<PAGE> 1
FIRST NORTH AMERICAN LIFE ASSURANCE COMPANY
Annuity Service Office and Mailing Address
International Corporate Center at Rye
555 Theodore Fremd Avenue
Rye, New York 10580
FNAL VARIABLE ACCOUNT
OF
FIRST NORTH AMERICAN LIFE ASSURANCE COMPANY
FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT
NON-PARTICIPATING
This Prospectus describes a flexible purchase payment individual
deferred combination fixed and variable annuity contract (the "contract") issued
by First North American Life Assurance Company ("the Company"), a stock life
insurance company organized under the laws of the state of New York. The
contract is designed for use in connection with retirement plans which may or
may not qualify for special federal income tax treatment.
The contract provides for the accumulation of contract values and the
payment of annuity benefits on a variable and/or fixed basis. The contract
offers thirty seven investment options: thirty four variable and three fixed.
The variable portion of the contract value and annuity payments, if selected on
a variable basis, will vary according to the investment performance of the
sub-accounts of FNAL Variable Account (the "Variable Account"). The Variable
Account is a separate account established by the Company. Purchase payments and
earnings on those purchase payments may be allocated to and transferred among
one or more of thirty four sub-accounts of the Variable Account. The assets of
each sub-account are invested in shares of NASL Series Trust (the "Trust"), a
mutual fund having an investment portfolio for each sub-account of the Variable
Account. (see the accompanying Prospectus of the Trust). Fixed contract values
may be accumulated under one, three and six year fixed account investment
options. Except as specifically noted herein and as set forth under the caption
"FIXED ACCOUNT INVESTMENT OPTIONS" below, this Prospectus describes only the
variable portion of the contract.
Additional information about the variable portion of the contract and
Variable Account is contained in a Statement of Additional Information, dated
the same date as this Prospectus, which has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. The Statement of
Additional Information is available without charge upon request by writing the
Company at the above address or telephoning (914) 921-1020. In addition, the
Securities and Exchange Commission ("Commission") maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding registrants
that file electronically with the Commission. The table of contents for the
Statement of Additional Information is included on page 34 of this Prospectus.
SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE VARIABLE ACCOUNT AND THE VARIABLE PORTION OF THE
CONTRACT THAT A PROSPECTIVE PURCHASER SHOULD KNOW BEFORE INVESTING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1997.
V9.PRO597
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS ........................................................ 3
SUMMARY .............................................................. 5
GENERAL INFORMATION ABOUT FIRST NORTH AMERICAN LIFE ASSURANCE COMPANY,
FNAL VARIABLE ACCOUNT
AND NASL SERIES TRUST ................................................ 13
First North American Life Assurance Company ....................... 13
FNAL Variable Account ............................................. 13
NASL Series Trust ................................................. 13
DESCRIPTION OF THE CONTRACT .......................................... 18
ACCUMULATION PROVISIONS ........................................... 18
Purchase Payments ............................................ 18
Accumulation Units ........................................... 19
Value of Accumulation Units .................................. 19
Net Investment Factor ........................................ 19
Transfers Among Investment Options ........................... 20
Maximum Number of Investment Options ......................... 20
Special Transfer Services -
Dollar Cost Averaging ..................................... 20
Asset Rebalancing Program .................................... 20
Withdrawals .................................................. 21
Special Withdrawal Services -
Systematic Withdrawal Plan ................................ 22
Loans ........................................................ 22
Death Benefit Before Maturity Date ........................... 23
ANNUITY PROVISIONS ................................................ 24
General ...................................................... 24
Annuity Options .............................................. 24
Determination of Amount of the First Variable
Annuity Payment .............................................. 25
Annuity Units and the Determination of
Subsequent Variable Annuity Payments ......................... 26
Transfers After Maturity Date ................................ 26
Death Benefit on or After Maturity Date ...................... 26
OTHER CONTRACT PROVISIONS ......................................... 26
Ten Day Right to Review ...................................... 26
Ownership .................................................... 27
Beneficiary .................................................. 27
Modification ................................................. 27
Company Approval ............................................. 27
Misstatement and Proof of Age,
Sex or Survival .............................................. 27
FIXED ACCOUNT INVESTMENT OPTIONS .................................. 27
CHARGES AND DEDUCTIONS ............................................... 30
Withdrawal Charges ................................................ 30
Administration Fees ............................................... 31
Mortality and Expense Risk Charge ................................. 31
Taxes ............................................................. 32
FEDERAL TAX MATTERS .................................................. 32
Introduction ...................................................... 32
The Company's Tax Status .......................................... 32
Taxation of Annuities in General .................................. 32
Tax Deferral During Accumulation Period ...................... 32
Taxation of Partial and Full Withdrawals ..................... 34
Taxation of Annuity Payments ................................. 34
Taxation of Death Benefit Proceeds ........................... 34
Penalty Tax on Premature Distributions ....................... 35
Aggregation of Contracts ..................................... 35
Qualified Retirement Plans ........................................ 35
Qualified Plan Types ......................................... 36
Direct Rollovers ............................................. 37
Federal Income Tax Withholding .................................... 38
GENERAL MATTERS ...................................................... 38
Performance Data .................................................. 38
Financial Statements .............................................. 38
Asset Allocation and Timing Services .............................. 38
Distribution of Contracts ......................................... 39
Contract Owner Inquiries .......................................... 39
Legal Proceedings ................................................. 39
Other Information ................................................. 39
STATEMENT OF ADDITIONAL INFORMATION -
Table of Contents .................................................. 39
APPENDIX A:
Examples of Calculation of Withdrawal Charge ...................... 40
</TABLE>
<PAGE> 3
SPECIAL TERMS
The following terms as used in this Prospectus have the indicated
meanings:
Accumulation Unit - A unit of measure that is used to calculate the
value of the variable portion of the contract before the maturity date.
Annuitant - Any natural person or persons whose life is used to
determine the duration of annuity payments involving life contingencies. If the
contract owner names more than one person as an "Annuitant," the second person
named shall be referred to as "Co-Annuitant." The "Annuitant" is as specified in
the application, unless changed. All provisions based on the date of the death
of the "Annuitant" will be based on the date of death of the last to survive of
the "Annuitant" or "Co-Annuitant." In the event of the death of the "Annuitant"
or "Co-Annuitant" who is also a contract owner, a death benefit is payable under
the Death of Owner provision. The "Annuitant" and "Co-Annuitant" will be
referred to collectively as "Annuitant."
Annuity Option - The method selected by the contract owner for annuity
payments made by the Company.
Annuity Service Office - The service office of the Company is
International Corporate Center at Rye, 555 Theodore Fremd Avenue, Rye, New York
10580.
Annuity Unit - A unit of measure that is used after the maturity date
to calculate variable annuity payments.
Beneficiary - The person, persons or entity entitled to the death
benefit under the contract upon the death of the annuitant. The beneficiary is
as specified in the application, unless changed. (See also "Successor Owner").
Contingent Beneficiary - The person, persons or entity to become the
beneficiary if the beneficiary is not alive. The contingent beneficiary is as
specified in the application, unless changed.
Contract Anniversary - The anniversary of the contract date.
Contract Date - The date of issue of the contract.
Contract Value - The total of the investment account values and, if
applicable, any amount in the loan account attributable to the contract.
Contract Year - The period of twelve consecutive months beginning on
the contract date or any anniversary thereof.
Debt - Any amounts in the loan account attributable to the contract
plus any accrued loan interest. The loan provision is applicable to certain
qualified contracts only.
Due Proof of Death - Due Proof of Death is required upon the death of
the Annuitant or the Owner. One of the following must be received at the Annuity
Service Office within one year of the date of death:
(a) A certified copy of a death certificate;
(b) A certified copy of a decree of a court of competent jurisdiction
as to the finding of death; or
(c) Any other proof satisfactory to us.
Death benefits will be paid within 7 days of receipt of due proof of death and
all required claim forms by the Annuity Service Office.
Fixed Annuity - An annuity option with payments which are predetermined
and guaranteed as to dollar amount.
General Account - All the assets of the Company other than assets in
separate accounts.
3
<PAGE> 4
Investment Account - An account established by the Company which
represents a contract owner's interest in an investment option prior to the
maturity date.
Investment Account Value - The value of a contract owner's investment
in an investment account.
Investment Options - The investment choices available to contract
owners. There are thirty four variable and three fixed investment options under
the contract.
Loan Account - The portion of the general account that is used for
collateral when a loan is taken.
Market Value Charge - A charge that may be assessed if amounts are
withdrawn or transferred from the three or six year investment options prior to
the end of the interest rate guarantee period.
Maturity Date - The date on which annuity benefits commence. The
maturity date is the date specified on the contract specifications page and is
generally the first day of the month following the annuitant's 90th birthday.
Net Purchase Payment - The purchase payment less the amount of premium
tax, if any.
Non-Qualified Contracts - Contracts which are not issued under
qualified plans.
Owner or Contract Owner - The person, persons (co-owner) or entity
entitled to all of the ownership rights under the contract. The owner has the
legal right to make all changes in contractual designations where specifically
permitted by the contract. The owner is as specified in the application, unless
changed.
Portfolio or Trust Portfolio - A separate investment portfolio of the
Trust, a mutual fund in which the Variable Account invests, or of any successor
mutual fund.
Purchase Payment - An amount paid by a contract owner to the Company as
consideration for the benefits provided by the contract.
Qualified Contracts - Contracts issued under qualified plans.
Qualified Plans - Retirement plans which receive favorable tax
treatment under Section 401, 403, or 408 of the Internal Revenue Code of 1986,
as amended.
Separate Account - A segregated account of the Company that is not
commingled with the Company's general assets and obligations.
Sub-Account(s) - One or more of the sub-accounts of the Variable
Account. Each sub-account is invested in shares of a different Trust portfolio.
Successor Owner - The person, persons or entity to become the owner if
the owner dies prior to the Maturity Date. The successor owner is as specified
in the application, unless changed. If no Successor Owner is designated or the
Successor Owner dies before the Owner, the Owner's estate is the Successor
Owner. (See also "Beneficiary").
Valuation Date - Any date on which the New York Stock Exchange is open
for business and the net asset value of a Trust portfolio is determined.
Valuation Period - Any period from one valuation date to the next,
measured from the time on each such date that the net asset value of each
portfolio is determined.
Variable Account - The FNAL Variable Account, which is a separate
account of the Company.
Variable Annuity - An annuity option with payments which: (1) are not
predetermined or guaranteed as to dollar amount, and (2) vary in relation to the
investment experience of one or more specified sub-accounts.
4
<PAGE> 5
SUMMARY
The Contract. The contract offered by this Prospectus is flexible
purchase payment individual deferred combination fixed and variable annuity
contract. The contract provides for the accumulation of contract values and the
payment of annuity benefits on a variable and/or fixed basis. Except as
specifically noted herein and as set forth under the caption "FIXED ACCOUNT
INVESTMENT OPTIONS" below, this Prospectus describes only the variable portion
of the contract.
Retirement Plans. The contract may be issued pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Internal Revenue Code, such as individual retirement
accounts and annuities, pension and profit-sharing plans for corporations and
sole proprietorships/partnerships ("H.R. 10" and "Keogh" plans), and
tax-sheltered annuities for tax-exempt organizations. (See "QUALIFIED RETIREMENT
PLANS".)
Purchase Payments. A contract may be issued upon the making of an
initial purchase payment of as little as $30. A minimum of $300 must be paid
during the first contract year. Purchase payments may be made at any time,
except that if a purchase payment would cause the contract value to exceed
$1,000,000, or the contract value already exceeds $1,000,000, additional
purchase payments will be accepted only with the prior approval of the Company.
(See "PURCHASE PAYMENTS".)
Investment Options. Purchase payments may be allocated among the thirty
seven investment options currently available under the contract: thirty four
variable account investment options and three fixed account investment options.
Due to current administrative capabilities, a contract owner is limited to a
maximum of 17 investment options (including all fixed account investment
options) during the period prior to the maturity date of the contract. The
thirty four variable account investment options are the thirty four sub-accounts
of the Variable Account, a separate account established by the Company. The
sub-accounts invest in corresponding portfolios of the Trust: the Pacific Rim
Emerging Markets Trust, Science and Technology Trust, International Small Cap
Trust, Emerging Growth Trust, Pilgrim Baxter Growth Trust, Small/Mid Cap Trust,
International Stock Trust, Worldwide Growth Trust, Global Equity Trust, Growth
Trust, Equity Trust, Quantitative Equity Trust, Blue Chip Growth Trust, Real
Estate Securities Trust, Value Trust, International Growth and Income Trust,
Growth and Income Trust, Equity-Income Trust, Balanced Trust, Aggressive Asset
Allocation Trust, High Yield Trust, Moderate Asset Allocation Trust,
Conservative Asset Allocation Trust, Strategic Bond Trust, Global Government
Bond Trust, Capital Growth Bond Trust, Investment Quality Bond Trust, U.S.
Government Securities Trust, Money Market Trust, Lifestyle Aggressive 1000
Trust, Lifestyle Growth 820 Trust, Lifestyle Balanced 640 Trust, Lifestyle
Moderate 460 Trust and the Lifestyle Conservative 280 Trust. (see the
accompanying Prospectus of the Trust). The portion of the contract value in the
Variable Account and monthly annuity payments, if selected on a variable basis,
will reflect the investment performance of the sub-accounts selected. (See "FNAL
VARIABLE ACCOUNT".) Purchase payments may also be allocated to the three fixed
account investment options: one, three and six year guaranteed investment
accounts. Under the fixed account investment options, the Company guarantees the
principal value of purchase payments and the rate of interest credited to the
investment account for the term of the guarantee period. The portion of the
contract value in the fixed account investment options and monthly annuity
payments, if selected on a fixed basis, will reflect such interest and principal
guarantees. (See "FIXED ACCOUNT INVESTMENT OPTIONS".) Subject to certain
regulatory limitations, the Company may elect to add, subtract or substitute
investment options.
Transfers. Prior to the maturity date, amounts may be transferred among
the variable account investment options and from the variable account investment
options to the fixed account investment options without charge. In addition,
amounts may be transferred prior to the maturity date among the fixed account
investment options and from the fixed account investment options to the variable
account investment options, subject to a one year holding period requirement
(with certain exceptions) and a market value charge which may apply to such a
transfer. (See "FIXED ACCOUNT INVESTMENT OPTIONS".) After the maturity date,
transfers are not permitted from variable annuity options to fixed annuity
options or from fixed annuity options to variable annuity options. Transfers
from any investment account must be at least $300 or, if less, the entire
balance in the investment account. If, after the transfer the amount remaining
in the investment account of the contract from which the transfer is made is
less than $100, then we will transfer the entire amount instead of the requested
amount. The Company may impose certain additional limitations on transfers. (See
"TRANSFERS AMONG INVESTMENT OPTIONS" and "TRANSFERS AFTER MATURITY DATE".)
Transfer privileges may also be used under a special service offered by the
Company to dollar cost average an investment in the contract. (See "SPECIAL
TRANSFER SERVICES - DOLLAR COST AVERAGING".)
5
<PAGE> 6
Withdrawals. Prior to the earlier of the maturity date or the death of
the annuitant, the contract owner may withdraw all or a portion of the contract
value. The amount withdrawn from any investment account must be at least $300
or, if less, the entire balance of the investment account. If a partial
withdrawal plus any applicable withdrawal charge would reduce the contract value
to less than $300, the withdrawal request will be treated as a request to
withdraw the entire contract value. A withdrawal charge and an administration
fee may be imposed. (See "WITHDRAWALS".) A withdrawal may be subject to a
penalty tax. (See "FEDERAL TAX MATTERS".) Withdrawal privileges may also be
exercised pursuant to the Company's systematic withdrawal plan service. (See
"SPECIAL WITHDRAWAL SERVICES - SYSTEMATIC WITHDRAWAL PLAN".)
Loans. The Company offers a loan privilege to owners of contracts
issued in connection with Section 403(b) qualified plans that are not subject to
Title I of ERISA. Owners of such contracts may obtain loans using the contract
as the only security for the loan. The effective cost of a contract loan is 2%
per year of the amount borrowed. (See "LOANS".)
Death Benefit Before Maturity Date. Generally, if the annuitant dies
before the maturity date, the Company will pay to the beneficiary the minimum
death benefit less any debt. During the first contract year, the minimum death
benefit is the greater of (a) the contract value on the date due proof of death
and all required claim forms are received at the Company's Annuity Service
Office, or (b) the sum of all purchase payments made, less any amount deducted
in connection with partial withdrawals. Except as provided below, during any
subsequent contract year, the minimum death benefit will be the greater of (a)
the contract value on the date due proof of death and all required claim forms
are received at the Company's Annuity Service Office, or (b) the minimum death
benefit determined in accordance with these provisions as of the last day of the
previous contract year plus any purchase payments made and less any amount
deducted in connection with partial withdrawals since then. If the annuitant
dies after the first of the month following his or her 85th birthday, the
minimum death benefit is the greater of: (a) the contract value on the date due
proof of death and all required claim forms are received at the Company's
Annuity Service Office, or (b) the excess of the sum of all purchase payments
less the sum of any amounts deducted in connection with partial withdrawals. In
certain other cases, an amount equal to the owner's interest will be distributed
when the owner dies before the maturity date. (See "DEATH BENEFIT BEFORE
MATURITY DATE".) If the annuitant dies after the maturity date and annuity
payments have been selected based on an annuity option providing for payments
for a guaranteed period, the Company will make the remaining guaranteed payments
to the beneficiary. (See "DEATH BENEFIT ON OR AFTER MATURITY DATE".)
Annuity Payments. The Company offers a variety of fixed and variable
annuity options. Periodic annuity payments will begin on the maturity date. The
contract owner selects the maturity date, frequency of payment and annuity
option. (See "ANNUITY PROVISIONS".)
Ten Day Review. Within 10 days of receipt of a contract, the contract
owner may cancel the contract by returning it to the Company. (See "TEN DAY
RIGHT TO REVIEW".)
Charges and Deductions. The following table and Example are designed to
assist contract owners in understanding the various costs and expenses that
contract owners bear directly and indirectly. The table reflects expenses of the
Variable Account and the Trust. The items listed under "Contract Owner
Transaction Expenses" and "Separate Account Annual Expenses" are more completely
described in this Prospectus (see "CHARGES AND DEDUCTIONS"). The items listed
under "Trust Annual Expenses" are described in detail in the accompanying Trust
Prospectus to which reference should be made.
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CONTRACT OWNER TRANSACTION EXPENSES
Deferred sales load (as percentage of purchase payments)
<TABLE>
<CAPTION>
NUMBER OF COMPLETE YEARS WITHDRAWAL
PURCHASE PAYMENT IN CHARGE
CONTRACT PERCENTAGE
-------- ----------
<S> <C>
0 6%
1 6%
2 5%
3 4%
4 3%
5 2%
6+ 0%
</TABLE>
<TABLE>
<S> <C>
Annual Contract Fee.............................. $30
</TABLE>
Separate Account Annual Expenses (as a percentage of average account value)
<TABLE>
<S> <C>
Mortality and expense risk fees................. 1.25%
Administration fee - asset based............... 0.15%
Total Separate Account Annual Expenses ......... 1.40%
</TABLE>
Trust Annual Expenses (as a percentage of Trust average net assets)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL TRUST
TRUST PORTFOLIO FEES EXPENSES ANNUAL EXPENSES
- --------------- ---- -------- ---------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets........ 0.850% 0.300% 1.150%
Science and Technology.............. 1.100% 0.100%* 1.200%
International Small Cap............. 1.100% 0.190%* 1.290%
Emerging Growth..................... 1.050% 0.100%* 1.150%
Pilgrim Baxter Growth............... 1.050% 0.300%* 1.350%
Small/Mid Cap....................... 1.000% 0.100%* 1.100%
International Stock................. 1.050% 0.200%* 1.250%
Worldwide Growth.................... 1.000% 0.300%* 1.300%
Global Equity....................... 0.900% 0.110% 1.010%
Growth ............................. 0.850% 0.160%* 1.010%
Equity.............................. 0.750% 0.050% 0.800%
Quantitative Equity**............... 0.700%** 0.060% 0.760%**
Blue Chip Growth.................... 0.925% 0.050% 0.975%
Real Estate Securities**............ 0.700%** 0.100% 0.800%**
Value............................... 0.800% 0.050%* 0.850%
International Growth and Income..... 0.950% 0.160% 1.110%
Growth and Income................... 0.750% 0.050% 0.800%
Equity Income....................... 0.800% 0.050% 0.850%
Balanced ........................... 0.800% 0.150%* 0.950%
Aggressive Asset Allocation......... 0.750% 0.150% 0.900%
High Yield.......................... 0.775% 0.145%* 0.920%
Moderate Asset Allocation........... 0.750% 0.090% 0.840%
Conservative Asset Allocation....... 0.750% 0.120% 0.870%
Strategic Bond...................... 0.775% 0.085% 0.860%
Global Government Bond.............. 0.800% 0.100% 0.900%
</TABLE>
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<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL TRUST
TRUST PORTFOLIO FEES EXPENSES ANNUAL EXPENSES
- --------------- ---- -------- ---------------
<S> <C> <C> <C>
Capital Growth Bond**............... 0.650%** 0.100% 0.750%**
Investment Quality Bond............. 0.650% 0.080% 0.730%
U.S. Government Securities.......... 0.650% 0.060% 0.710%
Money Market ....................... 0.500% 0.050% 0.550%
</TABLE>
<TABLE>
<CAPTION>
Minimum Total Trust Maximum Total Trust
Annual Expenses*** Annual Expenses****
(After Fee Waiver) (After Fee Waiver)
------------------ -----------------
<S> <C> <C>
Lifestyle Aggressive 1000#.......... 0.760% 1.350%
Lifestyle Growth 820#............... 0.720% 1.260%
Lifestyle Balanced 640#............ 0.680% 1.180%
Lifestyle Moderate 460#............. 0.630% 1.090%
Lifestyle Conservative 260#......... 0.590% 1.010%
</TABLE>
*Based on estimates of payments to be made during the current fiscal year.
**"Total Trust Annual Expenses" for the Quantitative Equity, Real Estate
Securities and Capital Growth Bond Trusts do not reflect an agreement by NASL
Financial Services, Inc. ("NASL Financial") to voluntarily waive fees payable to
it and/or reimburse expenses for a period of one year commencing January 1, 1997
to the extent necessary to prevent "Total Trust Annual Expenses" for each such
Trust from exceeding .50% of average net assets. "Management Fees" for each such
Trust do not reflect estimated fee waivers by NASL Financial pursuant to such
agreement. If such waivers were reflected "Management Fees" would be 0.440%,
0.400% and 0.400% for the Quantitative Equity Trust, Real Estate Securities
Trust and the Capital Growth Bond Trust, respectively.
***Minimum Fees are determined assuming the following allocation for the
Underlying Portfolios: Lifestyle Aggressive 1000 Trust, 100% Quantitative Equity
Trust; Lifestyle Growth 820 Trust, 80% Quantitative Equity Trust, 20% Money
Market Trust; Lifestyle Balanced 640 Trust, 60% Quantitative Equity Trust, 40%
Money Market Trust; Lifestyle Moderate 460 Trust, 40% Quantitative Equity Trust,
60% Money Market Trust; Lifestyle Conservative 280 Trust, 20% Quantitative
Equity Trust, 80% Money Market Trust.
****Maximum Fees are determined assuming the following allocation for the
Underlying Portfolios: Lifestyle Aggressive 1000 Trust, 100% Pilgrim Baxter
Growth Trust; Lifestyle Growth 820 Trust, 80% Pilgrim Baxter Growth Trust, 20%
High Yield Trust; Lifestyle Balanced 640 Trust, 60% Pilgrim Baxter Growth Trust,
40% High Yield Trust; Lifestyle Moderate 460 Trust, 40% Pilgrim Baxter Growth
Trust, 60% High Yield Trust; Lifestyle Conservative 280 Trust, 20% Pilgrim
Baxter Growth Trust, 80% High Yield Trust.
#Each Lifestyle Trust will invest in shares of the Underlying Portfolios.
