) is the
maximum free withdrawal amount that you may withdraw during the
contract year without a surrender charge. The total withdrawal would
be $27,000 ($90,000 x .30). Therefore, $12,000 ($27,000 - $15,000) is
considered an excess withdrawal of a part of the initial premium
payment of $25,000 and would be subject to a 4% surrender charge of
$480 ($12,000 x .04). This example does not take into account any
Market Value Adjustment or deduction of any premium taxes.
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is a stock company
domiciled in Wilmington, Delaware
G3770 VALUE 3/99
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