PROSPECTUS
for
AUL American Individual Unit Trust
AUL American Series Fund, Inc.
Dated May 1, 2000
Sponsored by:
American United Life Insurance Company(R)
P.O. Box 7127
Indianapolis, Indiana 46209-7127
AUL
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Prospectus
AUL American Individual Unit Trust
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
Offered By
American United Life Insurance Company(R)
One American Square
Indianapolis, Indiana 46282
(317) 285-1877
Variable Products Service Office:
P.O. Box 7127, Indianapolis, Indiana 46209-7127
(800) 863-9354
This Prospectus describes individual variable annuity contracts (the
"Contracts") offered by American United Life Insurance Company(R) ("AUL" or the
"Company"). AUL designed the Contracts for use in connection with non-tax
qualified retirement plans and deferred compensation plans for individuals
("Non-Qualified Plans"). Contract Owners may also use the Contracts in
connection with retirement plans that meet the requirements of Sections 401,
403(b), 408, 408A, or 457 of the Internal Revenue Code.
This Prospectus describes two variations of Contracts: Contracts for which
premiums may vary in amount and frequency, subject to certain limitations
("Flexible Premium Contracts") and Contracts for which premiums may vary in
amount and frequency, only in the first Contract Year ("One Year Flexible
Premium Contracts"). Both Contracts provide for the accumulation of values on
either a variable basis, a fixed basis, or both. The Contracts also provide
several options for fixed annuity payments to begin on a future date.
A Contract Owner may allocate premiums designated to accumulate on a
variable basis to one or more of the Investment Accounts of a separate account
of AUL. The separate account is named the AUL American Individual Unit Trust
(the "Variable Account"). Each Investment Account of the Variable Account
invests in shares of one of the following mutual fund portfolios:
AUL American Equity Fidelity Contrafund
AUL American Bond Fidelity Equity-Income
AUL American Managed Fidelity Growth
AUL American Money Market Fidelity High Income
AUL American Tactical Asset Allocation Fidelity Index 500
Alger American Growth Fidelity Overseas
American Century VP Capital Appreciation PBHG Growth II
American Century VP International PBHG Technology & Communications
Calvert Social Mid Cap Growth T. Rowe Price Equity Income
Fidelity Asset Manager
Premiums allocated to an Investment Account of the Variable Account will
increase or decrease in dollar value depending on the investment performance of
the corresponding mutual fund portfolio in which the Investment Account invests.
These amounts are not guaranteed. In the alternative, a Contract Owner may
allocate premiums to AUL's Fixed Account. Such allocations will earn interest at
rates that are paid by AUL as described in "The Fixed Account."
This Prospectus concisely sets forth information about the Contracts and
the Variable Account that a prospective investor should know before investing.
Certain additional information is contained in a "Statement of Additional
Information," dated May 1, 2000, which has been filed with the Securities and
Exchange Commission (the "SEC"). The Statement of Additional Information is
incorporated by reference into this Prospectus. A prospective investor may
obtain a copy of the Statement of Additional Information without charge by
calling or writing to AUL at the telephone number or address indicated above. A
postage pre-paid envelope is included for this purpose. The table of contents of
the Statement of Additional Information is located at the end of this
Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
This prospectus should be accompanied by the current prospectuses for the
fund or funds being considered. Each of these prospectuses should be read
carefully and retained for future reference.
The date of this Prospectus is May 1, 2000.
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2
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TABLE OF CONTENTS
Description Page
----------- ----
DEFINITIONS............................................. 4
SUMMARY................................................. 6
Purpose of the Contracts.............................. 6
Types of Contracts.................................... 6
The Variable Account and the Funds.................... 6
Fixed Account......................................... 7
Premiums.............................................. 7
Transfers............................................. 7
Withdrawals........................................... 7
The Death Benefit..................................... 7
Charges............................................... 7
Free Look Right....................................... 7
Dollar Cost Averaging................................. 7
Contacting AUL........................................ 8
EXPENSE TABLE........................................... 8
CONDENSED FINANCIAL INFORMATION......................... 12
PERFORMANCE OF THE INVESTMENT
ACCOUNTS................................................ 14
INFORMATION ABOUT AUL, THE VARIABLE
ACCOUNT, AND THE FUNDS.................................. 15
American United Life Insurance Company(R)............. 15
Variable Account...................................... 16
The Funds............................................. 16
AUL American Series Fund, Inc......................... 16
AUL American Equity Portfolio........................ 16
AUL American Bond Portfolio.......................... 16
AUL American Managed Portfolio....................... 16
AUL American Money Market Portfolio.................. 16
AUL American Tactical Asset
Allocation Portfolio.............................. 16
Alger American Fund................................... 17
Alger American Growth Portfolio...................... 17
American Century Variable Portfolios, Inc............. 17
VP Capital Appreciation Portfolio.................... 17
VP International Portfolio........................... 17
Calvert Variable Series, Inc.......................... 17
Calvert Social Mid Cap Growth Portfolio.............. 17
Fidelity Variable Insurance Products Fund............. 17
Equity-Income Portfolio.............................. 17
Growth Portfolio..................................... 17
High Income Portfolio................................ 17
Overseas Portfolio................................... 18
Fidelity Variable Insurance Products Fund II.......... 18
Asset Manager Portfolio.............................. 18
Contrafund Portfolio................................. 18
Index 500 Portfolio.................................. 18
PBHG Insurance Series Fund, Inc....................... 18
Growth II Portfolio.................................. 18
Technology & Communications Portfolio................ 18
T. Rowe Price Equity Series, Inc...................... 18
T. Rowe Price Equity Income Portfolio................ 18
THE CONTRACTS........................................... 19
General............................................... 19
PREMIUMS AND CONTRACT VALUES
DURING THE ACCUMULATION PERIOD.......................... 19
Application for a Contract............................ 19
Premiums under the Contracts.......................... 19
Free Look Period...................................... 19
Allocation of Premiums................................ 19
Transfers of Account Value............................ 20
Dollar Cost Averaging Program......................... 20
Contract Owner's Variable Account Value............... 21
Accumulation Units................................... 21
Accumulation Unit Value.............................. 21
Net Investment Factor................................ 21
CASH WITHDRAWALS AND THE DEATH PROCEEDS................. 21
Cash Withdrawals...................................... 21
The Death Proceeds.................................... 22
Death of the Owner.................................... 22
Death of the Annuitant................................ 22
Payments from the Variable Account.................... 22
CHARGES AND DEDUCTIONS.................................. 23
Premium Tax Charge.................................... 23
Withdrawal Charge..................................... 23
Mortality and Expense Risk Charge..................... 23
Administrative Fee.................................... 23
Other Charges......................................... 24
Variations in Charges................................. 24
Guarantee of Certain Charges.......................... 24
Expenses of the Funds................................. 24
ANNUITY PERIOD.......................................... 24
General............................................... 24
Annuity Options....................................... 24
Option 1-Income for a Fixed Period................... 24
Option 2-Life Annuity................................ 25
Option 3-Survivorship Annuity........................ 25
Selection of an Option............................... 25
THE FIXED ACCOUNT....................................... 25
Interest.............................................. 25
Withdrawals........................................... 25
Transfers............................................. 26
Contract Charges...................................... 26
Payments from the Fixed Account....................... 26
MORE ABOUT THE CONTRACTS................................ 26
Designation and Change of Beneficiary................. 26
Assignability......................................... 26
Proof of Age and Survival............................. 26
Misstatements......................................... 26
Acceptance of New Premiums............................ 26
FEDERAL TAX MATTERS..................................... 27
Introduction.......................................... 27
Diversification Standards............................. 27
Taxation of Annuities in General-
Non-Qualified Plans.................................. 27
Additional Considerations............................. 28
Qualified Plans....................................... 28
Qualified Plan Federal Taxation Summary............... 29
403(b) Programs-Constraints on Withdrawals............ 30
OTHER INFORMATION....................................... 30
Voting of Shares of the Funds......................... 30
Substitution of Investments........................... 31
Changes to Comply with Law and Amendments............. 31
Reservation of Rights................................. 31
Periodic Reports...................................... 31
Legal Proceedings..................................... 31
Legal Matters......................................... 31
Financial Statements.................................. 31
PERFORMANCE INFORMATION ................................ 32
STATEMENT OF ADDITIONAL
INFORMATION TABLE OF CONTENTS........................... 33
3
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DEFINITIONS
Various terms commonly used in this Prospectus are defined as follows:
403(b) PROGRAM - An arrangement by a public school organization or an
organization that is described in Section 501(c)(3) of the Internal Revenue
Code, including certain charitable, educational and scientific organizations,
under which employees are permitted to take advantage of the Federal income tax
deferral benefits provided for in Section 403(b) of the Internal Revenue Code.
408 or 408A PLAN - A plan of individual retirement accounts or annuities,
including a simplified employee pension plan, SIMPLE IRA or Roth IRA plan
established by an employer, that meets the requirements of Section 408 or 408A
of the Internal Revenue Code.
457 PROGRAM - A plan established by a unit of a state or local government or
a tax-exempt organization under Section 457 of the Internal Revenue Code.
ACCUMULATION PERIOD - The period commencing on the Contract Date and ending when
the Contract is terminated, either through a surrender, withdrawal(s),
annuitization, payment of charges, payment of the death benefit, or a
combination thereof.
ACCUMULATION UNIT - A unit of measure used to record amounts of increases to,
decreases from, and accumulations in the Investment Accounts of the Variable
Account during the Accumulation Period.
ANNUITANT - The person or persons on whose life annuity payments depend.
ANNUITY - A series of payments made by AUL to an Annuitant or Beneficiary during
the period specified in the Annuity Option.
ANNUITY DATE - The first day of any month in which an annuity begins under a
Contract, which shall not be later than the required beginning date under
applicable federal requirements.
ANNUITY OPTIONS - Options under a Contract that prescribe the provisions under
which a series of annuity payments are made to an Annuitant, contingent
Annuitant, or Beneficiary.
ANNUITY PERIOD - The period during which annuity payments are made.
AUL - American United Life Insurance Company(R).
BENEFICIARY - The person having the right to payment of death proceeds, if any,
payable upon the death of the Contract Owner during the Accumulation Period, and
the person having the right to benefits, if any, payable upon the death of an
Annuitant during the Annuity Period under any Annuity Option other than a
survivorship option (i.e., Option 3-under which the contingent Annuitant has the
right to benefits payable upon the death of an Annuitant).
BUSINESS DAY - A day on which AUL's Home Office is customarily open for
business. Traditionally, in addition to federal holidays, AUL is not open for
business on the day after Thanksgiving and either the day before or after
Christmas or Independence Day.
CONTRACT ANNIVERSARY - The yearly anniversary of the Contract Date.
CONTRACT DATE - The date shown as the Contract Date in a Contract. It will not
be later than the date the initial premium is accepted under a Contract, and it
is the date used to determine Contract Months, Contract Years, and Contract
Anniversaries.
CONTRACT OWNER OR OWNER - The person entitled to the ownership rights under the
Contract and in whose name the Contract is issued. A trustee or custodian may be
designated to exercise an Owner's rights and responsibilities under a Contract
in connection with a retirement plan that meets the requirements of Section 401
or 408 of the Internal Revenue Code. An administrator, custodian, or other
person performing similar functions may be designated to exercise an Owner's
responsibilities under a Contract in connection with a 403(b) or 457 Program.
The term "Owner," as used in this Prospectus, shall include, where appropriate,
such a trustee, custodian, or administrator.
CONTRACT VALUE - The current value of a Contract, which is equal to the sum of
Fixed Account Value and Variable Account Value. Initially, it is equal to the
initial premium and thereafter will reflect the net result of premiums,
investment experience, charges deducted, and any partial withdrawals taken.
CONTRACT YEAR - A period beginning with one Contract Anniversary, or, in the
case of the first Contract Year, beginning on the Contract Date, and ending the
day before the next Contract Anniversary.
DEATH PROCEEDS - The amount payable to the Beneficiary by reason of the death of
the Annuitant or Owner during the Accumulation Period in accordance with the
terms of the Contract.
EMPLOYEE BENEFIT PLAN - A pension or profit sharing plan established by an
Employer for the benefit of its employees and which is qualified under Section
401 of the Internal Revenue Code.
FIXED ACCOUNT - An account that is part of AUL's General Account in which all or
a portion of a Owner's Contract Value may be held for accumulation at fixed
rates of interest paid by AUL.
FIXED ACCOUNT VALUE - The total value under a Contract allocated to the Fixed
Account.
FREE WITHDRAWAL AMOUNT - The amount that may be withdrawn without incurring
withdrawal charges, which is 12% of the Contract Value at the time the first
withdrawal in a given Contract Year is requested.
FUNDS - AUL American Series Fund, Inc., which offers the Equity, Bond, Money
Market, Managed, and Tactical Asset Allocation Portfolios; Alger American Fund,
which offers the Alger American Growth Portfolio; American Century
4
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Variable Portfolios, Inc. which offers the VP Capital Appreciation and VP
International Portfolios; Calvert Variable Series, which offers the Calvert
Social Mid Cap Growth Fund; Fidelity Variable Insurance Products Fund ("VIP"),
which offers the Equity-Income, Growth, High Income and Overseas Portfolios;
Fidelity Variable Insurance Products Fund II ("VIP II"), which offers the Asset
Manager, Contrafund, and Index 500 Portfolios; PBHG Insurance Series Fund, Inc.,
which offers the Growth II and the Technology & Communications Portfolios; and
T. Rowe Price Equity Series, Inc., which offers the T. Rowe Price Equity Income
Portfolio. Each of the Funds is a diversified, open-end management investment
company commonly referred to as a mutual fund, or a portfolio thereof.
GENERAL ACCOUNT - All assets of AUL other than those allocated to the Variable
Account or to any other separate account of AUL.
HOME OFFICE - The Variable Products Service Office at AUL's principal business
office, One American Square, Indianapolis, Indiana 46282.
HR-10 PLAN - An Employee Benefit Plan established by a self-employed person in
accordance with Section 401 of the Internal Revenue Code.
INVESTMENT ACCOUNT - A sub-account of the Variable Account that invests in
shares of one of the Funds.
NET PURCHASE PAYMENTS - The premiums paid less any applicable premium tax.
NON-TAX QUALIFIED DEFERRED COMPENSATION PLAN - An unfunded arrangement in which
an employer makes agreements with management or highly compensated employees to
make payments in the future in exchange for their current services.
PREMIUMS - The amounts paid to AUL as consideration for the Contract. In those
states that require the payment of premium tax upon receipt of a premium by AUL,
the term "premium" shall refer to the amount received by AUL net of the amount
deducted for premium tax.
PROPER NOTICE - Notice that is received at our Home Office in a form that is
acceptable to us.
QUALIFIED PLANS - Employee Benefit Plans, 401 Programs, 403(b) Programs, 457
Programs, and 408 and 408A Programs.
VALUATION DATE - Valuation Dates are the dates on which the Investment Accounts
are valued. A Valuation Date is any date on which the New York Stock Exchange is
open for trading and we are open for business. Traditionally, in addition to
federal holidays, AUL is not open for business on the day after Thanksgiving and
either the day before or after Christmas or Independence Day.
VALUATION PERIOD - A period used in measuring the investment experience of each
Investment Account of the Variable Account. The Valuation Period begins at the
close of one Valuation Date and ends at the close of the next succeeding
Valuation Date.
VARIABLE ACCOUNT VALUE - The total value under a Contract allocated to the
Investment Accounts of the Variable Account.
WITHDRAWAL VALUE - An Owner's Contract Value minus the applicable withdrawal
charge.
5
<PAGE>
SUMMARY
This summary is intended to provide a brief overview of the more
significant aspects of the Contracts. Later sections of this Prospectus, the
Statement of Additional Information, and the Contracts provide further detail.
Unless the context indicates otherwise, the discussion in this summary and the
remainder of the Prospectus relates to the portion of the Contracts involving
the Variable Account. The pertinent Contract and "The Fixed Account" section of
this Prospectus briefly describe the Fixed Account.
PURPOSE OF THE CONTRACTS
AUL offers the individual variable annuity contracts ("Contracts")
described in this Prospectus for use in connection with taxable contribution
retirement plans and deferred compensation plans for individuals (collectively
"non-Qualified Plans"). AUL also offers the Contracts for use by individuals in
connection with retirement plans that meet the requirements of Sections 401,
403(b), 457, 408, or 408A of the Internal Revenue Code, allowing for pre-tax
contributions (collectively "Qualified Plans"). While a Contract Owner may
benefit from tax deferral under a Qualified Plan without the use of a variable
annuity contract, variable annuities may provide additional investment and
insurance or annuity-related benefits to individual Contract Owners. A variable
annuity contract presents a dynamic concept in retirement planning designed to
give Contract Owners flexibility in attaining investment goals. A Contract
provides for the accumulation of values on a variable basis, a fixed basis, or
both, and provides several options for fixed annuity payments. During the
Accumulation Period, a Contract Owner can allocate premiums to the various
Investment Accounts of the Variable Account or to the Fixed Account. See "The
Contracts."
TYPES OF CONTRACTS
AUL offers two variations of contracts that are described in this
Prospectus. With Flexible Premium Contracts, premiums payments may vary in
amount and frequency, subject to the limitations described below. With One Year
Flexible Premium Contracts, premiums payments may vary in amount and frequency
only during the first Contract Year. Premium payments may not be made after the
first Contract Year.
THE VARIABLE ACCOUNT AND THE FUNDS
AUL will allocate premiums designated to accumulate on a variable basis to
the Variable Account. See "Variable Account." The Variable Account is currently
divided into subaccounts referred to as Investment Accounts. Each Investment
Account invests exclusively in shares of one of the portfolios of the following
mutual funds:
<TABLE>
<S> <C> <C>
Investment Account and Mutual Fund Investment Adviser
Corresponding Mutual Fund Portfolio
AUL American Equity AUL American Series Fund, Inc. American United Life Insurance Company(R)
AUL American Bond AUL American Series Fund, Inc. American United Life Insurance Company(R)
AUL American Managed AUL American Series Fund, Inc. American United Life Insurance Company(R)
AUL American Money Market AUL American Series Fund, Inc. American United Life Insurance Company(R)
AUL American Tactical Asset Allocation AUL American Series Fund, Inc. American United Life Insurance Company(R)
Alger American Growth Alger American Fund Fred Alger Management, Inc.
American Century VP Capital Appreciation American Century Variable Portfolios, Inc. American Century Investment Management, Inc.
American Century VP International American Century Variable Portfolios, Inc. American Century Investment Management, Inc.
Calvert Social Mid Cap Growth Calvert Variable Series, Inc. Calvert Asset Management Company, Inc.
Fidelity Asset Manager Fidelity Variable Insurance Products Fund II Fidelity Management & Research Company
Fidelity Contrafund Fidelity Variable Insurance Products Fund II Fidelity Management & Research Company
Fidelity Equity-Income Fidelity Variable Insurance Products Fund Fidelity Management & Research Company
Fidelity Growth Fidelity Variable Insurance Products Fund Fidelity Management & Research Company
Fidelity High Income Fidelity Variable Insurance Products Fund Fidelity Management & Research Company
Fidelity Index 500 Fidelity Variable Insurance Products Fund II Fidelity Management & Research Company
Fidelity Overseas Fidelity Variable Insurance Products Fund Fidelity Management & Research Company
PBHG Growth II PBHG Insurance Series Fund, Inc. Pilgrim Baxter & Associates, Ltd.
PBHG Technology & Communications PBHG Insurance Series Fund, Inc. Pilgrim Baxter & Associates, Ltd.
T. Rowe Price Equity Income T. Rowe Price Equity Series, Inc. T. Rowe Price Associates, Inc.
</TABLE>
6
<PAGE>
Each of the Funds has a different investment objective. A Contract Owner
may allocate premiums to one or more of the Investment Accounts available under
a Contract. Premiums allocated to a particular Investment Account will increase
or decrease in dollar value depending upon the investment performance of the
corresponding mutual fund portfolio in which the Investment Account invests.
These amounts are not guaranteed. The Contract Owner bears the investment risk
for amounts allocated to an Investment Account of the Variable Account.
FIXED ACCOUNT
The Contract Owner may allocate premiums to the Fixed Account, which is
part of AUL's General Account. Amounts allocated to the Fixed Account earn
interest at rates periodically determined by AUL. Generally, any current rate
that exceeds the guaranteed rate will be effective for the Contract for a period
of at least one year. These rates are guaranteed to be at least an effective
annual rate of 3%. See "The Fixed Account."
PREMIUMS
For Flexible Premium Contracts, the Contract Owner may vary premiums in
amount and frequency. The minimum premium payment is $50. For the first three
Contract Years, premiums must total, on a cumulative basis, at least $300 each
Contract Year. For One Year Flexible Premium Contracts, the Contract Owner may
pay premiums only during the first Contract Year. The minimum premium is $500
with a minimum total first year premium of $5,000. See "Premiums under the
Contracts."