Therefore, each Lifestyle Trust will, in addition to its own expenses, such as
certain Other Expenses, bear its pro rata share of the fees and expenses
incurred by the Underlying Portfolios and the investment return of each
Lifestyle Trust will be net of the Underlying Portfolio expenses. NASL Financial
has voluntarily agreed to pay the expenses of each Lifestyle Trust (excluding
the expenses of the Underlying Portfolios). This expense reimbursement may be
terminated at any time after December 31, 1997. If such expense reimbursement
was not in effect, Total Trust Annual Expenses would be .04% higher (based on
estimates of the expenses of the Lifestyle Trusts for the current fiscal year)
as noted in the chart below:
<TABLE>
<CAPTION>
Minimum Total Trust Maximum Total Trust
Annual Expenses*** Annual Expenses****
------------------ -------------------
<S> <C> <C>
Lifestyle Aggressive 1000 Trust 0.800% 1.390%
Lifestyle Growth 820 Trust 0.760% 1.300%
Lifestyle Balanced 640 Trust 0.720% 1.220%
Lifestyle Moderate 460 Trust 0.670% 1.130%
Lifestyle Conservative 280 Trust 0.630% 1.050%
</TABLE>
8
<PAGE> 9
Example
A contract owner would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets, if the contract owner surrendered the
contract at the end of the applicable time period:
<TABLE>
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS** 10 YEARS**
- --------------- ------ ------- --------- ----------
<S> <C> <C> <C> <C>
Pacific Rim Emerging Markets........ $82 $131 $170 $297
Science & Technology................ 83 132
International Small Cap............. 83 135 177 311
Emerging Growth..................... 82 131
Pilgrim Baxter Growth............... 84 136
Small/Mid Cap....................... 82 129 167 292
International Stock................. 83 133
Worldwide Growth.................... 83 135
Global Equity....................... 81 127 163 283
Growth ............................. 81 127 163 283
Equity.............................. 79 121 152 262
Quantitative Equity................. 78 119 150 258
Blue Chip Growth.................... 80 126 161 280
Real Estate Securities.............. 79 121 152 262
Value............................... 79 122
International Growth and Income..... 82 129 168 293
Growth and Income................... 79 121 152 262
Equity Income ...................... 79 122 155 267
Balanced............................ 80 125
Aggressive Asset Allocation......... 80 123 157 272
High Yield.......................... 80 124
Moderate Asset Allocation........... 79 122 154 266
Conservative Asset Allocation....... 79 123 156 269
Strategic Bond...................... 79 122 155 268
Global Government Bond.............. 80 123 157 272
Capital Growth Bond................. 78 119 150 257
Investment Quality Bond............. 78 119 149 255
U.S. Government Securities......... 78 118 148 253
Money Market........................ 76 113 140 236
Lifestyle Aggressive 1000*.......... 81 128
Lifestyle Growth 820*............... 81 126
Lifestyle Balanced 640*............ 80 124
Lifestyle Moderate 460*............. 79 122
Lifestyle Conservative 280*......... 79 121
</TABLE>
*The Example of Expenses for the Lifestyle Trusts is calculated using the
midpoint of the minimum and maximum fees set forth under Annual Operating
Expenses.
** The Example of Expenses for certain Trusts contains only 1 year and 3 year
examples since they are newly formed Trusts.
9
<PAGE> 10
A contract owner would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets, if the contract owner annuitized as
provided in the contract or did not surrender the contract at the end of the
applicable time period:
<TABLE>
<CAPTION>
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS** 10 YEARS**
- --------------- ------ ------- --------- ----------
<S> <C> <C> <C> <C>
Pacific Rim Emerging Markets........ $27 $82 $140 $297
Science & Technology................ 27 83
International Small Cap............. 28 86 147 311
Emerging Growth..................... 27 82
Pilgrim Baxter Growth............... 29 88
Small/Mid Cap....................... 26 80 137 292
International Stock................. 28 85
Worldwide Growth.................... 28 86
Global Equity....................... 25 78 133 283
Growth.............................. 25 78 133 283
Equity ............................. 23 71 122 262
Quantitative Equity................. 23 70 120 258
Blue Chip Growth.................... 25 77 131 280
Real Estate Securities.............. 23 71 122 262
Value............................... 24 73
International Growth and Income..... 26 81 138 293
Growth and Income................... 23 71 122 262
Equity Income....................... 24 73 125 267
Balanced ........................... 25 76
Aggressive Asset Allocation......... 24 74 127 272
High Yield.......................... 24 75
Moderate Asset Allocation........... 24 73 124 266
Conservative Asset Allocation....... 24 74 126 269
Strategic Bond...................... 24 73 125 268
Global Government Bond.............. 24 74 127 272
Capital Growth...................... 23 70 120 257
Investment Quality Bond............. 22 69 119 255
U.S. Government Securities.......... 22 69 118 253
Money Market........................ 21 64 110 236
Lifestyle Aggressive 1000*.......... 26 79
Lifestyle Growth 820*............... 25 77
Lifestyle Balanced 640*............ 24 75
Lifestyle Moderate 460*............. 24 73
Lifestyle Conservative 280*......... 23 71
</TABLE>
*The Example of Expenses for the Lifestyle Trusts is calculated using the
midpoint of the minimum and maximum fees set forth under Annual Operating
Expenses.
** The Example of Expenses for certain Trusts contains only 1 year and 3 year
examples since they are newly formed Trusts.
For purposes of presenting the foregoing Example, the Company has made certain
assumptions mandated by the Securities and Exchange Commission (the
"Commission"). The Company has assumed that, where applicable, the maximum sales
load is deducted, that there are no transfers or other transactions and that the
"Other Expenses" line item under "Trust Annual Expenses" will remain the same.
Such assumptions, which are mandated by the Commission in an attempt to provide
prospective investors with standardized data with which to compare various
annuity contracts, do not take into account certain features of the contract and
prospective changes in the size of the Trust which may operate to change the
expenses borne by contract owners. Consequently, the amounts listed in the
Example above should not be considered a representation of past or future
expenses and actual expenses borne by contract owners may be greater or lesser
than those shown.
10
<PAGE> 11
In addition, for purposes of calculating the values in the above
Example, the Company has translated the $30 annual administration charge listed
under "Annual Contract Fee" to a .086% annual asset charge based on the $35,000
approximate average size during 1996 of contracts of the series offered. So
translated, such charge would be higher for smaller contracts and lower for
larger contracts. The example for certain of the Trusts do not include 5 and 10
year figures because they are newly formed portfolios. Amounts listed under
"Other Expenses" for these Trusts are based on estimates for current year
expenses.
The above summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus and Statement of Additional
Information and the Prospectus and Statement of Additional Information for the
Trust, to which reference should be made. This Prospectus generally describes
only the variable aspects of the contract, except where fixed aspects are
specifically mentioned.
TABLE OF ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
UNIT VALUE UNIT VALUE NUMBER
AT START AT END OF UNITS
SUB-ACCOUNT OF YEAR OF YEAR AT END OF YEAR
- ----------- ------- ------- --------------
<S> <C> <C> <C>
International Small Cap*
1996 $12.500000 $13.493094 365,317.719
Small/Mid Cap*
1996 $12.500000 $13.215952 746,253.254
Global Equity
1992 $12.003976 $11.790318 21,242.936
1993 11.790318 15.450341 701,425.817
1994 15.450341 15.500933 1,612,831.628
1995 15.500933 16.459655 1,679,042.917
1996 16.495655 18.276450 1,955,863.791
Blue Chip Growth**
1992 $10.000000 $9.923524 105,743.980
1993 9.923524 9.413546 605,012.548
1994 9.413546 8.837480 1,049,124.977
1995 8.837480 11.026969 1,318,608.463
1996 11.026969 13.688523 1,623,697.582
Equity
1992 $12.386657 $13.143309 17,805.389
1993 13.143309 15.075040 532,797.733
1994 15.075040 14.786831 1,212,483.594
1995 14.786831 20.821819 1,680,197.930
1996 20.821819 24.664354 2,439,815.649
Equity-Income***
1993 $10.000000 $11.175534 1,087,538.574
1994 11.175534 11.107620 2,147,059.046
1995 11.107620 13.548849 2,700,623.434
1996 13.548849 16.011513 3,362,755.333
Growth and Income
1992 $10.942947 $11.927411 33,716.020
1993 11.927411 12.893007 753,734.211
1994 12.893007 13.076664 1,298,075.564
1995 13.076664 16.660889 1,702,726.488
1996 16.660889 20.178770 2,601,497.610
Growth****
1996 $12.500000 $13.727312 140,312.944
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
International Growth and Income*****
1995 $10.000000 $10.554228 419,354.257
1996 10.554228 11.718276 1,080,586.010
Strategic Bond***
1993 $10.000000 $10.750617 414,573.339
1994 10.750617 9.965972 737,151.981
1995 9.965972 11.716972 878,455.666
1996 11.716972 13.250563 1,663,287.368
Global Government Bond
1992 $13.322602 $13.415849 7,122.534
1993 13.415849 15.741586 299,274.049
1994 15.741586 14.630721 463,867.775
1995 14.630721 17.772344 417,838.308
1996 17.772344 19.803954 462,253.788
Investment Quality Bond
(formerly called Bond Sub-account)
1992 $13.147350 $13.936240 1,442.768
1993 13.936240 15.118716 209,360.256
1994 15.118716 14.216516 309,793.553
1995 14.216516 16.751499 305,028.908
1996 16.751499 16.943257 386,465.721
U.S. Gov. Securities
(formerly
called U.S. Gov. Bond Sub-account)
1992 $13.015785 $13.651495 13,906.158
1993 13.651495 14.490734 546,010.063
1994 14.490734 14.111357 652,508.827
1995 14.111357 16.083213 696,869.324
1996 16.083213 16.393307 807,763.458
Money Market
1992 $12.892485 $13.137257 11.495
1993 13.137257 13.303085 141,771.056
1994 13.303085 13.623292 464,720.715
1995 13.623292 14.190910 639,836.317
1996 14.190910 14.699636 1,256,691.417
Aggressive Asset Allocation
1992 $10.880194 $11.623893 6,314.930
1993 11.623893 12.642493 220,581.039
1994 12.642493 12.381395 395,570.370
1995 12.381395 14.990551 463,740.240
1996 14.990551 16.701647 600,271.664
Moderate Asset Allocation
1992 $11.012835 $11.772128 31,652.055
1993 11.772128 12.775798 526,706.519
1994 12.775798 12.396295 994,126.229
1995 12.396295 14.752561 1,070,866.388
1996 14.752561 15.995076 1,346,688.023
Conservative Asset Allocation
1992 $11.102574 $11.821212 3,884.882
1993 11.821212 12.705196 176,613.459
1994 12.705196 12.298940 267,695.021
1995 12.298940 14.320582 306,895.403
1996 14.320582 15.113142 424,786.597
</TABLE>
* This Sub-account commenced operations on March 4, 1996.
** This Sub-account commenced operations on December 11, 1992.
*** This Sub-account commenced operations on February 19, 1993.
**** This Sub-account commenced operations on July 15, 1996.
***** This Sub-account commenced operations on January 9, 1995.
12
<PAGE> 13
GENERAL INFORMATION ABOUT
FIRST NORTH AMERICAN LIFE ASSURANCE COMPANY,
FNAL VARIABLE ACCOUNT
AND NASL SERIES TRUST
FIRST NORTH AMERICAN LIFE ASSURANCE COMPANY
First North American Life Assurance Company ("the Company") is a stock
life insurance company organized in 1992 under the laws of the state of New
York. The Company's principal office is located at International Corporate
Center at Rye, 555 Theodore Fremd Avenue, Rye, New York 10580.
The Company is a wholly-owned subsidiary of North American Security
Life Insurance Company, ("Security Life"). Security Life is a stock life
insurance company organized under the laws of Delaware in 1979 with its
principal office located at 116 Huntington Avenue, Boston, Massachusetts 02116.
Security Life's principal business is offering a variable annuity contract,
similar to that offered by the Company in New York, in 46 other states and the
District of Columbia.
The ultimate parent of Security Life is The Manufacturers Life
Insurance Company ("Manulife"), a Canadian mutual life insurance company based
in Toronto, Canada. Prior to January 1, 1996, Security Life was a wholly owned
subsidiary of North American Life Assurance Company ("NAL"), a Canadian mutual
life insurance company. On January 1, 1996, NAL and Manulife merged with the
combined company retaining the name Manulife.
FNAL VARIABLE ACCOUNT
The Company established the Variable Account on March 4, 1992 as a
separate account under the laws of New York. The income, gains and losses,
whether or not realized, from assets of the Variable Account are, in accordance
with the contracts, credited to or charged against the Variable Account without
regard to other income, gains or losses of the Company. Nevertheless, all
obligations arising under the contracts are general corporate obligations of the
Company. Assets of the Variable Account may not be charged with liabilities
arising out of any other business of the Company.
The Variable Account is registered with the Commission under the
Investment Company Act of 1940 ("1940 Act") as a unit investment trust. A unit
investment trust is a type of investment company which invests its assets in
specified securities, such as the shares of one or more investment companies.
Registration under the 1940 Act does not involve supervision by the Commission
of the management or investment policies or practices of the Variable Account.
There are currently thirty four sub-accounts within the Variable
Account: The Company reserves the right, subject to prior approval of the New
York Superintendent of Insurance and compliance with applicable law, to add
other sub-accounts, eliminate existing sub-accounts, combine sub-accounts or
transfer assets in one sub-account to another sub-account established by the
Company or an affiliated company.
NASL SERIES TRUST
The assets of each sub-account of the Variable Account are invested in
shares of a corresponding portfolio of the Trust. A description of each
portfolio is set forth below. The Trust is registered under the 1940 Act as an
open-end management investment company. Each of the portfolios is diversified
for purposes of the 1940 Act, except for the Global Government Bond Trust, the
Emerging Growth Trust and the five Lifestyle Trusts, which are non-diversified.
The Trust receives investment advisory services from NASL Financial Services,
Inc.
13
<PAGE> 14
The Trust currently has fourteen Subadvisers who manage all of the portfolios:
<TABLE>
<CAPTION>
SUBADVISER SUBADVISER TO
---------- -------------
<S> <C>
Fred Alger Management, Inc. Small/Mid Cap Trust
("Alger")
Founders Asset Management, Inc. Growth Trust
("Founders") Worldwide Growth Trust
Balanced Trust
International Small Cap Trust
Oechsle International Advisors, L.P. Global Government Bond Trust
("Oechsle International")
Fidelity Management Trust Company Equity Trust
("FMTC") Conservative Asset Allocation Trust
Moderate Asset Allocation Trust
Aggressive Asset Allocation Trust
Wellington Management Company, LLP Growth and Income Trust
("Wellington Management") Investment Quality Bond Trust
Salomon Brothers Asset Management Inc U.S. Government Securities Trust
("SBAM") Strategic Bond Trust
J.P. Morgan Investment Management Inc. International Growth and Income Trust
("J.P. Morgan")
T. Rowe Price Associates, Inc. Science & Technology Trust
("T. Rowe Price") Blue Chip Growth Trust
Equity-Income Trust
Rowe Price-Fleming International, Inc. International Stock Trust
("Price-Fleming")
Morgan Stanley Asset Management Inc. Global Equity Trust
("Morgan Stanley")
Miller Anderson & Sherrerd, LLP Value Trust
("MAS") High Yield Trust
Warburg, Pincus Counsellors, Inc. Emerging Growth Trust
("Warburg")
Pilgrim Baxter & Associates Pilgrim Baxter Growth Trust
("PBHG")
Manufacturers Adviser Corporation Pacific Rim Emerging Markets Trust
("MAC") Quantitative Equity Trust
Real Estate Securities Trust
Capital Growth Bond Trust
Money Market Trust
Lifestyle Trusts
</TABLE>
14
<PAGE> 15
The following is a brief description of each portfolio:
THE PACIFIC RIM EMERGING MARKETS TRUST seeks long-term growth of
capital by investing in a diversified portfolio that is comprised
primarily of common stocks and equity-related securities of
corporations domiciled in countries in the Pacific Rim region.
THE SCIENCE & TECHNOLOGY TRUST seeks long-term growth of capital.
Current income is incidental to the portfolio's objective.
THE INTERNATIONAL SMALL CAP TRUST seeks capital appreciation by
investing primarily in securities issued by foreign companies which
have total market capitalization or annual revenues of $1 billion or
less. These securities may represent companies in both established and
emerging economies throughout the world.
THE EMERGING GROWTH TRUST seeks maximum capital appreciation by
investing primarily in a portfolio of equity securities of domestic
companies. The Emerging Growth Trust ordinarily will invest at least
65% of its total assets in common stocks or warrants of emerging growth
companies that represent attractive opportunities for maximum capital
appreciation.
THE PILGRIM BAXTER GROWTH TRUST seeks capital appreciation by investing
in companies believed by the subadviser to have an outlook for strong
earnings growth and the potential for significant capital appreciation.
THE SMALL/MID CAP TRUST seeks long term capital appreciation by
investing at least 65% of its total assets (except during temporary
defensive periods) in small/mid cap equity securities. As used herein
small/mid cap equity securities are equity securities of companies
that, at the time of purchase, have total market capitalization between
$500 million and $5 billion.
THE INTERNATIONAL STOCK TRUST seeks long-term growth of capital by
investing primarily in common stocks of established, non-U.S.
companies.
THE WORLDWIDE GROWTH TRUST seeks long-term growth of capital by
normally investing at least 65% of its total assets in equity
securities of growth companies in a variety of markets throughout the
world.
THE GLOBAL EQUITY TRUST seeks long-term capital appreciation by
investing primarily in equity securities throughout the world,
including U.S. issuers and emerging markets.
THE GROWTH TRUST seeks long term growth of capital by investing at
least 65% of the portfolio's total assets in common stocks of
well-established, high-quality growth companies that the subadviser
believes have the potential to increase earnings faster than the rest
of the market.
THE EQUITY TRUST seeks growth of capital, by investing primarily in
common stocks of United States issuers and securities convertible into
or carrying the right to buy common stocks.
THE QUANTITATIVE EQUITY TRUST seeks to achieve intermediate and
long-term growth through capital appreciation and current income by
investing in common stocks and other equity securities of well
established companies with promising prospects for providing an above
average rate of return.
THE BLUE CHIP GROWTH TRUST seeks to achieve long-term growth of
capital. Current income is a secondary objective and many of the stocks
in the portfolio are expected to pay dividends.
THE REAL ESTATE SECURITIES TRUST seeks to achieve a combination of
long-term capital appreciation and satisfactory current income by
investing in real estate related equity and debt securities.
THE VALUE TRUST seeks to realize an above-average total return over a
market cycle of three to five years, consistent with reasonable risk by
investing primarily in common and preferred stocks, convertible
15
<PAGE> 16
securities, rights and warrants to purchase common stocks, ADRs and
other equity securities of companies with equity capitalizations
usually greater than $300 million.
THE INTERNATIONAL GROWTH AND INCOME TRUST seeks long-term growth of
capital and income by investing, under normal circumstances, at least
65% of its total assets in equity securities of foreign issuers. The
Portfolio may also invest in debt securities of corporate or sovereign
issuers rated A or higher by Moody's or S&P or, if unrated, of
equivalent credit quality as determined by the subadviser. Under normal
circumstances, the Portfolio will be invested approximately 85% in
equity securities and 15% in fixed income securities.
THE GROWTH AND INCOME TRUST seeks long-term growth of capital and
income, consistent with prudent investment risk, by investing primarily
in a diversified portfolio of common stocks of United States issuers
which the subadviser believes are of high quality.
THE EQUITY-INCOME TRUST seeks to provide substantial dividend income
and also long term capital appreciation by investing primarily in
dividend-paying common stocks, particularly of established companies
with favorable prospects for both increasing dividends and capital
appreciation.
THE BALANCED TRUST seeks current income and capital appreciation by
investing in a balanced portfolio of common stocks, U.S. and foreign
government obligations and a variety of corporate fixed-income
securities.
THE HIGH YIELD TRUST seeks to realize an above-average total return
over a market cycle of three to five years, consistent with reasonable
risk by investing primarily in high yield debt securities, including
corporate bonds and other fixed-income securities.
THE AUTOMATIC ASSET ALLOCATION TRUSTS seek the highest potential total
return consistent with a specified level of risk tolerance --
conservative, moderate or aggressive -- by investing primarily in the
kinds of securities in which the Equity, Investment Quality Bond, U.S.
Government Securities and Money Market Trusts may invest.
* THE AGGRESSIVE ASSET ALLOCATION TRUST seeks the highest total return
consistent with an aggressive level of risk tolerance. This Trust
attempts to limit the decline in portfolio value in very adverse market
conditions to 15% over any three year period.
* THE MODERATE ASSET ALLOCATION TRUST seeks the highest total return
consistent with a moderate level of risk tolerance. This Trust attempts
to limit the decline in portfolio value in very adverse market
conditions to 10% over any three year period.
* THE CONSERVATIVE ASSET ALLOCATION TRUST seeks the highest total
return consistent with a conservative level of risk tolerance. This
Trust attempts to limit the decline in portfolio value in very adverse
market conditions to 5% over any three year period.
THE STRATEGIC BOND TRUST seeks a high level of total return consistent
with preservation of capital by giving its subadviser broad discretion
to deploy the portfolio's assets among certain segments of the
fixed-income market as the subadviser believes will best contribute to
achievement of the portfolio's investment objective.
THE GLOBAL GOVERNMENT BOND TRUST seeks a high level of total return by
placing primary emphasis on high current income and the preservation of
capital, by investing primarily in a global portfolio of high-quality,
fixed-income securities of foreign and United States governmental
entities and supranational issuers.
THE CAPITAL GROWTH BOND TRUST seeks to achieve growth of capital by
investing in medium-grade or better debt securities, with income as a
secondary consideration. The Capital Growth Bond Trust differs from
most "bond" funds in that its primary objective is capital
appreciation, not income.
16
<PAGE> 17
THE INVESTMENT QUALITY BOND TRUST seeks a high level of current income
consistent with the maintenance of principal and liquidity, by
investing primarily in a diversified portfolio of investment grade
corporate bonds and U.S. Government bonds with intermediate to longer
term maturities. The portfolio may also invest up to 20% of its assets
in non-investment grade fixed income securities.
THE U.S. GOVERNMENT SECURITIES TRUST seeks a high level of current
income consistent with preservation of capital and maintenance of
liquidity, by investing in debt obligations and mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and derivative securities such as collateralized
mortgage obligations backed by such securities.
THE MONEY MARKET TRUST seeks maximum current income consistent with
preservation of principal and liquidity, by investing in high quality
money market instruments with maturities of 397 days or less issued
primarily by United States entities.
THE LIFESTYLE AGGRESSIVE 1000 TRUST seeks to provide long term growth
of capital (current income is not a consideration) by investing 100% of
the Lifestyle Trust's assets in other portfolios of the Trust
("Underlying Portfolios") which invest primarily in equity securities.
THE LIFESTYLE GROWTH 820 TRUST seeks to provide long term growth of
capital with consideration also given to current income by investing
approximately 20% of the Lifestyle Trust's assets in Underlying
Portfolios which invest primarily in fixed income securities and
approximately 80% of its assets in Underlying Portfolios which invest
primarily in equity securities.
THE LIFESTYLE BALANCED 640 TRUST seeks to provide a balance between a
high level of current income and growth of capital with a greater
emphasis given to capital growth by investing approximately 40% of the
Lifestyle Trust's assets in Underlying Portfolios which invest
primarily in fixed income securities and approximately 60% of its
assets in Underlying Portfolios which invest primarily in equity
securities.
THE LIFESTYLE MODERATE 460 TRUST seeks to provide a balance between a
high level of current income and growth of capital with a greater
emphasis given to high income by investing approximately 60% of the
Lifestyle Trust's assets in Underlying Portfolios which invest
primarily in fixed income securities and approximately 40% of its
assets in Underlying Portfolios which invest primarily in equity
securities.
THE LIFESTYLE CONSERVATIVE 280 TRUST seeks to provide a high level of
current income with some consideration also given to growth of capital
by investing approximately 80% of the Lifestyle Trust's assets in
Underlying Portfolios which invest primarily in fixed income securities
and approximately 20% of its assets in Underlying Portfolios which
invest primarily in equity securities.
In pursuing the Strategic Bond, High Yield and Investment Quality Bond
Trusts' investment objective, each portfolio expects to invest a portion of its
assets in high yield securities, commonly known as "junk bonds" which also
present a high degree of risk. The risks of these securities include price
volatility and risk of default in the payment of interest and principal. See
"Risk Factors Relating to High Yield Securities" contained in the NASL Series
Trust prospectus before investing in either Trust. In pursuing the Pacific Rim
Emerging Markets, International Stock, Worldwide Growth, International Small
Cap, Global Equity, Strategic Bond Trust, International Growth and Income, High
Yield and Global Government Bond Trusts' investment objective, each portfolio
may invest up to 100% of its assets in foreign securities which may present
additional risks. See "Foreign Securities" contained in the NASL Series Trust
prospectus before investing in any of these Trusts.
If the shares of a Trust portfolio are no longer available for
investment or in the Company's judgment investment in a Trust portfolio becomes
inappropriate in view of the purposes of the Variable Account, the Company may
eliminate the shares of a portfolio and substitute shares of another portfolio
of the Trust or another open-end registered investment company. Substitution may
be made with respect to both existing investments and the investment of future
purchase payments. However, no such substitution will be made without notice to
the contract owner and prior approval of the Commission to the extent required
by the 1940 Act.
17
<PAGE> 18
The Company will vote shares of the Trust portfolios held in the
Variable Account at meetings of shareholders of the Trust in accordance with
voting instructions received from the persons having the voting interest under
the contracts. The number of portfolio shares for which voting instructions may
be given will be determined by the Company in the manner described below, not
more than 90 days prior to the meeting of the Trust. Trust proxy material will
be distributed to each person having the voting interest under the contract
together with appropriate forms for giving voting instructions. Portfolio shares
held in the Variable Account that are attributable to contract owners and as to
which no timely instructions are received and portfolio shares held in the
Variable Account that are beneficially owned by the Company will be voted by the
Company in proportion to the instructions received.
Prior to the maturity date, the person having the voting interest under
a contract is the contract owner and the number of votes as to each portfolio
for which voting instructions may be given is determined by dividing the value
of the investment account corresponding to the sub-account in which such
portfolio shares are held by the net asset value per share of that portfolio.
After the maturity date, the person having the voting interest under a contract
is the annuitant and the number of votes as to each portfolio for which voting
instructions may be given is determined by dividing the reserve for the contract
allocated to the sub-account in which such portfolio shares are held by the net
asset value per share of that portfolio. Generally, the number of votes tends to
decrease as annuity payments progress since the amount of reserves attributable
to a contract will usually decrease after commencement of annuity payments. The
Company reserves the right to make any changes in the voting rights described
above that may be permitted by the federal securities laws or regulations or
interpretations of these laws or regulations.
A full description of the Trust, including the investment objectives,
policies and restrictions of each of the portfolios is contained in the
Prospectus for the Trust and should be read by a prospective purchaser before
investing.
DESCRIPTION OF THE CONTRACT
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Purchase payments are paid to the Company at its Annuity Service
Office. The minimum purchase payment is $30; however, at least $300 must be paid
during the first contract year. Purchase payments may be made at any time. The
Company may provide by separate agreement for purchase payments to be
automatically withdrawn from a contract owner's bank account on a periodic
basis. If a purchase payment would cause the contract value to exceed $1,000,000
or the contract value already exceeds $1,000,000, additional purchase payments
will be accepted only with the prior approval of the Company.
The Company may, at its option, cancel a contract at the end of any
three consecutive contract years in which no purchase payments have been made,
if both (i) the total purchase payments made over the life of the contract, less
any withdrawals, are less than $2,000; and (ii) the contract value at the end of
such three year period is less than $2,000. Upon cancellation the Company will
pay the contract owner the contract value computed as of the valuation period
during which the cancellation occurs less the annual $30 administration fee and
less any debt. The amounts paid will be treated as withdrawals for federal tax
purposes and, thus, may be subject to income tax and to a 10% penalty tax. (See
"FEDERAL TAX MATTERS".)
Purchase payments are allocated among the investment options in
accordance with the percentages designated by the contract owner in the
application. In addition, contract owners have the option to participate in the
Guarantee Plus Program administered by the Company. Under the Guarantee Plus
Program the initial purchase payment is split between the fixed and variable
investment options. A percentage of the initial purchase payment is allocated to
the chosen fixed account, such that, at the end of the guaranteed period the
fixed account will have grown to an amount at least equal to the total initial
purchase payment. The percentage depends upon the current interest rate of the
fixed investment option. The balance of the initial purchase payment is
allocated among the variable investment options as indicated on the contract
application. Contract owners may elect to participate in the Guarantee Plus
Program on the contract application and may obtain full information concerning
the program and its restrictions from their securities dealers or the Annuity
Service Office. The contract owner may change the allocation of subsequent
purchase payments at any time upon written notice to the Company.
18
<PAGE> 19
ACCUMULATION UNITS
The Company will establish an investment account for the contract owner
for each variable account investment option to which such contract owner
allocates purchase payments. Purchase payments are credited to such investment
accounts in the form of accumulation units. The following discussion of
accumulation units, the value of accumulation units and the net investment
factor formula pertains only to the accumulations in the variable account
investment options. The parallel discussion regarding accumulations in the fixed
account investment options appears elsewhere in this Prospectus. (See "FIXED
ACCOUNT INVESTMENT OPTIONS".)
The number of accumulation units to be credited to each investment
account is determined by dividing the net purchase payment allocated to that
investment account by the value of an accumulation unit for that investment
account for the valuation period during which the purchase payment is received
at the Company's Annuity Service Office complete with all necessary information
or, in the case of the first purchase payment, pursuant to the procedures
described below.
Initial purchase payments received by mail will usually be credited in
the valuation period during which received at the Annuity Service Office, and in
any event not later than two business days after receipt of a properly completed
application and all information necessary for processing of the application. The
applicant will be informed of any deficiencies in an application if it cannot be
processed and the purchase payment credited within two business days after
receipt. If the deficiencies are not remedied within five business days, the
purchase payment will be returned promptly to the applicant, unless the
applicant specifically consents to the Company's retaining the purchase payment
until all necessary information is received. Initial purchase payments received
by wire transfer from broker-dealers will be credited in the valuation period
during which received where such broker-dealers have made special arrangements
with the Company for the collection and forwarding of contract applications.
VALUE OF ACCUMULATION UNITS
The value of accumulation units will vary from one valuation period to
the next depending upon the investment results of the particular sub-accounts to
which purchase payments are allocated. The value of an accumulation unit for
each sub-account was arbitrarily set at $10 or $12.50 for the first valuation
period. The value of an accumulation unit for any subsequent valuation period is
determined by multiplying the value of an accumulation unit for the immediately
preceding valuation period by the net investment factor for such sub-account
(described below) for the valuation period for which the value is being
determined.
NET INVESTMENT FACTOR
The net investment factor is an index used to measure the investment
performance of a sub-account from one valuation period to the next. The net
investment factor for each sub-account for any valuation period is determined by
dividing (a) by (b) and subtracting (c) from the result:
Where (a) is:
(1) the net asset value per share of a portfolio share held in the
sub-account determined at the end of the current valuation period, plus
(2) the per share amount of any dividend or capital gain distributions
made by the portfolio on shares held in the sub-account if the "ex-dividend"
date occurs during the current valuation period.
Where (b) is:
the net asset value per share of a portfolio share held in the
sub-account determined as of the end of the immediately preceding valuation
period.
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Where (c) is:
a factor representing the charges deducted from the sub-account on a
daily basis for administrative expenses and mortality and expense risks. Such
factor is equal on an annual basis to 1.40%: (0.15% for administrative expenses
and 1.25% for mortality and expense risks).
The net investment factor may be greater or less than or equal to one;
therefore, the value of an accumulation unit may increase, decrease or remain
the same.
TRANSFERS AMONG INVESTMENT OPTIONS
Before the maturity date the contract owner may transfer amounts among
the variable account investment options and from such investment options to the
fixed account investment options at any time and without charge upon written
notice to the Company. Accumulation units will be canceled from the investment
account from which amounts are transferred and credited to the investment
account to which amounts are transferred. The Company will effect such transfers
so that the contract value on the date of the transfer will not be affected by
the transfer. The contract owner must transfer at least $300 or, if less, the
entire value of the investment account. If after the transfer the amount
remaining in the investment account is less than $100, then the Company will
transfer the entire amount instead of the requested amount. The Company reserves
the right to limit, upon notice, the maximum number of transfers a contract
owner may make to one per month or six at any time within a contract year. The
Company reserves the right to defer the transfer privilege at any time that the
Company is unable to purchase or redeem shares of the Trust portfolios. In
addition, in accordance with applicable law, the Company reserves the right to
modify or terminate the transfer privilege at any time.
MAXIMUM NUMBER OF INVESTMENT OPTIONS
Due to current administrative capabilities, a contract owner is limited
to a maximum of 17 investment options (including all fixed account investment
options) during the period prior to the maturity date of the contract (the
"Contract Period"). In calculating this limit for each contract owner,
investment options to which the contract owner has allocated purchased payments
at any time during the Contract Period will be counted toward the 17 maximum
even if the contract owner no longer has contract value allocated to these
investment options.
SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING
The Company administers a Dollar Cost Averaging ("DCA") program which
enables a contract owner to pre-authorize a periodic exercise of the contractual
transfer rights described above. Contract owners entering into a DCA agreement
instruct the Company to transfer monthly a predetermined dollar amount from any
sub-account or the one year fixed account investment option to other
sub-accounts until the amount in the sub-account from which the transfer is made
or one year fixed account investment option is exhausted. The DCA program is
generally suitable for contract owners making a substantial deposit to the
contract and who desire to control the risk of investing at the top of a market
cycle. The DCA program allows such investments to be made in equal installments
over time in an effort to reduce such risk. Contract owners interested in the
DCA program may elect to participate in the program on the contract application
or by separate application. Contract owners may obtain a separate application
and full information concerning the program and its restrictions from their
securities dealer or the Annuity Service Office.
ASSET REBALANCING PROGRAM
The Company administers an Asset Rebalancing Program which enables a
contract owner to indicate to the Company the percentage levels he or she would
like to maintain in particular portfolios. The contract owner's contract value
will be automatically rebalanced pursuant to the schedule described below to
maintain the indicated percentages by transfers among the portfolios. (Fixed
Account Investment Options are not eligible for participation in the Asset
Rebalancing Program). The entire value of the variable investment accounts must
be included in the Asset Rebalancing Program. Other investment programs, such as
the DCA Program, or other transfers or withdrawals may not work in concert with
the Asset Rebalancing Program. Therefore, contract owners should monitor their
use of other programs and any other transfers or withdrawals while the Asset
Rebalancing Program is being used. Contract owners interested in the Asset
Rebalancing Program may obtain a separate application and full information
concerning the program and its restrictions from their securities dealer or the
Annuity Service Office.
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For rebalancing programs begun on or after October 1, 1996 asset
rebalancing will only be permitted on the following time schedules:
(i) quarterly on the 25th day of the last month of the quarter (or
the next business day if the 25th is not a business day);
(ii) semi-annually on June 25th or December 26th (or the next
business day if these dates are not business days); or
(iii) annually on December 26th (or the next business day if
December 26th is not a business day).
Rebalancing will continue to take place on the last business day of every
calendar quarter for rebalancing programs begun prior to October 1, 1996.
WITHDRAWALS
Prior to the earlier of the maturity date or the death of the
annuitant, the contract owner may withdraw all or a portion of the contract
value upon written request, complete with all necessary information to the
Company's Annuity Service Office. For certain qualified contracts, exercise of
the withdrawal right may require the consent of the qualified plan participant's
spouse under the Internal Revenue Code and regulations promulgated by the
Treasury Department. In the case of a total withdrawal, the Company will pay the
contract value as of the date of receipt of the request at its Annuity Service
Office, less the annual $30 administration fee, any debt and any applicable
withdrawal charge, and the contract will be canceled. In the case of a partial
withdrawal, the Company will pay the amount requested and cancel that number of
accumulation units credited to each investment account necessary to equal the
amount withdrawn from each investment account plus any applicable withdrawal
charge deducted from such investment account. (See "CHARGES AND DEDUCTIONS".)
When making a partial withdrawal, the contract owner should specify the
investment options from which the withdrawal is to be made. The amount requested
from an investment option may not exceed the value of that investment option
less any applicable withdrawal charge. If the contract owner does not specify
the investment options from which a partial withdrawal is to be taken, a partial
withdrawal will be taken from the variable account investment options until
exhausted and then from the fixed account investment options. If the partial
withdrawal is less than the total value in the variable account investment
options, the withdrawal will be taken pro rata from the variable account
investment options: taking from each such variable account investment option an
amount which bears the same relationship to the total amount withdrawn as the
value of such variable account investment option bears to the total value of all
the contract owner's investments in variable account investment options.
For the rules governing the order and manner of withdrawals from the
fixed account investment options, see "FIXED ACCOUNT INVESTMENT OPTIONS".
There is no limit on the frequency of partial withdrawals; however, the
amount withdrawn must be at least $300 or, if less, the entire balance in the
investment option. If after the withdrawal (and deduction of any withdrawal
charge) the amount remaining in the investment option is less than $100, the
Company will treat the partial withdrawal as a withdrawal of the entire amount
held in the investment option. If a partial withdrawal plus any applicable
withdrawal charge would reduce the contract value to less than $300, the Company
will treat the partial withdrawal as a total withdrawal of the contract value.
The amount of any withdrawal from the variable account investment
options will be paid promptly, and in any event within seven days of receipt of
the request, complete with all necessary information at the Company's Annuity
Service Office, except that the Company reserves the right to defer the right of
withdrawal or postpone payments for any period when: (1) the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (2)
trading on the New York Stock Exchange is restricted, (3) an emergency exists as
a result of which disposal of securities held in the Variable Account is not
reasonably practicable or it is not reasonably practicable to determine the
value of the Variable Account's net assets, or (4) the Commission, by order, so
permits for the protection of security holders; provided that applicable rules
and regulations of the Commission shall govern as to whether the conditions
described in (2) and (3) exist.
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Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL
TAX MATTERS".)
SPECIAL WITHDRAWAL SERVICES - SYSTEMATIC WITHDRAWAL PLAN
The Company administers a Systematic Withdrawal Plan ("SWP") which
enables a contract owner to pre-authorize a periodic exercise of the contractual
withdrawal rights described above. Contract owners entering into a SWP agreement
instruct the Company to withdraw a level dollar amount from specified investment
options on a periodic basis. The total of SWP withdrawals in a contract year is
limited to not more than 10% of the purchase payments made to ensure that no
withdrawal or market value charge will ever apply to a SWP withdrawal. If an
additional withdrawal is made from a contract participating in SWP, the SWP will
terminate automatically and may be reinstated only on or after the next contract
anniversary pursuant to a new application. SWP is not available to contracts
participating in the dollar cost averaging program or for which purchase
payments are being automatically deducted from a bank account on a periodic
basis. SWP withdrawals will be withdrawn without withdrawal and market value
charges. SWP withdrawals may, however, be subject to income tax and a 10%
penalty tax. (See "FEDERAL TAX MATTERS".) Contract owners interested in SWP may
elect to participate in this program on the contract application or by separate
application. Contract owners may obtain a separate application and full
information concerning the program and its restrictions from their securities
dealer or the Annuity Service Office.
LOANS
The Company offers a loan privilege only to owners of contracts issued
in connection with Section 403(b) qualified plans that are not subject to Title
I of ERISA. Owners of such contracts may obtain loans using the contract as the
only security for the loan. Loans are subject to provisions of the Code and to
applicable retirement program rules (collectively, "loan rules"). Tax advisers
and retirement plan fiduciaries should be consulted prior to exercising loan
privileges.
Under the terms of the contract, the maximum loan value is equal to 80%
of the contract value, although loan rules may serve to reduce such maximum loan
value in some cases. The amount available for a loan at any given time is the
loan value less any outstanding debt. Debt equals the amount of any loans plus
accrued interest. Loans will be made only upon written request from the owner.
The Company will make loans within seven days of receiving a properly completed
loan application (applications are available from the Annuity Service Office),
subject to postponement under the same circumstances that payment of withdrawals
may be postponed. (See "WITHDRAWALS".)
When an owner requests a loan, the Company will reduce the owner's
investment in the investment accounts and transfer the amount of the loan to the
loan account, a part of the Company's general account. The owner may designate
the investment accounts from which the loan is to be withdrawn. Absent such a
designation, the amount of the loan will be withdrawn from the investment
accounts in accordance with the rules for making partial withdrawals. (See
"WITHDRAWALS".) The contract provides that owners may repay contract debt at any
time. Under applicable loan rules, loans generally must be repaid within five
years, repayments must be made at least quarterly and repayments must be made in
substantially equal amounts. When a loan is repaid, the amount of the repayment
will be transferred from the loan account to the investment accounts. The owner
may designate the investment accounts to which a repayment is to be allocated.
Otherwise, the repayment will be allocated in the same manner as the owner's
most recent purchase payment. On each contract anniversary, the Company will
transfer from the investment accounts to the loan account the amount by which
the debt on the contract exceeds the balance in the loan account.
The Company charges interest of 6% per year on contract loans. Loan
interest is payable in arrears and, unless paid in cash, the accrued loan
interest is added to the amount of the debt and bears interest at 6% as well.
The Company credits interest with respect to amounts held in the loan account at
a rate of 4% per year. Consequently, the net cost of loans under the contract is
2%. If on any date debt under a contract exceeds the contract value, the
contract will be in default. In such case the owner will receive a notice
indicating the payment needed to bring the contract out of default and will have
a thirty-one day grace period within which to pay the default amount. If the
required payment is not made within the grace period, the contract may be
foreclosed (terminated without value).
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The amount of any debt will be deducted from the minimum death benefit.
(See "DEATH BENEFIT BEFORE MATURITY DATE".) In addition, debt, whether or not
repaid, will have a permanent effect on the contract value because the
investment results of the investment accounts will apply only to the unborrowed
portion of the contract value. The longer debt is outstanding, the greater the
effect is likely to be. The effect could be favorable or unfavorable. If the
investment results are greater than the rate being credited on amounts held in
the loan account while the debt is outstanding, the contract value will not
increase as rapidly as it would have if no debt were outstanding. If investment
results are below that rate, the contract value will be higher than it would
have been had no debt been outstanding.
DEATH BENEFIT BEFORE MATURITY DATE
The following discussion applies principally to contracts that are not
issued in connection with qualified plans, i.e., a "non-qualified contract." The
requirements of the tax law applicable to qualified plans, and the tax treatment
of amounts held and distributed under such plans, are quite complex.
Accordingly, a prospective purchaser of the contract to be used in connection
with a qualified plan should seek competent legal and tax advice regarding the
suitability of the contract for the situation involved and the requirements
governing the distribution of benefits, including death benefits, from a
contract used in the plan. In particular, a prospective purchaser who intends to
use the contract in connection with a qualified plan should consider that the
contract provides a minimum death benefit (described below) that could be
characterized as an incidental death benefit. There are limits on the amount of
incidental benefits that may be provided under certain qualified plans and the
provision of such benefits may result in currently taxable income to plan
participants. (See "FEDERAL TAX MATTERS".)
Death of Annuitant who is not the Contract Owner. The Company will pay
the minimum death benefit, less any debt, to the beneficiary if the contract
owner is not the annuitant and the annuitant dies before the contract owner and
before the maturity date. If there is more than one such annuitant, the minimum
death benefit will be paid on the death of the last surviving co-annuitant. The
minimum death benefit will be paid either as a lump sum or in accordance with
any of the annuity options available under the contract. An election to receive
the death benefit under an annuity option must be made within 60 days after the
date on which the death benefit first becomes payable. (See "ANNUITY OPTIONS".)
Rather than receiving the minimum death benefit, the beneficiary may elect to
continue the contract as the new contract owner. (In general, a beneficiary who
makes such an election will nonetheless be treated for federal income tax
purposes as if he had received the minimum death benefit.)
Death of Annuitant who is the Contract Owner. The Company will pay the
minimum death benefit, less any debt, to the beneficiary if the contract owner
is the annuitant, dies before the maturity date and is not survived by a
co-annuitant. If the contract is a non-qualified contract, the contract owner is
the annuitant and the contract owner dies before the maturity date survived by a
co-annuitant, the Company, instead of paying the minimum death benefit to the
beneficiary, will pay to the successor owner an amount equal to the amount
payable on total withdrawal without reduction for any withdrawal charge. (See
"WITHDRAWALS".) If the contract is a non-qualified contract, distribution of the
minimum death benefit to the beneficiary (or of the amount payable to the
successor owner) must be made within five years after the owner's death. If the
beneficiary or successor owner, as appropriate, is an individual, in lieu of
distribution within five years of the owner's death, distribution may be made as
an annuity which begins within one year of the owner's death and is payable over
the life of the beneficiary (or the successor owner) or over a period not in
excess of the life expectancy of the beneficiary (or the successor owner). If
the owner's spouse is the beneficiary (or the successor owner, as appropriate)
that spouse may elect to continue the contract as the new owner in lieu of
receiving the distribution. In such a case, the distribution rules applicable
when a contract owner dies generally will apply when that spouse, as the owner,
dies.
Death of Owner who is not the Annuitant. If the owner is not the
annuitant and dies before the maturity date and before the annuitant, the
successor owner will become the owner of the contract. If the contract is a
non-qualified contract, an amount equal to the amount payable on total
withdrawal, without reduction for any withdrawal charge, will be paid to the
successor owner. (See "WITHDRAWALS".) Distribution of that amount to the
successor owner must be made within five years of the owner's death. If the
successor owner is an individual, in lieu of distribution within five years of
the owner's death, distribution may be made as an annuity which begins within
one year of the owner's death and is payable over the life of the successor
owner (or over a period not greater than the successor owner's life expectancy).
If the owner's spouse is the successor owner, that spouse may elect to continue
the contract as the new contract owner in lieu of receiving the distribution. In
such a case, the distribution rules applicable when a contract owner dies
generally will apply when that spouse, as the owner, dies. If there is more than
one owner, distribution will occur upon the death of any
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owner. If both owners are individuals, distribution will be made to the
remaining owner rather than to the successor owner.
Entity as Owner. In the case of a non-qualified contract which is not
owned by an individual (for example, a non-qualified contract owned by a
corporation or a trust), the special rules stated in this paragraph apply. For
purposes of distributions of death benefits before the maturity date, any
annuitant will be treated as the owner of the contract, and a change in the
annuitant or any co-annuitant shall be treated as the death of the owner. In the
case of distributions which result from a change in an annuitant when the
annuitant does not actually die, the amount distributed will be reduced by
charges which would otherwise apply upon withdrawal.
(See "WITHDRAWALS".)
If the contract is a non-qualified contract and there is both an
individual and a non-individual contract owner, death benefits must be paid as
provided in the contract upon the death of any annuitant, a change in any
annuitant, or the death of any individual contract owner, whichever occurs
earlier.
If the annuitant dies on or prior to the first month following his or
her 85th birthday, the minimum death benefit is as follows: during the first
contract year, the minimum death benefit is the greater of: (a) the contract
value on the date due proof of death and all required claim forms are received
at the Company's Annuity Service Office, or (b) the sum of all purchase payments
made, less any amount deducted in connection with partial withdrawals. Except as
provided below, during any subsequent contract year, the minimum death benefit
will be the greater of: (a) the contract value on the date due proof of death
and all required claim forms are received at the Company's Annuity Service
Office, or (b) the minimum death benefit determined in accordance with these
provisions as of the last day of the previous contract year plus any purchase
payments made and less any amount deducted in connection with partial
withdrawals since then. If the annuitant dies after the first of the month
following his or her 85th birthday, the minimum death benefit is the greater of:
(a) the contract value on the date due proof of death and all required claim
forms are received at the Company's Annuity Service Office, or (b) the excess of
the sum of all purchase payments less the sum of any amounts deducted in
connection with partial withdrawals.
Death benefits will be paid within seven days of receipt of due proof
of death and all required claim forms at the Company's Annuity Service Office,
subject to postponement under the same circumstances that payment of withdrawals
may be postponed. (See "WITHDRAWALS".)
ANNUITY PROVISIONS
GENERAL
The proceeds of the contract payable on death, withdrawal or the
contract maturity date may be applied to the annuity options described below,
subject to the distribution of death benefits provisions. (See "DEATH BENEFIT
BEFORE MATURITY DATE".)
Generally, annuity benefits under the contract will begin on the
maturity date. The maturity date is the date specified on the contract
specifications page, unless changed. If no date is specified, the maturity date
is the maximum maturity date described below. The maximum maturity date is the
first day of the month following the 90th birthday of the annuitant. The
contract owner may specify a different maturity date at any time by written
request at least one month before both the previously specified and the new
maturity date. The new maturity date must be the first day of a month no later
than the first day of the month following the 90th birthday of the annuitant.
See "FEDERAL TAX MATTERS --Taxation of Annuities in General-- Delayed Maturity
Dates." Distributions from qualified contracts may be required before the
maturity date. See "FEDERAL TAX MATTERS--Qualified Retirement Plans.""
The contract owner may select the frequency of annuity payments.