TRANSFERS
A Contract Owner may transfer his or her Variable Account Value among the
available Investment Accounts or to the Fixed Account at any time during the
Accumulation Period. The Contract Owner may transfer part of his or her Fixed
Account Value to one or more of the available Investment Accounts during the
Accumulation Period, subject to certain restrictions. The minimum transfer
amount from any one Investment Account or from the Fixed Account is $500. If the
Contract Value in an Investment Account or the Fixed Account prior to a transfer
is less than $500, then the minimum transfer amount is the Contract Owner's
remaining Contract Value in that Account. If, after any transfer, the remaining
Contract Value in an Investment Account or in the Fixed Account would be less
than $500, then AUL will treat that request for a transfer of the entire
Contract Value in that Investment Account.
Amounts transferred from the Fixed Account to an Investment Account cannot
exceed 20% of the Owner's Fixed Account Value as of the beginning of that
Contract Year. See "Transfers of Account Value."
WITHDRAWALS
The Contract Owner may surrender the Contract or take a partial withdrawal
from the Contract Value at any time before the Annuity Date. Withdrawals and
surrender are subject to the limitations under any applicable Qualified Plan and
applicable law. The minimum withdrawal amount is $200 for Flexible Premium
Contracts and $500 for One Year Flexible Premium Contracts.
Certain retirement programs, such as 403(b) Programs, are subject to
constraints on withdrawals and full surrenders. See "403(b) Programs-Constraints
on Withdrawals." See "Cash Withdrawals" for more information, including the
possible charges and tax consequences of full and partial withdrawals.
THE DEATH BENEFIT
If a Contract Owner dies during the Accumulation Period, AUL will pay a
death benefit to the Beneficiary. The amount of the death benefit is equal to
the Death Proceeds. A death benefit will not be payable if the Contract Owner
dies on or after the Annuity Date, except as may be provided under the Annuity
Option elected. See "Death Proceeds" and "Annuity Period."
CHARGES
AUL will deduct certain charges in connection with the operation of the
Contracts and the Variable Account. These charges include a withdrawal charge
assessed upon partial withdrawal or surrender, a mortality and expense risk
charge, a premium tax charge, and an administrative fee. In addition, the Funds
pay investment advisory fees and other expenses. For further information on
these charges and expenses, see "Charges and Deductions."
FREE LOOK RIGHT
The Contract Owner has the right to return the Contract for any reason
within ten days of receipt (or a longer period if required by state law). If the
Contract Owner exercises this right, AUL will treat the Contract as void from
its inception. AUL will refund to the Contract Owner the greater of (1) premium
payments, or (2) the Contract Value minus amounts deducted for premium taxes.
DOLLAR COST AVERAGING
Owners may purchase units of an Investment Account over a period of time
through the Dollar Cost Averaging ("DCA") Program. Under a DCA Program, the
Owner authorizes AUL to transfer a specific dollar amount from the AUL American
Money Market Investment Account into one or more other Investment Accounts at
the unit values determined on the dates of the transfers. An Owner may elect
monthly, quarterly, semi-annual, or annual DCA transfers. These transfers will
continue automatically until AUL receives notice to discontinue the Program, or
until there is not enough money in the AUL American Money Market Investment
Account to continue the Program. To participate in the program, AUL requires a
minimum transfer amount of $500, and a minimum deposit of $10,000. For further
information, see the explanation under "Dollar Cost Averaging Program."
7
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CONTACTING AUL
Individuals should direct all written requests, notices, and forms required
under these Contracts, and any questions or inquiries to AUL's Variable Products
Service Office shown in the front of this Prospectus.
EXPENSE TABLE
The purpose of the following table is to assist investors in understanding
the various costs and expenses that Contract Owners bear directly and
indirectly. The table reflects expenses of the Variable Account as well as the
Funds. Expenses of the Variable Account shown under "Contract Owner Transaction
Expenses" (including the withdrawal charge and annual contract fee) and
"Variable Account Annual Expenses" are fixed and specified under the terms of
the Contract. Expenses of the Funds as shown under "Fund Annual Expenses" are
not fixed or specified under the terms of the Contract, and may vary from year
to year. The fees in this expense table have been provided by the Funds and have
not been independently verified by AUL. The table does not reflect AUL's charges
for premium taxes that may be imposed by various jurisdictions. See "Premium Tax
Charge." The information contained in the table is not generally applicable to
amounts allocated to the Fixed Account or to annuity payments under an Annuity
Option.
For a complete description of a Contract's costs and expenses, see "Charges
and Deductions." For a more complete description of the Funds' costs and
expenses, see the Funds' Prospectuses.
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
DEFERRED SALES LOAD (as a percentage of amount surrendered; ALSO REFERRED TO AS A "WITHDRAWAL CHARGE")(1)
Charge on Withdrawal Exceeding 12% Free Withdrawal Amount(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contract Year 1 2 3 4 5 6 7 8 9 10 11 or more
------------- - - - - - - - - - -- ----------
Flexible Premium
Contracts 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
One Year Flexible
Premium Contracts 7% 6% 5% 4% 3% 2% 1% 0% 0% 0% 0%
Annual Contract Fee
Maximum administrative fee (per year)(2)..................................................................................... $30
Variable Account Annual Expenses (as a percentage of average account value)
Mortality and expense risk fee............................................................................................... 1.25%
<FN>
(1) An amount withdrawn during a Contract Year referred to as the Free
Withdrawal Amount will not be subject to a withdrawal charge. The Free
Withdrawal Amount is 12% of the Contract Value at the time of the first
withdrawal in any Contract Year in which the withdrawal is made. See "Withdrawal
Charge."
(2)The Annual Contract Fee may be less than $30.00 per year, based on the
Owner's Account Value. The maximum charge imposed will be the lesser of 2% of
the Owner's Contract Value or $30.00 per year. The Annual Contract Fee is waived
if the Account Value equals or exceeds $50,000 on a Contract Anniversary.
</FN>
8
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EXPENSE TABLE (continued)
</TABLE>
<TABLE>
FUND ANNUAL EXPENSES (as a percentage of net assets of each Fund)
<S> <C> <C> <C>
Management/ Other Total Fund
Portfolio Advisory Fee Expenses Annual Expenses
--------- ------------ -------- ---------------
AUL American Series Fund, Inc.
Equity Portfolio 0.50%(3) 0.13% 0.63%
Bond Portfolio 0.50%(3) 0.12% 0.62%
Managed Portfolio 0.50%(3) 0.12% 0.62%
Money Market Portfolio 0.40%(3) 0.15% 0.55%
Tactical Asset Allocation Portfolio 0.80%(3) 0.19% 0.99%
Alger American Fund
Alger American Growth Portfolio 0.75% 0.04% 0.79%
American Century Variable Portfolios, Inc.
American Century VP Capital Appreciation Portfolio 1.00% 0.00% 1.00%(4)
American Century VP International Portfolio 1.50% 0.00% 1.50%(4)
Calvert Variable Series, Inc.
Calvert Social Mid Cap Growth Portfolio 0.90% 0.21% 1.11%(5)
Fidelity Variable Insurance Products Fund
Equity-Income Portfolio 0.50% 0.08% 0.58%(6)
Growth Portfolio 0.60% 0.09% 0.69%(6)
High Income Portfolio 0.59% 0.12% 0.71%(6)
Overseas Portfolio 0.75% 0.17% 0.92%(6)
Fidelity Variable Insurance Products Fund II
Asset Manager Portfolio 0.55% 0.10% 0.65%(6)
Contrafund Portfolio 0.60% 0.11% 0.71%(6)
Index 500 Portfolio 0.24% 0.04% 0.28%(7)
PBHG Insurance Series Fund, Inc.
Growth II Portfolio 0.75% 0.42% 1.17%(8)
Technology & Communications Portfolio 0.85% 0.24% 1.09%(8)
T. Rowe Price Equity Series, Inc.
T. Rowe Price Equity Income Portfolio 0.85% 0.00% 0.85%(9)
<FN>
(3)AUL has currently agreed to waive its advisory fee if the ordinary
expenses of a Portfolio exceed 1% and, to the extent necessary, assume any
expenses in excess of its advisory fee so that the expenses of each Portfolio,
including the advisory fee but excluding extraordinary expenses, will not exceed
1% of the Portfolio's average daily net asset value per year. The Adviser may
terminate the policy of reducing its fee and/or assuming Fund expenses upon 30
days written notice to the Fund and such policy will be terminated automatically
by the termination of the Investment Advisory Agreement. During 1999, AUL
reduced its advisory fee for the Tactical Asset Allocation Portfolio.
(4) American Century VP International fees are 1.50% on the first
$250,000,000 of average net assets; 1.20% on the next $250,000,000 of average
net assets; and, 1.10% thereafter. American Century VP Capital Appreciation fees
are 1.00% on the first $500,000,000 of net assets; 0.95% on the next
$500,000,000; and, 0.90% thereafter.
(5) "Other Expenses" reflect an indirect fee. Net fund operating expenses
after reductions for fees paid indirectly would be 1.02% for Social Mid Cap
Growth. Total expenses have been restated to reflect expenses expected to be
incurred in 2000.
(6) A portion of the brokerage commissions that certain funds pay was used
to reduce fund expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian expenses. Including these
reductions, the total operating expenses presented in the table would have been
.57% for Equity-Income Portfolio, .67% for Growth Portfolio, .90% for Overseas
Portfolio, .64% for Asset Manager Portfolio, .68% for Contrafund Portfolio and
.71% for High Income Portfolio.
(7) FMR agreed to reimburse a portion of Index 500 Portfolio's expenses
during the period. Without this reimbursement, the fund's management fee, other
expenses and total expenses would have been .27%, .13% and .40%, respectively.
(8) You should know that because Pilgrim Baxter has contractually agreed to
waive that portion, if any, of the annual management fees payable by the
Portfolio and to pay certain expenses of the Portfolio to the extent necessary
to ensure that the total annual fund operating expenses do not exceed 1.20%. You
should also know that in any fiscal year in which the Portfolio's assets are
greater than $75 million and its total annual fund operating expenses are less
than 1.20%, the Portfolio's Board of Directors may elect to reimburse Pilgrim
Baxter for any fees it waived or expenses it reimbursed on the Portfolio's
behalf during the previous two fiscal years. In 1999, the Board elected to
reimburse $31,616 in waived fees for the Growth II Portfolio and $93,603 in
waived fees for the Technology and Communications Portfolio.
(9) Management fee includes operating expenses.
</FN>
</TABLE>
9
<PAGE>
EXAMPLES (for any Investment Account)
The following examples show expenses that a Contract Owner would pay at the
end of one, three, five, or ten years if at the end of those time periods, the
Contract is (1) surrendered, (2) annuitized, or (3) not surrendered or
annuitized. The information below represents expenses on a $1,000 premium and
assumes a 5% return per year. For a Contract that is surrendered, and for a
Contract that is annuitized, the example shows expenses for Flexible Premium
Contracts and One Year Flexible Premium Contracts. Expenses will be the same for
both Contracts if not surrendered or annuitized. Column (2) reflects an
assumption that a life annuity or survivorship annuity is elected. Under certain
circumstances, a withdrawal charge may apply upon annuitization. See "Withdrawal
Charge." These examples should not be considered a representation of past or
future expenses. Because Fund expenses may vary, actual expenses may be greater
or less than those shown. The assumed 5% return is hypothetical and should not
be considered a representation of past or future returns, which may be greater
or less than the assumed amount.
<TABLE>
<CAPTION>
(1) If Your Contract (2) If your Contract (3) If your Contract
is Surrendered is Annuitized is not Surrendered or
Annuitized
<S> <C> <C> <C> <C> <C>
Flexible Premium One Year Flexible Flexible One Year Flexible
Premium Contracts Premium Contracts Premium Contracts Premium Contracts All Contracts
----------------- ----------------- ----------------- ----------------- -------------
Investment Account
------------------
AUL American Equity
1 year $107.08 $ 85.37 $107.08 $ 85.37 $ 22.08
3 years 144.21 115.57 144.21 67.83 67.83
5 years 176.31 146.06 115.81 115.81 115.81
10 years 257.98 246.40 246.40 246.40 246.40
AUL American Bond
1 year 106.97 85.27 106.97 85.27 21.97
3 years 143.90 115.25 143.90 67.50 67.50
5 years 175.78 145.52 115.25 115.25 115.25
10 years 256.86 245.27 245.27 245.27 245.27
AUL American Managed
1 year 106.97 85.27 106.97 85.27 21.97
3 years 143.90 115.25 143.90 67.50 67.50
5 years 175.78 145.52 115.25 115.25 115.25
10 years 256.86 245.27 245.27 245.27 245.27
AUL American Money Market
1 year 106.27 84.62 106.27 84.62 21.27
3 years 141.95 113.24 141.95 65.39 65.39
5 years 172.45 142.07 111.70 111.70 111.70
10 years 249.71 238.04 238.04 238.04 238.04
AUL American Tactical Asset Allocation
1 year 110.71 88.77 110.71 88.77 25.71
3 years 154.30 125.97 154.30 78.76 78.76
5 years 193.49 163.78 134.08 134.08 134.08
10 years 294.31 283.15 283.15 283.15 283.15
Alger American Growth
1 year 108.70 86.88 108.70 86.88 23.70
3 years 148.71 120.21 148.71 72.70 72.70
5 years 183.98 153.98 123.97 123.97 123.97
10 years 274.30 262.91 262.91 262.91 262.91
American Century VP Capital Appreciation
1 year 110.78 88.84 110.78 88.84 25.78
3 years 154.51 126.18 154.51 78.98 78.98
5 years 193.83 164.14 134.44 134.44 134.44
10 years 295.03 283.88 283.88 283.88 283.88
American Century VP International
1 year 115.78 93.52 115.78 93.52 30.78
3 years 168.29 140.39 168.29 93.89 93.89
5 years 217.06 188.11 159.15 159.15 159.15
10 years 342.94 332.34 332.34 332.34 332.34
Calvert Social Mid Cap Growth
1 year 111.91 89.90 111.91 89.90 26.91
3 years 157.64 129.42 157.64 82.37 82.37
5 years 199.14 169.62 140.09 140.09 140.09
10 years 306.10 295.08 295.08 295.08 295.08
10
<PAGE>
Examples (for any Investment Account) (continued)
<CAPTION>
(1) If Your Contract (2) If your Contract (3) If your Contract
is Surrendered is Annuitized is not Surrendered or
Annuitized
<S> <C> <C> <C> <C> <C>
Flexible Premium One Year Flexible Flexible One Year Flexible
Premium Contracts Premium Contracts Premium Contracts Premium Contracts All Contracts
----------------- ----------------- ----------------- ----------------- -------------
Investment Account
------------------
Fidelity VIP Equity-Income
1 year $106.57 $ 84.89 $106.57 $ 84.89 $ 21.57
3 years 142.77 114.09 142.77 66.28 66.28
5 years 173.85 143.52 113.20 113.20 113.20
10 years 252.72 241.09 241.09 241.09 241.09
Fidelity VIP Growth
1 year 107.71 85.96 107.71 85.96 22.71
3 years 145.95 117.36 145.95 69.72 69.72
5 years 179.28 149.13 118.97 118.97 118.97
10 years 264.32 252.82 252.82 252.82 252.82
Fidelity VIP High Income
1 year 107.89 86.13 107.89 86.13 22.89
3 years 146.46 117.89 146.46 70.27 70.27
5 years 180.15 150.03 119.90 119.90 119.90
10 years 266.18 254.70 254.70 254.70 254.70
Fidelity VIP Overseas
1 year 110.01 88.12 110.01 88.12 25.01
3 years 152.37 123.99 152.37 76.67 76.67
5 years 190.22 160.41 130.60 130.60 130.60
10 years 287.45 276.21 276.21 276.21 276.21
Fidelity VIP II Asset Manager
1 year 107.30 85.58 107.30 85.58 22.30
3 years 144.82 116.20 144.82 68.50 68.50
5 years 177.36 147.14 116.92 116.92 116.92
10 years 260.22 248.67 248.67 248.67 248.67
Fidelity VIP II Contrafund
1 year 107.89 86.13 107.89 86.13 22.89
3 years 146.46 117.89 146.46 70.27 70.27
5 years 180.15 150.03 119.90 119.90 119.90
10 years 266.18 254.70 254.70 254.70 254.70
Fidelity VIP II Index 500
1 year 103.55 82.07 103.55 82.07 18.55
3 years 134.31 105.36 134.31 57.12 57.12
5 years 159.34 128.55 97.76 97.76 97.76
10 years 221.35 209.36 209.36 209.36 209.36
PBHG Growth II
1 year 112.50 90.45 112.50 90.45 27.50
3 years 159.26 131.08 159.26 84.12 84.12
5 years 201.87 172.43 142.99 142.99 142.99
10 years 311.76 300.80 300.80 300.80 300.80
PBHG Technology & Communications
1 year 111.70 89.69 111.70 89.69 26.70
3 years 157.04 128.79 157.04 81.71 81.71
5 years 198.12 168.56 139.00 139.00 139.00
10 years 303.97 292.92 292.92 292.92 292.92
T. Rowe Price Equity Income
1 year 109.28 87.43 109.28 87.43 24.28
3 years 150.34 121.89 150.34 74.47 74.47
5 years 186.76 156.84 126.92 126.92 126.92
10 years 280.17 268.85 268.85 268.85 268.85
</TABLE>
11
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following table presents Condensed Financial Information with respect
to each of the Investment Accounts of the Variable Account for the period from
the date of first deposit on November 21, 1994 to December 31, 1999. The
following tables should be read in conjunction with the Variable Account's
financial statements, which are included in the Variable Account's Annual Report
dated as of December 31, 1999. The Variable Account's financial statements have
been audited by PricewaterhouseCoopers LLP, the Variable Account's independent
accountant.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Accumulation Unit Value Accumulation Unit Value Number of Accumulations Units
Investment Account at beginning of period at end of period Outstanding at end of period
------------------ ------------------------ ----------------------- -----------------------------