However, if the contract value at the maturity date is such that a monthly
payment would be less than $20, the Company may pay the contract value, less any
debt, in one lump sum to the annuitant on the maturity date.
ANNUITY OPTIONS
Annuity benefits are available under the contract on a fixed or
variable basis, or any combination of fixed and variable bases. Upon purchase of
the contract, and on or before the maturity date, the contract owner may select
one or
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more of the annuity options described below on a fixed and/or variable basis
(except Option 5 which is available on a fixed basis only) or choose an
alternate form of settlement acceptable to the Company. If an annuity option is
not selected, we will provide either variable or fixed, or a combination
variable and fixed, annuity payments in proportion to the Investment Account
Value of each Investment Option at the Maturity Date. Annuity payments will
continue for 10 years or the life of the Annuitant, if longer. Treasury
Department regulations may preclude the availability of certain annuity options
in connection with certain qualified contracts.
The following annuity options are guaranteed in the contract.
Option 1(a): Non-Refund Life Annuity - An annuity with payments during
the lifetime of the annuitant. No payments are due after the death of the
annuitant. Since there is no guarantee that any minimum number of payments will
be made, an annuitant may receive only one payment if the annuitant dies prior
to the date the second payment is due.
Option 1(b): Life Annuity with Payments Guaranteed for 10 Years - An
annuity with payments guaranteed for 10 years and continuing thereafter during
the lifetime of the annuitant. Since payments are guaranteed for 10 years,
annuity payments will be made to the end of such period if the annuitant dies
prior to the end of the tenth year.
Option 2(a): Joint & Survivor Non-Refund Life Annuity - An annuity with
payments during the lifetimes of the annuitant and a designated co-annuitant. No
payments are due after the death of the last survivor of the annuitant and
co-annuitant. Since there is no guarantee that any minimum number of payments
will be made, an annuitant or co-annuitant may receive only one payment if the
annuitant and co-annuitant die prior to the date the second payment is due.
Option 2(b): Joint & Survivor Life Annuity with Payments Guaranteed for
10 Years - An annuity with payments guaranteed for 10 years and continuing
thereafter during the lifetimes of the annuitant and a designated co-annuitant.
Since payments are guaranteed for 10 years, annuity payments will be made to the
end of such period if both the annuitant and the co-annuitant die prior to the
end of the tenth year.
In addition to the foregoing annuity options which the Company is
contractually obligated to offer at all times, the Company currently offers the
following annuity options. The Company may cease offering the following annuity
options at any time and may offer other annuity options in the future.
Option 3: Life annuity with Payments Guaranteed for 5, 15 or 20 Years -
An Annuity with payments guaranteed for 5, 15 or 20 years and continuing
thereafter during the lifetime of the annuitant. Since payments are guaranteed
for the specific number of years, annuity payments will be made to the end of
the last year of the 5, 15 or 20 year period.
Option 4: Joint & Two-Thirds Survivor Non-Refund Life Annuity - An
annuity with full payments during the joint lifetime of the annuitant and a
designated co-annuitant and two-thirds payments during the lifetime of the
survivor. Since there is no guarantee that any minimum number of payments will
be made, an annuitant or co-annuitant may receive only one payment if the
annuitant and co-annuitant die prior to the date the second payment is due.
Option 5: Period Certain Only Annuity for 5, 10, 15 or 20 years - An
annuity with payments for a 5, 10, 15 or 20 year period and no payments
thereafter.
DETERMINATION OF AMOUNT OF THE FIRST VARIABLE ANNUITY PAYMENT
The first variable annuity payment is determined by applying that
portion of the contract value used to purchase a variable annuity, measured as
of a date not more than ten business days prior to the maturity date (minus any
applicable premium taxes), to the annuity tables contained in the contract. The
rates contained in such tables depend upon the annuitant's age, sex and annuity
option selected, except for contracts issued in connection with certain employer
sponsored plans where sex-based tables may not be used. Under such tables, the
longer the life expectancy of the annuitant under any life annuity option or the
duration of any period for which payments are guaranteed under the option, the
smaller will be the amount of the first monthly variable annuity payment. The
tables are based on the 1983-a Individual Annuitant Mortality Table projected at
Scale G, and reflect an assumed interest rate of 4% per year.
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ANNUITY UNITS AND THE DETERMINATION OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS
Variable annuity payments subsequent to the first will be based on the
investment performance of the sub-accounts selected. The amount of such
subsequent payments is determined by dividing the amount of the first annuity
payment from each sub-account by the annuity unit value of such sub-account (as
of the same date the contract value to effect the annuity was determined) to
establish the number of annuity units which will thereafter be used to determine
payments. This number of annuity units for each sub-account is then multiplied
by the appropriate annuity unit value as of a uniformly applied date not more
than ten business days before the annuity payment is due, and the resulting
amounts for each sub-account are then totaled to arrive at the amount of the
payment to be made. The number of annuity units remains constant during the
annuity payment period. A pro-rata portion of the administration fee will be
deducted from each annuity payment.
The value of an annuity unit for each sub-account for any valuation
period is determined by multiplying the annuity unit value for the immediately
preceding valuation period by the net investment factor for that sub-account
(see "NET INVESTMENT FACTOR") for the valuation period for which the annuity
unit value is being calculated and by a factor to neutralize the assumed
interest rate.
A 4% assumed interest rate is built into the annuity tables in the
contract used to determine the first variable annuity payment. A higher
assumption would mean a larger first annuity payment, but more slowly rising
subsequent payments when actual investment performance exceeds the assumed rate,
and more rapidly falling subsequent payments when actual investment performance
is less than the assumed rate. A lower assumption would have the opposite
effect. If the actual net investment performance is 4% annually, annuity
payments will be level.
TRANSFERS AFTER MATURITY DATE
Once variable annuity payments have begun, the contract owner may
transfer all or part of the investment upon which such payments are based from
one sub-account to another. Transfers will be made upon notice to the Company at
least 30 days before the due date of the first annuity payment to which the
change will apply. Transfers after the maturity date will be made by converting
the number of annuity units being transferred to the number of annuity units of
the sub-account to which the transfer is made, so that the next annuity payment
if it were made at that time would be the same amount that it would have been
without the transfer. Thereafter, annuity payments will reflect changes in the
value of the new annuity units. The Company reserves the right to limit, upon
notice, the maximum number of transfers a contract owner may make per contract
year to four. The Company reserves the right to defer the transfer privilege at
any time that the Company is unable to purchase or redeem shares of the Trust
portfolios. In addition, in accordance with applicable law, the Company reserves
the right to modify or terminate the transfer privilege at any time. Once
annuity payments have commenced, no transfers may be made from a fixed annuity
option to a variable annuity option or from a variable annuity option to a fixed
annuity option.
DEATH BENEFIT ON OR AFTER MATURITY DATE
If annuity payments have been selected based on an Annuity Option
providing for payments for a guaranteed period, and the Annuitant dies on or
after the Maturity Date, we will make the remaining guaranteed payments to the
Beneficiary. Any remaining payments will be made as rapidly as under the method
of distribution being used as of the date of the Annuitant's death. If no
Beneficiary is living, we will commute any unpaid guaranteed payments to a
single sum (on the basis of the interest rate used in determining the payments)
and pay that single sum to the estate of the last to die of the Annuitant and
the Beneficiary.
OTHER CONTRACT PROVISIONS
TEN DAY RIGHT TO REVIEW
The contract owner may cancel the contract by returning it to the
Company's Annuity Service Office or agent at any time within 10 days after
receipt of the contract. Within 7 days of receipt of the contract by the
Company, the Company will pay to the contract owner an amount equal to the
contract value computed at the end of the valuation period on the date of
surrender. When the contract is issued as an individual retirement annuity under
Internal Revenue Code
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Section 408, during the first 7 days of the 10 day period, the Company will
return all purchase payments if this is greater than the amount otherwise
payable.
No withdrawal charge is imposed upon return of the contract within the
ten day right to review period.
OWNERSHIP
The contract owner is the person entitled to exercise all rights under
the contract. Prior to the maturity date, the contract owner is the person
designated in the application or as subsequently named. On and after the
maturity date, the annuitant is the contract owner and after the death of the
annuitant, the beneficiary is the contract owner.
In the case of non-qualified contracts, ownership of the contract may
be changed or the contract collaterally assigned at any time during the lifetime
of the annuitant prior to the maturity date, subject to the rights of any
irrevocable beneficiary. Assigning a contract, or changing the ownership of a
contract, may be treated as a distribution of the contract value for Federal tax
purposes. (See "FEDERAL TAX MATTERS".) Any change of ownership or assignment
must be made in writing. Any change must be approved by the Company. Any
assignment and any change, if approved, will be effective as of the date on
which written. The Company assumes no liability for any payments made or actions
taken before a change is approved or assignment is accepted or responsibility
for the validity or sufficiency of any assignment.
In the case of qualified contracts, ownership of the contract generally
may not be transferred except by the trustee of an exempt employees' trust which
is part of a retirement plan qualified under Section 401 of the Internal Revenue
Code. Subject to the foregoing, a qualified contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
BENEFICIARY
The beneficiary is the person, persons, or entity designated in the
application or as subsequently named. The beneficiary may be changed during the
lifetime of the annuitant subject to the rights of any irrevocable beneficiary.
Any change must be made in writing, approved by the Company and if approved,
will be effective as of the date on which written. The Company assumes no
liability for any payments made or actions taken before the change is approved.
Prior to the maturity date, if no beneficiary survives the annuitant, the
contract owner or the contract owner's estate will be the beneficiary. The
interest of any beneficiary is subject to that of any assignee. In the case of
certain qualified contracts, regulations promulgated by the Treasury Department
prescribe certain limitations on the designation of a beneficiary.
MODIFICATION
The contract may not be modified by the Company without the consent of
the contract owner, except as may be required to make it conform to any law or
regulation or ruling issued by a governmental agency or to improve the rights
and/or benefits under the contract.
COMPANY APPROVAL
The Company reserves the right to accept or reject any contract
application at its sole discretion.
MISSTATEMENT AND PROOF OF AGE, SEX OR SURVIVAL
The Company may require proof of age, sex or survival of any person
upon whose age, sex or survival any payment depends. If the age or sex of the
annuitant has been misstated, the benefits will be those that would have been
provided for the annuitant's correct age and sex. If the Company has made
incorrect annuity payments, the amount of any underpayment will be paid
immediately and the amount of any overpayment will be deducted from future
annuity payments.
FIXED ACCOUNT INVESTMENT OPTIONS
Due to certain exemptive and exclusionary provisions, interests in the
fixed account investment options are not registered under the Securities Act of
1933 ("1933 Act") and the Company's general account is not registered as an
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investment company under the 1940 Act. Accordingly, neither interests in the
fixed account investment options nor the general account are subject to the
provisions or restrictions of the 1933 Act or the 1940 Act and the staff of the
Commission has not reviewed the disclosures in this Prospectus relating thereto.
Disclosures relating to interests in the fixed account investment options and
the general account, however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy of statements
made in a registration statement.
Investment Options. There are three fixed account investment options
under the contract: one, three and six year investment accounts. Fixed
investment accounts provide for the accumulation of interest on purchase
payments at guaranteed rates for the duration of the one, three or six year
guarantee period. The guaranteed interest rates on new amounts allocated or
transferred to a fixed investment account are determined from time-to-time by
the Company in accordance with market conditions. In no event will the
guaranteed rate of interest be less than 4%. Once an interest rate is guaranteed
for a fixed investment account, it is guaranteed for the duration of the
guarantee period and may not be changed by the Company.
Investment Accounts. Contract owners may allocate purchase payments, or
make transfers from the variable investment options, to the fixed account
investment options at any time prior to the maturity date. The Company
establishes a separate investment account each time the contract owner allocates
or transfers amounts to a fixed account investment option, except that amounts
allocated or transferred to the same fixed account investment option on the same
day will establish a single investment account. Amounts may not be allocated to
a fixed account investment option that would extend the guarantee period beyond
the maturity date.
Renewals. At the end of a guarantee period, the contract owner may
establish a new investment account with the same guarantee period at the then
current interest rate, select a different fixed account investment option or
transfer the amounts to a variable account investment option, all without the
imposition of any charge. The contract owner may not select a guarantee period
that would extend beyond the maturity date. In the case of renewals within one
year of the maturity date, the only fixed account investment option available is
to have interest accrued up to the maturity date at the then current interest
rate for one year guarantee periods.
If the contract owner does not specify the renewal option desired, the
Company will select the same guarantee period as has just expired, so long as
such period does not extend beyond the maturity date. In the event a renewal
would extend beyond the maturity date, the Company will select the longest
period that will not extend beyond such date, except in the case of a renewal
within one year of the maturity date in which case the Company will credit
interest up to the maturity date at the then current interest rate for one year
guarantee periods.
Market Value Charge. Any amount withdrawn, transferred or borrowed from
a three or six year investment account prior to the end of the guarantee period
may be subject to a market value charge. A market value charge will be
calculated separately for each investment account affected by a transaction to
which a market value charge may apply. The market value charge for an investment
account will be calculated by multiplying the amount withdrawn or transferred
from the investment account by the adjustment factor described below.
The adjustment factor is determined by the following formula:
0.75x(B-A)xC/12 where:
A - The guaranteed interest rate on the investment account.
B - The guaranteed interest rate available, on the date the
request is processed, for amounts allocated to a new
investment account with the same length of guarantee period as
the investment account from which the amounts are being
withdrawn.
C - The number of complete months remaining to the end of the
guarantee period.
For purposes of applying this calculation, the maximum difference
between "B" and "A" will be 3%. The adjustment factor will never be greater than
2x(A-4%) and never less than zero.
The total market value charge will be the sum of the market value
charges for each investment account being withdrawn. Where the guaranteed rate
available on the date of the request is less than the rate guaranteed on the
investment account from which the amounts are being withdrawn (B-A in the
adjustment factor is negative), there is no market value charge. There is only a
market value charge when interest rates have increased (B-A in the adjustment
factor is positive).
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There will be no market value charge on withdrawals from the fixed
account investment options in the following situations: (a) death of the
annuitant; (b) amounts withdrawn to pay fees or charges; (c) amounts withdrawn
from three and six year investment accounts within one month prior to the end of
the guarantee period; and (d) amounts withdrawn in any year that do not exceed
10% of total purchase payments less any prior partial withdrawals in that year.
Notwithstanding application of the foregoing formula, in no event will
the market value charge (i) exceed the earnings attributable to the amount
withdrawn from an investment account, (ii) together with any withdrawal charges
for an investment account be greater than 10% of the amount transferred or
withdrawn, or (iii) reduce the amount payable on withdrawal or transfer below
the amount required under the non-forfeiture laws of the state with jurisdiction
over the contract. The cumulative effect of the market value and withdrawal
charges (or the effect of the withdrawal charge itself) could, however, result
in a contract owner receiving total withdrawal proceeds of less than the
contract owner's investment in the contract.
Transfers. Prior to the maturity date, the contract owner may transfer
amounts among the fixed account investment options and from the fixed account
investment options to the variable account investment options, subject to the
following conditions. An amount in a fixed investment account may not be
transferred until held in such account for at least one year, except transfers
may be made pursuant to the Dollar Cost Averaging program. Consequently, except
as noted above, amounts in one year investment accounts effectively may not be
transferred prior to the end of the guarantee period. Amounts in three and six
year investment accounts may be transferred, after the one year holding period
has been satisfied, but the market value charge described above may apply to
such a transfer. The market value charge, if applicable, will be deducted from
the amount transferred.
The contract owner must specify the fixed account investment option
from or to which a transfer is to be made. Where there are multiple investment
accounts within a fixed account investment option, the contract owner may
designate the particular investment accounts from which a transfer is to be
taken. Absent such a designation, amounts will be withdrawn from the fixed
account investment options on a first-in-first-out basis.
Withdrawals. Prior to the earlier of the maturity date or the death of
the annuitant, the contract owner may make total and partial withdrawals of
amounts held in fixed account investment options. Withdrawals from fixed account
investment options will be made in the same manner and be subject to the same
limitations as set forth under "WITHDRAWALS", plus the following provisions also
apply to withdrawals from fixed account investment options: (1) the Company
reserves the right to defer payment of amounts withdrawn from fixed account
investment options for up to six months from the date it receives the written
withdrawal request (if a withdrawal is deferred for more than 10 days pursuant
to this right, the Company will pay interest on the amount deferred at a rate
not less than 4% per year); (2) if there are multiple investment accounts under
a fixed account investment option, amounts must be withdrawn from such accounts
on a first-in-first-out basis; and (3) the market value charge described above
may apply to withdrawals from the three and six year investment options. In the
event a market value charge applies to a withdrawal from a fixed investment
account, it will be calculated with respect to the full amount in the investment
account and deducted from the amount payable in the case of a total withdrawal.
In the case of a partial withdrawal, the market value charge will be calculated
on the amount requested and deducted, if applicable, from the remaining
investment account value.
Where a contract owner requests a partial withdrawal from a contract in
excess of the amounts in the variable account investment options and does not
specify the fixed account investment options from which the withdrawal is to be
made, such withdrawal will be made from the one, three and six year investment
options in that order. Within such sequence, where there are multiple investment
accounts within a fixed account investment option, withdrawals will be made on a
first-in-first-out basis.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL
TAX MATTERS".)
Loans. The Company offers a loan privilege only to owners of contracts
issued in connection with Section 403(b) qualified plans that are not subject to
Title I of ERISA. Owners of such contracts may obtain loans using the contract
as the only security for the loan. Owners of such contracts may borrow amounts
allocated to fixed investment accounts in the same manner and subject to the
same limitations as set forth under "LOANS". The market value charge
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described above may apply to amounts transferred from three and six year
investment accounts to the loan account in connection with such loans and, if
applicable, will be deducted from the amount so transferred.
Fixed Annuity Options. Subject to the distribution of death benefits
provisions (see "DEATH BENEFIT BEFORE THE MATURITY DATE"), on death, withdrawal
or the maturity date of the contract, the proceeds may be applied to a fixed
annuity option. (See "ANNUITY OPTIONS".) The amount of each fixed annuity
payment is determined by applying the portion of the proceeds applied to
purchase the fixed annuity (less any applicable premium taxes), to the
appropriate table in the contract. If the table in use by the Company is more
favorable to the contract owner, the Company will substitute that table. The
Company guarantees the dollar amount of fixed annuity payments.
CHARGES AND DEDUCTIONS
Charges and deductions under the contracts are assessed against
contract values or annuity payments. Currently, there are no deductions made
from purchase payments. In addition, there are deductions from and expenses paid
out of the assets of the Trust portfolios that are described in the accompanying
Prospectus of the Trust.
WITHDRAWAL CHARGES
If a withdrawal is made from the contract before the maturity date, a
withdrawal charge (contingent deferred sales charge) may be assessed against
amounts withdrawn attributable to purchase payments that have been in the
contract less than six complete contract years. There is never a withdrawal
charge with respect to earnings accumulated in the contract, certain other
amounts available without withdrawal charges described below or purchase
payments that have been in the contract more than six complete contract years.
In no event may the total withdrawal charges exceed 6% of the amount invested.
The amount of the withdrawal charge and when it is assessed is discussed below:
1. Each withdrawal from the contract is allocated first to the "amounts
available without withdrawal charges" and second to "unliquidated purchase
payments". In any contract year, the amounts available without withdrawal
charges for that year is the greater of (1) the excess of the contract value on
the date of withdrawal over the unliquidated purchase payments (the accumulated
earnings on the contract) or (2) 10% of total purchase payments less any prior
partial withdrawals in that year. Withdrawals allocated to the amounts available
without withdrawal charges may be withdrawn without the imposition of a
withdrawal charge.
2. If a withdrawal is made for an amount in excess of the amounts
available without withdrawal charges, the excess will be allocated to purchase
payments which will be liquidated on a first-in first-out basis. On any
withdrawal request, the Company will liquidate purchase payments equal to the
amount of the withdrawal request which exceeds the amounts available without
withdrawal charges in the order such purchase payments were made: the oldest
unliquidated purchase payment first, the next purchase payment second, etc...
until all purchase payments have been liquidated.
3. Each purchase payment or portion thereof liquidated in connection
with a withdrawal request is subject to a withdrawal charge based on the length
of time the purchase payment has been in the contract. The amount of the
withdrawal charge is calculated by multiplying the amount of the purchase
payment being liquidated by the applicable withdrawal charge percentage obtained
from the table below.
<TABLE>
<CAPTION>
NUMBER OF COMPLETE YEARS WITHDRAWAL
PURCHASE PAYMENT IN CHARGE
CONTRACT PERCENTAGE
-------- ----------
<S> <C>
0 6%
1 6%
2 5%
3 4%
4 3%
5 2%
6+ 0%
</TABLE>
The total withdrawal charge will be the sum of the withdrawal charges
for the purchase payments being liquidated.
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4. The withdrawal charge is deducted from the contract value remaining
after the contract owner is paid the amount requested, except in the case of a
complete withdrawal when it is deducted from the amount otherwise payable. In
the case of a partial withdrawal, the amount requested from an investment
account may not exceed the value of that investment account less any applicable
withdrawal charge.
5. There is no withdrawal charge on distributions made as a result of
the death of the annuitant or contract owner and no withdrawal charges are
imposed on the maturity date if the contract owner annuitizes as provided in the
contract.
The amount collected from the withdrawal charge will be used to
reimburse the Company for the compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses related to
sales activity.
For examples of calculation of the withdrawal charge, see Appendix A.
Withdrawals from the fixed account investment options may be subject to a market
value charge in addition to the withdrawal charge described above. (See "FIXED
ACCOUNT INVESTMENT OPTIONS".)
ADMINISTRATION FEES
Each year the Company will deduct an annual administration fee of $30
as partial compensation for the cost of providing all administrative services
attributable to the contracts and the operations of the Variable Account and the
Company in connection with the contracts. Prior to the maturity date, this
administration fee is deducted on the last day of each contract year. It is
withdrawn from each investment option in the same proportion that the value of
such investment option bears to the contract value. If the entire contract is
withdrawn on other than the last day of any contract year, the $30
administration fee will be deducted from the amount paid. During the annuity
period, the fee is deducted on a pro-rata basis from each annuity payment.
A daily charge in an amount equal to 0.15% of the value of each
variable investment account on an annual basis is also deducted from each
sub-account to reimburse the Company for administrative expenses. This asset
based administrative charge will not be deducted from the fixed account
investment options. The charge will be reflected in the contract value as a
proportionate reduction in the value of each variable investment account.
Because this portion of the administrative fee is a percentage of assets rather
than a flat amount, larger contracts will in effect pay a higher proportion of
this portion of the administrative expense than smaller contracts.
The Company does not expect to recover from such fees any amount in
excess of its accumulated administrative expenses. Even though administrative
expenses may increase, the Company guarantees that it will not increase the
amount of the administration fees. There is no necessary relationship between
the amount of the administrative charge imposed on a given contract and the
amount of the expense that may be attributed to that contract.
MORTALITY AND EXPENSE RISK CHARGE
The mortality risk assumed by the Company is the risk that annuitants
may live for a longer period of time than estimated. The Company assumes this
mortality risk by virtue of annuity rates incorporated into the contract which
cannot be changed. This assures each annuitant that his longevity will not have
an adverse effect on the amount of annuity payments. Also, the Company
guarantees that if the annuitant dies before the maturity date, it will pay a
minimum death benefit. (See "DEATH BENEFIT BEFORE MATURITY DATE".) The expense
risk assumed by the Company is the risk that the administration charges or
withdrawal charge may be insufficient to cover actual expenses.
To compensate it for assuming these risks, the Company deducts from
each of the sub-accounts a daily charge in an amount equal to 1.25% of the value
of the variable investment accounts on an annual basis, consisting of .8% for
the mortality risk and .45% for the expense risk. The charge will be reflected
in the contract value as a proportionate reduction in the value of each variable
investment account. The rate of the mortality and expense risk charge cannot be
increased. If the charge is insufficient to cover the actual cost of the
mortality and expense risks undertaken, the Company will bear the loss.
Conversely, if the charge proves more than sufficient, the excess will be profit
to the Company and will be available for any proper corporate purpose including,
among other things, payment of distribution expenses. The mortality and expense
risk charge is not assessed against the fixed account investment options.