AUL American Equity
1999 $ 9.435 $ 9.247 1,050,856.567
1998 8.902 9.435 1,276,705.096
1997 6.956 8.902 1,008,286.648
1996 5.911 6.956 528,267.190
1995 5.010 5.911 169,738.465
1994 5.000 (11/21/94) 5.010 15,959.218
AUL American Bond
1999 $ 6.800 $ 6.641 943,531.667
1998 6.331 6.800 936,406.295
1997 5.945 6.331 373,790.804
1996 5.888 5.945 327,311.392
1995 5.062 5.888 81,914.403
1994 5.000 (11/21/94) 5.062 118.883
AUL American Managed
1999 $ 8.357 $ 8.196 1,062,997.593
1998 7.809 8.357 1,202,410.643
1997 6.539 7.809 791,100.951
1996 5.923 6.539 499,400.967
1995 5.034 5.923 119,092.277
1994 5.000 (11/21/94) 5.034 664.550
AUL American Money Market
1999 $ 1.159 $ 1.198 11,290,259.090
1998 1.118 1.159 8,002,380.959
1997 1.080 1.118 4,549,403.805
1996 1.044 1.080 2,487,983.053
1995 1.004 1.044 1,582,630.174
1994 1.000 (11/21/94) 1.004 626,535.146
AUL American Tactical Asset Allocation
1999 $ 7.309 $ 6.997 525,619.475
1998 6.900 7.309 675,363.836
1997 6.051 6.900 459,162.276
1996 5.297 6.051 161,866.199
1995 5.000 (7/31/95) 5.297 18,030.022
1994 N.A. N.A. N.A.
Alger American Growth
1999 $12.203 $16.118 3,129,408.963
1998 8.344 12.203 2,475,912.921
1997 6.720 8.344 1,748,167.113
1996 6.003 6.720 1,256,069.865
1995 5.000 (4/28/95) 6.003 208,236.470
1994 N.A. N.A. N.A.
American Century VP Capital Appreciation
1999 $ 5.657 $ 9.192 225,291.429
1998 5.855 5.657 307,985.286
1997 6.128 5.855 312,676.383
1996 6.486 6.128 145,117.247
1995 5.010 6.486 128,270.148
1994 5.000 (11/21/94) 5.010 2,809.564
American Century VP International
1999 $ 8.327 $13.490 464,550.838
1998 7.100 8.327 456,952.682
1997 6.060 7.100 371,155.699
1996 5.364 6.060 372,018.867
1995 4.840 5.364 74,261.271
1994 5.000 (11/21/94) 4.840 831.382
Calvert Social Mid Cap Growth
1999 $10.307 $10.888 375,729.249
1998 8.041 10.307 344,388.990
1997 6.587 8.041 231,352.822
1996 6.211 6.587 202,261.345
1995 5.000 (4/28/95) 6.211 24,090.888
1994 N.A. N.A. N.A.
Fidelity VIP Equity-Income
1999 $ 9.403 $ 9.874 1,546,416.315
1998 8.530 9.403 1,527,150.779
1997 6.743 8.530 1,186,973.297
1996 5.974 6.743 842,213.457
1995 5.000 (4/28/95) 5.974 162,252.393
1994 N.A. N.A. N.A.
12
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<S> <C> <C> <C>
Accumulation Unit Value Accumulation Unit Value Number of Accumulations Units
Investment Account at beginning of period at end of period Outstanding at end of period
------------------ ------------------------ ----------------------- -----------------------------
Fidelity VIP Growth
1999 $12.793 $17.363 2,048,629.670
1998 9.286 12.793 1,720,026.949
1997 7.615 9.286 1,393,042.116
1996 6.723 7.615 1,131,117.169
1995 5.028 6.723 382,748.411
1994 5.000 (11/21/94) 5.028 17,303.821
Fidelity VIP High Income
1999 $ 7.346 $ 7.846 765,292.207
1998 7.776 7.346 770,129.826
1997 6.691 7.776 577,023.227
1996 5.942 6.691 310,543.860
1995 4.988 5.942 124,255.921
1994 5.000 (11/21/94) 4.988 12,229.340
Fidelity VIP Overseas
1999 $ 7.301 $10.284 336,608.215
1998 6.557 7.301 284,063.291
1997 5.952 6.557 297,194.608
1996 5.324 5.952 178,473.714
1995 4.915 5.324 66,675.195
1994 5.000 (11/21/94) 4.915 3,238.060
Fidelity VIP II Asset Manager
1999 $ 8.642 $ 9.481 2,597,381.444
1998 7.606 8.642 2,330,886.939
1997 6.384 7.606 1,581,638.720
1996 5.641 6.384 938,554.934
1995 4.883 5.641 246,331.760
1994 5.000 (11/21/94) 4.883 14,681.732
Fidelity VIP II Contrafund
1999 $11.367 $13.949 1,972,158.692
1998 8.855 11.367 1,702,358.228
1997 7.224 8.855 1,310,233.857
1996 6.030 7.224 861,470.661
1995 5.000 (4/28/95) 6.030 121,824.755
1994 N.A. N.A. N.A.
Fidelity VIP II Index 500
1999 $13.700 $16.305 3,019,439.078
1998 10.811 13.700 2,611,395.641
1997 8.250 10.811 1,836,588.504
1996 6.802 8.250 815,021.928
1995 5.020 6.802 130,390.078
1994 5.000 (11/21/94) 5.020 20.000
PBHG Growth II
1999 $ 5.694 $11.146 185,826.610
1998 5.330 5.694 112,805.001
1997 5.000 (5/1/97) 5.330 97,880.906
1996 N.A. N.A. N.A.
1995 N.A. N.A. N.A.
1994 N.A. N.A. N.A.
PBHG Technology & Communications
1999 $ 6.739 $22.256 584,749.707
1998 5.162 6.739 166,707.424
1997 5.000 (5/1/97) 5.162 78,547.885
1996 N.A. N.A. N.A.
1995 N.A. N.A. N.A.
1994 N.A. N.A. N.A.
T. Rowe Price Equity Income
1999 $ 9.737 $ 9.973 2,719,224.510
1998 9.040 9.737 2,878,954.195
1997 7.104 9.040 2,226,490.645
1996 6.016 7.104 1,081,375.512
1995 5.000 (4/28/95) 6.016 163,043.483
1994 N.A. N.A. N.A.
</TABLE>
13
<PAGE>
PERFORMANCE OF THE INVESTMENT ACCOUNTS
The following tables present the return on investment for each of the
Investment Accounts. The return on investment figures in the first and second
tables (including charges) represents a change in an Accumulation Unit allocated
to an Investment Account and takes into account Variable Account charges such as
the mortality and expense risk charge, withdrawal charges, and a pro-rata
portion of the administrative charge. The return on investment figures in the
third table (excluding charges) include the mortality and expense risk charge,
but do not reflect the deduction of withdrawal charges or a pro-rata portion of
the administrative charge. For the periods that a particular Investment Account
has been in operation (see the Inception Date of Investment Account column), the
figures represent actual performance. Therefore, the performance figures for the
one year and three year periods ending 12/31/99 and the Lessor of 5 Years or
Since Inception represent actual performance. For the periods that precede the
creation of the Investment Account, if the mutual fund portfolio was in
existence (see Inception Date of Mutual Fund column), results represent
hypothetical returns that the Investment Accounts that invest in the
corresponding Mutual Fund Portfolios would have achieved had they invested in
such Portfolios for the periods indicated. Therefore, the performance figures
for the 5 year period ending 12/31/99, and the Lessor of 10 Years or Since
Inception may be hypothetical, or they may represent actual performance, based
on the inception date of a particular Investment Account and the mutual fund
portfolio.
<TABLE>
<CAPTION>
Performance (including charges) for One Year Flexible Premium Contracts
<S> <C> <C> <C> <C> <C> <C> <C>
ACTUAL PERFORMANCE | ACTUAL/HYPOTHETICAL PERFORMANCE
|
|
Average Average Average |Average Average
Annual Annual Annual |Annual Annual
Return on Return on Return on |Return on Return on
Inception Inception Investment Investment Investment |Investment Investment
Date of Date of for Year for 3 Years for lesser of |for 5 Years for lesser of
Mutual Investment ending ending 5 Years or |ending 10 Years or
Investment Account Fund Account 12/31/99 12/31/99 Since Inception |12/31/99* Since Inception*
------------------ ---- ------- -------- -------- --------------- |--------- ---------------
|
AUL American Equity 4/10/90 11/21/94 (9.12%) 7.77% 12.21% | 12.02% 12.21%
AUL American Bond 4/10/90 11/21/94 (9.45%) 1.69% 4.82% | 4.62% 4.82%
AUL American Managed 4/10/90 11/21/94 (9.06%) 5.68% 9.44% | 9.24% 9.44%
AUL American Money |
Market 4/10/90 11/21/94 (4.15%) 1.49% 2.84% | 2.67% 2.84%
AUL American Tactical |
Asset Allocation 7/31/95 7/31/95 (11.23%) 2.88% 6.80% | N.A. 6.80%
Alger American |
Growth 1/09/89 4/28/95 31.68% 33.46% 28.09% | 28.93% 21.01%
American Century |
VP Capital |
Appreciation 11/20/87 11/21/94 49.50% 11.90% 12.06% | 11.71% 9.60%
American Century VP |
International 5/01/94 11/21/94 50.21% 27.97% 21.10% | 21.64% 21.10%
Calvert Social Mid |
Cap Growth 7/16/91 4/28/95 5.32% 17.88% 17.77% | 17.88% 17.77%
Fidelity VIP |
Equity-Income 10/09/86 4/28/95 (2.64%) 11.30% 14.58% | 16.07% 12.73%
Fidelity VIP Growth 10/09/86 11/21/94 25.85% 29.00% 27.25% | 26.97% 18.09%
Fidelity VIP High |
Income 9/19/85 11/21/94 (0.96%) 3.35% 8.60% | 8.49% 10.71%
Fidelity VIP Overseas 1/28/87 11/21/94 30.60% 17.61% 14.61% | 14.86% 9.71%
Fidelity VIP II Asset |
Manager 9/06/89 11/21/94 1.72% 11.82% 12.57% | 13.16% 11.41%
Fidelity VIP II |
Contrafund 1/03/95 4/28/95 14.08% 22.36% 23.38% | N.A. 23.38%
Fidelity VIP II |
Index 500 8/27/92 11/21/94 10.35% 23.00% 25.47% | 25.42% 25.47%
PBHG Growth II 5/01/97 5/01/97 79.18% N.A. 31.42% | N.A. 31.42%
PBHG Technology |
& Communications 5/01/97 5/01/97 206.20% N.A. 71.14% | N.A. 71.14%
T. Rowe Price Equity |
Income 3/31/94 4/28/95 (5.03%) 10.02% 14.82% | 16.08% 14.82%
* For the periods that a particular Investment Account has been in existence
(see Inception Date of Investment Account column) the performance is actual
performance and not hypothetical in nature. For the Lesser of 10 Years or Since
Inception (the last column), if the Mutual Fund has been in existence for 10
Years, then the return reflects hypothetical performance of the mutual fund; if
the mutual fund has not been in existence for 10 Years, then the return reflects
actual performance of the Investment Account.
14
<PAGE>
<CAPTION>
PERFORMANCE OF THE INVESTMENT ACCOUNTS (continued)
Performance (including charges) for Flexible Premium Contracts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACTUAL PERFORMANCE | ACTUAL/HYPOTHETICAL PERFORMANCE
|
|
Average Average Average |Average Average
Annual Annual Annual |Annual Annual
Return on Return on Return on |Return on Return on
Inception Inception Investment Investment Investment |Investment Investment
Date of Date of for Year for 3 Years for lesser of |for 5 Years for lesser of
Mutual Investment ending ending 5 years or |ending 10 Years or
Investment Account Fund Account 12/31/99 12/31/99 Since Inception |12/31/99* Since Inception*
------------------ ---- ------- -------- -------- --------------- |--------- ---------------
|
AUL American Equity 4/10/90 11/21/94 (12.05%) 6.62% 11.52% | 11.32% 11.52%
AUL American Bond 4/10/90 11/21/94 (12.37%) 0.61% 4.18% | 3.97% 4.18%
AUL American Managed 4/10/90 11/21/94 (11.99%) 4.56% 8.77% | 8.56% 8.77%
AUL American Money |
Market 4/10/90 11/21/94 (7.24%) 0.41% 2.21% | 2.03% 2.21%
AUL American Tactical |
Asset Allocation 7/31/95 7/31/95 (14.09%) 1.78% 6.05% | N.A. 6.05%
Alger American |
Growth 1/09/89 4/28/95 18.52% 29.80% 26.41% | 27.34% 20.89%
American Century |
VP Capital |
Appreciation 11/20/87 11/21/94 44.68% 10.71% 11.37% | 11.01% 9.49%
American Century VP |
International 5/01/94 11/21/94 45.37% 26.61% 20.36% | 20.88% 20.36%
Calvert Social Mid |
Cap Growth 7/16/91 4/28/95 (5.21%) 14.65% 16.22% | 17.47% 16.22%
Fidelity VIP |
Equity-Income 10/09/86 4/28/95 (5.78%) 10.12% 13.81% | 15.35% 12.62%
Fidelity VIP Growth 10/09/86 11/21/94 21.79% 27.63% 26.48% | 26.17% 17.97%
Fidelity VIP High |
Income 9/19/85 11/21/94 (4.16%) 2.25% 7.93% | 7.81% 10.60%
Fidelity VIP Overseas 1/28/87 11/21/94 26.39% 16.36% 13.91% | 14.14% 9.60%
Fidelity VIP II Asset |
Manager 9/06/89 11/21/94 (1.56%) 10.63% 11.89% | 12.45% 11.29%
Fidelity VIP II |
Contrafund 1/03/95 4/28/95 10.40% 21.06% 22.55% | N.A. 22.55%
Fidelity VIP II |
Index 500 8/27/92 11/21/94 6.79% 21.69% 24.70% | 24.64% 24.70%
PBHG Growth II 5/01/97 5/01/97 73.40% N.A. 29.85% | N.A. 29.85%
PBHG Technology |
& Communications 5/01/97 5/01/97 196.32% N.A. 69.09% | N.A. 69.09%
T. Rowe Price Equity |
Income 3/31/94 4/28/95 (8.09%) 8.85% 14.05% | 15.36% 14.05%
<CAPTION>
Performance (excluding charges) for All Contracts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACTUAL PERFORMANCE | ACTUAL/HYPOTHETICAL PERFORMANCE
|
|
Average Average Average |Average Average
Annual Annual Annual |Annual Annual
Return on Return on Return on |Return on Return on
Inception Inception Investment Investment Investment |Investment Investment
Date of Date of for Year for 3 Years for lesser of |for 5 Years for lesser of
Mutual Investment ending ending 5 years or |ending 10 Years or
Investment Account Fund Account 12/31/99 12/31/99 Since Inception |12/31/99* Since Inception*
------------------ ---- ------- -------- -------- --------------- |--------- ---------------
|
AUL American Equity 4/10/90 11/21/94 (2.28%) 9.63% 12.65% | 12.70% 12.65%
AUL American Bond 4/10/90 11/21/94 (2.63%) 3.45% 5.24% | 5.26% 5.24%
AUL American Managed 4/10/90 11/21/94 (2.21%) 7.50% 9.87% | 9.91% 9.87%
AUL American Money |
Market 4/10/90 11/21/94 3.06% 3.24% 3.25% | 3.30% 3.25%
AUL American Tactical |
Asset Allocation 7/31/95 7/31/95 (4.55%) 4.65% 7.54% | N.A. 7.54%
Alger American |
Growth 1/09/89 4/28/95 31.68% 33.46% 28.09% | 28.93% 21.01%
American Century |
VP Capital |
Appreciation 11/20/87 11/21/94 60.76% 13.83% 12.50% | 12.40% 9.60%
American Century VP |
International 5/01/94 11/21/94 61.52% 30.18% 21.58% | 22.38% 21.58%
Calvert Social Mid |
Cap Growth 7/16/91 4/28/95 5.32% 17.88% 17.77% | 17.88% 17.77%
Fidelity VIP |
Equity-Income 10/09/86 4/28/95 4.69% 13.22% 15.33% | 16.78% 12.73%
Fidelity VIP Growth 10/09/86 11/21/94 35.32% 31.22% 27.76% | 27.74% 18.09%
Fidelity VIP High |
Income 9/19/85 11/21/94 6.49% 5.14% 9.03% | 9.15% 10.71%
Fidelity VIP Overseas 1/28/87 11/21/94 40.43% 19.64% 15.07% | 15.57% 9.71%
Fidelity VIP II Asset |
Manager 9/06/89 11/21/94 9.38% 13.75% 13.02% | 13.85% 11.41%
Fidelity VIP II |
Contrafund 1/03/95 4/28/95 22.34% 24.15% 24.19% | N.A. 24.19%
Fidelity VIP II |
Index 500 8/27/92 11/21/94 18.65% 25.12% 25.97% | 26.19% 25.97%
PBHG Growth II 5/01/97 5/01/97 92.66% N.A. 33.97% | N.A. 33.97%
PBHG Technology |
& Communications 5/01/97 5/01/97 229.24% N.A. 74.46% | N.A. 74.46%
T. Rowe Price Equity |
Income 3/31/94 4/28/95 2.12% 11.64% 15.58% | 16.79% 15.58%
* For the periods that a particular Investment Account has been in existence
(see Inception Date of Investment Account column) the performance is actual
performance and not hypothetical in nature. For the Lesser of 10 Years or Since
Inception (the last column), if the Mutual Fund has been in existence for 10
Years, then the return reflects hypothetical performance of the mutual fund; if
the mutual fund has not been in existence for 10 Years, then the return reflects
actual performance of the Investment Account.
</TABLE>
15
<PAGE>
INFORMATION ABOUT AUL, THE VARIABLE ACCOUNT, AND THE FUNDS
AMERICAN UNITED LIFE INSURANCE COMPANY(R)
AUL is a legal reserve mutual life insurance company existing under the
laws of the State of Indiana. It was originally incorporated as a fraternal
society on November 7, 1877, under the laws of the Federal government, and
reincorporated under the laws of the State of Indiana in 1933. It is qualified
to do business in 49 states and the District of Columbia. AUL has its principal
business office located at One American Square, Indianapolis, Indiana 46282.
At a meeting of the AUL Board of Directors held on February 17, 2000, the
Board approved the concept of changing the corporate structure of AUL. During
the second quarter of 2000, the Board of Directors of AUL is expected to
formally approve a plan of conversion ("Plan") under which AUL will convert from
a mutual life insurance company to a stock life insurance company ultimately
controlled by a mutual holding company ("Mutual Holding Company"). This
transaction is intended to result in a corporate structure that provides, among
other things, better access to external sources of capital. Under the Plan, upon
the conversion, the insurance company would issue voting stock to a newly-formed
stock holding company ("Stock Holding Company"). It is anticipated that the
Stock Holding Company could, subsequent to the conversion, offer shares of its
stock publicly or privately; however, the Mutual Holding Company must always
hold at least 51% of the voting stock of the Stock Holding Company. The Stock
Holding Company would always own 100% of the voting stock of AUL. No plans have
been formulated to issue any shares of capital stock or debt securities of the
Stock Holding Company at this time.
Since AUL currently is a mutual life insurance company, owners
("policyholders") of AUL's annuity contracts and life insurance policies
("policies") have certain membership interests in AUL consisting principally of
the right to vote on the election of the Board of Directors and on other matters
and certain rights upon liquidation or dissolution of AUL. Under the Plan,
policyholders continue to be policyholders in the same insurance company, but
would no longer have a membership interest in the insurance company; rather,
policyholders would have membership interests in the Mutual Holding Company.
These interests in the Mutual Holding Company would be substantially the same as
the membership interests that policyholders have in AUL prior to the conversion,
consisting principally of the right to vote on the election of the Board of
Directors and on other matters and certain rights upon liquidation or
dissolution of the Mutual Holding Company. After the conversion, persons who
acquire policies from AUL would automatically be members in the Mutual Holding
Company. The conversion will not, in any way, increase premium payments or
reduce policy benefits, values, guarantees or other policy obligations to
policyholders. The Plan is subject to the approval by AUL policyholders and the
consent of the Insurance Commissioner of Indiana, among other approvals and
conditions. If the necessary approvals are obtained and conditions met, the
conversion could occur in 2000. Under the Plan, the insurance company name will
not change.
AUL conducts a conventional life insurance, reinsurance, and
annuity business. At December 31, 1999, AUL had assets of
$10,577,535,000 and a policyholders' surplus of $739,224,931.
The principal underwriter for the Contracts is AUL, which is registered
with the SEC as a broker-dealer.
VARIABLE ACCOUNT
AUL American Individual Unit Trust was established by AUL on April 14,
1994, under procedures established under Indiana law. The income, gains, or
losses of the Variable Account are credited to or charged against the assets of
the Variable Account without regard to other income, gains, or losses of AUL.
Assets in the Variable Account attributable to the reserves and other
liabilities under the Contracts are not chargeable with liabilities arising from
any other business that AUL conducts. AUL owns the assets in the Variable
Account and is required to maintain sufficient assets in the Variable Account to
meet all Variable Account obligations under the Contracts. AUL may transfer to
its General Account assets that exceed anticipated obligations of the Variable
Account. All obligations arising under the Contracts are general corporate
obligations of AUL. AUL may invest its own assets in the Variable Account, and
may accumulate in the Variable Account proceeds from Contract charges and
investment results applicable to those assets.
The Variable Account is currently divided into sub-accounts referred to as
Investment Accounts. Each Investment Account invests exclusively in shares of
one of the Funds. Premiums may be allocated to one or more Investment Accounts
available under a Contract. AUL may in the future establish additional
Investment Accounts of the Variable Account, which may invest in other
securities, mutual funds, or investment vehicles.
The Variable Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). Registration with the
SEC does not involve supervision by the SEC of the administration or investment
practices of the Variable Account or of AUL.
THE FUNDS
Each of the Funds is a diversified, open-end management investment company
commonly referred to as a mutual fund, or a portfolio thereof. Each of the Funds
is registered with the SEC under the 1940 Act. Such registration does not
involve supervision by the SEC of the investments or investment policies or
practices of the Fund. Each Fund has its own investment objective or objectives
and policies. The shares of a Fund are purchased by AUL for the corresponding
Investment Account at the Fund's net asset value per share, i.e., without any
sales load. All dividends and capital gain distributions received from a Fund
are automatically reinvested in such Fund at net asset value, unless otherwise
instructed by AUL. AUL has entered into agreements with the
Distributors/Advisers of Alger Management, Inc., American Century Variable
Portfolios, Inc., Calvert Variable Series, Inc., Fidelity Investments, Pilgrim
Baxter & Associates, and T. Rowe Price Equity
16
<PAGE>
Series, Inc. under which AUL has agreed to render certain services and to
provide information about these funds to its Contract Owners and/or Participants
who invest in these funds. Under these agreements and for providing these
services, AUL receives compensation from the Distributor/Adviser of these funds,
ranging from zero basis points until a certain level of Fund assets have been
purchased to 25 basis points on the net average aggregate deposits made.
The investment advisers of the Funds are identified on page 6. All of the
investment advisers are registered with the SEC as investment advisers.
A summary of the investment objective or objectives of each Fund is
provided below. There can be no assurance that any Fund will achieve its
objective or objectives. More detailed information is contained in the
Prospectus for the Funds, including information on the risks associated with the
investments and investment techniques of each Fund.
AUL AMERICAN SERIES FUND, INC.
AUL AMERICAN EQUITY PORTFOLIO
The primary investment objective of the AUL American Equity Portfolio is
long-term capital appreciation. The Fund seeks current investment income as a
secondary objective. The Fund attempts to achieve these objectives by investing
primarily in equity securities selected on the basis of fundamental investment
research for their long-term growth prospects.
AUL AMERICAN BOND PORTFOLIO
The primary investment objective of the AUL American Bond Portfolio is to
provide a high level of income consistent with prudent investment risk. As a
secondary objective, the Fund seeks to provide capital appreciation to the
extent consistent with the primary objective. The Fund attempts to achieve these
objectives by investing primarily in corporate bonds and other debt securities.
AUL AMERICAN MANAGED PORTFOLIO
The investment objective of the AUL American Managed Portfolio is to
provide a high total return consistent with prudent investment risk. The Fund
attempts to achieve this objective through a fully managed investment policy
utilizing publicly traded common stock, debt securities (including convertible
debentures), and money market securities.
AUL AMERICAN MONEY MARKET PORTFOLIO
The investment objective of the AUL American Money Market Portfolio is to
provide a high level of current income while preserving assets and maintaining
liquidity and investment quality. The Fund attempts to achieve this objective by
investing in short-term money market instruments that are of the highest
quality.
AUL AMERICAN TACTICAL ASSET ALLOCATION PORTFOLIO
The investment objective of the Tactical Asset Allocation Portfolio is
preservation of capital and competitive investment returns. The Portfolio seeks
to achieve its objective by investing primarily in stocks, United States
Treasury bonds, notes and bills, and money market funds.
FOR ADDITIONAL INFORMATION CONCERNING AUL AMERICAN SERIES FUND, INC. AND ITS
PORTFOLIOS, PLEASE SEE THE AUL AMERICAN SERIES FUND, INC. PROSPECTUS, WHICH
SHOULD BE READ CAREFULLY BEFORE INVESTING.
ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO
The Alger American Growth Portfolio seeks long term capital appreciation.
It focuses on growing companies that generally have broad product lines,
markets, financial resources and depth of management. Under normal
circumstances, the Portfolio invests primarily in the equity securities of large
companies. The Portfolio considers a large company to have a market
capitalization of $1 billion or greater.
FOR ADDITIONAL INFORMATION CONCERNING THE ALGER AMERICAN FUND AND ITS
PORTFOLIOS, PLEASE SEE THE ALGER AMERICAN FUND PROSPECTUS, WHICH SHOULD BE READ
CAREFULLY BEFORE INVESTING.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AMERICAN CENTURY VP CAPITAL APPRECIATION PORTFOLIO
The American Century VP Capital Appreciation Portfolio seeks capital growth
by investing primarily in common stocks and other securities that meet certain
fundamental and technical standards of selection and have, in the opinion of the
Fund's investment manager, better than average potential for appreciation. The
Fund tries to stay fully invested in such securities, regardless of the movement
of prices generally.
NOTE: Effective May 1, 1999, the American Century VP Capital Appreciation
Portfolio is no longer available for new contracts. Effective July 1, 1999, the
American Century VP Capital Appreciation Portfolio is no longer available for
new money deposits and transfers on existing contracts.
AMERICAN CENTURY VP INTERNATIONAL PORTFOLIO
The American Century VP International Portfolio seeks to achieve its
investment objective of capital growth by investing primarily in securities of
foreign companies that meet certain fundamental and technical standards of
selection and have, in the opinion of the investment manager, potential for
appreciation. The Fund will invest primarily in common stocks of companies
located in developed markets. Investment in securities of foreign issuers
typically involves greater risks than investment in domestic securities,
including currency fluctuations and political instability.
FOR ADDITIONAL INFORMATION CONCERNING AMERICAN CENTURY VARIABLE PORTFOLIOS,
17
<PAGE>
INC. AND ITS PORTFOLIOS, PLEASE SEE THE AMERICAN CENTURY VARIABLE PORTFOLIOS,
INC. PROSPECTUS, WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING OR SENDING
MONEY.
CALVERT VARIABLE SERIES, INC.
CALVERT SOCIAL MID CAP GROWTH PORTFOLIO
The Calvert Social Mid Cap Growth Portfolio is a socially responsible
growth Portfolio that seeks long-term capital appreciation by investing
primarily in a nondiversified portfolio of the equity securities of mid-sized
companies that are undervalued but demonstrate a potential for growth.
Investments are selected on the basis of their ability to contribute to the dual
objectives of their financial soundness and social criteria. Although the
Portfolio's social criteria tend to limit the availability of investment
opportunities more than is customary with other investment companies, the
Advisor believes there are sufficient investment opportunities to permit full
investment among issuers which satisfy the Portfolio's investment and social
objectives.
FOR ADDITIONAL INFORMATION CONCERNING CALVERT VARIABLE SERIES, INC., AND THE
CALVERT SOCIAL MID CAP GROWTH PORTFOLIO, PLEASE SEE THE CALVERT VARIABLE SERIES,
INC. PROSPECTUS, WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP EQUITY-INCOME PORTFOLIO
The VIP Equity-Income Portfolio seeks reasonable income. The fund will also
consider the potential for capital appreciation. The fund's goal is to achieve a
yield which exceeds the composite yield on the securities comprising the S&P
500. Fidelity Management & Research Company (FMR) normally invests at least 65%
of the fund's total assets in income-producing equity securities. FMR may also
invest the fund's assets in other types of equity securities and debt
securities, including lower-quality debt securities. The Adviser may also invest
in securities of foreign issuers in addition to securities of domestic issuers.
VIP GROWTH PORTFOLIO
The VIP Growth Portfolio seeks to achieve capital appreciation. FMR invests
the fund's assets in companies that it believes have above-average growth
potential. Growth may be measured by factors such as earnings or revenue. FMR
may invest the fund's assets in securities of foreign issuers in addition to
securities of domestic issuers.
VIP HIGH INCOME PORTFOLIO
The VIP High Income Portfolio seeks a high level of current income while
also considering growth of capital. FMR normally invests at least 65% of the
fund's total assets in income-producing debt securities, preferred stocks and
convertible securities, with an emphasis on lower-quality debt securities. Many
lower-quality debt securities are subject to legal or contractual restrictions
limiting FMR's ability to resell the securities to the general public. FMR may
also invest the fund's assets in non-income producing securities, including
defaulted securities and common stocks. FMR intends to limit common stocks to
10% of the fund's total assets. FMR may invest in companies whose financial
condition is troubled or uncertain and that may be involved in bankruptcy
proceedings, reorganization or financial restructurings.
VIP OVERSEAS PORTFOLIO
The VIP Overseas Portfolio seeks long-term growth of capital. FMR normally
invests at least 65% of the fund's total assets in foreign securities. FMR
normally invests the fund's assets primarily in stocks. FMR normally diversifies
the fund's investments across different countries and regions. In allocating the
fund's investments across countries and regions, FMR will consider the size of
the market in each country and region relative to the size of the international
market as a whole.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II ASSET MANAGER PORTFOLIO
The VIP II Asset Manager Portfolio seeks to obtain high total return with
reduced risk over the long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term instruments. FMR allocates the fund's
assets among the following classes, or types, of investments. The stock class
includes equity securities of all types. The bond class includes all varieties
of fixed-income securities, including lower-quality debt securities, maturing in
more than one year. The short-term/money market class includes all types of
short-term and money market instruments.
VIP II CONTRAFUND(R) PORTFOLIO
The VIP II Contrafund(R) Portfolio seeks long-term capital appreciation.
FMR normally invests the fund's assets primarily in common stocks. FMR invests
the fund's assets in securities of companies whose value FMR believes is not
fully recognized by the public. The types of companies in which the fund may
invest include companies experiencing positive fundamental change such as a new
management team or product launch, a significant cost-cutting initiative, a
merger or acquisition, or a reduction in industry capacity that should lead to
improved pricing; companies whose earnings potential has increased or is
expected to increase more than generally perceived; companies that have enjoyed
recent market popularity but which appear to have temporarily fallen out of
favor for reasons that are considered non-recurring or short-term; and companies
that are undervalued in relation to securities of other companies in the same
industry.
VIP II INDEX 500 PORTFOLIO
The VIP II Index 500 Portfolio seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by the S&P 500.
18
<PAGE>
Banker's Trust invests at least 80% of assets in common stocks included in the
S&P 500.
FOR ADDITIONAL INFORMATION CONCERNING FIDELITY'S VARIABLE INSURANCE PRODUCTS
FUND ("VIP") AND VARIABLE INSURANCE PRODUCTS FUND II ("VIP II") AND THEIR
PORTFOLIOS, PLEASE SEE THE VIP AND VIP II PROSPECTUS, WHICH SHOULD BE READ
CAREFULLY BEFORE INVESTING.
PBHG INSURANCE SERIES FUND, INC.
PBHG GROWTH II PORTFOLIO
The investment objective of the PBHG Growth II Portfolio is capital
appreciation. The Portfolio will normally invest in growth securities of small
and medium-sized companies with market capitalizations or annual revenues
between $500 million and $10 billion. The growth securities in the Portfolio are
primarily common stocks that the Adviser believes have strong business momentum,
earnings growth and capital appreciation potential. The PBHG Growth II Portfolio
is managed by Jeffrey A. Wrona, CFA, who is responsible for managing other
mid-cap institutional accounts and the PBHG Technology & Communications Fund of
The PBHG Funds, Inc.
PBHG TECHNOLOGY & COMMUNICATIONS PORTFOLIO
The primary objective of the PBHG Technology & Communications Portfolio is
long-term growth of capital. Current income is incidental to the Portfolio's
objective. The Portfolio will normally invest in common stocks of companies
doing business in the technology and communications sectors of the market. The
Portfolio will invest 25% of its assets in one or more of the industries within
these sectors, which may include computer software and hardware, network and
cable broadcasting, semiconductors, defense and data storage and retrieval and
biotechnology. The Portfolio is managed by Jeffrey A. Wrona, CFA, who also
manages the PBHG Technology & Communications Fund of The PBHG Funds, Inc.
FOR ADDITIONAL INFORMATION CONCERNING THE PBHG INSURANCE SERIES FUND, INC. AND
ITS PORTFOLIOS, PLEASE SEE THE PBHG INSURANCE SERIES FUND, INC. PROSPECTUS,
WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING.
T. ROWE PRICE EQUITY SERIES, INC.
T. ROWE PRICE EQUITY INCOME PORTFOLIO
The T. Rowe Price Equity Income Portfolio seeks to provide substantial
dividend income as well as long-term growth of capital through investments in
the common stocks of established companies.
FOR ADDITIONAL INFORMATION CONCERNING T. ROWE PRICE EQUITY SERIES, INC. AND ITS
PORTFOLIO, PLEASE SEE THE T. ROWE PRICE EQUITY SERIES, INC. PROSPECTUS, WHICH
SHOULD BE READ CAREFULLY BEFORE INVESTING.
THE CONTRACTS
GENERAL
The Contracts are offered for use in connection with non-tax qualified
retirement plans by an individual. The Contracts are also eligible for use in
connection with certain tax qualified retirement plans that meet the
requirements of Sections 401, 403(b), 408 or 408A of the Internal Revenue Code.
Certain Federal tax advantages are currently available to retirement plans that
qualify as (1) self-employed individuals' retirement plans under Section 401,
such as HR-10 Plans, (2) pension or profit-sharing plans established by an
employer for the benefit of its employees under Section 401, (3) Section 403(b)
annuity purchase plans for employees of public schools or a charitable,
educational, or scientific organization described under Section 501(c)(3), and
(4) individual retirement accounts or annuities, including those established by
an employer as a simplified employee pension plan or SIMPLE IRA plan under
Section 408, Roth IRA plan under Section 408A or (5) deferred compensation plans
for employees established by a unit of a state or local government or by a
tax-exempt organization under Section 457.
PREMIUMS AND CONTRACT VALUES DURING THE ACCUMULATION PERIOD
APPLICATION FOR A CONTRACT
Any person or, in the case of Qualified Plans, any qualified organization,
wishing to purchase a Contract must submit an application and an initial premium
to AUL, and provide any other form or information that AUL may require. AUL
reserves the right to reject an application or premium for any reason, subject
to AUL's underwriting standards and guidelines.
PREMIUMS UNDER THE CONTRACTS
Premiums under Flexible Premium Contracts may be made at any time during
the Contract Owner's life and before the Contract's Annuity Date. Premiums for
Flexible Premium Contracts may vary in amount and frequency but each premium
payment must be at least $50. Premiums must accumulate a total of at least $300
each Contract Year for the first three Contract Years. Premiums may not total
more than $12,000 in any one Contract Year unless otherwise agreed to by AUL.
For One Year Flexible Premium Contracts, premiums may vary in amount and
frequency except that additional
19
<PAGE>
premiums will only be accepted during the first Contract Year. Each such premium
payment must be at least $500; premiums must total at least $5,000 in the first
Contract Year for non-qualified plans and $2,000 in the first Contract Year for
qualified plans, and all premiums combined may not exceed $1,000,000 unless
otherwise agreed to by AUL.
If the minimum premium amounts under Flexible Premium or One Year Flexible
Premium Contracts are not met, AUL may, after 60 days notice, terminate the
Contract and pay an amount equal to the Contract Value as of the close of
business on the effective date of termination. AUL may change the minimum
premiums permitted under a Contract, and may waive any minimum required premium
at its discretion.
Annual premiums under any Contract purchased in connection with a Qualified
Plan will be subject to maximum limits imposed by the Internal Revenue Code and
possibly by the terms of the Qualified Plan. See the Statement of Additional
Information for a discussion of these limits or consult the pertinent Qualified
Plan document. Such limits may change without notice.
Initial premiums must be credited to a Contract no later than the end of
the second Business Day after it is received by AUL at its Home Office if it is
preceded or accompanied by a completed application that contains all the
information necessary for issuing the Contract and properly crediting the
premium. If AUL does not receive a complete application, AUL will notify the
applicant that AUL does not have the necessary information to issue a Contract.
If the necessary information is not provided to AUL within five Business Days
after the Business Day on which AUL first receives an initial premium or if AUL
determines it cannot otherwise issue a Contract, AUL will return the initial
premium to the applicant, unless consent is received to retain the initial
premium until the application is made complete.
Subsequent premiums (other than initial premiums) are credited as of the
end of the Valuation Period in which they are received by AUL at its Home
Office.
FREE LOOK PERIOD
The Owner has the right to return the Contract for any reason within the
Free Look Period which is a ten day period beginning when the Owner receives the
Contract. If a particular state requires a longer Free Look Period, then
eligible Owners in that state will be allowed the longer statutory period in
which to return the Contract. The returned Contract will be deemed void and AUL
will refund the greater of (1) premium payments and (2) any Contract Value as of
the end of the Valuation Period in which AUL receives the Contract plus any
amounts deducted for premium taxes.
ALLOCATION OF PREMIUMS
Initial premiums will be allocated among the Investment Accounts of the
Variable Account or to the Fixed Account as instructed by the Contract Owner.
Allocation to the Investment Accounts and the Fixed Account must be made in
increments of 5% or 33 1/3%.
A Contract Owner may change the allocation instructions at any time by
giving Proper Notice of the change to AUL at its Home Office and such allocation
will continue in effect until subsequently changed. Any such change in
allocation instructions will be effective upon receipt of the change in
allocation instructions by AUL at its Home Office. Changes in the allocation of
future premiums have no effect on premiums already paid. Such amounts, however,
may be transferred among the Investment Accounts of the Variable Account or the
Fixed Account in the manner described in "Transfers of Account Value."
TRANSFERS OF ACCOUNT VALUE
All or part of an Owner's Contract Value may be transferred among the
Investment Accounts of the Variable Account or to the Fixed Account at any time
during the Accumulation Period upon receipt of a proper written request by AUL
at its Home Office. Transfers may be made by telephone if a Telephone
Authorization Form has been properly completed and received by AUL at its Home
Office. The minimum amount that may be transferred from any one Investment
Account is $500 or, if less than $500, the Owner's remaining Contract Value in
the Investment Account, provided however, that amounts transferred from the
Fixed Account to an Investment Account during any given Contract Year cannot
exceed 20% of the Owner's Fixed Account Value as of the beginning of that
Contract Year. If, after any transfer, the Owner's remaining Contract Value in
an Investment Account or in the Fixed Account would be less than $500, then such
request will be treated as a request for a transfer of the entire Contract
Value. Currently, there are no limitations on the number of transfers between
Investment Accounts available under a Contract or the Fixed Account. In
addition, no charges are currently imposed upon transfers. AUL reserves the
right, however, at a future date, to change the limitation on the minimum
transfer, to assess transfer charges, to change the limit on remaining balances,
to limit the number and frequency of transfers, and to suspend the transfer
privilege or the telephone transfer authorization. Any transfer from an
Investment Account of the Variable Account shall be effected as of the end of
the Valuation Date in which AUL receives the request in proper form. AUL has
established procedures to confirm that instructions communicated by telephone
are genuine, which include the use of personal identification numbers and
recorded telephone calls. Neither AUL nor its agents, will be liable for acting
upon instructions believed by AUL or its agents to be genuine, provided AUL has
complied with its procedures.
Part of a Contract Owner's Fixed Account Value may be transferred to one or
more Investment Accounts of the Variable Account during the Accumulation Period
subject to certain limitations as described in "The Fixed Account."
DOLLAR COST AVERAGING PROGRAM
Owners who wish to purchase units of an Investment Account over a period of
time may do so through the Dollar Cost Averaging ("DCA") Program. The theory of
dollar cost averaging is that greater numbers of Accumulation Units are
purchased at times when the unit prices are relatively low
20
<PAGE>
than are purchased when the prices are higher. This has the effect, when
purchases are made at different prices, of reducing the aggregate average cost
per Accumulation Unit to less than the average of the Accumulation Unit prices
on the same purchase dates. However, participation in the Dollar Cost Averaging
Program does not assure a Contract Owner of greater profits from the purchases
under the Program, nor will it prevent or necessarily alleviate losses in a
declining market.
For example, assume that a Contract Owner requests that $1,000 per month be
transferred from the Money Market Investment Account to the AUL American Equity
Investment Account. The following table illustrates the effect of dollar cost
averaging over a six month period.
<TABLE>
<CAPTION>
Transfer Unit Units
Month Amount Value Purchased
----- ------ ----- ---------
<S> <C> <C> <C>
1 $1,000 $20 50
2 $1,000 $25 40
3 $1,000 $30 33.333
4 $1,000 $40 25
5 $1,000 $35 28.571
6 $1,000 $30 33.333
</TABLE>
The average price per unit for these purchases is the sum of the prices ($180)
divided by the number of monthly transfers (6) or $30. The average cost per
Accumulation Unit for these purchases is the total amount transferred ($6,000)
divided by the total number of Accumulation Units purchased (210.237) or $28.54.
THIS TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY AND IS NOT REPRESENTATIVE OF FUTURE
RESULTS.
Under a DCA Program, the owner deposits premiums into the AUL American
Money Market Investment Account and then authorizes AUL to transfer a specific
dollar amount from the Money Market Investment Account into one or more other
Investment Accounts at the unit values determined on the dates of the transfers.
This may be done monthly, quarterly, semi-annually, or annually. These transfers
will continue automatically until AUL receives notice to discontinue the
Program, or until there is not enough money in the Money Market Investment
Account to continue the Program, whichever occurs first.
Currently, the minimum required amount of each transfer is $500, although
AUL reserves the right to change this minimum transfer amount in the future.
Transfers to or from the Fixed Account are not permitted under the Dollar Cost
Averaging Program. At least ten days advance written notice to AUL is required
before the date of the first proposed transfer under the DCA Program. AUL offers
the Dollar Cost Averaging Program to Contract Owners at no charge and the
Company reserves the right to temporarily discontinue, terminate, or change the
Program at any time. Contract Owners may change the frequency of scheduled
transfers, or may increase or decrease the amount of scheduled transfers, or may
discontinue participation in the Program at any time by providing written notice
to AUL, provided that AUL must receive written notice of such a change at least
five days before a previously scheduled transfer is to occur.
Contract Owners may initially elect to participate in the DCA Program, and
if this election is made at the time the Contract is applied for, the Program
will take effect on the first monthly, quarterly, semi-annual, or annual
transfer date following the premium receipt by AUL at its Home Office. The
Contract Owner may select the particular date of the month, quarter, or year
that the transfers are to be made and such transfers will automatically be
performed on such date, provided that such date selected is a day that AUL is
open for business and provided further that such date is a Valuation Date. If
the date selected is not a Business Day or is not a Valuation Date, then the
transfer will be made on the next succeeding Valuation Date. To participate in
the Program, a minimum deposit of $10,000 is required.