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TAXES
The Company reserves the right to charge, or provide for, certain taxes
against purchase payments, contract values or annuity payments. Such taxes may
include premium taxes or other taxes levied by any government entity which the
Company determines to have resulted from the (i) establishment or maintenance of
the Variable Account, (ii) receipt by the Company of purchase payments, (iii)
issuance of the contracts, or (iv) commencement or continuance of annuity
payments under the contracts. The State of New York does not currently assess a
premium tax. In the event New York does impose a premium tax, the Company
reserves the right to pass-through such tax to contract owners. For a discussion
on premium taxes which may be applicable to non-New York residents, see "STATE
PREMIUM TAXES" in the Statement of Additional Information. The Company will
withhold taxes to the extent required by applicable law.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
contract is not exhaustive, does not purport to cover all situations, and is not
intended as tax advice. A qualified tax adviser should always be consulted with
regard to the application of law to individual circumstances. This discussion is
based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Department regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences
associated with the purchase of a contract. In addition, THE COMPANY MAKES NO
GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE, OR LOCAL --OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under the Code. Since
the operations of the Variable Account are a part of, and are taxed with, the
operations of the Company, the Variable Account is not separately taxed as a
"regulated investment company" under the Code. Under existing federal income tax
laws, investment income and capital gains of the Variable Account are not taxed
to the extent they are applied under a contract. The Company does not anticipate
that it will incur any federal income tax liability attributable to such income
and gains of the Variable Account, and therefore the Company does not intend to
make provision for any such taxes. If the Company is taxed on investment income
or capital gains of the Variable Account, then the Company may impose a charge
against the Variable Account in order to make provision for such taxes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any
increase in the contract value is generally not taxable to the contract owner or
annuitant until received, either in the form of annuity payments, as
contemplated by the contract, or in some other form of distribution. However,
certain requirements must be satisfied in order for this general rule to apply,
including: (1) the contract must be owned by an individual (or treated as owned
by an individual), (2) the investments of the Variable Account must be
"adequately diversified" in accordance with Treasury Department regulations, (3)
the Company, rather than the owner, must be considered the owner of the assets
of the Variable Account for federal tax purposes, and (4) the contract must
provide for appropriate amoritization, through annuity payments, of the
contract's purchase payments and earnings, e.g., the maturity date must not
occur at too advanced an age.
Non-Natural Owner. As a general rule, deferred annuity contracts held
by "non-natural persons" such as a corporation, trust or other similar entity,
as opposed to a natural person, are not treated as annuity contracts for federal
tax purposes. The investment income on such contracts is taxed as ordinary
income that is received or accrued by the owner of the contract during the
taxable year. There are several exceptions to this general rule for
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non-natural contract owners. First, contracts will generally be treated as held
by a natural person if the nominal owner is a trust or other entity which holds
the contract as an agent for a natural person. However, this special exception
will not apply in the case of any employer who is the nominal owner of an
annuity contract under a non-qualified deferred compensation arrangement for its
employees.
In addition, exceptions to the general rule for non-natural contract
owners will apply with respect to (1) contracts acquired by an estate of a
decedent by reason of the death of the decedent, (2) certain qualified
contracts, (3) certain contracts purchased by employers upon the termination of
certain qualified plans, (4) certain contracts used in connection with
structured settlement agreements, and (5) contracts purchased with a single
premium when the annuity starting date (as defined in the tax law) is no later
than a year from purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually, during the annuity period.
Diversification Requirements. For a contract to be treated as an
annuity for federal income tax purposes, the investments of the Variable Account
must be "adequately diversified" in accordance with Treasury Department
Regulations. The Secretary of the Treasury has issued regulations which
prescribe standards for determining whether the investments of the Variable
Account are "adequately diversified." If the Variable Account failed to comply
with these diversification standards, a contract would not be treated as an
annuity contract for federal income tax purposes and the contract owner would
generally be taxable currently on the excess of the contract value over the
premiums paid for the contract.
Although the Company does not control the investments of the NASL
Series Trust, it expects that the Trust will comply with such regulations so
that the Variable Account will be considered "adequately diversified."
Ownership Treatment. In certain circumstances, a variable annuity
contract owner may be considered the owner, for federal income tax purposes, of
the assets of the separate account used to support his or her contract. In those
circumstances, income and gains from such separate account assets would be
includible in the contract owner's gross income. The Internal Revenue Service
(the "Service") has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In addition, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor, rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular sub-accounts [of
a separate account] without being treated as owners of the underlying assets."
As of the date of this Prospectus, no such guidance has been issued.
The ownership rights under this contract are similar to, but different
in certain respects from, those described by the Service in rulings in which it
was determined that contract owners were not owners of separate account assets.
For example, the owner of this contract has the choice of many more investment
options to which to allocate premiums and contract values, and may be able to
transfer among investment options more frequently than in such rulings. These
differences could result in the contract owner being treated as the owner of the
assets of the Variable Account and thus subject to current taxation on the
income and gains from those assets. In addition, the Company does not know what
standards will be set forth in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves the
right to modify the contract as necessary to attempt to prevent the contract
owner from being considered the owner of the assets of the Variable Account.
Delayed Maturity Dates. If the contract's maturity date occurs (or is
scheduled to occur) at a time when the annuitant has reached an advanced age,
e.g., past age 85, it is possible that the contract would not be treated as an
annuity for federal income tax purposes. In that event, the income and gains
under the contract could be currently includible in the owner's income.
The remainder of this discussion assumes that the contract will be
treated as an annuity contract for federal income tax purposes and that the
Company will be treated as the owner of the Variable Account assets.
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TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal, amounts received are includible in
income to the extent the contract value before the withdrawal exceeds the
"investment in the contract." In the case of a full withdrawal, amounts received
are includible in income to the extent they exceed the "investment in the
contract." For these purposes the investment in the contract at any time equals
the total of the purchase payments made under the contract to that time (to the
extent such payments were neither deductible when made nor excludable from
income as, for example, in the case of certain employer contributions to
qualified plans) less any amounts previously received from the contract which
were not included in income.
Other than in the case of certain qualified contracts, any amount
received as a loan under a contract, and any assignment or pledge (or agreement
to assign or pledge) any portion of the contract value, is treated as a
withdrawal of such amount or portion. (Loans, assignments and pledges are
permitted only in limited circumstances under qualified contracts.) The
investment in the contract is increased by the amount includible in income with
respect to such assignment or pledge, though it is not affected by any other
aspect of the assignment or pledge (including its release). If an individual
transfers an annuity contract without adequate consideration to a person other
than the owner's spouse (or to a former spouse incident to divorce), the owner
will be taxed on the difference between the "contract value" and the "investment
in the contract" at the time of transfer. In such case, the transferee's
investment in the contract will be increased to reflect the increase in the
transferor's income.
The contract provides a death benefit that in certain circumstances may
exceed the greater of the purchase payments and the contract value. As described
elsewhere in this Prospectus, the Company imposes certain charges with respect
to the death benefit. It is possible that those charges (or some portion
thereof) could be treated for federal income tax purposes as a partial
withdrawal from the contract.
There may be special income tax issues present in situations where the
owner and the annuitant are not the same person and are not married to one
another. A tax advisor should be consulted in those situations.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as ordinary
income is equal to the excess of the payment over the exclusion amount. In the
case of variable annuity payments, the exclusion amount is the "investment in
the contract" (defined above) allocated to the variable annuity option, adjusted
for any period certain or refund feature, when payments begin to be made divided
by the number of payments expected to be made (determined by Treasury Department
regulations which take into account the annuitant's life expectancy and the form
of annuity benefit selected). In the case of fixed annuity payments, the
exclusion amount is the amount determined by multiplying (1) the payment by (2)
the ratio of the investment in the contract allocated to the fixed annuity
option, adjusted for any period certain or refund feature, to the total expected
value of annuity payments for the term of the contract (determined under
Treasury Department regulations).
Once the total amount of the investment in the contract is excluded
using these ratios, annuity payments will be fully taxable. If annuity payments
cease because of the death of the annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his or her last taxable year.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a non-qualified contract because of the
death of an owner or the annuitant. Prior to the maturity date, such death
benefit proceeds are includible in income as follows: (1) if distributed in a
lump sum, they are taxed in the same manner as a full withdrawal, as described
above, or (2) if distributed under an annuity option, they are taxed in the same
manner as annuity payments, as described above. After the maturity date, where a
guaranteed period exists under an annuity option and the annuitant dies before
the end of that period, payments made to the beneficiary for the remainder of
that period are includible in income as follows: (1) if received in a lump sum,
they are includible in income to the extent that they exceed the unrecovered
investment in the contract at that time, or (2) if distributed in accordance
with the existing annuity option selected,
34
<PAGE> 35
they are fully excludable from income until the remaining investment in the
contract is deemed to be recovered, and all annuity payments thereafter are
fully includible in income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any payment from a
non-qualified contract unless the payment is: (a) received on or after the
contract owner reaches age 59 1/2; (b) attributable to the contract owner's
becoming disabled (as defined in the tax law); (c) made to a beneficiary on or
after the death of the contract owner or, if the contract owner is not an
individual, on or after the death of the primary annuitant (as defined in the
tax law); (d) made as a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the
annuitant or for the joint lives (or joint life expectancies) of the annuitant
and designated beneficiary (as defined in the tax law); (e) made under an
annuity contract purchased with a single premium when the annuity starting date
(as defined in the tax law) is no later than a year from purchase of the annuity
and substantially equal periodic payments are made, not less frequently than
annually, during the annuity period; or (f) made with respect to certain
annuities issued in connection with structured settlement agreements. (A similar
penalty tax, applicable to distributions from certain qualified contracts, is
discussed below.)
AGGREGATION OF CONTRACTS
In certain circumstances, the amount of an annuity payment or a
withdrawal from a contract that is includible in income may be determined by
combining some or all of the non-qualified contracts owned by an individual. For
example, if a person purchases a contract offered by this Prospectus and also
purchases at approximately the same time an immediate annuity, the Service may
treat the two contracts as one contract. In addition, if a person purchases two
or more deferred annuity contracts from the same insurance company (or its
affiliates) during any calendar year, all such contracts will be treated as one
contract. The effects of such aggregation are not clear; however, it could
affect the amount of a withdrawal or an annuity payment that is taxable and the
amount which might be subject to the penalty tax described above.
QUALIFIED RETIREMENT PLANS
The contracts are also designed for use in connection with certain
types of retirement plans which receive favorable treatment under the Code.
Numerous special tax rules apply to the participants in such qualified plans and
to the contracts used in connection with such qualified plans. Therefore, no
attempt is made in this Prospectus to provide more than general information
about use of the contract with the various types of qualified plans.
The tax rules applicable to qualified plans vary according to the type
of plan and the terms and conditions of the plan itself. For example, for both
withdrawals and annuity payments under certain qualified contracts, there may be
no "investment in the contract" and the total amount received may be taxable.
Also, loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loan must be repaid. (Owners
should always consult their tax advisors and retirement plan fiduciaries prior
to exercising their loan privileges.) Both the amount of the contribution that
may be made, and the tax deduction or exclusion that the owner may claim for
such contribution, are limited under qualified plans. If this contract is used
in connection with a qualified plan, the owner and annuitant must be the same
individual. If a co-annuitant is named, all distributions made while the
annuitant is alive must be made to the annuitant. Also, if a co-annuitant is
named who is not the annuitant's spouse, the annuity options which are available
may be limited, depending on the difference in ages between the annuitant and
co-annuitant. Furthermore, the length of any guarantee period may be limited in
some circumstances to satisfy certain minimum distribution requirements under
the Code.
In addition, special rules apply to the time at which distributions
must commence and the form in which the distributions must be paid. For example,
failure to comply with minimum distribution requirements applicable to qualified
plans will result in the imposition of an excise tax. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
actual distribution from the qualified plan. In the case of IRAs, distributions
of minimum amounts (as specified in the tax law) must generally commence by
April 1 of the calendar year following the calendar year in which the owner
attains age 70 1/2. In the case of certain other
35
<PAGE> 36
qualified plans, distributions of such minimum amounts must generally commence
by the later of this date or April 1 of the calendar year following the calendar
year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of any payment
from certain qualified contracts (but not section 457 plans). (The amount of the
penalty tax is 25% of the taxable amount of any payment received from a "SIMPLE
retirement account" during the 2 year period beginning on the date the
individual first participated in any qualified salary reduction arrangement (as
defined in the tax law) maintained by the individual's employer.) There are
exceptions to this penalty tax which vary depending on the type of qualified
plan. In the case of an "Individual Retirement Annuity" ("IRA"), including a
"SIMPLE IRA," exceptions provide that the penalty tax does not apply to a
payment (a) received on or after the contract owner reaches age 59 1/2, (b)
received on or after the owner's death or because of the owner's disability (as
defined in the tax law), or (c) made as a series of substantially equal periodic
payments (not less frequently than annually) for the life (or life expectancy)
of the owner or for the joint lives (or joint life expectancies) of the owner
and designated beneficiary (as defined in the tax law). These exceptions, as
well as certain others not described herein, generally apply to taxable
distributions from other qualified plans (although, in the case of plans
qualified under sections 401 and 403, exception "c" above for substantially
equal periodic payments applies only if the owner has separated from service).
When issued in connection with a qualified plan, a contract will be
amended as generally necessary to conform to the requirements of the plan.
However, contract owners, annuitants, and beneficiaries are cautioned that the
rights of any person to any benefits under qualified plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the contract. In addition, the Company shall not be bound by terms
and conditions of qualified plans to the extent such terms and conditions
contradict the contract, unless the Company consents.
QUALIFIED PLAN TYPES
Following are brief descriptions of various types of qualified plans in
connection with which the Company may issue a contract.
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." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the time
when distributions may commence. Also, distributions from certain other types of
qualified retirement plans may be "rolled over" on a tax-deferred basis into an
IRA.
IRAs generally may not provide life insurance coverage, but they may
provide a death benefit that equals the greater of the premiums paid and the
contract value. The contract provides a death benefit that in certain
circumstances may exceed the greater of the purchase payments and the contract
value. It is possible that the contract's death benefit could be viewed as
providing life insurance coverage with the result that the contract would not be
viewed as satisfying the requirements of an IRA.
Simplified Employee Pensions (SEP-IRAs). Section 408(k) of the Code
allows employers to establish simplified employee pension plans for their
employees, using the employees' IRAs for such purposes, if certain criteria are
met. Under these plans the employer may, within specified limits, make
deductible contributions on behalf of the employees to IRAs. As discussed above
(see Individual Retirement Annuities), there is some uncertainty regarding the
treatment of the contract's death benefit for purposes of the tax rules
governing IRAs (which would include SEP-IRAs). Employers intending to use the
contract in connection with such plans should seek competent advice.
SIMPLE IRAs. Section 408(p) of the Code permits certain small employers
to establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by both
employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may be
eligible, and the time when distributions may commence. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the proper
characterization of the contract's death benefit for purposes of the tax rules
governing IRAs
36
<PAGE> 37
(which would include SIMPLE IRAs). Employers intending to use the contract in
connection with such plans should seek competent advice.
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and
Profit-Sharing Plans. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh", permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
contracts in order to provide benefits under the plans. The contract provides a
death benefit that in certain circumstances may exceed the greater of the
purchase payments and the contract value. It is possible that such death benefit
could be characterized as an incidental death benefit. There are limitations on
the amount of incidental benefits that may be provided under pension and profit
sharing plans. In addition, the provision of such benefits may result in current
taxable income to participants. Employers intending to use the contract in
connection with such plans should seek competent advice.
Tax-Sheltered Annuities. Section 403(b) of the Code permits public
school employees and employees of certain types of charitable, educational and
scientific organizations specified in section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities". Purchasers of the contracts for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the contracts. In
particular, purchasers should consider that the contract provides a death
benefit that in certain circumstances may exceed the greater of the purchase
payments and the contract value. It is possible that such death benefit could be
characterized as an incidental death benefit. If the death benefit were so
characterized, this could result in currently taxable income to purchasers. In
addition, there are limitations on the amount of incidental benefits that may be
provided under a tax-sheltered annuity. Even if the death benefit under the
contract were characterized as an incidental death benefit, it is unlikely to
violate those limits unless the purchaser also purchases a life insurance
contract as part of his or her tax-sheltered annuity plan.
Tax-sheltered annuity contracts must contain restrictions on
withdrawals of (i) contributions made pursuant to a salary reduction agreement
in years beginning after December 31, 1988, (ii) earnings on those
contributions, and (iii) earnings after 1988 on amounts attributable to salary
reduction contributions (and earnings on those contributions) held as of the
last day of the year beginning before January 1, 1989. These amounts can be paid
only if the employee has reached age 59 1/2, separated from service, died, or
become disabled (within the meaning of the tax law), or in the case of hardship
(within the meaning of the tax law). Amounts permitted to be distributed in the
event of hardship are limited to actual contributions; earnings thereon cannot
be distributed on account of hardship. Amounts subject to the withdrawal
restrictions applicable to section 403(b)(7) custodial accounts may be subject
to more stringent restrictions. (These limitations on withdrawals do not apply
to the extent the Company is directed to transfer some or all of the contract
value to the issuer of another tax-sheltered annuity or into a section 403(b)(7)
custodial account.)
DIRECT ROLLOVERS
If the contract is used in connection with a retirement plan that is
qualified under sections 401(a), 403(a), or 403(b) of the Code, any "eligible
rollover distribution" from the contract will be subject to "direct rollover"
and mandatory withholding requirements. An eligible rollover distribution
generally is any taxable distribution from such qualified plans, excluding
certain amounts such as (i) minimum distributions required under section
401(a)(9) of the Code, and (ii) certain distributions for life, life expectancy,
or for 10 years or more which are part of a "series of substantially equal
periodic payments."
Under these requirements, federal income tax equal to 20% of the
eligible rollover distribution will be withheld from the amount of the
distribution. Unlike withholding on certain other amounts distributed from the
contract, discussed below, the owner cannot elect out of withholding with
respect to an eligible rollover distribution. However, this 20% withholding will
not apply if, instead of receiving the eligible rollover distribution, the
distributee elects to have it directly transferred to certain qualified plans.
Prior to receiving an eligible rollover dis-
37
<PAGE> 38
tribution, a notice will be provided explaining generally the direct rollover
and mandatory withholding requirements and how to avoid the 20% withholding by
electing a direct rollover.
FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. Government a part of
the taxable portion of each distribution made under a contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances, the
Company may be required to withhold tax. The withholding rates applicable to the
taxable portion of periodic annuity payments are the same as the withholding
rates generally applicable to payments of wages. In addition, the withholding
rate applicable to the taxable portion of non-periodic payments (including
withdrawals prior to the maturity date) is 10%. As discussed above, the
withholding rate applicable to eligible rollover distributions is 20%.
GENERAL MATTERS
PERFORMANCE DATA
From time to time the Variable Account may publish advertisements
containing performance data relating to its sub-accounts. For periods prior
October 31, 1992, performance data will be hypothetical figures based on the
assumption that a contract offered by this Prospectus was issued when the
sub-accounts first became available for investment under other contracts offered
by an affiliate of the Company. Hypothetical performance figures will also be
furnished for sub-accounts investing in the Trust portfolios established on
December 31, 1996 in connection with the merger of Manulife Series Fund, Inc.
with and into the Trust. Such figures are based on the assumption that the
sub-accounts had been available for investment under a contract offered by this
Prospectus when the applicable Manulife Series Fund portfolio first became
available under contracts issued be affiliates of the Company. The sub-accounts
may advertise both "standardized" and "non-standardized" total return figures,
although standardized figures will always accompany non-standardized figures.
Standardized performance data will consist of total return quotations, which
will always include quotations for recent one year and, when applicable, five
and ten year periods and, where less than ten years, for the period subsequent
to the date each sub-account first became available for investment. Such
quotations for such periods will be the average annual rates of return required
for an initial purchase payment of $1,000 to equal the actual contract value
attributable to such purchase payment on the last day of the period, after
reflection of all charges. Standardized total return figures will be quoted
assuming redemption at the end of the period. Such figures may be accompanied by
non-standardized total return figures that are calculated on the same basis as
the standardized returns except that the calculations (i) assume no redemption
at the end of the period and (ii) do not reflect imposition of the $30 per
contract charge inasmuch as the impact of such charge varies by contract size.
In addition to the non-standardized returns, each of the sub-accounts may from
time to time quote aggregate non-standardized total returns for other time
periods. Except as noted above, performance figures used by the Variable Account
are based on the actual historical performance of its sub-accounts for specified
periods, and the figures are not intended to indicate future performance. More
detailed information on the computations is set forth in the Statement of
Additional Information.
FINANCIAL STATEMENTS
Financial Statements for the Variable Account and for the Company are
contained in the Statement of Additional Information.
ASSET ALLOCATION AND TIMING SERVICES
The Company is aware that certain third parties may offer asset
allocation and timing services in connection with the contracts. In certain
cases the Company may agreed to honor transfer instructions from such asset
allocation and timing services where it has received powers of attorney, in a
form acceptable to it, from the contract owners participating in the service.
THE COMPANY DOES NOT ENDORSE, APPROVE OR RECOMMEND SUCH SERVICES IN ANY WAY AND
CONTRACT OWNERS SHOULD BE AWARE THAT FEES PAID FOR SUCH SERVICES ARE SEPARATE
AND IN ADDITION TO FEES PAID UNDER THE CONTRACTS.
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<PAGE> 39
DISTRIBUTION OF CONTRACTS
NASL Financial Services, Inc. ("NASL Financial"), 116 Huntington
Avenue, Boston, Massachusetts 02116, a wholly-owned subsidiary of North American
Security Life, the parent of the Company, is the principal underwriter of the
contracts in addition to providing advisory services to the Trust. NASL
Financial is a broker-dealer registered under the Securities Exchange Act of
1934 ("1934 Act") and a member of the National Association of Securities
Dealers, Inc. ("NASD"). NASL Financial has entered into a non-exclusive
promotional agent agreement with Wood Logan Associates, Inc. ("Wood Logan").
Wood Logan, a wholly owned subsidiary of a holding company that is 85% owned by
Manulife and approximately 15% owned by principals of Wood Logan, is a
broker-dealer registered under the 1934 Act and a member of the NASD. Sales of
the contracts will be made by registered representatives of broker-dealers
authorized by NASL Financial to sell the contracts. Such registered
representatives will also be licensed insurance agents of the Company. Under the
promotional agent agreement, Wood Logan will recruit and provide sales training
and licensing assistance to such registered representatives. In addition, Wood
Logan will prepare sales and promotional materials for the Company's approval.
NASL Financial will pay distribution compensation to selling brokers in varying
amounts which under normal circumstances are not expected to exceed 6.00% of
purchase payments or 4.75% of purchase payments plus 0.25% of the contract value
per year beginning in the second contract year. NASL Financial may from time to
time pay additional compensation pursuant to promotional contests. Additionally,
in some circumstances, NASL Financial will provide reimbursement of certain
sales and marketing expenses. NASL Financial will pay the promotional agent for
providing marketing support for the distribution of the contracts.
CONTRACT OWNER INQUIRIES
All contract owner inquiries should be directed to the Company's
Annuity Service Office at International Corporate Center at Rye, 555 Theodore
Fremd Avenue, Suite C-209, Rye, New York 10580.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party
or to which the assets of the Variable Account are subject. Neither the Company
nor NASL Financial are involved in any litigation that is of material importance
in relation to their total assets or that relates to the Variable Account.
OTHER INFORMATION
A registration statement has been filed with the Commission under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940 with
respect to the variable portion of the contracts discussed in this Prospectus.
Not all the information set forth in the registration statement, amendments and
exhibits thereto has been included in this Prospectus. Statements contained in
this Prospectus or the Statement of Additional Information concerning the
content of the contracts and other legal instruments are only summaries. For a
complete statement of the terms of these documents, reference should be made to
the instruments filed with the Commission.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History......................................... 3
Performance Data........................................................ 3
State Premium Taxes..................................................... 6
Services ............................................................... 7
Independent Auditors........................................... 7
Servicing Agent................................................ 7
Principal Underwriter.......................................... 7
Cancellation of Contract....................................... 7
Appendix A: State Premium Taxes......................................... 8
Financial Statements.................................................... 9
</TABLE>
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<PAGE> 40
APPENDIX A
EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE
Example 1 - Assume a single payment of $50,000 is made into the contract, no
transfers are made, no additional payments are made and there are no partial
withdrawals. The table below illustrates four examples of the withdrawal charges
that would be imposed if the contract is completely withdrawn, based on
hypothetical contract values.