CONTRACT OWNER'S VARIABLE ACCOUNT VALUE
ACCUMULATION UNITS
Premiums allocated to the Investment Accounts available under a Contract
are credited to the Contract in the form of Accumulation Units. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the particular Investment Account by the Accumulation Unit value
for the particular Investment Account as of the end of the Valuation Period in
which the premium is credited. The number of Accumulation Units so credited to
the Contract shall not be changed by a subsequent change in the value of an
Accumulation Unit, but the dollar value of an Accumulation Unit may vary from
Valuation Date to Valuation Date depending upon the investment experience of the
Investment Account and charges against the Investment Account.
ACCUMULATION UNIT VALUE
AUL determines the Accumulation Unit value for each Investment Account of
the Variable Account on each Valuation Date. The Accumulation Unit value for
each Investment Account was initially set at one dollar $1 for the Money Market
Investment Account and $5 for all other Investment Accounts. Subsequently, on
each Valuation Date, the Accumulation Unit value for each Investment Account is
determined by multiplying the Net Investment Factor determined as of the end of
the Valuation Date for the particular Investment Account by the Accumulation
Unit value for the Investment Account as of the immediately preceding Valuation
Period. The Accumulation Unit value for each Investment Account may increase,
decrease, or remain the same from Valuation Period to Valuation Period in
accordance with the Net Investment Factor.
NET INVESTMENT FACTOR
The Net Investment Factor is used to measure the investment performance of
an Investment Account from one Valuation Period to the next. For any Investment
Account for a Valuation Period, the Net Investment Factor is determined by
dividing (a) by (b) and then subtracting (c) from the result where:
(a) is equal to:
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(1) the net asset value per share of the Fund in which the Investment
Account invests, determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution, if any,
paid by the Fund during the Valuation Period, plus or minus
(3) a credit or charge with respect to taxes if any, paid or reserved for
AUL during the Valuation Period that are determined by AUL to be attributable to
the operation of the Investment Account (although no Federal income taxes are
applicable under present law and no such charge is currently assessed);
(b) is the net asset value per share of the Fund determined as of the end
of the preceding Valuation Period; and
(c) is a daily charge factor determined by AUL to reflect the fee assessed
against the assets of the Investment Account for the mortality and expense risk
charge.
CASH WITHDRAWALS AND THE DEATH PROCEEDS
CASH WITHDRAWALS
During the lifetime of the Annuitant, at any time before the Annuity Date
and subject to the limitations under any applicable Qualified Plan and
applicable law, a Contract may be surrendered or a partial withdrawal may be
taken from a Contract. A surrender or withdrawal request will be effective as of
the end of the Valuation Date that a proper written request in a form acceptable
to AUL is received by AUL at its Home Office.
A full surrender of a Contract will result in a withdrawal payment equal to
the Owner's Contract Value allocated to the Variable Account as of the end of
the Valuation Period during which a proper withdrawal request is received by AUL
at its Home Office, minus any applicable withdrawal charge. A partial withdrawal
may be requested for a specified percentage or dollar amount of an Owner's
Contract Value. A request for a partial withdrawal will result in a payment by
AUL equal to the amount specified in the partial withdrawal request. Upon
payment, the Owner's Contract Value will be reduced by an amount equal to the
payment and any applicable withdrawal charge. Requests for a partial withdrawal
that would leave a Contract Value of less than $5000 for a non-qualified One
Year Flexible Premium Contract ($2,000 for a qualified contract) and less than
the required cumulative minimum for a Flexible Premium Contract will be treated
as a request for a full surrender. AUL may change or waive this provision at its
discretion.
The minimum amount that may be withdrawn from a Contract Owner's Contract
Value is $200 for Flexible Premium Contracts and $500 for One Year Flexible
Premium Contracts. If the remaining Contract Value is less than these amounts, a
request for a withdrawal will be treated as a surrender of the Contract. In
addition, the Contracts may be issued in connection with certain retirement
programs that are subject to constraints on withdrawals and full surrenders.
The amount of a partial withdrawal will be taken from the Investment
Accounts and the Fixed Account as instructed, and if the Owner does not specify,
in proportion to the Owner's Contract Value in the various Investment Accounts
and the Fixed Account. A partial withdrawal will not be effected until proper
instructions are received by AUL at its Home Office.
A surrender or a partial withdrawal may result in the deduction of a
withdrawal charge and may be subject to a premium tax charge for any tax on
premiums that may be imposed by various states and municipalities. See "Premium
Tax Charge." A surrender or withdrawal that results in receipt of proceeds by a
Contract Owner may result in receipt of taxable income to the Contract Owner
and, in some instances, a tax penalty. In addition, distributions under certain
Qualified Plans may result in a tax penalty. See "Tax Penalty." Owners of
Contracts used in connection with a Qualified Plan should refer to the terms of
the applicable Qualified Plan for any limitations or restrictions on cash
withdrawals. The tax consequences of a surrender or withdrawal under the
Contracts should be carefully considered. See "Federal Tax Matters."
THE DEATH PROCEEDS
If a Contract Owner dies at or after age 76, the amount of the Death
Proceeds is equal to the Contract Owner's Contract Value as of the end of the
Valuation Period in which due proof of death and instructions regarding payment
are received by AUL at its Home Office. If a Contract Owner or, as described
below, an Annuitant, dies before age 76, the Death Proceeds will be the greater
of the Contract Value as of the end of the Valuation Period in which due proof
of death and instructions regarding payment are received by AUL at its Home
Office or the value given by (a)-(b)-(c)+(d) where: (a) is the net premiums; (b)
is any amounts withdrawn (including any withdrawal charges) prior to death; (c)
is the annual fees assessed prior to death; and (d) is the interest earned on
(a)-(b)-(c), credited at an annual effective rate of 4% until the date of death.
Death of the Owner
If the Contract Owner dies before the Annuity Date and the Beneficiary is
not the Contract Owner's surviving spouse, the Death Proceeds will be paid to
the Beneficiary. Such Death Proceeds will be paid in a lump-sum, unless the
Beneficiary elects to have this value applied under a settlement option. If a
settlement option is elected, the Beneficiary must be named the Annuitant and
payments must begin within one year of the Contract Owner's death. The option
also must have payments which are payable over the life of the Beneficiary or
over a period which does not extend beyond the life expectancy of the
Beneficiary.
If the Contract Owner dies before the Annuity Date and the Beneficiary is
the Contract Owner's surviving spouse, the surviving spouse will become the new
Contract Owner. The Contract will continue with its terms unchanged and the
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Contract Owner's spouse will assume all rights as Contract Owner. Within 120
days of the original Contract Owner's death, the Contract Owner's spouse may
elect to receive the Death Proceeds or withdraw any of the Contract Value
without any early withdrawal charge. However, depending upon the circumstances,
a tax penalty may be imposed upon such a withdrawal.
Any amount payable under a Contract will not be less than the minimum
required by the law of the state where the Contract is delivered.
Death of the Annuitant
If the Annuitant dies before the Annuity Date and the Annuitant is not also
the Contract Owner, then: (1) if the Contract Owner is not an individual, the
Death Proceeds will be paid to the Contract Owner in a lump-sum; or (2) if the
Contract Owner is an individual, a new Annuitant may be named and the Contract
will continue. If a new Annuitant is not named within 120 days of the
Annuitant's death, the Contract Value, less any withdrawal charges, will be paid
to the Contract Owner in a lump-sum.
The death benefit will be paid to the Beneficiary or Contract Owner, as
appropriate, in a single sum or under one of the Annuity Options, as directed by
the Contract Owner or as elected by the Beneficiary. If the Beneficiary is to
receive annuity payments under an Annuity Option, there may be limits under
applicable law on the amount and duration of payments that the Beneficiary may
receive, and requirements respecting timing of payments. A tax adviser should be
consulted in considering payout options.
PAYMENTS FROM THE VARIABLE ACCOUNT
Payment of an amount from the Variable Account resulting from a surrender,
partial withdrawal, transfer from an Owner's Contract Value allocated to the
Variable Account, or payment of the Death Proceeds, normally will be made within
seven days from the date a proper request is received at AUL's Home Office.
However, AUL can postpone the calculation or payment of such an amount to the
extent permitted under applicable law, which is currently permissible only for
any period: (a) during which the New York Stock Exchange is closed other than
customary weekend and holiday closings; (b) during which trading on the New York
Stock Exchange is restricted, as determined by the SEC; (c) during which an
emergency, as determined by the SEC, exists as a result of which (1) disposal of
securities held by the Variable Account is not reasonably practicable, or (2) it
is not reasonably practicable to determine the value of the assets of the
Variable Account; or (d) for such other periods as the SEC may by order permit
for the protection of investors. For information concerning payment of an amount
from the Fixed Account, see "The Fixed Account."
CHARGES AND DEDUCTIONS
PREMIUM TAX CHARGE
Various states and municipalities impose a tax on premiums received by
insurance companies. Whether or not a premium tax is imposed will depend upon,
among other things, the Owner's state of residence, the Annuitant's state of
residence, the insurance tax laws, and AUL's status in a particular state. AUL
assesses a premium tax charge to reimburse itself for premium taxes that it
incurs. This charge will be deducted as premium taxes are incurred by AUL, which
is usually when an annuity is effected. Premium tax rates currently range from
0% to 3.5%, but are subject to change.
WITHDRAWAL CHARGE
No deduction for sales charges is made from premiums for a Contract.
However, if a cash withdrawal is made or the Contract is surrendered by the
Owner, then depending on the type of Contract, a withdrawal charge (which may
also be referred to as a contingent deferred sales charge), may be assessed by
AUL on the amount withdrawn if the Contract has not been in existence for a
certain period of time. An amount withdrawn during a Contract Year referred to
as the Free Withdrawal Amount will not be subject to an otherwise applicable
withdrawal charge. The Free Withdrawal Amount is 12% of the Contract Value at
the time of the first withdrawal in any Contract Year in which the withdrawal is
being made. Any transfer of Contract Value from the Fixed Account to the
Variable Account will reduce the Free Withdrawal Amount by the amount
transferred. The chart below illustrates the amount of the withdrawal charge
that applies to both variations of Contracts based on the number of years that
the Contract has been in existence.
<TABLE>
<CAPTION>
Charge on Withdrawal Exceeding 12% Free Withdrawal Amount(1)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contract Year 1 2 3 4 5 6 7 8 9 10 11 or more
Flexible Premium
Contracts 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
One Year Flexible
Premium Contracts 7% 6% 5% 4% 3% 2% 1% 0% 0% 0% 0%
</TABLE>
In no event will the amount of any withdrawal charge, when added to any
withdrawal charges previously assessed against any amount withdrawn from a
Contract, exceed 8.5% of the total premiums paid on a Flexible Premium Contract
or 8% of the total premiums paid on a One Year Flexible Premium Contract. In
addition, no withdrawal charge will be imposed upon payment of Death Proceeds
under the Contract.
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A withdrawal charge may be assessed upon annuitization of a Contract. For a
Flexible Premium Contract, no withdrawal charge will apply if the Contract is in
its fifth Contract Year or later and a life annuity or survivorship annuity
option is selected. For a One Year Flexible Premium Contract, no withdrawal
charge will apply if a life annuity or survivorship option is selected or if the
Contract is in its fourth Contract Year or later and the fixed income option for
a period of 10 or more years is chosen. Otherwise, the withdrawal charge will
apply.
The withdrawal charge will be used to recover certain expenses relating to
sales of the Contracts, including commissions paid to sales personnel and other
promotional costs. AUL reserves the right to increase or decrease the withdrawal
charge for any Contracts established on or after the effective date of the
change, but the withdrawal charge will not exceed 8.5% of the total premiums
paid on a Flexible Premium Contract or 8% of the total premiums paid on a One
Year Flexible Premium Contract.
MORTALITY AND EXPENSE RISK CHARGE
AUL deducts a daily charge from the assets of each Investment Account for
mortality and expense risks assumed by AUL. The charge is equal to an annual
rate of 1.25% of the average daily net assets of each Investment Account. This
amount is intended to compensate AUL for certain mortality and expense risks AUL
assumes in offering and administering the Contracts and in operating the
Variable Account. The 1.25% charge is based on original estimates of 0.40% for
expense risk and 0.85% for mortality risk.
The expense risk is the risk that AUL's actual expenses in issuing and
administering the Contracts and operating the Variable Account will be more than
the charges assessed for such expenses. The mortality risk borne by AUL is the
risk that the Annuitants, as a group, will live longer than the AUL's actuarial
tables predict. AUL may ultimately realize a profit from this charge to the
extent it is not needed to address mortality and administrative expenses, but
AUL may realize a loss to the extent the charge is not sufficient. AUL may use
any profit derived from this charge for any lawful purpose, including any
distribution expenses not covered by the withdrawal charge.
ADMINISTRATIVE FEE
AUL deducts an annual administrative fee from each Owner's Contract Value
equal to the lesser of 2.0% of the Contract Value or $30 per year. The fee is
assessed every year on a Contract if the Contract is in effect on the Contract
Anniversary, and is assessed only during the Accumulation Period. The
administrative fee is waived on each Contract Anniversary when the Contract
Value, at the time the charge would otherwise have been imposed, exceeds
$50,000. When a Contract Owner annuitizes or surrenders on any day other than a
Contract Anniversary, a pro rata portion of the charge for that portion of the
year will not be assessed. The charge is deducted proportionately from the
Contract Value allocated among the Investment Accounts and the Fixed Account.
The purpose of this fee is to reimburse AUL for the expenses associated with
administration of the Contracts and operation of the Variable Account. AUL does
not expect to profit from this fee.
OTHER CHARGES
AUL may charge the Investment Accounts of the Variable Account for the
federal, state, or local income taxes incurred by AUL that are attributable to
the Variable Account and its Investment Accounts. No such charge is currently
assessed.
VARIATIONS IN CHARGES
AUL may reduce or waive the amount of the withdrawal charge and
administrative charge for a Contract where the expenses associated with the sale
of the Contract or the administrative costs associated with the Contract are
reduced. For example, the withdrawal and/or administrative charge may be reduced
in connection with acquisition of the Contract in exchange for another annuity
contract issued by AUL. AUL may also reduce or waive the withdrawal charge and
administrative charge on Contracts sold to the directors or employees of AUL or
any of its affiliates or to directors or any employees of any of the Funds.
GUARANTEE OF CERTAIN CHARGES
AUL guarantees that the mortality and expense risk charge shall not
increase. AUL may increase the administrative fee, but only to the extent
necessary to recover the expenses associated with administration of the
Contracts and operations of the Variable Account.
EXPENSES OF THE FUNDS
Each Investment Account of the Variable Account purchases shares at the net
asset value of the corresponding Fund. The net asset value reflects the
investment advisory fee and other expenses that are deducted from the assets of
the Fund. The advisory fees and other expenses are not fixed or specified under
the terms of the Contract and are described in the Funds' Prospectuses.
ANNUITY PERIOD
GENERAL
On the Annuity Date, the adjusted value of the Owner's Contract Value may
be applied to provide an annuity under one of the options described below. The
adjusted value will be equal to the value of the Owner's Contract Value as of
the Annuity Date, reduced by any applicable premium or similar taxes, and any
applicable withdrawal charge. For a Flexible Premium Contract, no withdrawal
charge will apply if the Contract is in its fifth Contract Year or later and a
life annuity or survivorship annuity option is selected. For a One Year Flexible
Premium Contract, no withdrawal charge will apply if a life annuity or
survivorship annuity option is selected or if the Contract is in its fourth
Contract Year or later and the fixed income option for a period of 10 or more
years is chosen. Otherwise, the withdrawal charge will apply.
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The Contracts provide for three Annuity Options, any one of which may be
elected, except as otherwise noted. A lump-sum distribution may also be elected.
Other Annuity Options may be available upon request at the discretion of AUL.
All Annuity Options are fixed and the annuity payments are based upon annuity
rates that vary with the Annuity Option selected and the age of the Annuitant
(as adjusted), except that in the case of Option 1, the Income for a Fixed
Period Option, age is not a consideration. The annuity rates are based upon an
assumed interest rate of 3%, compounded annually. Generally, if no Annuity
Option has been selected for a Contract Owner, annuity payments will be made to
the Annuitant under Option 2, the life annuity with 120 guaranteed payments. For
Contracts used in connection with certain Employee Benefit Plans and employer
sponsored 403(b) programs, annuity payments to Contract Owners who are married
will be made under Option 3, with the Contract Owner's spouse as contingent
Annuitant, unless the Contract Owner otherwise elects and obtains his or her
spouse's consent.
Once annuity payments have commenced, a Contract Owner cannot surrender his
or her annuity and receive a lump-sum settlement in lieu thereof and cannot
change the Annuity Option. If, under any option, monthly payments are less than
$100 each, AUL has the right to make either a lump-sum settlement or to make
larger payments on a less frequent basis. AUL also reserves the right to change
the minimum payment amount.
Annuity payments will begin as of the Annuity Date.
A Contract Owner may designate an Annuity Date, Annuity Option, contingent
Annuitant, and Beneficiary on an Annuity Election Form that must be received by
AUL at its Home Office prior to the Annuity Date. AUL may also require
additional information before annuity payments commence. If the Contract Owner
is an individual, the Annuitant may be changed at any time prior to the Annuity
Date. The Annuitant must also be an individual and must be the Contract Owner,
or someone chosen from among the Contract Owner's spouse, parents, brothers,
sisters, and children. Any other choice requires AUL's consent. If the Contract
Owner is not an individual, a change in the Annuitant will not be permitted
without AUL's consent. The Beneficiary, if any, may be changed at any time and
the Annuity Date and Annuity Option may also be changed at any time prior to the
Annuity Date. For Contracts used in connection with a Qualified Plan, reference
should be made to the terms of the Qualified Plan for pertinent limitations
regarding annuity dates and options. To help ensure timely receipt of the first
annuity payment, a transfer of a Contract Owner's Contract Value in the Variable
Account should be made to the Fixed Account at least two weeks prior to the
Annuity Date.
ANNUITY OPTIONS
OPTION 1 - INCOME FOR A FIXED PERIOD
An annuity payable monthly for a fixed period (not more than 20 years) as
elected, with the guarantee that if, at the death of the Annuitant, payments
have been made for less than the selected fixed period, annuity payments will be
continued during the remainder of said period to the Beneficiary.
OPTION 2 - LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant that ends
with the last monthly payment before the death of the Annuitant. A minimum
number of payments can be guaranteed such as 120 or the number of payments
required to refund the proceeds applied.
OPTION 3 - SURVIVORSHIP ANNUITY
An annuity payable monthly during the lifetime of the Annuitant and, after
the death of the Annuitant, an amount equal to 50%, or 100% (as specified in the
election) of such annuity, will be paid to the contingent Annuitant named in the
election if and so long as such contingent Annuitant lives.
An election of this option is automatically cancelled if either the
Contract Owner or the contingent Annuitant dies before the Annuity Date.
SELECTION OF AN OPTION
Contract Owners should carefully review the Annuity Options with their
financial or tax advisers. For Contracts used in connection with a Qualified
Plan, reference should be made to the terms of the applicable Qualified Plan for
pertinent limitations respecting the form of annuity payments, the commencement
of distributions, and other matters. For instance, annuity payments under a
Qualified Plan generally must begin no later than April 1 of the calendar year
following the calendar year in which the Contract Owner reaches age 70 1/2 if
the Participant is no longer employed. For Option 1, the period elected for
receipt of annuity payments under the terms of the Annuity Option generally may
be no longer than the joint life expectancy of the Annuitant and Beneficiary in
the year that the Annuitant reaches age 70 1/2 and must be shorter than such
joint life expectancy if the Beneficiary is not the Annuitant's spouse and is
more than 10 years younger than the Annuitant. Under Option 3, if the contingent
Annuitant is not the Annuitant's spouse and is more than 10 years younger than
the Annuitant, the 100% election specified above may not be available.
THE FIXED ACCOUNT
Contributions or transfers to the Fixed Account become part of AUL's
General Account. The General Account is subject to regulation and supervision by
the Indiana Insurance Department as well as the insurance laws and regulations
of other jurisdictions in which the Contracts are distributed. In reliance on
certain exemptive and exclusionary provisions, interests in the Fixed Account
have not been registered as securities under the Securities Act of 1933 (the
"1933 Act")
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and the Fixed Account has not been registered as an investment company under the
1940 Act. Accordingly, neither the Fixed Account nor any interests therein are
generally subject to the provisions of the 1933 Act or the 1940 Act. AUL has
been advised that the staff of the SEC has not reviewed the disclosure in this
Prospectus relating to the Fixed Account. This disclosure, however, may be
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in the
Prospectus. This Prospectus is generally intended to serve as a disclosure
document only for aspects of a Contract involving the Variable Account and
contains only selected information regarding the Fixed Account. For more
information regarding the Fixed Account, see the Contract itself.