<TABLE>
<CAPTION>
HYPOTHETICAL AMOUNT PURCHASE
CONTRACT CONTRACT AVAILABLE WITHOUT PAYMENTS
YEAR VALUE WITHDRAWAL CHARGES LIQUIDATED WITHDRAWAL CHARGE
- ---- ----- ------------------ ---------- -----------------
PERCENT AMOUNT
<S> <C> <C> <C> <C> <C>
1 55,000 5,000(a) 50,000 6% 3,000
3 50,500 5,000(b) 45,500 5% 2,275
5 60,000 10,000(c) 50,000 3% 1,500
7 70,000 20,000(d) 50,000 0% 0
</TABLE>
(a) During any contract year the amount that may be withdrawn without withdrawal
charges is the greater of accumulated earnings, or 10% of the total purchase
payments made under the contract less any prior partial withdrawals in that
contract year. In the first contract year the earnings under the contract and
10% of purchase payments both equal $5,000. Consequently, on total withdrawal
$5,000 is withdrawn without withdrawal charges, the entire $50,000 purchase
payment is liquidated and the withdrawal charge is assessed against such
liquidated purchase payment (contract value less withdrawal amount without
charges).
(b) In the example for the third contract year, the accumulated earnings of $500
is less than 10% of purchase payments, therefore the amount that may be
withdrawn without withdrawal charges is equal to 10% of purchase payments
($50,000 X 10% = $5,000) and the withdrawal charge is only applied to purchase
payments liquidated (contract value less withdrawal amount without charges).
(c) In the example for the fifth contract year, the accumulated earnings of
$10,000 is greater than 10% of purchase payments ($5,000), therefore the amount
that may be withdrawn without withdrawal charges is equal to the accumulated
earnings of $10,000 and the withdrawal charge is applied to the purchase
payments liquidated (contract value less withdrawal amount without charges).
(d) There is no withdrawal charge on any purchase payments liquidated that have
been in the contract for at least 6 years.
40
<PAGE> 41
Example 2 - Assume a single payment of $50,000 is made into the
contract, no transfers are made, no additional payments are made and there are a
series of four partial withdrawals made during the third contract year of
$2,000, $5,000, $7,000, and $8,000.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL PURCHASE
CONTRACT PARTIAL WITHDRAW AMOUNT PAYMENTS
VALUE REQUESTED WITHOUT CHARGES LIQUIDATED WITHDRAWAL CHARGE
- ----- --------- --------------- ---------- -----------------
PERCENT AMOUNT
<S> <C> <C> <C> <C> <C>
65,000 2,000 15,000(a) 0 5% 0
49,000 5,000 3,000(b) 2,000 5% 100
52,000 7,000 4,000(c) 3,000 5% 150
44,000 8,000 0(d) 8,000 5% 400
</TABLE>
(a) The amount that can be withdrawn without withdrawal charges during any
contract year is the greater of the contract value less the unliquidated
purchase payments (accumulated earnings), or 10% of purchase payments less 100%
of all prior withdrawals in that contract year. For the first example,
accumulated earnings of $15,000 is the amount that can be withdrawn without
withdrawal charges since it is greater than 10% of purchase payments less prior
withdrawals ($5,000-0). The amount requested ($2,000) is less than the amount
that can be withdrawn without withdrawal charges so no purchase payments are
liquidated and no withdrawal charge applies.
(b) The contract has negative accumulated earnings ($49,000-$50,000), so the
amount that can be withdrawn without withdrawal charges is limited to 10% of
purchase payments less all prior withdrawals. Since $2,000 has already been
withdrawn earlier in the current contract year, the remaining amount that can be
withdrawn without withdrawal charges during the third contract year is $3,000.
The $5,000 partial withdrawal will consist of $3,000 amount that can be
withdrawn without withdrawal charge, and the remaining $2,000 will be subject to
a withdrawal charge and result in purchase payments being liquidated. The
remaining unliquidated purchase payments are $48,000.
(c) The contract has increased in value to $52,000. The unliquidated purchase
payments are $48,000 so the accumulated earnings are $4,000, which is greater
than 10% of purchase payments less prior withdrawals ($5,000-$2,000-$5,000<0).
Hence the amount that can be withdrawn without withdrawal charges is $4,000.
Therefore, $3,000 of the $7,000 partial withdrawal will be subject to a
withdrawal charge and result in purchase payments being liquidated. The
remaining unliquidated purchase payments are $45,000.
(d) The amount that can be withdrawn without withdrawal charges is zero since
the contract has negative accumulated earnings ($44,000-$45,000) and the full
10% of purchase payments ($5,000) has already been utilized. The full amount of
$8,000 will result in purchase payments being liquidated subject to a withdrawal
charge. At the beginning of the next contract year the full 10% of purchase
payments would be available again for withdrawal requests during that year.
41
<PAGE> 42
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
FNAL VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
of
First North American Life
Assurance Company
FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT
NON-PARTICIPATING
This Statement of Additional Information is not a Prospectus. It
contains information in addition to that described in the Prospectus
and should be read in conjunction with the Prospectus dated the same
date as this Statement of Additional Information. The Prospectus may be
obtained by writing First North American Life Assurance Company ("First
North American") at the Annuity Service Office, International Corporate
Center at Rye, 555 Theodore Fremd Avenue, Rye, New York 10580 or by
telephoning (914) 921-1020.
The date of this Statement of Additional Information is May 1, 1997.
- --------------------------------------------------------------------------------
V9SAI597
<PAGE> 43
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information and History...............................3
Performance Data..............................................3
State Premium Taxes...........................................6
Services......................................................7
Independent Auditors.................................7
Servicing Agent......................................7
Principal Underwriter................................7
Cancellation of Contract.............................7
Appendix A - State Premium Taxes..............................8
Financial Statements..........................................9
</TABLE>
2
<PAGE> 44
GENERAL INFORMATION AND HISTORY
The FNAL Variable Account ("Variable Account") is a separate investment
account of First North American Life Assurance Company ("First North American"),
a stock life insurance company organized under the laws of New York in 1992.
First North American is a wholly-owned subsidiary of North American Security
Life Insurance Company ("Security Life"), a stock life insurance company
established in 1979 in Delaware. The ultimate parent of Security Life is The
Manufacturers Life Insurance Company ("Manulife"), a Canadian mutual life
insurance company based in Toronto, Canada. Prior to January 1, 1996, Security
Life was a wholly owned subsidiary of North American Life Assurance Company
("NAL"), a Canadian mutual life insurance company. On January 1, 1996, NAL and
Manulife merged with the combined company retaining the name Manulife.
PERFORMANCE DATA
Each of the sub-accounts may in its advertising and sales materials
quote total return figures. For periods prior to October 31, 1992, performance
data will be hypothetical figures based on the assumption that a contract
offered by the Prospectus was issued when the sub-accounts first became
available for investment under other contracts offered by the Company.
Hypothetical performance figures will also be furnished for sub-accounts
investing in NASL Series Trust portfolios established on December 31, 1996 in
connection with the merger of Manulife Series Fund, Inc. with and into the NASL
Series Trust. Such figures are based on the assumption that the sub-accounts had
been available for investment under a contract offered by this Prospectus when
the applicable Manulife Series Fund portfolio first became available under
contracts issued by affiliates of First North American. The sub-accounts may
advertise both "standardized" and "non-standardized" total return figures,
although standardized figures will always accompany non-standardized figures.
Such figures will always include the average annual total return for recent one
year and, when applicable, five and ten year periods and the period since the
sub-account became available to contract owners. Where the period since
inception is less than one year, the total return quoted will be the aggregate
return for the period. The average annual total return is the average annual
compounded rate of return that equates a purchase payment to the market value of
such purchase payment on the last day of the period for which such return is
calculated. The aggregate total return is the percentage change (not annualized)
that equates a purchase payment to the market value of such purchase payment on
the last day of the period for which such return is calculated. For purposes of
the calculations it is assumed that an initial payment of $1,000 is made on the
first day of the period for which the return is calculated. In calculating
standardized return figures, all recurring charges are reflected, the asset
charges are reflected in changes in unit values and the $30 administration fee
is deducted as a dollar amount based on the $35,000 approximate average contract
size during 1996. "Recurring charges" is defined as all asset charges (mortality
and expense risk fees and administration fees) and the $30 administrative fee.
Standardized total return figures will be quoted assuming redemption at the end
of the period. Such figures may be accompanied by non-standardized total return
figures that are calculated on the same basis as the standardized returns except
that the calculations (i) assume no redemption at the end of the period and (ii)
do not reflect imposition of the $30 per contract charge inasmuch as the impact
of such charge varies by contract size. First North American believes such
non-standardized figures are useful to contract owners who wish to assess the
performance of an ongoing contract of the size that is meaningful to the
individual contract owner. In addition, each of the sub-accounts may from time
to time quote aggregate non-standardized total returns calculated in the same
manner as set forth above for other time periods.
3
<PAGE> 45
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
CALCULATED AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
=======================================================================================================================
TRUST PORTFOLIO 1 YEAR 5 YEAR SINCE INCEPTION DATE
INCEPTION OR
10 YEARS,
WHICHEVER
SHORTER
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pacific Rim Emerging Markets* 2.31% N/A 2.42% 10/4/94
- -----------------------------------------------------------------------------------------------------------------------
International Small Cap N/A N/A 1.99% 3/4/96
- -----------------------------------------------------------------------------------------------------------------------
Small/Mid Cap N/A N/A -0.10% 3/4/96
- -----------------------------------------------------------------------------------------------------------------------
Global Equity 4.95% 8.19% 6.99% 3/18/88
- -----------------------------------------------------------------------------------------------------------------------
Growth N/A N/A 3.75% 7/15/96
- -----------------------------------------------------------------------------------------------------------------------
Equity 12.37% 14.42% 12.25%= 6/18/85
- -----------------------------------------------------------------------------------------------------------------------
Quantitative Equity* 10.20% 9.89% 9.06% 4/30/87
- -----------------------------------------------------------------------------------------------------------------------
Blue Chip Growth 18.05% N/A 7.37% 12/13/92
- -----------------------------------------------------------------------------------------------------------------------
Real Estate Securities* 26.73% 15.50% 11.72% 4/30/87
- -----------------------------------------------------------------------------------------------------------------------
International Growth and Income 4.94% N/A 5.42% 1/09/95
- -----------------------------------------------------------------------------------------------------------------------
Growth and Income 15.03% 12.51% 12.85% 4/23/91
- -----------------------------------------------------------------------------------------------------------------------
Equity-Income 12.09% N/A 12.13% 2/19/93
- -----------------------------------------------------------------------------------------------------------------------
Aggressive Asset Allocation 5.33% 8.42% 7.35% 8/03/89
- -----------------------------------------------------------------------------------------------------------------------
Moderate Asset Allocation 2.44% 7.20% 6.61% 8/03/89
- -----------------------------------------------------------------------------------------------------------------------
Conservative Asset Allocation -0.28% 5.69% 5.70% 8/03/89
- -----------------------------------------------------------------------------------------------------------------------
Strategic Bond 7.00% N/A 6.62% 2/19/93
- -----------------------------------------------------------------------------------------------------------------------
Global Government Bond 5.35% 7.76% 7.97% 3/18/88
- -----------------------------------------------------------------------------------------------------------------------
Capital Growth Bond* -4.49% 4.56% 5.88%= 6/26/84
- -----------------------------------------------------------------------------------------------------------------------
Investment Quality Bond** -4.40% 4.57% 6.38% 4/23/91
- -----------------------------------------------------------------------------------------------------------------------
U.S. Government Securities*** -3.67% 4.10% 6.28% 5/01/89
- -----------------------------------------------------------------------------------------------------------------------
Money Market -2.11% 2.03% 4.01%= 6/18/85
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 46
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
CALCULATED AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
=======================================================================================================================
TRUST PORTFOLIO 1 YEAR 5 YEAR SINCE INCEPTION DATE
INCEPTION OR
10 YEARS,
WHICHEVER
SHORTER
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim Emerging Markets* 8.28% N/A 4.66% 10/4/94
- -----------------------------------------------------------------------------------------------------------------------
International Small Cap N/A N/A 7.94% 3/4/96
- -----------------------------------------------------------------------------------------------------------------------
Small/Mid Cap N/A N/A 5.73% 3/4/96
- -----------------------------------------------------------------------------------------------------------------------
Global Equity 11.04% 8.70% 7.06% 3/18/88
- -----------------------------------------------------------------------------------------------------------------------
Growth N/A N/A 9.82% 7/15/96
- -----------------------------------------------------------------------------------------------------------------------
Equity 18.45% 14.84% 12.30%= 6/18/85
- -----------------------------------------------------------------------------------------------------------------------
Quantitative Equity* 16.28% 10.36% 9.12% 4/30/87
- -----------------------------------------------------------------------------------------------------------------------
Blue Chip Growth 24.14% N/A 8.05% 12/13/92
- -----------------------------------------------------------------------------------------------------------------------
Real Estate Securities* 32.82% 15.90% 11.77% 4/30/87
- -----------------------------------------------------------------------------------------------------------------------
International Growth and Income 11.03% N/A 8.35% 1/09/95
- -----------------------------------------------------------------------------------------------------------------------
Growth and Income 21.11% 12.96% 13.12% 4/23/91
- -----------------------------------------------------------------------------------------------------------------------
Equity-Income 18.18% N/A 12.95% 2/19/93
- -----------------------------------------------------------------------------------------------------------------------
Aggressive Asset Allocation 11.41% 8.93% 7.43% 8/03/89
- -----------------------------------------------------------------------------------------------------------------------
Moderate Asset Allocation 8.42% 7.73% 6.69% 8/03/89
- -----------------------------------------------------------------------------------------------------------------------
Conservative Asset Allocation 5.53% 6.24% 5.78% 8/03/89
- -----------------------------------------------------------------------------------------------------------------------
Strategic Bond 13.09% N/A 7.55% 2/19/93
- -----------------------------------------------------------------------------------------------------------------------
Global Government Bond 11.43% 8.28% 8.04% 3/18/88
- -----------------------------------------------------------------------------------------------------------------------
Capital Growth Bond* 1.06% 5.14% 5.95%= 6/26/84
- -----------------------------------------------------------------------------------------------------------------------
Investment Quality Bond** 1.14% 5.15% 6.71% 4/23/91
- -----------------------------------------------------------------------------------------------------------------------
U.S. Government Securities*** 1.93% 4.69% 6.35% 5/01/89
- -----------------------------------------------------------------------------------------------------------------------
Money Market 3.58% 2.66% 4.08%= 6/18/85
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
= Ten year performance
* On December 31, 1996, Manulife Series Fund, Inc. merged with NASL
Series Trust. Performance presented for these sub-accounts is based upon the
performance of the respective predecessor Manulife Series Fund portfolio for
periods
5
<PAGE> 47
to December 31, 1996. Performance for each of these sub-accounts is based on the
historical performance of the predecessor Manulife Series Fund portfolio and
reflects the current expenses that an investor would have incurred as a holder
of units of the sub-account.
** Because the Investment Quality Bond Trust changed its subadviser and
investment objective effective April 23, 1991, the Company has elected to quote
performance for the Investment Quality Bond Sub-account only since the date of
change in order to quote returns representative of its current objective and
produced by its current portfolio manager. Per share information concerning the
period prior to the change appears in the Trust's Prospectus. Average annual
total rates of return for the one, five, and ten year periods for the
sub-account are available upon request.
*** The U.S. Government Securities Sub-account commenced operations on March 18,
1988 by investing in shares of the Convertible Securities Trust. That Trust
changed its investment objective and its investment Subadviser effective May 1,
1989, pursuant to a vote of its shareholders. In view of the change in
investment objective and portfolio manager, the U.S. Government Securities
Sub-account has elected to quote performance only since the date of the change
in order to quote returns representative of its current objective and produced
by its current portfolio manager. Per share information concerning the period
prior to the change appears in the Trust's Prospectus. Average annual total
rates of return for the one, five, and ten year periods for the sub-account are
available upon request.
In addition to the non-standardized returns quoted above, each of the
sub-accounts may from time to time quote aggregate non-standardized total
returns calculated in the same manner as set forth above for other time periods.
From time to time the Trust may include in its advertising and sales literature
general discussions of economic theories, including but not limited to,
discussions on how demographic and political trends can affect the financial
markets. Further, the Trust may also include in its advertising and sales
literature specific information on each of the Trust's subadvisers, including
but not limited to, research capabilities of a subadviser, assets under
management, information relating to other clients of a subadviser, and other
generalized information.
STATE PREMIUM TAXES
New York does not currently assess a premium tax. In the event New York
does impose a premium tax, the Company reserves the right to pass-through such
tax to contract owners. For residents of all other states, except for residents
in Pennsylvania, South Dakota and Kentucky premium taxes will be deducted from
the contract value used to provide for fixed or variable annuity payments unless
required otherwise by applicable law. The amount deducted will depend on the
premium tax assessed in the applicable state. State premium taxes currently
range from 0% to 3.5% depending on the jurisdiction and the tax status of the
contract and are subject to change by the legislature or other authority. (See
"APPENDIX B: STATE PREMIUM TAXES") FOR RESIDENTS OF PENNSYLVANIA, SOUTH DAKOTA
AND KENTUCKY THE FOLLOWING PREMIUM TAX ASSESSMENT WILL APPLY: A premium tax will
be assessed against all non-qualified purchase payments received from contract
owners who are residents of South Dakota. The rate of tax is 1.25% for South
Dakota residents. If the Kentucky Revenue Cabinet's policy change on premium
taxes becomes effective as expected, a premium tax will be assessed against all
purchase payments received on or after July 1, 1997 from contract owners who are
residents of Kentucky. The rate of tax is 2.00% for Kentucky residents. Purchase
payments received for the period October 1, 1992 through September 7, 1995 for
non-qualified contracts of Pennsylvania residents will be assessed a 2.00%
premium tax; purchase payments received on or after September 8, 1995 will not
be assessed a premium tax. For purchase payments received on or after October 1,
1992 (July 1, 1997 for Kentucky), the state premium tax will be collected upon
payment of any withdrawal benefits, upon any annuitization or payment of death
benefits. For payments received prior to October 1, 1992 (July 1, 1997 for
Kentucky) the premium tax will deducted upon annuitization only. In the states
of Pennsylvania and South Dakota, purchase payments received in connection with
the funding of a qualified plan are exempt from state premium tax.
6
<PAGE> 48
SERVICES
INDEPENDENT AUDITORS
The financial statements of First North American and the Variable
Account at December 31, 1996 and for the year then ended appearing in this
Statement of Additional Information have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and is included in reliance upon such given upon the authority of such
firm as experts in accounting and auditing.
The statutory balance sheet of First North American as of December 31,
1995 and the related statutory statements of operations, changes in capital and
deficit and cash flows for each of the two years in the period ended December
31, 1995, appearing in this Statement of Additional Information have been
included herein in reliance on the report (which report includes an adverse
opinion as to generally accepted accounting principles and an unqualified
opinion as to statutory accounting practices prescribed or permitted by the
Insurance Department of the State of New York), of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The statement of operations and changes in net assets of the Variable
Account for the year ended December 31, 1995, appearing in this Statement of
Additional Information has been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
SERVICING AGENT
Vantage Computer Systems, Inc. ("Vantage") provides to First North
American a computerized data processing recordkeeping system for variable
annuity administration. Vantage provides various daily, semimonthly, monthly,
semiannual and annual reports including: daily updates on accumulation unit
values, variable annuity participants and transactions, and agent production and
commissions; semimonthly commission statements; monthly summaries of agent
production and daily transaction reports; semiannual statements for contract
owners; and annual contract owner tax reports. Vantage receives approximately
$7.50 per policy per year, plus certain other fees paid by First North American
for the services provided.
PRINCIPAL UNDERWRITER
NASL Financial Services, Inc., a wholly-owned subsidiary of Security Life,
serves as principal underwriter of the contracts. Contracts are offered on a
continuous basis. The aggregate dollar amount of underwriting commissions paid
to NASL Financial Services, Inc. was $7,049,687 in 1996, $5,659,896 in 1995 and
$6,512,457 in 1994. The amount retained by NASL Financial Services, Inc. during
1996, 1995 and 1994 was $0, $0 and $0, respectively.
CANCELLATION OF CONTRACT
The Company may, at its option, cancel a contract at the end of any
three consecutive contract years in which no purchase payments by or on behalf
of the contract owner have been made, if both (i) the total purchase payments
made for the contract, less any withdrawals, are less than $2,000; and (ii) the
contract value at the end of such three year period is less than $2,000. The
Company, as a matter of administrative practice, will attempt to notify a
contract owner prior to such cancellation in order to allow the contract owner
to make the necessary purchase payment to keep the contract in force.
7
<PAGE> 49
APPENDIX A
STATE PREMIUM TAXES
Premium taxes vary according to the state and are subject to change. In
many jurisdictions there is no tax at all. For current information, a tax
adviser should be consulted.
<TABLE>
<CAPTION>
TAX RATE
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- -------------------------------------------------------------------------------
<S> <C> <C>
CALIFORNIA .50% 2.35%
DISTRICT OF COLUMBIA 2.25% 2.25%
KANSAS .00 2.00%
KENTUCKY 2.00% 2.00%
MAINE .00 2.00%
NEVADA .00 3.50%
PUERTO RICO 1.00% 1.00%
SOUTH DAKOTA .00 1.25%
TEXAS .04% .04%
WEST VIRGINIA 1.00% 1.00%
WYOMING .00 1.00%
</TABLE>
8
<PAGE> 50
FINANCIAL STATEMENTS
9
<PAGE> 51
AUDITED FINANCIAL STATEMENTS
FIRST NORTH AMERICAN LIFE ASSURANCE COMPANY
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Years ended December 31, 1996, 1995 and 1994
<PAGE> 52
First North American Life
Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Audited Statutory-Basis Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets--Statutory-Basis...............................................3
Statements of Operations--Statutory-Basis.....................................4
Statements of Changes in Capital and Deficit--Statutory-Basis.................5
Statements of Cash Flows--Statutory-Basis.....................................6
Notes to Statutory-Basis Financial Statements.................................7
<PAGE> 53
Report of Independent Auditors
Board of Directors and Shareholder
First North American Life Assurance Company
We have audited the accompanying statutory-basis balance sheet of First North
American Life Assurance Company (a wholly-owned subsidiary of North American
Security Life Insurance Company) as of December 31, 1996, and the related
statutory-basis statements of operations, changes in capital and deficit and
cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York State Insurance Department, which practices differ
from generally accepted accounting principles. The variances between such
practices and generally accepted accounting principles also are described in
Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of First North American Life Assurance Company at December 31, 1996, or the
results of its operations or its cash flows for the year then ended.
1
<PAGE> 54
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First North American Life
Assurance Company at December 31, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with accounting practices
prescribed or permitted by the New York State Insurance Department.
Boston, Massachusetts
February 21, 1997
Ernst & Young LLP
2
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
First North American Life Assurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, capital and surplus of First North American Life Assurance Company
(a wholly-owned subsidiary of North American Life Assurance Company of New York,
Canada) as of December 31, 1995 and the related statutory statements of
operations, capital and surplus, and cash flows for the two years in the period
ended December 31, 1995. These statutory financial statement 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.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware (SAP), which
practices after 1996 (upon issuance of 1996 financial statements) differ from
generally accepted accounting principles (GAAP). The effects on the financial
statements of the variances between SAP and GAAP are not currently determinable.
In our report dated February 23, 1996, we expressed our opinion that the 1995
and 1994 financial statements, prepared using SAP, presented fairly, in all
material respects, the financial position of North American Security Life
Insurance Company as of December 31, 1995 and the results of its operations, and
its cash flows for the two years in the period ended December 31, 1995 in
conformity with GAAP. As described in Note 1 to the financial statements,
financial statements of wholly-owned stock life subsidiaries of mutual life
insurance enterprises prepared in accordance with SAP are no longer considered
to be presented in conformity with GAAP. Accordingly, our present opinion on the
1995 and 1994 financial statements as presented herein is different from that
expressed in our previous report.