INTEREST
A Contract Owner's Fixed Account Value earns interest at fixed rates that
are paid by AUL. The Account Value in the Fixed Account earns interest at one or
more interest rates determined by AUL at its discretion and declared in advance
("Current Rate"), which are guaranteed to be at least an annual effective rate
of 3% ("Guaranteed Rate"). AUL will determine a Current Rate from time to time,
and any Current Rate that exceeds the Guaranteed Rate will be in effect for a
period of at least one year. If AUL determines a Current Rate in excess of the
Guaranteed Rate, premiums allocated or transfers to the Fixed Account under a
Contract during the time the Current Rate is in effect are guaranteed to earn
interest at that particular Current Rate for at least one year.
Amounts contributed or transferred to the Fixed Account earn interest at
the Current Rate then in effect. If AUL changes the Current Rate, such amounts
contributed or transferred on or after the effective date of the change earn
interest at the new Current Rate; however, amounts contributed or transferred
prior to the effective date of the change may earn interest at the prior Current
Rate or other Current Rate determined by AUL. Therefore, at any given time,
various portions of a Contract Owner's Fixed Account Value may be earning
interest at different Current Rates for different periods of time, depending
upon when such portions were originally contributed or transferred to the Fixed
Account. AUL bears the investment risk for Contract Owner's Fixed Account Values
and for paying interest at the Current Rate on amounts allocated to the Fixed
Account.
WITHDRAWALS
A Contract Owner may make a full surrender or a partial withdrawal from his
or her Fixed Account Value subject to the provisions of the Contract. A full
surrender of a Contract Owner's Fixed Account Value will result in a withdrawal
payment equal to the value of the Contract Owner's Fixed Account Value as of the
day the surrender is effected, minus any applicable withdrawal charge. A partial
withdrawal may be requested for a specified percentage or dollar amount of the
Contract Owner's Fixed Account Value. For a further discussion of surrenders and
partial withdrawals as generally applicable to a Contract Owner's Variable
Account Value and Fixed Account Value, see "Cash Withdrawals."
TRANSFERS
A Contract Owner's Fixed Account Value may be transferred from the Fixed
Account to the Variable Account subject to certain limitations. The minimum
amount that may be transferred from the Fixed Account is $500 or, if the Fixed
Account Value is less than $500 after the transfer, the Contract Owner's
remaining Fixed Account Value. If the amount remaining in the Fixed Account
after a transfer would be less than $500, the remaining amount will be
transferred with the amount that has been requested. The maximum amount that may
be transferred in any one Contract Year is the lesser of 20% of a Contract
Owner's Fixed Account Value as of the last Contract Anniversary preceding the
request, or the Contract Owner's entire Fixed Account Value if it would be less
than $500 after the transfer. Transfers and withdrawals of a Contract Owner's
Fixed Account Value will be effected on a last-in first-out basis. For a
discussion of transfers as generally applicable to a Contract Owner's Variable
Account Value and Fixed Account Value, see "Transfers of Account Value."
CONTRACT CHARGES
The withdrawal charge will be the same for amounts surrendered or withdrawn
from a Contract Owner's Fixed Account Value as for amounts surrendered or
withdrawn from a Contract Owner's Variable Account Value. In addition, the
annual fee will be the same whether or not a Owner's Contract Value is allocated
to the Variable Account or the Fixed Account. The charge for mortality and
expense risks will not be assessed against the Fixed Account, and any amounts
that AUL pays for income taxes allocable to the Variable Account will not be
charged against the Fixed Account. In addition, the investment advisory fees and
operating expenses paid by the Funds will not be paid directly or indirectly by
Contract Owners to the extent the Contract Value is allocated to the Fixed
Account; however, such Contract Owners will not participate in the investment
experience of the Variable Account. See "Charges and Deductions."
PAYMENTS FROM THE FIXED ACCOUNT
Surrenders, withdrawals, and transfers from the Fixed Account and payment
of Death Proceeds based upon a Contract Owner's Fixed Account Value may be
delayed for up to six months after a written request in proper form is received
by AUL at its Home Office. During the period of deferral, interest at the
applicable interest rate or rates will continue to be credited to the Contract
Owner's Fixed Account Value.
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MORE ABOUT THE CONTRACTS
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation contained in an application for the Contracts
will remain in effect until changed. The interests of a Beneficiary who dies
before the Contract Owner will pass to any surviving Beneficiary, unless the
Contract Owner specifies otherwise. Unless otherwise provided, if no designated
Beneficiary is living upon the death of the Contract Owner prior to the Annuity
Date, the Contract Owner's estate is the Beneficiary. Unless otherwise provided,
if no designated Beneficiary under an Annuity Option is living after the Annuity
Date, upon the death of the Annuitant, the Owner is the Beneficiary. If the
Contract Owner is not an individual, the Contract Owner will be the Beneficiary.
Subject to the rights of an irrevocably designated Beneficiary, the
designation of a Beneficiary may be changed or revoked at any time while the
Contract Owner is living by filing with AUL a written beneficiary designation or
revocation in such form as AUL may require. The change or revocation will not be
binding upon AUL until it is received by AUL at its Home Office. When it is so
received, the change or revocation will be effective as of the date on which the
beneficiary designation or revocation was signed, but the change or revocation
will be without prejudice to AUL if any payment has been made or any action has
been taken by AUL prior to receiving the change or revocation.
For Contracts issued in connection with Qualified Plans, reference should
be made to the terms of the particular Qualified Plan, if any, and any
applicable law for any restrictions on the beneficiary designation. For
instance, under an Employee Benefit Plan, the Beneficiary (or contingent
Annuitant) must be the Contract Owner's spouse if the Contract Owner is married,
unless the spouse properly consents to the designation of a Beneficiary (or
contingent Annuitant) other than the spouse.
ASSIGNABILITY
A Contract Owner may assign a Contract, but the rights of the Contract
Owner and any Beneficiary will be secondary to the interests of the assignee.
AUL assumes no responsibility for the validity of an assignment. Any assignment
will not be binding upon AUL until received in writing at its Home Office.
Because an assignment may be a taxable event, Contract Owners should consult a
tax advisor as to the tax consequences resulting from such an assignment.
However, under certain Qualified Plans, no benefit or privilege under a
Contract may be sold, assigned, 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 or entity other than AUL.
PROOF OF AGE AND SURVIVAL
AUL may require proof of age, sex, or survival of any person on whose life
annuity payments depend.
MISSTATEMENTS
If the age or sex of an Annuitant or contingent Annuitant has been
misstated, the correct amount paid or payable by AUL shall be such as the
Contract would have provided for the correct age and sex.
ACCEPTANCE OF NEW PREMIUMS
AUL reserves the right to refuse to accept new premiums for a Contract at
any time.
FEDERAL TAX MATTERS
INTRODUCTION
The Contracts described in this Prospectus are designed for use in
connection with non-tax qualified retirement plans for individuals and for use
by individuals in connection with retirement plans under the provisions of
Sections 401, 403(b), 457, 408 or 408A of the Internal Revenue Code ("Code").
The ultimate effect of Federal income taxes on values under a Contract, on
annuity payments, and on the economic benefits to the Owner, the Annuitant, and
the Beneficiary or other payee, may depend upon the type of Qualified Plan for
which the Contract is purchased and a number of different factors. The
discussion contained herein and in the Statement of Additional Information is
general in nature. It is based upon AUL's understanding of the present Federal
income tax laws as currently interpreted by the Internal Revenue Service
("IRS"), and is not intended as tax advice. No representation is made regarding
the likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the IRS. Future legislation may affect annuity
contracts adversely. Moreover, no attempt is made to consider any applicable
state or other laws. Because of the inherent complexity of such laws and the
fact that tax results will vary according to the terms of the Qualified Plan and
the particular circumstances of the individual involved, any person
contemplating the purchase of a Contract, or receiving annuity payments under a
Contract, should consult a qualified tax adviser.
AUL DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY CONTRACT OR ANY
TRANSACTION INVOLVING THE CONTRACTS. CONSULT YOUR TAX ADVISOR.
DIVERSIFICATION STANDARDS
Treasury Department regulations under Section 817(h) of the Code prescribe
asset diversification requirements which are expected to be met by the
investment companies whose shares are sold to the Investment Accounts. Failure
to meet these requirements would jeopardize the tax status of the Contracts. See
the Statement of Additional Information for additional details.
In connection with the issuance of the regulations governing
diversification under Section 817(h) of the Code, the Treasury Department
announced that it would issue future regulations or rulings addressing the
circumstances in which a variable contract owner's control of the investments of
a
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separate account may cause the contract owner, rather than the insurance
company, to be treated as the owner of the assets held by the separate account.
If the variable contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in a contract owner's gross income. It is not clear,
at present, what these regulations or rulings may provide. It is possible that
when the regulations or rulings are issued, the Contracts may need to be
modified in order to remain in compliance. AUL intends to make reasonable
efforts to comply with any such regulations or rulings so that the Contracts
will be treated as annuity contracts for Federal income tax purposes and
reserves the right to make such changes as it deems appropriate for that
purpose.
TAXATION OF ANNUITIES IN GENERAL - NON-QUALIFIED PLANS
Section 72 of the Code governs taxation of annuities. In general, a
Contract Owner is not taxed on increases in value under an annuity contract
until some form of distribution is made under the contract. However, the
increase in value may be subject to tax currently under certain circumstances.
See "Contracts Owned by Non-Natural Persons" below and "Diversification
Standards" above.
1. Surrenders or Withdrawals Prior to the Annuity Date
Code Section 72 provides that amounts received upon a total or partial
surrender or withdrawal from a contract prior to the annuity date generally will
be treated as gross income to the extent that the cash value of the contract
(determined without regard to any surrender charge in the case of a partial
withdrawal) exceeds the "investment in the contract." In general, the
"investment in the contract" is that portion, if any, of premiums paid under a
contract less any distributions received previously under the contract that are
excluded from the recipient's gross income. The taxable portion is taxed at
ordinary income tax rates. For purposes of this rule, a pledge or assignment of
a contract is treated as a payment received on account of a partial withdrawal
of a contract. Similarly, loans under a contract generally are treated as
distributions under the contract.
2. Surrenders or Withdrawals on or after the Annuity Date
Upon receipt of a lump-sum payment, the recipient is taxed if the cash
value of the contract exceeds the investment in the contract.
3. Amounts received as an Annuity
For amounts received as an Annuity, the taxable portion of each payment is
determined by using a formula known as the "exclusion ratio," which establishes
the ratio that the investment in the contract bears to the total expected amount
of annuity payments for the term of the contract. That ratio is then applied to
each payment to determine the non-taxable portion of the payment. That remaining
portion of each payment is taxed at ordinary income rates. Once the excludible
portion of annuity payments to date equals the investment in the contract, the
balance of the annuity payments will be fully taxable.
Withholding of Federal income taxes on all distributions may be required
unless a recipient who is eligible elects not to have any amounts withheld and
properly notifies AUL of that election. Special rules apply to withholding on
distributions from Employee Benefit Plans that are qualified under Section
401(a) of the Internal Revenue Code.
4. Penalty Tax on Certain Surrenders and Withdrawals
With respect to amounts withdrawn or distributed before the recipient
reaches age 59 1/2, a penalty tax is imposed equal to 10% of the portion of such
amount which is includible in gross income. However, the penalty tax is not
applicable to withdrawals: (1) made on or after the death of the owner (or where
the owner is not an individual, the death of the "primary annuitant," who is
defined as the individual the events in whose life are of primary importance in
affecting the timing and amount of the payout under the contract); (2)
attributable to the recipient's becoming totally disabled within the meaning of
Code Section 72(m)(7); or (3) which are part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the recipient, or the joint lives (or joint life expectancies) of
the recipient and his beneficiary. The 10% penalty also does not apply in
certain other circumstances described in Code Section 72.
If the penalty tax does not apply to a surrender or withdrawal as a result
of the application of item (3) above, and the series of payments are
subsequently modified (other than by reason of death or disability), the tax for
the first year in which the modification occurs will be increased by an amount
(determined in accordance with IRS regulations) equal to the tax that would have
been imposed but for item (3) above, plus interest for the deferral period, if
the modification takes place (a) before the close of the period which is five
years from the date of the first payment and after the recipient attains age 59
1/2, or (b) before the recipient reaches age 59 1/2.
ADDITIONAL CONSIDERATIONS
1. Distribution-at-Death Rules
In order to be treated as an annuity contract, a contract must provide the
following two distribution rules: (a) if the owner dies on or after the Annuity
Commencement Date, and before the entire interest in the contract has been
distributed, the remaining interest must be distributed at least as quickly as
the method in effect on the owner's death; and (b) if the owner dies before the
Annuity Date, the entire interest in the contract must generally be distributed
within five years after the date of death, or, if payable to a designated
beneficiary, must be annuitized over the life of that designated beneficiary or
over a period not extending beyond the life expectancy of that beneficiary,
commencing within one year after the date of death of the owner. If the
designated beneficiary is the spouse of the owner, the contract may be continued
in the name of the spouse as owner.
For purposes of determining the timing of distributions under the foregoing
rules, where the owner is not an
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individual, the primary annuitant is considered the owner. In that case, a
change in the primary annuitant will be treated as the death of the owner.
Finally, in the case of joint owners, the distribution-at-death rules will be
applied by treating the death of the first owner as the one to be taken into
account in determining how generally distributions must commence, unless the
sole surviving owner is the deceased owner's spouse.
2. Gift of Annuity Contracts
Generally, gifts of contracts (not purchased in connection with a Qualified
Plan) before the Annuity Commencement Date will trigger income tax on the gain
on the contract, with the donee getting a stepped-up basis for the amount
included in the donor's income. This provision does not apply to certain
transfers incident to a divorce. The 10% penalty tax on pre-age 59 1/2
withdrawals and distributions and gift tax also may be applicable.
3. Contracts Owned by Non-Natural Persons
If the contract is held by a non-natural person (for example, a corporation
in connection with its non-tax qualified deferred compensation plan) the income
on that contract (generally the net surrender value less the premium payments)
is includible in taxable income each year. Other taxes (such as the alternative
minimum tax and the environmental tax imposed under Code Section 59A) may also
apply. The rule does not apply where the contract is acquired by the estate of a
decedent, where the contract is held by certain types of retirement plans, where
the contract is a qualified funding asset for structured settlements, where the
contract is purchased on behalf of an employee upon termination of an Employee
Benefit Plan, and in the case of a so-called immediate annuity. Code Section 457
(deferred compensation) plans for employees of state and local governments and
tax-exempt organizations are not within the purview of the exceptions. However,
the income of state and local governments and tax-exempt organizations generally
is exempt from federal income tax.
4. Multiple Contract Rule
For purposes of determining the amount of any distribution under Code
Section 72(e) (amounts not received as annuities) that is includable in gross
income, all annuity contracts issued by the same insurer to the same contract
owner during any calendar year must be aggregated and treated as one contract.
Thus, any amount received under any such contract prior to the contract's
Annuity Commencement Date, such as a partial surrender, dividend, or loan, will
be taxable (and possibly subject to the 10% penalty tax) to the extent of the
combined income in all such contracts. In addition, the Treasury Department has
broad regulatory authority in applying this provision to prevent avoidance of
the purposes of this new rule.
QUALIFIED PLANS
The Contract may be used with certain types of Qualified Plans as described
under "The Contracts." The tax rules applicable to participants in such
Qualified Plans vary according to the type of plan and the terms and conditions
of the plan itself. No attempt is made herein to provide more than general
information about the use of the Contract with the various types of Qualified
Plans. Contract Owners, Annuitants, and Beneficiaries, are cautioned that the
rights of any person to any benefits under such Qualified Plans will be subject
to the terms and conditions of the plans themselves and may be limited by
applicable law, regardless of the terms and conditions of the Contract issued in
connection therewith. For example, AUL may accept beneficiary designations and
payment instructions under the terms of the Contract without regard to any
spousal consents that may be required under the Code or the Employee Retirement
Income Securities Act of 1974 ("ERISA"). Consequently, a Contract Owner's
Beneficiary designation or elected payment option may not be enforceable.
The following are brief descriptions of the various types of Qualified
Plans and the use of the Contract therewith:
1. Individual Retirement Annuities
Code Section 408 permits an eligible individual to contribute to an
individual retirement program through the purchase of Individual Retirement
Annuities ("IRAs"). The Contract may be purchased as an IRA. IRAs are subject to
limitations on the amount that may be contributed, the persons who may be
eligible, and on the time when distributions must commence. Depending upon the
circumstances of the individual, contributions to an IRA may be made on a
deductible or non-deductible basis. IRAs may not be transferred, sold, assigned,
discounted, or pledged as collateral for a loan or other obligation. The annual
premium for an IRA may not exceed $2,000. Any refund of premium must be applied
to payment of future premiums or the purchase of additional benefits. In
addition, distributions from certain other types of Qualified Plans may be
placed on a tax-deferred basis into an IRA.
2. Roth IRA
Effective January 1, 1998, a Roth IRA under Code Section 408A is available
for retirement savings for individuals with earned income. The Contract may be
purchased as a Roth IRA. Roth IRA allows an individual to contribute
non-deductible contributions for retirement purposes, with the earnings income
tax-deferred, and the potential ability to withdraw the money income tax-free
under certain circumstances. Roth IRAs are subject to limitations on the amount
that may be contributed, the persons who may be eligible, and the time when
distributions must commence. Roth IRAs may not be transferred, sold, assigned,
discounted, or pledged as collateral for a loan or other obligation. The annual
premium for a Roth IRA may not exceed $2,000, reduced by any contribution to
that individual's IRA. In addition, a taxpayer may elect to convert an IRA to a
Roth IRA, accelerating deferred income taxes on previous earnings in the IRA to
a current year.
3. Corporate Pension and Profit Sharing Plans
Code Section 401(a) permits corporate employers to establish various types
of retirement plans for their employees. For this purpose, self-employed
individuals (proprietors or partners operating a trade or business) are treated
as employees eligible to participate in such plans. Such
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retirement plans may permit the purchase of Contracts to provide benefits
thereunder.
In order for a retirement plan to be "qualified" under Code Section 401, it
must: (1) meet certain minimum standards with respect to participation, coverage
and vesting; (2) not discriminate in favor of "highly compensated" employees;
(3) provide contributions or benefits that do not exceed certain limitations;
(4) prohibit the use of plan assets for purposes other than the exclusive
benefit of the employees and their beneficiaries covered by the plan; (5)
provide for distributions that comply with certain minimum distribution
requirements; (6) provide for certain spousal survivor benefits; and (7) comply
with numerous other qualification requirements.
A retirement plan qualified under Code Section 401 may be funded by
employer contributions, employee contributions or a combination of both. Plan
participants are not subject to tax on employer contributions until such amounts
are actually distributed from the plan. Depending upon the terms of the
particular plan, employee contributions may be made on a pre-tax or after-tax
basis. In addition, plan participants are not taxed on plan earnings derived
from either employer or employee contributions until such earnings are
distributed.
4. Tax-Deferred Annuities
Section 403(b) of the Code permits the purchase of "tax-deferred annuities"
by public schools and organizations described in Section 501(c)(3) of the Code,
including certain charitable, educational and scientific organizations. These
qualifying employers may pay premiums under the Contracts for the benefit of
their employees. Such premiums are not includable in the gross income of the
employee until the employee receives distributions from the Contract. The amount
of premiums to the tax-deferred annuity is limited to certain maximums imposed
by the Code. Furthermore, the Code sets forth additional restrictions governing
such items as transferability, distributions, nondiscrimination and withdrawals.
Any employee should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
5. Deferred Compensation Plans
Section 457 of the Code permits employees of state and local governments
and units and agencies of state and local governments as well as tax-exempt
organizations described in Section 501(c)(3) of the Code to defer a portion of
their compensation without paying current taxes. Distributions received by an
employee from a 457 Plan will be taxed as ordinary income.
Qualified Plan Federal Taxation Summary
The above description of the Federal income tax consequences of the
different types of Qualified Plans which may be funded by the Contract offered
by this Prospectus is only a brief summary and is not intended as tax advice.
The rules governing the provisions of Qualified Plans are extremely complex and
often difficult to comprehend. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have adverse tax
consequences. A prospective Contract Owner considering adoption of a Qualified
Plan and purchase of a Contract in connection therewith should first consult a
qualified and competent tax adviser with regard to the suitability of the
Contract as an investment vehicle for the Qualified Plan.
Periodic distributions (e.g., annuities and installment payments) from a
Qualified Plan that will last for a period of ten or more years are generally
subject to voluntary income tax withholding. The amount withheld on such
periodic distributions is determined at the rate applicable to wages. The
recipient of a periodic distribution may generally elect not to have withholding
apply.
Nonperiodic distributions (e.g., lump-sums and annuities or installment
payments of less than 10 years) from a Qualified Plan (other than IRAs) are
generally subject to mandatory 20% income tax withholding. However, no
withholding is imposed if the distribution is transferred directly to another
eligible Qualified Plan or IRA. Nonperiodic distributions from an IRA are
subject to income tax withholding at a flat 10% rate. The recipient of such a
distribution may elect not to have withholding apply.
403(b) PROGRAMS - CONSTRAINTS ON WITHDRAWALS
Section 403(b) of the Internal Revenue Code permits public school employees
and employees of organizations specified in Section 501(c)(3) of the Internal
Revenue Code, such as certain types of charitable, educational, and scientific
organizations, to purchase annuity contracts, and subject to certain
limitations, to exclude the amount of purchase payments from gross income for
federal tax purposes. Section 403(b) imposes restrictions on certain
distributions from tax-sheltered annuity contracts meeting the requirements of
Section 403(b) that apply to tax years beginning on or after January 1, 1989.
Section 403(b) requires that distributions from Section 403(b)
tax-sheltered annuities that are attributable to employee contributions made
after December 31, 1988 under a salary reduction agreement not begin before the
employee reaches age 59 1/2, separates from service, dies, becomes disabled, or
incurs a hardship. Furthermore, distributions of income or gains attributable to
such contributions accrued after December 31, 1988 may not be made on account of
hardship. Hardship, for this purpose, is generally defined as an immediate and
heavy financial need, such as paying for medical expenses, the purchase of a
principal residence, or paying certain tuition expenses.
An Owner of a Contract purchased as a tax-deferred Section 403(b) annuity
contract will not, therefore, be entitled to exercise the right of surrender or
withdrawal, as described in this Prospectus, in order to receive his or her
Contract Value attributable to premiums paid under a salary reduction agreement
or any income or gains credited to such Contract Owner under the Contract unless
one of the above-described conditions has been satisfied, or unless the
withdrawal is otherwise permitted under applicable federal tax law. In the case
of transfers of amounts accumulated in a different Section 403(b) contract to
this Contract under a Section 403(b) Program, the withdrawal constraints
described above would not apply to the amount transferred to the Contract
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attributable to a Contract Owner's December 31, 1988 account balance under the
old contract, provided that the amounts transferred between contracts meets
certain conditions. An Owner's Contract may be able to be transferred to certain
other investment or funding alternatives meeting the requirements of Section
403(b) that are available under an employer's Section 403(b) arrangement.
OTHER INFORMATION
VOTING OF SHARES OF THE FUNDS
AUL is the legal owner of the shares of the Portfolios of the Funds held by
the Investment Accounts of the Variable Account. In accordance with its view of
present applicable law, AUL will exercise voting rights attributable to the
shares of the Funds held in the Investment Accounts at any regular and special
meetings of the shareholders of the Funds on matters requiring shareholder
voting under the 1940 Act. AUL will exercise these voting rights based on
instructions received from persons having the voting interest in corresponding
Investment Accounts of the Variable Account and consistent with any requirements
imposed on AUL under contracts with any of the Funds, or under applicable law.
However, if the 1940 Act or any regulations thereunder should be amended, or if
the present interpretation thereof should change, and as a result AUL determines
that it is permitted to vote the shares of the Funds in its own right, it may
elect to do so.
The person having the voting interest under a Contract is the Contract
Owner. AUL or the pertinent Fund shall send to each Contract Owner a Fund's
proxy materials and forms of instruction by means of which instructions may be
given to AUL on how to exercise voting rights attributable to the Fund's shares.
Unless otherwise required by applicable law or under a contract with any of
the Funds, with respect to each of the Funds, the number of Fund shares as to
which voting instructions may be given to AUL is determined by dividing the
value of all of the Accumulation Units of the corresponding Investment Account
attributable to a Contract on a particular date by the net asset value per share
of that Fund as of the same date. Fractional votes will be counted. The number
of votes as to which voting instructions may be given will be determined as of
the date coincident with the date established by a Fund for determining
shareholders eligible to vote at the meeting of the Fund. If required by the SEC
or under a contract with any of the Funds, AUL reserves the right to determine
in a different fashion the voting rights attributable to the shares of the Fund.
Voting instructions may be cast in person or by proxy.
Voting rights attributable to the Contracts for which no timely voting
instructions are received will be voted by AUL in the same proportion as the
voting instructions which are received in a timely manner for all Contracts
participating in that Investment Account. AUL will vote shares of any Investment
Account, if any, that it owns beneficially in its own discretion, except that if
a Fund offers it shares to any insurance company separate account that funds
variable life insurance contracts or if otherwise required by applicable law or
contract, AUL will vote its own shares in the same proportion as the voting
instructions that are received in a timely manner for Contracts participating in
the Investment Account.
Neither the Variable Account nor AUL is under any duty to inquire as to the
instructions received or the authority of Owners or others to instruct the
voting of shares of any of the Funds.
SUBSTITUTION OF INVESTMENTS
AUL reserves the right, subject to compliance with the law as then in
effect, to make additions to, deletions from, substitutions for, or combinations
of the securities that are held by the Variable Account or any Investment
Account or that the Variable Account or any Investment Account may purchase. If
shares of any or all of the Funds should no longer be available for investment,
or if, in the judgment of AUL's management, further investment in shares of any
or all of the Funds should become inappropriate in view of the purposes of the
Contracts, AUL may substitute shares of another fund for shares already
purchased, or to be purchased in the future under the Contracts. AUL may also
purchase, through the Variable Account, other securities for other classes of
contracts, or permit a conversion between classes of contracts on the basis of
requests made by Contract Owners or as permitted by Federal law.
Where required under applicable law, AUL will not substitute any shares
attributable to a Contract Owner's interest in an Investment Account or the
Variable Account without notice, Contract Owner approval, or prior approval of
the SEC or a state insurance commissioner, and without following the filing or
other procedures established by applicable state insurance regulators.
AUL also reserves the right to establish additional Investment Accounts of
the Variable Account that would invest in another investment company, a series
thereof, or other suitable investment vehicle. New Investment Accounts may be
established in the sole discretion of AUL, and any new Investment Account will
be made available to existing Contract Owners on a basis to be determined by
AUL. AUL may also eliminate or combine one or more Investment Accounts or cease
permitting new allocations to an Investment Account if, in its sole discretion,
marketing, tax, or investment conditions so warrant.
Subject to any required regulatory approvals, AUL reserves the right to
transfer assets of any Investment Account of the Variable Account to another
separate account or Investment Account.
In the event of any such substitution or change, AUL may, by appropriate
endorsement, make such changes in these and other Contracts as may be necessary
or appropriate to reflect such substitution or change. AUL reserves the right to
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operate the Variable Account as a management investment company under the 1940
Act or any other form permitted by law, an Investment Account may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other separate accounts of AUL or an
affiliate thereof. Subject to compliance with applicable law, AUL also may
combine one or more Investment Accounts and may establish a committee, board, or
other group to manage one or more aspects of the operation of the Variable
Account.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
AUL reserves the right, without the consent of Contract Owners, to make any
change to the provisions of the Contracts to comply with, or to give Contract
Owners the benefit of, any Federal or state statute, rule, or regulation,
including, but not limited to, requirements for annuity contracts and retirement
plans under the Internal Revenue Code and regulations thereunder or any state
statute or regulation.
RESERVATION OF RIGHTS
AUL reserves the right to refuse to accept new premiums under a Contract
and to refuse to accept any application for a Contract.
PERIODIC REPORTS
AUL will send quarterly statements showing the number, type, and value of
Accumulation Units credited to the Contract. AUL will also send statements
reflecting transactions in a Contract Owner's Account as required by applicable
law. In addition, every person having voting rights will receive such reports or
Prospectuses concerning the Variable Account and the Funds as may be required by
the 1940 Act and the 1933 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Variable Account is a
party, or which would materially affect the Variable Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Contracts
described in this Prospectus and the organization of AUL, its authority to issue
the Contracts under Indiana law, and the validity of the forms of the Contracts
under Indiana law have been passed upon by the Associate General Counsel of AUL.
Legal matters relating to the Federal securities and Federal income tax
laws have been passed upon by Dechert Price & Rhoads, Washington, D.C.
FINANCIAL STATEMENTS
Financial statements of AUL as of December 31, 1999, are included in the
Statement of Additional Information.
PERFORMANCE INFORMATION
Performance information for the Investment Accounts is shown under
"Performance of the Investment Accounts." Performance information for the
Investment Accounts may also appear in promotional reports and sales literature
to current or prospective Contract Owners in the manner described in this
section. Performance information in promotional reports and literature may
include the yield and effective yield of the Investment Account investing in the
Money Market Investment Account, the yield of the remaining Investment Accounts,
the average annual total return and the total return of all Investment Accounts.
For information on the calculation of current yield and effective yield, see the
Statement of Additional Information.
Quotations of average annual total return for any Investment Account will
be expressed in terms of the average annual compounded rate of return on a
hypothetical investment in a Contract over a period of one, five and ten years
(or, if less, up to the life of the Investment Account), and will reflect the
deduction of the applicable withdrawal charge, the mortality and expense risk
charge, and if applicable, the administrative charge. Hypothetical quotations of
average annual total return may also be shown for an Investment Account for
periods prior to the time that the Investment Account commenced operations based
upon the performance of the mutual fund portfolio in which that Investment
Account invests, and will reflect the deduction of the applicable withdrawal
charge, the administrative charge, and the mortality and expense risk charge as
if, and to the extent, that such charges had been applicable. Quotations of
total return, actual and hypothetical, may simultaneously be shown that do not
take into account certain contractual charges such as the withdrawal charge and
the administrative charge and may be shown for different periods.
Performance information for any Investment Account reflects only the
performance of a hypothetical Contract under which Contract Value is allocated
to an Investment Account during a particular time period on which the
calculations are based. Performance information should be considered in light of
the investment objectives and policies, characteristics, and quality of the Fund
in which the Investment Account invests, and the market conditions during the
given time period, and should not be considered as representation of what may be
achieved in the future. For a description of the methods used to determine yield
and total return in promotional reports and literature for the Investment
Accounts, information on possible uses for performance, and other information,
see the Statement of Additional Information.
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STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information
and financial statements relating to AUL. The Table of Contents of the Statement
of Additional Information is set forth below:
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY.................................................................. 3
DISTRIBUTION OF CONTRACTS........................................................................ 3
CUSTODY OF ASSETS................................................................................ 3
TAX STATUS OF AUL AND THE VARIABLE ACCOUNT....................................................... 3
TAX TREATMENT OF AND LIMITS ON PREMIUMS UNDER RETIREMENT PLANS................................... 3-6
403(b) Programs................................................................................ 4
408 and 408A Programs.......................................................................... 4
Employee Benefit Plans......................................................................... 5
Tax Penalty for All Annuity Contracts.......................................................... 5
Withholding for Employee Benefit Plans and Tax-Deferred Annuities.............................. 5
INDEPENDENT ACCOUNTANTS.......................................................................... 6
PERFORMANCE INFORMATION.......................................................................... 6-7
FINANCIAL STATEMENTS............................................................................. 7-19
</TABLE>
A Statement of Additional Information may be obtained without charge by calling
or writing to AUL at the telephone number and address set forth in the front of
this Prospectus. A postage pre-paid envelope is included for this purpose.
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================================================================================
No dealer, salesman or any other person is authorized by the AUL
American Individual Unit Trust or by AUL to give any information or to
make any representation other than as contained in this Prospectus in
connection with the offering described herein.
AUL has filed a Registration Statement with the Securities and
Exchange Commission, Washington, D.C. For further information
regarding the AUL American Individual Unit Trust, AUL and its variable
annuities, please reference the Registration statement and the
exhibits filed with it or incorporated into it. All contracts referred
to in this prospectus are also included in that filing.
================================================================================
AUL AMERICAN INDIVIDUAL UNIT TRUST
Individual Variable Annuity Contracts
Sold By
AMERICAN UNITED
LIFE INSURANCE COMPANY(R)
One American Square
Indianapolis, Indiana 46282
PROSPECTUS
Dated: May 1, 2000
================================================================================
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
AUL American Individual Unit Trust
Individual Variable Annuity Contracts
Offered By
American United Life Insurance Company(R)
One American Square
Indianapolis, Indiana 46282
(317) 285-4045
Individual Annuity Service Office Mail Address:
P.O. Box 7127, Indianapolis, Indiana 46206-7127
(800) 863-9354
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the current Prospectus for AUL American
Individual Unit Trust, dated May 1, 2000.
A Prospectus is available without charge by calling the number listed
above or by mailing the Business Reply Mail card included in this
Statement of Additional Information to American United Life Insurance
Company(R) ("AUL") at the address listed above.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Description Page
<S> <C>
GENERAL INFORMATION AND HISTORY................................................................. 3
DISTRIBUTION OF CONTRACTS....................................................................... 3
CUSTODY OF ASSETS............................................................................... 3
TAX STATUS OF AUL AND THE VARIABLE ACCOUNT...................................................... 3
TAX TREATMENT OF AND LIMITS ON PREMIUMS UNDER RETIREMENT PROGRAMS............................... 3-6
403(b) Programs............................................................................... 4
408 and 408A Programs......................................................................... 4
Employee Benefit Plans........................................................................ 5
Tax Penalty for All Annuity Contracts......................................................... 5
Withholding for Employee Benefit Plans and Tax-Deferred Annuities............................. 5
INDEPENDENT ACCOUNTANTS......................................................................... 6
PERFORMANCE INFORMATION......................................................................... 6-7
FINANCIAL STATEMENTS............................................................................ 7-19
</TABLE>
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GENERAL INFORMATION AND HISTORY
For a general description of AUL and AUL American Individual Unit Trust
(the "Variable Account"), see the section entitled "Information about AUL, The
Variable Account, and The Funds" in the Prospectus. Defined terms used in this
Statement of Additional Information have the same meaning as terms defined in
the Prospectus.
DISTRIBUTION OF CONTRACTS
AUL is the Principal Underwriter for the variable annuity contracts (the
"Contracts") described in the Prospectus and in this Statement of Additional
Information. AUL is registered with the Securities and Exchange Commission (the
"SEC") as a broker-dealer. The Contracts are currently being sold in a
continuous offering. While AUL does not anticipate discontinuing the offering of
the Contracts, it reserves the right to do so. The Contracts are sold by
registered representatives of AUL who are also licensed insurance agents.
AUL also has sales agreements with various broker-dealers under which the
Contracts will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable state
regulations to sell variable annuity contracts. The broker-dealers are required
to be registered with the SEC and members of the National Association of
Securities Dealers, Inc.
AUL serves as the Principal Underwriter without compensation from the
Variable Account.
CUSTODY OF ASSETS
The assets of the Variable Account are held by AUL. The assets are
maintained separate and apart from the assets of other separate accounts of AUL
and from AUL's General Account assets. AUL maintains records of all purchases
and redemptions of shares of the Funds.
TAX STATUS OF AUL AND THE VARIABLE ACCOUNT
The operations of the Variable Account form a part of AUL, so AUL will be
responsible for any Federal income and other taxes that become payable with
respect to the income of the Variable Account. Each Investment Account will bear
its allocable share of such liabilities, but under current law, no dividend,
interest income, or realized capital gain attributable, at a minimum, to
appreciation of the Investment Accounts will be taxed to AUL to the extent it is
applied to increase reserves under the Contracts.
Each of the Funds in which the Variable Account invests has advised AUL
that it intends to qualify as a "regulated investment company" under the Code.
AUL does not guarantee that any Fund will so qualify. If the requirements of the
Code are met, a Fund will not be taxed on amounts distributed on a timely basis
to the Variable Account. Were such a Fund not to so qualify, the tax status of
the Contracts as annuities might be lost, which could result in immediate
taxation of amounts earned under the Contracts (except those held in Employee
Benefit Plans and 408 Programs).
Under regulations promulgated under Code Section 817(h), each Investment
Account must meet certain diversification standards. Generally, compliance with
these standards is determined by taking into account an Investment Account's
share of assets of the appropriate underlying Fund. To meet this test, on the
last day of each calendar quarter, no more than 55% of the total assets of a
Fund may be represented by any one investment, no more than 70% may be
represented by any two investments, no more than 80% may be represented by any
three investments, and no more than 90% may be represented by any four
investments. For the purposes of Section 817(h), securities of a single issuer
generally are treated as one investment, but obligations of the U.S. Treasury
and each U.S. Governmental agency or instrumentality generally are treated as
securities of separate issuers.
TAX TREATMENT OF AND LIMITS ON PREMIUMS UNDER RETIREMENT PROGRAMS
The Contracts may be offered for use with several types of qualified or
non-qualified retirement programs as described in the Prospectus. The tax rules
applicable to Owners of Contracts used in connection with qualified retirement
programs vary according to the type of retirement plan and its terms and
conditions. Therefore, no attempt is made herein to provide more than general
information about the use of the Contracts with the various types of qualified
retirement programs.
Owners, Annuitants, Beneficiaries and other payees are cautioned that the
rights of any person to any benefits under these programs may be subject to the
terms and conditions of the Qualified Plans themselves, regardless of the terms
and conditions of the Contracts issued in connection therewith.
Generally, no taxes are imposed on the increases in the value of a Contract
by reason of investment experience or employer contributions until a
distribution occurs, either as a lump-sum payment or annuity payments under an
elected Annuity Option or in the form of cash withdrawals, surrenders, or other
distributions prior to the Annuity Date.
The amount of premiums that may be paid under a Contract
3
<PAGE>
issued in connection with a Qualified Plan are subject to limitations that may
vary depending on the type of Qualified Plan. In addition, early distributions
from most Qualified Plans may be subject to penalty taxes, or in the case of
distributions of amounts contributed under salary reduction agreements, could
cause the Qualified Plan to be disqualified. Furthermore, distributions from
most Qualified Plans are subject to certain minimum distribution rules. Failure
to comply with these rules could result in disqualification of the Qualified
Plan or subject the Annuitant to penalty taxes. As a result, the minimum
distribution rules could limit the availability of certain Annuity Options to
Contract Owners and their Beneficiaries.
Below are brief descriptions of various types of qualified retirement
programs and the use of the Contracts in connection therewith. Unless otherwise
indicated in the context of the description, these descriptions reflect the
assumption that the Contract Owner is a participant in the retirement program.
For Employee Benefit Plans that are defined benefit plans, a Contract generally
would be purchased by a Participant, but owned by the plan itself.
403(b) PROGRAMS
Premiums paid pursuant to a 403(b) Program are excludible from a Contract
Owner's gross income if they do not exceed the smallest of the limits calculated
under Sections 402(g), 403(b)(2), and 415 of the Internal Revenue Code. Section
402(g) generally limits a Contract Owner's salary reduction premiums to a 403(b)
Program to $10,000 a year. The $10,000 limit may be reduced by salary reduction
premiums to another type of retirement plan. A Contract Owner with at least 15
years of service for a "qualified employer" (i.e., an educational organization,
hospital, home health service agency, health and welfare service agency, church
or convention or association of churches) generally may exceed the $10,000 limit
by $3,000 per year, subject to an aggregate limit of $15,000 for all years.
Section 403(b)(2) provides an overall limit on employer and Contract Owner
salary reduction premiums that may be made to a 403(b) Program. Section
403(b)(2) generally provides that the maximum amount of premiums a Contract
Owner may exclude from his gross income in any taxable year is equal to the
excess, if any, of:
(a) the amount determined by multiplying 20% of his includable compensation
by the number of his years of service with his employer, over
(b) the total amount contributed to retirement plans sponsored by his
employer, including the Section 403(b) Program, that were excludible from his
gross income in prior years.
Contract Owners employed by "qualified employers" may elect to have certain
alternative limitations apply.
Section 415(c) also provides an overall limit on the amount of employer and
Contract Owner's salary reduction premiums to a Section 403(b) Program that will
be excludible from an employee's gross income in a given year. The Section
415(c) limit is the lesser of (a) $30,000, or (b) 25% of the Contract Owner's
annual compensation (reduced by his salary reduction premiums to the 403(b)
Program and certain other employee plans). This limit will be reduced if a
Contract Owner also participates in an Employee Benefit Plan maintained by a
business that he or she controls.