<PAGE> 56
In our opinion, because of the effects of the matter discussed in the two
preceding paragraphs, the financial statements referred to above do not present
fairly in conformity with GAAP, the financial position of First North American
Life Assurance Company as of December 31, 1995, or the results of its operations
or its cash flows for the two years in the period ended December 31, 1995.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects the financial condition of First North American
Life Assurance Company as of December 31, 1995, and the results of its
operations and its cash flows for the two years in the period ended December 31,
1995, on the basis of accounting described in Note 1.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 23, 1996, except for the information
in Note 1 - "Basis of Presentation", for which
the date is February 21, 1997
<PAGE> 57
<TABLE>
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Balance Sheets--Statutory-Basis
<CAPTION>
DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 82,204,775 $ 72,506,765
Cash and short-term investments 8,089,101 10,924,688
Accrued investment income 1,528,000 1,521,013
State income tax recoverable 18,617 169,102
Policy loans 183,070 67,323
Separate account assets 361,309,525 216,807,655
---------------------------
Total admitted assets $453,333,088 $301,996,546
===========================
LIABILITIES, CAPITAL AND DEFICIT
Liabilities:
Aggregate reserves $ 79,708,490 $ 80,630,795
Transfers from separate account, net (13,279,792) (8,948,130)
Borrowed money 2,001,417
Payable to Parent and affiliate 2,016,646 1,152,224
Asset valuation reserve 332,653 199,691
Interest maintenance reserve 375,672 364,729
Other liabilities 604,824 966,383
Separate account liabilities 361,309,525 216,807,655
--------------------------
Total liabilities 431,068,018 293,174,764
Capital and deficit:
Common stock (shares authorized, issued and
outstanding: 2,000,000; par value $1) 2,000,000 2,000,000
Paid-in capital in excess of par value 24,800,000 11,500,000
Unassigned deficit (4,534,930) (4,678,218)
--------------------------
Total capital and deficit 22,265,070 8,821,782
--------------------------
Total liabilities, capital and deficit $453,333,088 $301,996,546
==========================
</TABLE>
See accompanying notes.
3
<PAGE> 58
<TABLE>
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Statements of Operations--Statutory-Basis
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Revenues:
Annuity considerations and deposits $116,736,289 $89,142,231 $107,925,456
Net investment income 5,303,010 4,773,019 1,048,795
-----------------------------------------
Total revenues 122,039,299 93,915,250 108,974,251
Expenses:
Annuity benefits 16,793,601 13,492,673 5,576,889
Increase (decrease) in reserves (922,305) 41,026,784 31,083,813
Commissions 4,075,498 3,119,978 3,777,391
General expenses 4,843,155 3,554,429 3,827,352
Increase in separate account liability 96,404,376 33,198,775 65,510,108
-----------------------------------------
Total expenses 121,194,325 94,392,639 109,775,553
Gain (loss) from operations before federal
income taxes and net realized losses 844,974 (477,389) (801,302)
Federal income taxes 612,686 101,510 65,322
-----------------------------------------
Gain (loss) from operations before net realized
losses 232,288 (578,899) (866,624)
Net realized losses (973)
-----------------------------------------
Net income (loss) $ 231,315 $ (578,899) $ (866,624)
=========================================
</TABLE>
See accompanying notes.
4
<PAGE> 59
<TABLE>
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Statements of Changes in Capital and Deficit--Statutory-Basis
<CAPTION>
PAID-IN
CAPITAL IN EXCESS TOTAL
COMMON OF UNASSIGNED CAPITAL AND
STOCK PAR VALUE DEFICIT DEFICIT
--------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at January 1, 1994 $2,000,000 $ 8,500,000 $(1,373,463) $9,126,537
Net loss (866,624) (866,624)
Increase in nonadmitted assets (107,834) (107,834)
Increase in asset valuation reserve (48,439) (48,439)
--------------------------------------------------------
Balances at December 31, 1994 2,000,000 8,500,000 (2,396,360) 8,103,640
Net loss (578,899) (578,899)
Additional paid-in capital 3,000,000 3,000,000
Change in reserve valuation basis (1,713,707) (1,713,707)
Decrease in nonadmitted assets 154,099 154,099
Increase in asset valuation reserve (143,351) (143,351)
--------------------------------------------------------
Balances at December 31, 1995 2,000,000 11,500,000 (4,678,218) 8,821,782
Net income 231,315 231,315
Additional paid-in capital 13,300,000 13,300,000
Decrease in nonadmitted assets 44,935 44,935
Increase in asset valuation reserve (132,962) (132,962)
--------------------------------------------------------
Balances at December 31, 1996 $2,000,000 $24,800,000 $(4,534,930) 22,265,070
========================================================
</TABLE>
5
See accompanying notes.
<PAGE> 60
<TABLE>
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Statements of Cash Flows--Statutory-Basis
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Annuity considerations and deposits $ 116,736,289 $ 89,142,231 $107,925,456
Net investment income 5,359,641 3,622,972 1,082,479
Surrender benefits and other fund
withdrawals paid
(14,430,908) (9,892,657) (5,195,538)
Other benefits paid to policyholders (2,368,633) (3,597,101) (371,351)
Commissions, other expenses and taxes paid (8,888,890) (6,514,600) (7,698,601)
Net transfers to separate account (100,736,038) (34,354,414) (69,221,494)
Federal income taxes (101,510) (65,322)
----------------------------------------------------
Net cash provided by (used for) operating
activities
(4,328,539) 38,304,921 26,455,629
INVESTING ACTIVITIES
Proceeds from bonds sold, matured or repaid 31,658,755 18,834,870 7,404,273
Cost of bonds acquired (41,409,440) (69,601,394) (18,628,562)
Net loss on cash and short-term investments (973)
Net increase in policy loans (115,747) (67,323)
----------------------------------------------------
Net cash used by investing activities (9,867,405) (50,833,847) (11,224,289)
OTHER CASH PROVIDED (APPLIED)
Capital and surplus paid-in 13,300,000 3,000,000
Borrowed money (2,001,417) 2,000,000
Other sources 473,275 882,019 589,197
Other applications (411,501) (90,196) (1,046,518)
----------------------------------------------------
Net other cash provided (used) 11,360,357 5,791,823 (457,321)
----------------------------------------------------
Net change in cash and short-term investments
(2,835,587) (6,737,103) 14,774,019
Balance at beginning of year 10,924,688 17,661,791 2,887,772
----------------------------------------------------
Balance at end of year $ 8,089,101 $ 10,924,688 $ 17,661,791
====================================================
</TABLE>
See accompanying notes.
6
<PAGE> 61
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements
December 31, 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
First North American Life Assurance Company (the Company), a stock life
insurance company, was organized on February 10, 1992 under the laws of the
state of New York. The Company is a wholly-owned subsidiary of North American
Security Life Insurance Company (Security Life or Parent). Security Life is a
wholly-owned subsidiary of NAWL Holding Company Inc. (NAWL). NAWL holds all the
outstanding shares of the Company and Wood Logan Associates, Inc. (WLA).
Manufacturers Life Insurance Company (MLI) owns all class A shares of NAWL,
representing 85% of the voting shares of NAWL. Certain employees of WLA own all
class B shares, which represent the remaining 15% voting interest in NAWL. Prior
to January 1, 1996, Security Life was a wholly-owned subsidiary of North
American Life Assurance Company (NAL), a Canadian mutual life insurance company.
On January 1, 1996, NAL merged with MLI. The surviving company will conduct
business under the name "Manufacturers Life Insurance Company". Effective
January 1, 1996, immediately following the merger, the Company's Parent went
through a corporate restructuring which resulted in the formation of a newly
organized holding corporation, NAWL.
On December 22, 1995, the New York State Insurance Department approved the
application submitted to MLI to acquire control of FNAL subject to commitment
letters given to the Department by MLI and FNAL. As part of the agreement, MLI
contributed $13.3 million of additional surplus to FNAL in 1996.
The Company issues fixed and variable annuity contracts in the State of New
York. Amounts invested in the fixed portion of the contracts are allocated to
the General Account of the Company. The Company invests all assets in the
General Account in fixed income securities. Amounts invested in the variable
portion of the annuity contracts are allocated to the FNAL Variable Account, a
separate account of the Company. The assets of the FNAL Variable Account
contracts are invested in shares of the NASL Series Trust, a no-load, open-end
management investment company organized as a Massachusetts business trust.
7
<PAGE> 62
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NASL Financial Services, Inc. (NASL Financial or Affiliate), a wholly-owned
subsidiary of Security Life, acts as the investment advisor to the NASL Series
Trust and as principal underwriter of the variable annuity contracts. NASL
Financial has entered into a promotional agent agreement with WLA, to act as the
promotional agent of annuity contract sales.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known which would impact the amounts reported and
disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the New York State Insurance
Department, which practices differ from generally accepted accounting principles
(GAAP).
The 1995 financial statements presented for comparative purposes were previously
described as also being prepared in accordance with GAAP for stock life
insurance subsidiaries of a mutual life parent. Pursuant to FASB Interpretation
40, Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises (FIN 40), as amended, which is effective for
1996 annual financial statements, financial statements based on statutory
accounting practices can no longer be described as prepared in conformity with
GAAP. Furthermore, financial statements prepared in conformity with statutory
accounting practices for periods prior to the effective date of FIN 40 are not
considered GAAP presentations when presented in comparative form with the
financial statements for periods subsequent to the effective date. Accordingly,
the 1995 financial statements are no longer considered to be presented in
conformity with GAAP.
8
<PAGE> 63
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The more significant variances from GAAP are as follows
Investments: Investments in bonds are reported at amortized cost based on their
National Association of Insurance Commissioners (NAIC) rating; for GAAP, such
fixed maturity investments would be designated at purchase as held-to-maturity,
trading, or available-for-sale. Held-to-maturity fixed investments would be
reported at amortized cost, and the remaining fixed maturity investments are
reported at fair value with unrealized holding gains and losses reported in
operations for those designated as trading and as a separate component of
capital for those designated as available-for-sale.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds, attributable to changes in the general level of interest
rates and amortizes those deferrals over the remaining period to maturity based
on groupings of individual securities sold in five-year bands. That net deferral
is reported as the "interest maintenance reserve" in the accompanying balance
sheets. Realized capital gains and losses are reported in income net of federal
income tax and transfers to the interest maintenance reserve. The "asset
valuation reserve" is determined by an NAIC prescribed formula and is reported
as a liability rather than unassigned deficit. Under GAAP, realized capital
gains and losses would be reported in the income statement on a pretax basis in
the period that the asset giving rise to the gain or loss is sold and valuation
allowances would be provided when there has been a decline in value deemed other
than temporary, in which case, the provision for such declines would be charged
to earnings.
Policy Acquisition Costs: The costs of acquiring and renewing business are
expensed when incurred. Under GAAP, acquisition costs related to investment
products, to the extent recoverable from future gross profits, are amortized
generally in proportion to the present value of expected gross profits from
surrender charges and investment, mortality, and expense margins.
Nonadmitted Assets: Certain assets designated as "nonadmitted," principally
furniture and equipment, are excluded from the accompanying balance sheets and
are charged directly to unassigned deficit.
9
<PAGE> 64
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Annuity Considerations and Deposits: Revenues for annuity considerations and
deposits consist of the entire premium received and annuity benefits represent
the death benefits, annuitizations and withdrawals and surrenders paid and the
change in policy reserves. Under GAAP, annuity considerations and deposits
received in excess of policy charges would not be recognized as premium revenue
and annuity benefits would represent the excess of benefits paid over the policy
account value and interest credited to the account values.
Aggregate Reserves: Certain policy reserves are calculated based on statutorily
required interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Federal Income Taxes: Deferred federal income taxes are not provided for
differences between the financial statement amounts and tax bases of assets
and liabilities.
The effects of the foregoing variances from GAAP on the accompanying
statutory-basis financial statements have not been determined, but are presumed
to be material.
10
<PAGE> 65
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other significant accounting policies are as follows:
INVESTMENTS AND INVESTMENT INCOME
Investments are valued in accordance with rules promulgated by the NAIC. Bonds
not backed by loans are valued at amortized cost using the constant yield
method.
Loan-backed bonds and structured securities are valued at amortized cost using
the constant yield method including anticipated prepayments. Prepayment
assumptions are obtained from broker dealer survey values. These assumptions are
consistent with the current interest rate and economic environment. The
retrospective method is being used to value all securities.
Investment income is recognized on the accrual basis. Unrealized gains or losses
on investments are recorded in unassigned deficit. Realized gains or losses on
investments sold are determined on the basis of the specific identification
method.
SHORT-TERM INVESTMENTS
Short-term investments generally consist of treasury bills, commercial paper and
money market instruments whose maturities at the time of acquisition are one
year or less. Short-term instruments are valued at cost, which approximates
market value.
11
<PAGE> 66
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ANNUITY CONSIDERATIONS AND DEPOSITS
Annuity considerations and deposits are recognized as revenue when received.
Expenses, including acquisition costs such as commissions and other costs in
connection with acquiring new business, are charged to operations as incurred.
AGGREGATE RESERVES
The reserves, developed using accepted actuarial methods, have been established
and maintained on the basis of published mortality tables and prescribed
interest rates per the State of New York. The method used for the valuation of
annuities is the Commissioner's Annuity Reserve Valuation Method (CARVM). Under
this method the reserve is the highest present value of all future guaranteed
cash surrender values.
Surrender values on policies do not exceed the corresponding reserves.
Additional reserves are established when the results of cash flow testing under
various interest rate scenarios indicate the need for such reserves. During
1996, an additional reserve of $500,000 was established as a result of the
Company's cash flow testing.
SEPARATE ACCOUNT
Separate account assets and liabilities reported in the accompanying balance
sheet represent mutual funds that are separately administered for the exclusive
benefit of variable annuity contractholders and are reported at fair market
value. Since the contractholders receive the full benefit and bear the full risk
of the separate account investments, the income, realized and unrealized gains
and losses from such investments, is offset by an equivalent change in the
liabilities related to the separate accounts. Transfers from the separate
account, net, primarily represent the difference between the contract owner's
account value and the CARVM reserves. Fees charged on separate account deposits
are included in other income.
12
<PAGE> 67
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
The Asset Valuation Reserve (AVR) provides for potential market and credit
losses on general account invested assets. Changes in the AVR are accounted for
as a direct increase or decrease in unassigned deficit. The Interest Maintenance
Reserve (IMR) captures realized capital gains and losses which result from
changes in interest rates for all fixed income securities and amortizes these
capital gains and losses into investment income over the original life of the
investments.
FEDERAL INCOME TAXES
The Company will participate as a member of the NAWL affiliated group, filing a
consolidated federal income tax return. The Company will file a separate New
York State return.
The method of allocation between the companies is subject to a tax sharing
agreement. The tax liability is allocated to each member on a pro-rata basis
based on the relationship that the member's tax liability (computed on a
separate return basis) bears to the tax liability of the consolidated group. The
tax charge to the Company will not be more than the Company would have paid on a
separate return basis.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the State of New York
Insurance Department. "Prescribed" statutory accounting practices include state
laws, regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC currently is in the process of recodifying
statutory accounting practices, the result of which is expected to constitute
the only source of "prescribed" statutory accounting practices. Accordingly,
that project, which is expected to be completed in 1997, will likely change, to
some
13
<PAGE> 68
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
extent, prescribed statutory accounting practices, and may result in changes to
the accounting practices that the Company uses to prepare its statutory
financial statements.
The impact of any such changes on the Company's statutory-surplus cannot be
determined at this time and could be material.
3. RELATED PARTY TRANSACTIONS
The Company utilizes various services and personnel of the Parent for
accounting, actuarial, administration and systems support. These costs are
allocated to the Company based on the percentage of time incurred by the
Parent's personnel in connection with services rendered on behalf of the
Company. The total costs allocated for these services in 1996, 1995 and 1994
were approximately $661,000, $456,000 and $418,000, respectively.
The Company's insurance contracts are distributed through NASL Financial
pursuant to an underwriting agreement. NASL Financial is responsible for the
payment of all commissions and has agreed to charge the Company commissions and
expense allowances equal to 6% of all annuity contract sales.
The financial statements have been prepared from the records maintained by the
Company and may not necessarily be indicative of the financial condition or
results of operations if the Company had been operated as an unaffiliated
corporation.
4. INVESTMENTS
Net investment income was as follows:
1996 1995 1994
-----------------------------------
Bonds $4,476,472 $4,436,994 $874,148
Short-term investments 873,146 403,497 235,859
Amortization of IMR 78,801 5,105 (17,670)
Investment expenses (125,409) (72,577) (43,542)
-----------------------------------
Net investment income $5,303,010 $4,773,019 $1,048,795
===================================
14
<PAGE> 69
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of investments in debt securities
at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
==============================================================
(In thousands)
<STUB> <C> <C> <C> <C>
December 31, 1996:
U.S. Treasury securities and
obligations of U.S.
Government agencies $ 3,244 $ 193 $ 3,437
Corporate securities 73,366 1,082 $191 74,257
Mortgage-backed securities 1,017 5 1,012
States, territories and
possessions 4,578 182 4,760
--------------------------------------------------------------
Total $82,205 $1,457 $196 $83,466
==============================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
================================================================
(In thousands)
<STUB> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury securities and
obligations of U.S.
Government agencies $ 405 $ 17 $ 422
Corporate securities 62,976 2,282 $10 65,248
Mortgage-backed securities 2,507 2 2,509
States, territories and
possessions
6,619 329 6,948
---------------------------------------------------------
Total $72,507 $2,630 $10 $75,127
=========================================================
</TABLE>
15
<PAGE> 70
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of debt securities at December 31,
1996 by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers or lenders may have the right to
call or prepay obligations with or without call or prepayment penalties. The
fair values of investments in debt securities were determined based on quoted
market price or dealer quotes.
AMORTIZED ESTIMATED FAIR
COST VALUE
-----------------------------------
(In thousands)
Due in one year or less $17,626 $17,627
Due after one year through five years 46,623 47,701
Due after five years through ten years 13,154 13,185
Due after ten years through twenty years 1960 1,929
Over twenty years 2842 3,024
-----------------------------
Total $82,205 $83,466
=============================
In 1996, 1995 and 1994, gross realized gains on sales of investments in debt
securities were $90,811, $466,167 and $11,321, respectively, and gross realized
losses were $2,039, $0 and $125,000, respectively. Net realized gains (losses)
of $89,745, $466,167 and ($113,679) were transferred to IMR in 1996, 1995 and
1994, respectively.
A United States Treasury note with a statement value of $401,651 at December 31,
1996 was in a custody account on behalf of the New York State Insurance
Department and is included with bonds on the Statement of Admitted Assets,
Liabilities, Capital and Surplus.
16
<PAGE> 71
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
5. LIFE AND ANNUITY ACTUARIAL RESERVES
The Company issues flexible premium deferred combination fixed and variable
annuity contracts. Reserves for these contracts are established using the
Commissioners Annuity Reserve Valuation Method (CARVM) as adopted by the New
York State Insurance Department. The reserves for the fixed portion of the
contracts are held in the general account and the reserves for the variable
portion of the contracts are held in the separate account. In addition, the
Company holds a minimum death benefit guaranteed reserve in the general account,
in the amount of $303,773, to cover the death benefit guarantees on the variable
portion of the contracts. The Company does not offer surrender values in excess
of the reserves.
<TABLE>
Withdrawal characteristics of annuity actuarial reserves are as follows (in
thousands):
<CAPTION>
<S> <C> <C>
Subject to discretionary withdrawal with market value
adjustment $ 58,358 13.64%
Subject to discretionary withdrawal at book value less
surrender charge (of 5% or more) 19,113 4.47
Subject to discretionary withdrawal at market value 348,333 81.44
---------------------
Subtotal 425,804 99.55%
Subject to discretionary withdrawal at book value without
adjustment 903 .21
Not subject to discretionary withdrawal provision 1,031 .24
---------------------
Total annuity actuarial reserve and deposit fund liabilities $427,738 100%
=====================
</TABLE>
For the year ended December 31, 1995, the New York State Insurance Department
instructed the Company to change from the Change in Funds valuation basis to the
Issue Year basis. This change resulted in an increase in reserves of $1,713,707.
In accordance with NAIC reporting guidelines, this was reflected as a direct
charge to surplus in 1995.
17
<PAGE> 72
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
6. LEASES
The Company leases office space under an operating lease agreement which expires
in 1999 and is subject to a renewal option at market rates prevailing at the
time of renewal. For the years ended December 31, 1996, 1995 and 1994, the
Company incurred rent expense of $79,950, $72,695 and $72,695, respectively. The
minimum lease payments associated with the office space are as follows:
MINIMUM LEASE
YEAR PAYMENTS
-------------------------------------
1997 $ 73,994
1998 81,648
1999 61,236
----------------
Total $216,878
================
7. BORROWED MONEY
The Company has an unsecured line of credit with State Street Bank and Trust, in
the amount of $5 million, bearing interest at various pricing options based upon
the money market rates quoted by the bank. The outstanding balances at December
31, 1996 and 1995 were $0 and $2,000,000, respectively. Interest expense was
approximately $27,000, $1,400 and $0 for the years ended December 31, 1996, 1995
and 1994, respectively.
18
<PAGE> 73
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
8. SEPARATE ACCOUNT
Annuity considerations and deposits for the separate account during 1996, 1995
and 1994 were $98,328,113, $56,218,157 and $80,714,388, respectively. A
reconciliation of the amounts transferred to and from the separate account is
presented below:
<TABLE>
<CAPTION>
1996
------------------------
(In thousands)
<S> <C>
Transfers as reported in the Summary of Operations of the Separate
Account Statements:
Transfers to separate account $121,102,516
Transfers from separate account (24,195,491)
------------------------
Net transfers to separate account 96,907,025
Reconciling Adjustments:
Suspense Account Adjustment (502,649)
------------------------
Transfers as reported in the Statement of Operations of the Life,
Accident & Health Annual Statement $ 96,404,376
========================
</TABLE>
9. EMPLOYEE RETIREMENT PLAN
Prior to December 31, 1995, NAL maintained the NALACO Pension Plan, a defined
benefit pension plan for all U.S. employees, which vests at five years of
service. Sponsorship of this plan was assumed by MLI at the time of the merger.
Benefit payout is a function of years of service and average earnings during the
employee's last five years of service. MLI's funding policy is to contribute
annually the normal cost up to the maximum amount that can be deducted for
federal income tax purposes and to charge each subsidiary for its allocable
share of such contributions based on a percentage of payroll. No pension cost
was allocated to the Company in 1996, 1995 or 1994, as the plan was subject to
the full funding limitation under the Internal Revenue Code. At December 31,
1996 the plan's total accumulated benefit obligation determined in accordance
with FASB 87, and valued as of January 1, 1996 based upon an assumed
19
<PAGE> 74
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
9. EMPLOYEE RETIREMENT PLAN (CONTINUED)
interest rate of 7%, was $10,183,862, including vested benefits of $10,094,294,
and fair value of assets of $24,427,811.
NASL sponsors a defined contribution retirement plan established pursuant to
regulation 401(k) of the Internal Revenue Code. All Company employees are
eligible after one year of service and upon attaining age 21. The Company
voluntarily contributes two percent of base pay plus fifty percent of the
employee savings contribution. The employee savings contribution is limited to
six percent of base pay. The Company contributed $7,992 , $6,175 and $4,459 in
1996, 1995 and 1994, respectively.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
"fair value" disclosures for financial instruments in the accompanying financial
statements and notes thereto:
Cash and Short-term Investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate their
fair values.
Bonds: Fair values for bonds are based on quoted market prices, where
applicable. For bonds not actively traded, fair values are estimated using
values obtained from independent pricing services.
Assets and Liabilities of Separate Accounts: Separate account assets and
liabilities are reported at estimated fair value in the Company's balance
sheets.
Aggregate Reserves: Fair values of the Company's liabilities under contracts not
involving significant mortality risk (deferred annuities) are stated at the cost
the Company would incur to extinguish the liability; i.e., the cash surrender
value.
20
<PAGE> 75
First North American Life Assurance Company
(A Wholly-Owned Subsidiary of
North American Security Life Insurance Company)
Notes to Statutory-Basis Financial Statements (continued)
10. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
The following sets forth a comparison of the carrying values and fair values of
the Company's financial instruments at December 31, 1996 and 1995.
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Bonds $ 82,204,775 $ 83,466,000 $ 72,506,765 $ 75,127,000
Cash and short-term
investments 8,089,101 8,089,101 10,924,688 10,924,688
Assets held in separate
accounts
361,309,525 361,309,525 216,807,655 216,807,655
LIABILITIES:
Aggregate reserves for deferred
annuities 79,708,490 74,985,163 80,630,795 76,820,216
Liabilities held in separate
accounts 348,029,733 361,309,525 207,859,524 216,807,655
</TABLE>
21
<PAGE> 76
REPORT OF INDEPENDENT AUDITORS
To the Contract Owners of
FNAL Variable Account of First North American Life Assurance Company:
We have audited the accompanying statement of assets and contract owners' equity
of FNAL Variable Account of First North American Life Assurance Company (the
Company) as of December 31, 1996, and the related statement of operations and
changes in net assets for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of FNAL Variable Account of
First North American Life Assurance Company at December 31, 1996, and the
results of its operations and the changes in its net assets for the year then
ended in conformity with generally accepted accounting principles.
Boston, Massachusetts
February 14, 1997
Ernst & Young LLP
<PAGE> 77
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
FNAL Variable Account:
We have audited the accompanying statement of assets and liabilities of the
sub-accounts comprising FNAL Variable Account (consisting of the Equity,
Investment Quality Bond, Growth and Income, Blue Chip Growth, Money Market,
Global Equity, Global Government Bond, U.S. Government Securities, Conservative
Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation,
Equity-Income, Strategic Bond and International Growth and Income sub-accounts)
of First North American Life Assurance Company as of December 31, 1995 and the
related statements of operations and changes in net assets of the Equity,
Investment Quality Bond, Growth and Income, Blue Chip Growth, Money Market,
Global Equity, Global Government Bond, U.S. Government Securities, Conservative
Asset Allocation, Moderate Asset Allocation, Aggressive Asset Allocation,
Equity-Income and Strategic Bond sub-accounts for the year then ended and the
related statement of operations and changes in net assets of the International
Growth and Income sub-account for the period January 9, 1995 (date of
commencement of operations to 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 financial statements referred to above present fairly, in
all material respects, the financial position of the aforementioned sub-accounts
comprising FNAL Variable Account of First North American Life Assurance Company
as of December 31, 1995, and the results of their operations and the changes in
their net assets for the year then ended or the period indicated, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 23, 1996
<PAGE> 78
FNAL VARIABLE ACCOUNT
<TABLE>
STATEMENT OF ASSETS AND CONTRACT OWNERS' EQUITY -- December 31, 1996
<S> <C>
ASSETS
Investments at market value:
Subaccounts:
Equity Portfolio 2,660,322 Shares (Cost $48,924,637) $ 60,176,479
Investment Quality Bond Portfolio 550,714 Shares (Cost $6,389,620) 6,547,987
Growth and Income Portfolio 2,708,721 Shares (Cost $41,023,429) 52,495,021
Blue Chip Growth Portfolio 1,553,181Shares (Cost $17,058,938) 22,226,023
Money Market Portfolio 1,847,291 Shares (Cost $18,472,906) 18,472,906
Global Equity Portfolio 2,003,713 Shares (Cost $32,353,705) 35,746,247
Global Government Bond Portfolio 611,520 Shares (Cost $8,248,949) 9,154,452
U.S. Government Securities Portfolio 994,138 Shares (Cost $12,854,519) 13,241,913
Conservative Asset Allocation Portfolio 551,534 Shares (Cost $6,096,577) 6,419,859
Moderate Asset Allocation Portfolio 1,724,610 Shares (Cost $19,869,461) 21,540,378
Aggressive Asset Allocation Portfolio 745,392 Shares (Cost $8,935,636) 10,025,525
Equity-Income Portfolio 3,494,017 Shares (Cost $43,491,636) 53,842,801
Strategic Bond Portfolio 1,844,309 Shares (Cost $20,218,703) 22,039,495
International Growth and Income Portfolio 1,075,837 Shares (Cost $11,549,687) 12,662,605
Growth Portfolio 140,285 Shares (Cost $1,901,257) 1,926,120
Small/Mid Cap Portfolio 737,655 Shares (Cost $9,480,921) 9,862,447
International Small Cap Portfolio 362,446 Shares (Cost $4,742,144) 4,929,267
----------
Total assets................................................................... $361,309,525
============
CONTRACT OWNERS' EQUITY
Variable annuity contracts..................................................... $361,309,525
Total contract owners' equity................................................ $361,309,525
============
</TABLE>
See accompanying notes.
2
<PAGE> 79
FNAL VARIABLE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<CAPTION>
Sub-Account
------------------------------------------------------------------------------------
Investment
Equity Quality Bond Growth and Income
-------------------------- ------------------------ --------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
-------------------------- ------------------------ --------------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends ........................... $ 4,212,194 $ 135,620 $ 330,960 $ 271,523 $ 1,201,526 $ 533,062
Expenses:
Mortality & expense risk and
administrative charges ............. 696,214 360,127 81,731 64,712 554,839 308,504
----------- ----------- ---------- ---------- ----------- -----------
Net investment income (loss) ......... 3,515,980 (224,507) 249,229 206,811 646,687 224,558
Net realized gain (loss) ............. 803,960 611,935 (41,679) (32,802) 699,979 375,818
Unrealized appreciation
(depreciation) during the period ..... 4,001,154 7,719,374 (126,465) 580,422 6,590,316 4,617,755
----------- ----------- ---------- ---------- ----------- -----------
Net increase in net assets
from operations .................... 8,321,094 8,106,802 81,085 754,431 7,936,982 5,218,131
----------- ----------- ---------- ---------- ----------- -----------
Changes from principal transactions:
Purchase payments ................... 12,415,699 7,577,645 1,522,442 762,664 12,711,765 5,737,087
Transfers between sub-accounts
and the Company .................... 6,970,084 2,720,711 143,185 (292,980) 5,146,931 1,784,338
Withdrawals ......................... (2,484,007) (1,329,819) (305,464) (515,888) (1,647,121) (1,330,546)
Annual contract fee ................. (31,168) (19,351) (2,952) (2,721) (22,473) (14,571)
----------- ----------- ---------- ---------- ----------- -----------
Net increase (decrease) in net assets
from principal transactions ........ 16,870,608 8,949,186 1,357,211 (48,925) 16,189,102 6,176,308
----------- ----------- ---------- ---------- ----------- -----------
Total increase in net assets ......... 25,191,702 17,055,987 1,438,296 705,506 24,126,084 11,394,439
Net assets at beginning of period .... 34,984,777 17,928,790 5,109,691 4,404,185 28,368,937 16,974,498
----------- ----------- ---------- ---------- ----------- -----------
Net assets at end of period .......... $60,176,479 $34,984,777 $6,547,987 $5,109,691 $52,495,021 $28,368,937
=========== =========== ========== ========== =========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 80
FNAL VARIABLE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
--------------------------------------------------------------------------------------
Blue Chip Growth Money Market Global Equity
-------------------------- -------------------------- --------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
-------------------------- -------------------------- --------------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends .......................... $ 49,244 $ 46,242 $ 666,610 $ 387,185 $ 508,320 $ 1,198,967
Expenses:
Mortality & expense risk and
administrative charges ........... 256,791 168,576 190,702 98,890 452,278 352,382
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss) ......... (207,547) (122,334) 475,908 288,295 56,042 846,585
Net realized gain (loss) ............. 1,130,363 193,338 0 0 328,529 308,274
Unrealized appreciation (depreciation)
during the period ................ 2,929,786 2,439,497 0 0 3,040,904 366,727
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net assets
from operations .................. 3,852,602 2,510,501 475,908 288,295 3,425,475 1,521,586
----------- ----------- ----------- ----------- ----------- -----------
Changes from principal transactions:
Purchase payments .................. 3,792,020 2,709,401 17,222,435 8,603,980 4,732,647 3,342,385
Transfers between sub-accounts
and the Company .................. 837,918 551,425 (6,926,625) (4,856,654) 1,228,061 (973,974)
Withdrawals ........................ (785,268) (494,371) (1,374,481) (1,283,008) (1,254,487) (1,233,219)
Annual contract fee ................ (11,504) (8,322) (4,191) (3,779) (21,917) (20,706)
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets
from principal transactions ...... 3,833,166 2,758,133 8,917,138 2,460,539 4,684,304 1,114,486
----------- ----------- ----------- ----------- ----------- -----------
Total increase in net assets ......... 7,685,768 5,268,634 9,393,046 2,748,834 8,109,779 2,636,072
Net assets at beginning of period .... 14,540,255 9,271,621 9,079,860 6,331,026 27,636,468 25,000,395
----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period .......... $22,226,023 $14,540,255 $18,472,906 $ 9,079,860 $35,746,247 $27,636,467
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 81
FNAL VARIABLE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
----------------------------------------------------------------------------------
Global U.S. Conservative
Government Bond Government Securities Asset Allocation
------------------------ -------------------------- ------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
------------------------ -------------------------- ------------------------
1996 1995 1996 1995 1996 1995
----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends .......................... $ 691,071 $ 346,915 $ 695,497 $ 610,608 $ 303,060 $ 164,851
Expenses:
Mortality & expense risk and
administrative charges ........... 117,412 95,533 180,392 144,558 74,150 50,603
---------- ---------- ----------- ----------- ---------- ----------
Net investment income (loss) ......... 573,659 251,382 515,105 466,050 228,910 114,248
Net realized gain (loss) ............. 49,478 (44,507) (90,826) (53,021) (5,915) (27,098)
Unrealized appreciation (depreciation)
during the period ................ 302,087 1,122,323 (161,555) 900,528 52,849 455,530
---------- ---------- ----------- ----------- ---------- ----------
Net increase in net assets
from operations .................. 925,224 1,329,198 262,724 1,313,557 275,844 542,680
---------- ---------- ----------- ----------- ---------- ----------
Changes from principal transactions:
Purchase payments .................. 1,280,963 466,946 3,026,542 3,265,176 1,430,444 852,626
Transfers between sub-accounts
and the Company .................. (173,816) (587,274) (487,892) (1,111,092) 479,988 (113,763)
Withdrawals ........................ (299,284) (564,978) (760,893) (1,461,968) (157,409) (175,896)
Annual contract fee ................ (4,601) (4,646) (6,466) (5,560) (3,929) (3,091)
---------- ---------- ----------- ----------- ---------- ----------
Net increase (decrease) in net assets
from principal transactions ...... 803,262 (689,952) 1,771,291 686,556 1,749,094 559,876
---------- ---------- ----------- ----------- ---------- ----------
Total increase in net assets ......... 1,728,486 639,246 2,034,014 2,000,113 2,024,938 1,102,556
Net assets at beginning of period .... 7,425,966 6,786,720 11,207,898 9,207,785 4,394,921 3,292,365
---------- ---------- ----------- ----------- ---------- ----------
Net assets at end of period .......... $9,154,452 $7,425,966 $13,241,913 $11,207,898 $6,419,859 $4,394,921
========== ========== =========== =========== ========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 82
FNAL VARIABLE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
-------------------------------------------------------------------------------------
Moderate Aggressive Equity-
Asset Allocation Asset Allocation Income
-------------------------- ------------------------- --------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
-------------------------- ------------------------- --------------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends .......................... $ 1,444,910 $ 633,934 $ 591,316 $ 327,033 $ 2,760,886 $ 391,036
Expenses:
Mortality & expense risk and
administrative charges ........... 260,204 194,902 123,166 81,752 626,800 424,953
----------- ----------- ----------- ---------- ----------- -----------
Net investment income (loss) ......... 1,184,706 439,032 468,150 245,281 2,134,086 (33,917)
Net realized gain (loss) ............. 45,838 18,054 102,080 12,887 1,002,895 270,632
Unrealized appreciation (depreciation)
during the period ................ 302,322 1,958,863 399,926 859,164 4,397,254 5,443,860
----------- ----------- ----------- ---------- ----------- -----------
Net increase in net assets
from operations .................. 1,532,866 2,415,949 970,156 1,117,332 7,534,235 5,680,575
----------- ----------- ----------- ---------- ----------- -----------
Changes from principal transactions:
Purchase payments .................. 4,663,584 2,265,994 2,011,845 1,235,589 9,586,456 7,132,960
Transfers between sub-accounts
and the Company .................. 348,765 (175,790) 426,113 152,297 1,711,762 1,508,346
Withdrawals ........................ (790,985) (1,021,778) (327,864) (446,461) (1,552,108) (1,559,771)
Annual contract fee ................ (11,874) (9,835) (6,447) (4,748) (27,883) (20,487)
----------- ----------- ----------- ---------- ----------- -----------
Net increase (decrease) in net assets
from principal transactions ...... 4,209,490 1,058,591 2,103,647 936,677 9,718,227 7,061,048
----------- ----------- ----------- ---------- ----------- -----------
Total increase in net assets ......... 5,742,356 3,474,540 3,073,803 2,054,009 17,252,462 12,741,623
Net assets at beginning of period .... 15,798,022 12,323,482 6,951,722 4,897,713 36,590,339 23,848,716
----------- ----------- ----------- ---------- ----------- -----------
Net assets at end of period .......... $21,540,378 $15,798,022 $10,025,525 $6,951,722 $53,842,801 $36,590,339
=========== =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes
6
<PAGE> 83
FNAL VARIABLE ACCOUNT
<TABLE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
-------------------------------------------------------------------------------------
Strategic International
Bond Growth and Income Growth (1)
---------------------------- --------------------------- ----------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
---------------------------- --------------------------- ----------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ----------- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends .......................... $ 895,859 $ 334,831 $ 11,510 $ 94,190 $ 12,025 $0
Expenses:
Mortality & expense risk and
administrative charges ........... 211,859 115,643 121,381 26,781 5,889 0
------------ ------------ ------------ ----------- ----------- --
Net investment income (loss) ......... 684,000 219,188 (109,871) 67,409 6,136 0
Net realized gain (loss) ............. 92,972 (4,259) 115,386 8,241 11,692 0
Unrealized appreciation (depreciation)
during the period ................ 1,076,844 1,130,052 1,003,453 109,466 24,863 0
------------ ------------ ------------ ----------- ----------- --
Net increase in net assets
from operations .................. 1,853,816 1,344,981 1,008,968 185,116 42,691 0
------------ ------------ ------------ ----------- ----------- --
Changes from principal transactions:
Purchase payments .................. 8,169,822 2,350,168 5,129,470 3,147,804 1,266,705 0
Transfers between sub-accounts
and the Company .................. 2,164,565 (247,803) 2,564,247 1,230,469 621,477 0
Withdrawals ........................ (434,689) (496,216) (460,411) (137,089) (4,637) 0
Annual contract fee ................ (6,859) (4,727) (5,629) (340) (116) 0
------------ ------------ ------------ ----------- ----------- --
Net increase (decrease) in net assets
from principal transactions ...... 9,892,839 1,601,422 7,227,677 4,240,844 1,883,429 0
------------ ------------ ------------ ----------- ----------- --
Total increase in net assets ......... 11,746,655 2,946,403 8,236,645 4,425,960 1,926,120 0
Net assets at beginning of period .... 10,292,840 7,346,437 4,425,960 0 0 0
------------ ------------ ------------ ----------- ----------- --
Net assets at end of period .......... $ 22,039,495 $ 10,292,840 $ 12,662,605 $ 4,425,960 $ 1,926,120 $0
============ ============ ============ =========== =========== ==
</TABLE>
(1) From commencement of operations July 15, 1996
See accompanying notes.
7
<PAGE> 84
<TABLE>
FNAL VARIABLE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (continued)
<CAPTION>
Sub-Account
--------------------------------------------------
Small/Mid International
Cap (2) Small Cap (2) Total Total
------------------------ ------------------------ ------------ ------------
Period Ended December 31 Period Ended December 31 Period Ended Period Ended
------------------------ ------------------------
December 31, December 31,
1996 1995 1996 1995 1996 1995
---------- ---- ---------- ---- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividends .......................... $ 0 $0 $ 18,137 $0 $ 14,393,125 $ 5,475,997
Expenses:
Mortality & expense risk and
administrative charges ........... 60,914 0 28,083 0 4,042,805 2,487,916
---------- -- ---------- -- ------------ ------------
Net investment income (loss) ......... (60,914) 0 (9,946) 0 10,350,320 2,988,081
Net realized gain (loss) ............. (39,038) 0 27,193 0 4,232,907 1,637,492
Unrealized appreciation (depreciation)
during the period ................ 381,526 0 187,123 0 24,402,387 27,703,561
---------- -- ---------- -- ------------ ------------
Net increase in net assets
from operations .................. 281,574 0 204,370 0 38,985,614 32,329,134
---------- -- ---------- -- ------------ ------------
Changes from principal transactions:
Purchase payments .................. 6,512,107 0 3,155,015 0 98,629,961 49,450,425
Transfers between sub-accounts
and the Company .................. 3,214,790 0 1,665,228 0 19,934,781 (411,745)
Withdrawals ........................ (145,116) 0 (94,862) 0 (12,879,086) (12,051,007)
Annual contract fee ................ (908) 0 (484) 0 (169,401) (122,884)
---------- -- ---------- -- ------------ ------------
Net increase (decrease) in net assets
from principal transactions ...... 9,580,873 0 4,724,897 0 105,516,255 36,864,789
---------- -- ---------- -- ------------ ------------
Total increase in net assets ......... 9,862,447 0 4,929,267 0 144,501,868 69,193,923
Net assets at beginning of period .... 0 0 0 0 216,807,656 147,613,733
---------- -- ---------- -- ------------ ------------
Net assets at end of period .......... $9,862,447 $0 $4,929,267 $0 $361,309,525 $216,807,656
========== == ========== == ============ ============
</TABLE>
(2) From commencement of operations March 4, 1996
See accompanying notes.
8
<PAGE> 85
FNAL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION:
The FNAL Variable Account (the "Account") is a separate account established by
First North American Life Assurance Company (the "Company"). The Company
established the Account on July 22, 1992 as a separate account under New York
law. The Account operates as a Unit Investment Trust under the Investment
Company Act of 1940, as amended, and invests in NASL Series Trust (the "Trust")
which currently consists of seventeen subaccounts. The Account is a funding
vehicle for variable annuity contracts (the "Contracts") issued by the Company.
The Company is a wholly-owned subsidiary of North American Security Life
Insurance Company ("Security Life"). Security Life is a wholly-owned subsidiary
of NAWL Holding Company, Inc. ("NAWL"). NAWL holds all the outstanding shares of
Security Life and Wood Logan Associates, Inc. ("WLA"). Manufacturers Life
Insurance Company ("MLI") owns all class A shares of NAWL, representing 85% of
the voting shares of NAWL. Certain employees of WLA own all class B shares,
which represent the remaining 15% voting interest in NAWL. Prior to January 1,
1996, Security Life was a wholly-owned subsidiary of North American Life
Assurance Company (NAL), a Canadian mutual life insurance company. NAL merged
with the Manufacturers Life Insurance Company of Canada effective January 1,
1996. The surviving company will conduct business under the name "Manufacturers
Life Insurance Company."
On March 4, 1996, two new sub-accounts, Small/Mid Cap and International Small
Cap, commenced operations. On July 15, 1996, the Growth sub-account commenced
operations. Effective October 1, 1996, the name of Pasadena Growth was changed
to Blue Chip Growth. Effective December 31, 1996, the name of Value Equity was
changed to Equity-Income.
Effective after the close of business on December 31, 1996, the portfolios of
the Manulife Series Funds, Inc. (a series trust of MLI) were merged with the
NASL Series Trust. As a result of this merger, eight additional sub-accounts
will be available as investment options to the contract owners of the Account
beginning in 1997. Also, effective after the close of business on December 31,
1996, ten new sub-accounts were created which will be available as investment
options for contract owners in 1997. The merger and the creation of the new
funds had no effect on the statement of assets and contract owners' equity as
of December 31, 1996 nor the statement of operations and changes in net assets
for the year then ended.
2. SIGNIFICANT ACCOUNTING POLICIES:
Investments are made in the portfolios of the Trust and are valued at the
reported net asset value of such portfolios. Transactions are recorded on the
trade date. Income from dividends is recorded on the ex-dividend date. Realized
gains and losses on the sales of investments are computed on the basis of the
identified cost of the investment sold.
In addition to the Account, a contract holder may also allocate funds to the
Fixed Account, which is part of the Company's general account. Because of
exemptive and exclusionary provisions, interests in the Fixed Account have not
been registered under the Securities Act of 1933 and the Company's general
account has not been registered as an investment company under the Investment
Company act of 1940.
The operations of the Account are included in the federal income tax return of
the Company, which is taxed as a Life Insurance Company under the provisions of
the Internal Revenue Code (the "Code"). Under the current provisions of the
Code, the Company does not expect to incur federal income taxes on the earnings
of the Account to the extent the earnings are credited under the contracts.
Based on this, no charge is being made currently to the Account for federal
income taxes. The Company will review periodically the status of such decision
based on changes in the tax law. Such a charge may be made in future years for
any federal income taxes that would be attributable to the contract.
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
9
<PAGE> 86
FNAL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
3. AFFILIATED COMPANY TRANSACTIONS:
Administrative services necessary for the operation of the Account are borne by
the Company. The Company has an underwriting agreement with its wholly-owned
subsidiary, NASL Financial Services, Inc. ("NASL Financial"). NASL Financial has
a promotional agent agreement with Wood Logan Associates, Inc., an affiliate of
the Company, to promote the sales of annuity contracts. Certain officers of the
Account are officers and directors of the Company or the Trust.
4. CONTRACT CHARGES:
There are no deductions made from purchase payments for sales charges at the
time of purchase. In the event of a surrender, a contingent deferred sales
charge may be charged by the Company to cover sales expenses. An annual
administrative fee of $30 is deducted from each contract owners' account on the
contract anniversary date to cover contract administration costs. This charge is
waived on certain contracts.
Deductions from each sub-account are made daily for administrative fees and for
the assumption of mortality and expense risk charges, equal to an effective
annual rate of 0.15% and 1.25% of the contract value, respectively.
5. PURCHASES AND SALES OF INVESTMENTS:
The following table shows aggregate cost of shares purchased and proceeds from
sales of each sub-account for the year ended December 31, 1996.
Purchases Sales
--------- -----
Equity Portfolio $23,281,498 $2,894,910
Investment Quality Bond Portfolio 2,317,847 711,407
Growth and Income Portfolio 19,113,118 2,277,329
Blue Chip Growth Portfolio 7,486,785 3,861,166
Money Market Portfolio 30,005,365 20,612,319
Global Equity Portfolio 8,529,241 3,788,894
Global Government Bond Portfolio 3,267,184 1,890,263
U.S. Government Securities Portfolio 5,747,196 3,460,800
Conservative Asset Allocation Portfolio 2,738,590 760,586
Moderate Asset Allocation Portfolio 6,817,123 1,422,927
Aggressive Asset Allocation Portfolio 4,002,708 1,430,911
Equity-Income Portfolio 15,428,560 3,576,247
Strategic Bond Portfolio 11,515,625 938,786
International Growth and Income Portfolio 8,233,752 1,115,946
Growth Portfolio 2,016,972 127,407
Small/MidCap Portfolio 13,558,397 4,038,438
International Small Cap Portfolio 5,252,890 537,939
------------ -----------
Total $169,312,851 $53,446,275
============ ===========
10
<PAGE> 87
FNAL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
<TABLE>
6. UNIT VALUES: A summary of the accumulated unit values at December 31, 1995
and 1996 and the accumulation of units and dollar value outstanding at
December 31, 1996 are as follows:
<CAPTION>
1995 1996
------------- ----------------------------------------------
Unit Unit
Value Value Units Dollars
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Equity sub-account $20.821819 $24.664354 2,439,816 $ 60,176,479
Investment Quality Bond 16.751499 16.943257 386,466 6,547,987
sub-account
Growth and Income sub-account 16.660889 20.178770 2,601,498 52,495,021
Blue-Chip Growth sub-account 11.026969 13.688523 1,623,698 22,226,023
Money Market sub-account 14.190910 14.699636 1,256,691 18,472,906
Global Equity sub-account 16.495655 18.276450 1,955,864 35,746,247
Global Government Bond 17.772344 19.803954 462,254 9,154,452
sub-account
U.S. Government Securities 16.083213 16.393307 807,763 13,241,913
sub-account
Conservative Asset Allocation 14.320582 15.113142 424,787 6,419,859
sub-account
Moderate Asset Allocation 14.752561 15.995076 1,346,688 21,540,378
sub-account
Aggressive Asset Allocation 14.990551 16.701647 600,272 10,025,525
sub-account
Equity-Income sub-account 13.548849 16.011513 3,362,755 53,842,801
Strategic Bond sub-account 11.716972 13.250563 1,663,287 22,039,495
International Growth and Income 10.554228 11.718276 1,080,586 12,662,605
sub-account
Growth sub-account ----- 13.727312 140,313 1,926,120
Small/Mid Cap sub-account ----- 13.215952 746,253 9,862,447
International Small Cap ----- 13.493094 365,318 4,929,267
sub-account
------------
$361,309,525
============
</TABLE>
11
<PAGE> 88
FNAL VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
7. DIVERSIFICATION REQUIREMENTS:
Under the provisions of Section 817(h) of the Internal Revenue Code, a variable
annuity contract other than a contract issued in connection with certain types
of employee benefits plans, will not be treated as an annuity contract for
federal tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that the Account satisfies the current requirements
of the regulations, and it intends that the Account will continue to meet such
requirements.
12