The limits described above do not apply to amounts "rolled over" from
another Section 403(b) Program. A Contract Owner who receives an "eligible
rollover distribution" will be permitted either to roll over such amount to
another Section 403(b) Program or an IRA within 60 days of receipt or to make a
direct rollover to another Section 403(b) Program or an IRA without recognition
of income. An "eligible rollover distribution" means any distribution to a
Contract Owner of all or any taxable portion of the balance of his credit under
a Section 403(b) Program, other than a required minimum distribution to a
Contract Owner who has reached age 70 1/2 and excluding any distribution which
is one of a series of substantially equal payments made (1) over the life
expectancy of the Contract Owner or the joint life expectancy of the Contract
Owner and his beneficiary or (2) over a specified period of 10 years or more.
Provisions of the Internal Revenue Code require that 20% of every eligible
rollover distribution that is not directly rolled over be withheld by the payor
for federal income taxes.
408 AND 408A PROGRAMS
Code Sections 219, 408 and 408A permit eligible individuals to contribute
to an individual retirement program, including a Simplified Employee Pension
Plan, an Employer Association Established Individual Retirement Account Trust,
known as an Individual Retirement Account ("IRA"), and a Roth IRA. These IRA
accounts are subject to limitations on the amount that may be contributed, the
persons who may be eligible, and on the time when distributions may commence. In
addition, certain distributions from some other types of retirement plans may be
placed on a tax-deferred basis in an IRA. Sale of the Contracts for use with
IRAs may be subject to special requirements imposed by the Internal Revenue
Service. Purchasers of the Contracts for such purposes will be provided with
such supplementary information as may be required by the Internal Revenue
Service or other appropriate agency, and will have the right to revoke the
Contract under certain circumstances.
If an Owner of a Contract issued in connection with a 408 Program
surrenders the Contract or makes a partial withdrawal, the Contract Owner will
realize income taxable at ordinary tax rates on the amount received to the
extent that amount exceeds the 408 premiums that were not excludible from the
taxable income of the employee when paid.
Premiums paid to the individual retirement account of a Contract Owner
under a 408 Program that is described in Section 408(c) of the Internal Revenue
Code are subject to the limits on premiums paid to individual retirement
accounts under Section 219(b) of the Internal Revenue Code. Under Section 219(b)
of the Code, premiums paid to an individual retirement account are limited to
the lesser of $2,000 per year or the Contract Owner's annual compensation. For
tax years beginning after 1996, if a married couple files a joint return, each
spouse may, in the great majority of cases, make contributions to his or her IRA
up to the $2,000 limit. The extent to which a Contract Owner may deduct premiums
paid in connection with this type of 408 Program depends on his and his
4
<PAGE>
spouse's gross income for the year and whether either participate in another
employer-sponsored retirement plan.
Premiums paid in connection with a 408 Program that is a simplified
employee pension plan are subject to limits under Section 402(h) of the Internal
Revenue Code. Section 402(h) currently limits premiums paid in connection with a
simplified employee pension plan to the lesser of (a) 15% of the Contract
Owner's compensation, or (b) $30,000. Premiums paid through salary reduction are
subject to additional annual limits.
Withdrawals from Roth IRAs may be made tax-free under certain
circumstances. Please consult your tax adviser for more details.
457 PROGRAMS
Deferrals by an eligible individual to a 457 Program generally are limited
under Section 457(b) of the Internal Revenue Code to the lesser of (a) $8,000 or
(b) 33 1/3% of the Contract Owner's includable compensation. If the Contract
Owner participates in more than one 457 Program, the $8,000 limit applies to
contributions to all such programs. The $8,000 limit is reduced by the amount of
any salary reduction contribution the Contract Owner makes to a 403(b) Program,
a 408 Program, or an Employee Benefit Program. The Section 457(b) limit is
increased during the last three years ending before the Contract Owner reaches
his normal retirement age under the 457 Program. Effective January 1, 1997, the
limit on deferrals is indexed in $500 increments.
EMPLOYEE BENEFIT PLANS
Code Section 401 permits business employers and certain associations to
establish various types of retirement plans for employees. Such retirement plans
may permit the purchase of Contracts to provide benefits thereunder.
If an Owner of a Contract issued in connection with an Employee Benefit
Plan who is a participant in the Plan receives a lump-sum distribution, the
portion of the distribution equal to any premiums that were taxable to the
Contract Owner in the year when paid is generally received tax free. The balance
of the distribution will generally be treated as ordinary income. Special
ten-year averaging and a capital-gains election may be available to a Contract
Owner who reached age 50 before 1986.
Under an Employee Benefit Plan under Section 401 of the Code, when annuity
payments commence (as opposed to a lump-sum distribution), under Section 72 of
the Code, the portion of each payment attributable to premiums that were taxable
to the participant in the year made, if any, is excluded from gross income as a
return of the participant's investment. The portion so excluded is determined at
the time the payments commence by dividing the participant's investment in the
Contract by the expected return. The periodic payments in excess of this amount
are taxable as ordinary income. Once the participant's investment has been
recovered, the full annuity payment will be taxable. If the annuity should stop
before the investment has been received, the unrecovered portion is deductible
on the Annuitant's final return. If the Contract Owner paid no premiums that
were taxable to the Contract Owner in the year made, there would be no portion
excludible.
The applicable annual limits on premiums paid in connection with an
Employee Benefit Plan depend upon the type of plan. Total premiums paid on
behalf of a Contract Owner who is a participant to all defined contribution
plans maintained by an Employer are limited under Section 415(c) of the Internal
Revenue Code to the lesser of (a) $30,000, or (b) 25% of a participant's annual
compensation. Premiums paid through salary reduction to a cash-or-deferred
arrangement under a profit sharing plan are subject to additional annual limits.
Premiums paid to a defined benefit pension plan are actuarially determined based
upon the amount of benefits the participant will receive under the plan formula.
The maximum annual benefit any participant may receive under an Employer's
defined benefit plan is limited under Section 415(b) of the Internal Revenue
Code. The limits determined under Section 415(b) and (c) of the Internal Revenue
Code are further reduced for a participant who participates in a defined
contribution plan and a defined benefit plan maintained by the same employer.
TAX PENALTY FOR ALL ANNUITY CONTRACTS
Any distribution made to a Contract Owner who is a participant from an
Employee Benefit Plan or a 408 Program other than on account of one or more of
the following events will be subject to a 10% penalty tax on the amount
distributed:
(a) the Contract Owner has attained age 59 1/2;
(b) the Contract Owner has died; or
(c) the Contract Owner is disabled.
In addition, a distribution from an Employee Benefit Plan will not be
subject to a 10% excise tax on the amount distributed if the Contract Owner is
55 and has separated from service. Distributions received at least annually as
part of a series of substantially equal periodic payments made for the life of
the Participant will not be subject to an excise tax. Certain amounts paid for
medical care also may not be subject to an excise tax.
WITHHOLDING FOR EMPLOYEE BENEFIT PLANS AND
TAX-DEFERRED ANNUITIES
Distributions from an Employee Benefit Plan to an employee, surviving
spouse, or former spouse who is an alternate payee under a qualified domestic
relations order, in the form a lump-sum settlement or periodic annuity payments
for a fixed period of fewer than 10 years are subject to mandatory federal
income tax withholding of 20% of the taxable amount of the distribution, unless
the distributee directs the transfer of such amounts to another Employee Benefit
Plan or to an Individual Retirement Account under Code Section 408. The taxable
amount is the amount of the distribution, less the amount allocable to after-tax
premiums.
All other types of distributions from Employee Benefit Plans and all
distributions from Individual Retirement Accounts, are subject to federal income
tax withholding on the taxable amount unless the distributee elects not to have
the withholding apply. The amount withheld is based on the type of distribution.
Federal tax will be withheld from annuity payments (other than those subject to
mandatory 20% withholding) pursuant to the recipient's withholding certificate.
If no withholding certificate is filed with AUL, tax will be withheld on the
basis that the payee is married with three withholding exemptions. Tax on all
surrenders and lump-sum distributions from Individual Retirement Accounts will
be withheld at a flat 10% rate.
Withholding on annuity payments and other distributions from the Contract
will be made in accordance with regulations of the Internal Revenue Service.
5
<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, independent accountants, performs certain
accounting and auditing services for AUL and performs similar services for the
Variable Account. The AUL financial statements included in this Statement of
Additional Information have been audited to the extent and for the periods
indicated in their report thereon and its internal accounting controls have been
reviewed.
PERFORMANCE INFORMATION
Performance information for the Investment Accounts is shown in the
prospectus under "Performance of the Investment Accounts." Performance
information for the Investment Accounts may also appear in promotional reports
and literature to current or prospective Contract Owners in the manner described
in this section. Performance information in promotional reports and literature
may include the yield and effective yield of the Investment Account investing in
the AUL American Money Market Portfolio ("Money Market Investment Account"), the
yield of the remaining Investment Accounts, the average annual total return and
the total return of all Investment Accounts.
Current yield for the Money Market Investment Account will be based on the
change in the value of a hypothetical investment (exclusive of capital changes)
over a particular 7-day period, less a pro rata share of the Investment
Account's expenses accrued over that period (the "base period"), and stated as a
percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figures carried to at least the nearest hundredth of
one percent.
Calculation of "effective yield" begins with the same "base period return"
used in the calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)**365/7] - 1
Quotations of yield for the remaining Investment Accounts will be based on all
investment income per Accumulation Unit earned during a particular 30-day
period, less expenses accrued during the period ("net investment income"), and
will be computed by dividing net investment income by the value of the
Accumulation Unit on the last day of the period, according to the following
formula:
YIELD = 2[(a-b/cd + 1)**6 - 1]
where a = net investment income earned during the period by the Portfolio
attributable to shares owned by the Investment Account
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of Accumulation Units outstanding during
the period that were entitled to receive dividends, and
d = the value (maximum offering period) per Accumulation Unit on the
last day of the period.
Quotations of average annual total return for any Investment Account will
be expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five, and ten years
(or, if less, up to the life of the Investment Account), calculated pursuant to
the following formula: P(1 + T)**n = ERV (where P = a hypothetical initial
payment of $1,000, T = the average annual total return, n = the number of years,
and ERV = the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period). Hypothetical quotations of average total return
may also be shown for an Investment Account for periods prior to the time that
the Investment Account commenced operations based upon the performance of the
mutual fund portfolio in which that Investment Account invests, as adjusted for
applicable charges. All standardized total return figures reflect the deduction
of the applicable withdrawal charge, the administrative charge, and the
mortality and expense risk charge. Quotations of total return, actual and
hypothetical, may simultaneously be shown that do not take into account certain
contractual charges such as the withdrawal charge and the administrative charge
and quotations of total return may reflect other periods of time.
The average annual return that the Investment Accounts achieved for the one
year, three year, five year, and the lesser of ten years or since inception for
the periods ended December 31, 1999 under a Flexible Premium Contract and a One
Year Flexible Premium Contract (assuming the withdrawal charge is taken into
account in computing the ending redeemable value) and all Contracts (assuming
the withdrawal charge is not taken into account in computing the ending
redeemable value) may be found in the Prospectus.
Performance information for an Investment Account may be compared, in
promotional reports and literature, to: (1) the Standard & Poor's 500 Composite
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, or other indices that measure performance of a pertinent
group of securities so that investors may compare an Investment Account's
results with those of a group of securities widely regarded by investors as
representative of the securities markets in general; (2) other groups of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services, a widely used independent research firm which ranks
mutual funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications,
or persons who rank such investment companies on overall performance or other
criteria; and (3) the Consumer Price Index (measure for inflation) to assess the
real rate of return from an investment in the Contract. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
6
<PAGE>
Performance information for any Investment Account reflects only the
performance of a hypothetical Contract under which an Owner's Contract Value is
allocated to an Investment Account during a particular time period on which the
calculations are based. Performance information should be considered in light of
the investment objectives and policies, characteristics and quality of the Funds
in which the Investment Account invests, and the market conditions during the
given time period, and should not be considered as a representation of what may
be achieved in the future.
Promotional reports and literature may also contain other information
including (1) the ranking of any Investment Account derived from rankings of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by other rating services, companies, publications,
or other persons who rank separate accounts or other investment products on
overall performance or other criteria; (2) the effect of tax-deferred
compounding on an Investment Account's investment returns, or returns in
general, which may include a comparison, at various points in time, of the
return from an investment in a Contract (or returns in general) on a
tax-deferred basis; (assuming one or more tax rates) with the return on a
taxable basis; and (3) AUL's rating or a rating of AUL's claim-paying ability by
firms that analyze and rate insurance companies and by nationally recognized
statistical rating organizations.
FINANCIAL STATEMENTS
The financial statements of AUL, which are included in this Statement of
Additional Information, should be considered only as bearing on the ability of
AUL to meet its obligations under the Contracts. They should not be considered
as bearing on the investment performance of the assets held in the Variable
Account.
REPORT OF INDEPENDENT ACCOUNTANTS
Report of Independent Accountants
To the Board of Directors
American United Life Insurance Company (R)
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations and comprehensive income, policyholder's surplus and
cash flows present fairly, in all materials respects, the financial position of
American United Life Insurance Company (R) and affiliates (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for years then ended, in conformity with accounting principles generally
accepted in the United States. 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 of these
financial statements in accordance with auditing standards generally accepted in
the United States which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
_________________________________
PricewaterhouseCoopers LLP
Indianapolis, IN
March 17, 2000
<TABLE>
<CAPTION>
7
<PAGE>
Combined Balance Sheet
December 31 , 1999 and 1998 1999 (in millions) 1998
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<S> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale at fair value $ 1,859.6 $ 1,695.4
Held to maturity at amortized cost 2,151.9 2,536.2
Equity securities at fair value 82.2 75.1
Mortgage loans 1,157.8 1,128.5
Real Estate 44.3 46.6
Policy loans 149.3 144.4
Short term and other invested assets 112.8 64.9
Cash and cash equivalents 62.3 95.7
----------------------------------------------------------------------------------------------------------------------------------
Total investments 5,620.2 5,786.8
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Accrued investment income 72.5 73.0
Reinsurance receivables 432.7 290.6
Deferred acquisition costs 550.7 451.7
Property and equipment 66.9 56.8
Insurance premiums in course of collection 67.3 66.7
Other assets 48.9 16.1
Assets held in separate accounts 3,718.3 2,594.6
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Total assets $10,577.5 $ 9,336.3
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Liabilities and policyholders' surplus
Liabilities
Policy reserves $ 5,347.7 $ 5,399.1
Other policyholder funds 158.6 203.9
Pending policyholder claims 292.2 209.2
Surplus notes 75.0 75.0
Other liabilities and accrued expenses 246.5 180.4
Liabilities related to separate accounts 3,718.3 2,594.6
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Total liabilities 9,838.3 8,602.2
----------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income:
Unrealized appreciation (depreciation) of securities,
net of deferred tax (23.6) 39.5
Policyholders' surplus 762.8 694.6
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Total policyholders' surplus 739.2 734.1
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Total liabilities and policyholders' surplus $10,577.5 $ 9,336.3
----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Combined Statement of Operations and Comprehensive Income
Year ended December 31 1999 (in millions) 1998
----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Insurance premiums and other considerations $ 538.2 $ 478.5
Policy and contract charges 89.0 87.7
Net investment income 431.0 452.1
Realized investment gains .6 15.8
Other income 10.9 8.9
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Total revenues 1,069.7 1,043.0
----------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Policy benefits $ 482.8 $ 462.4
Interest expense on annuities and financial products 206.9 231.9
Underwriting, acquisition and insurance expenses 177.3 157.8
Amortization of deferred acquisition costs 51.5 59.7
Dividends to policyholders 25.9 26.4
Interest expense on surplus notes 5.8 5.8
Other operating expenses 13.1 10.2
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Total benefits and expenses 963.3 954.2
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Income before income tax expense 106.4 88.8
Income tax expense 38.2 22.3
----------------------------------------------------------------------------------------------------------------------------------
Net income $ 68.2 $ 66.5
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Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period $ (63.4) $ 4.7
Less: reclassification adjustment for gains (losses)
included in net income (0.3) 1.7
----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (63.1) 3.0
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 5.1 $ 69.5
----------------------------------------------------------------------------------------------------------------------------------
Combined Statement of Policyholders' Surplus
December 31, 1999 and 1998 1999 (in millions) 1998
----------------------------------------------------------------------------------------------------------------------------------
Policyholders' surplus at beginning of year $ 734.1 $ 664.6
Net income 68.2 66.5
Change in accumulated other comprehensive
income (63.1) 3.0
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Policyholders' surplus at end of year $ 739.2 $ 734.1
----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
Combined Statement of Cash Flows
For years ended December 31, 1999 and 1998 1999 (in millions) 1998
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 68.2 $ 66.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred acquisition costs 51.5 59.7
Depreciation 12.0 11.2
Deferred taxes 22.0 8.1
Realized investment gains (.6) (15.8)
Policy acquisition costs capitalized (105.4) (94.2)
Interest credited to deposit liabilities 200.3 225.7
Fees charged to deposit liabilities (32.2) (32.7)
Amortization and accrual of investment income (2.5) (10.8)
Increase in insurance liabilities 241.7 169.6
Increase in other assets (168.2) (45.5)
Increase (decrease) in other liabilities 36.1 (1.8)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 322.9 340.0
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases:
Fixed maturities, held to maturity (.3) (18.7)
Fixed maturities, available for sale (650.3) (473.8)
Equity securities (6.2) (63.7)
Mortgage loans (185.1) (183.2)
Real estate (10.5) (4.9)
Short-term and other invested assets (77.2) (2.7)
Proceeds from sales, calls or maturities:
Fixed maturities, held to maturity 369.0 388.9
Fixed maturities, available for sale 331.3 461.6
Equity securities 1.6 8.1
Mortgage loans 157.0 179.2
Real estate 2.1 4.0
Short-term and other invested assets 34.1 39.9
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Net cash provided (used) by investing activities (34.5) 334.7
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits to insurance liabilities 937.0 846.6
Withdrawals from insurance liabilities (1,255.9) (1,467.0)
Other (2.9) .2
----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (321.8) (620.2)
----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (33.4) 54.5
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 95.7 41.2
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents end of year $ 62.3 $ 95.7
----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Nature of Operations and Basis of Presentation
American United Life Insurance Company(R) (AUL) is an Indiana-domiciled mutual
life insurance company with headquarters in Indianapolis. AUL is licensed to do
business in 49 states and the District of Columbia and is an authorized
reinsurer in all states. AUL offers individual life and annuity products through
its career agent distribution system. AUL's qualified group retirement plans,
tax-deferred annuities and other non-medical group products are marketed through
independent agents and brokers, as well as career agents who are supported by 32
regional sales offices located throughout the country. Life and pooled
reinsurance is marketed directly to other insurance companies in both the
domestic and international markets. The combined company financial statements
include the accounts of AUL, The State Life Insurance Company (State Life), AUL
Equity Sales Corporation, and AUL Reinsurance Management Services, LLC.
Significant intercompany transactions have been excluded.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP). AUL and
State Life file separate financial statements with insurance regulatory
authorities, which are prepared on the basis of statutory accounting practices
that are significantly different from financial statements prepared in
accordance with GAAP. These differences are described in detail in Note 10
-Statutory Information.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Investments
Fixed maturity securities which may be sold to meet liquidity and other needs of
the company are categorized as available for sale and are stated at fair value.
Unrealized gains and losses, resulting from carrying available-for-sale
securities at fair value, are reported in policyholders' surplus, net of
deferred taxes. Fixed maturity securities that the company has the positive
intent and ability to hold to maturity are categorized as held-to-maturity and
are stated at amortized cost. Equity securities are stated at fair value.
Mortgage loans on real estate are carried at amortized cost less an impairment
allowance for estimated uncollectible amounts. Real estate is reported at cost,
less allowances for depreciation. Depreciation is provided (straight line) over
the estimated useful lives of the related assets. Investment real estate is net
of accumulated depreciation of $30.9 million and $31.7 million at December 31,
1999 and 1998, respectively. Depreciation expense for investment real estate
amounted to $2.3 million and $2.4 million for 1999 and 1998, respectively.
Policy loans are carried at their unpaid balance. Other invested assets are
reported at cost, plus the company's equity in undistributed net equity since
acquisition. Short-term investments include investments with maturities of one
year or less and are carried at cost, which approximates market. Short-term
certificates of deposit and savings certificates are considered to be cash
equivalents. The carrying amount for cash and cash equivalents approximates
market.
Realized gains and losses on sale or maturity of investments are based upon
specific identification of the investments sold and do not include amounts
allocable to separate accounts. At the time a decline in value of an investment
is determined to be other than temporary, a provision for loss is recorded,
which is included in realized investment gains and losses.
Deferred Policy Acquisition Costs
Those costs of acquiring new business, which vary with and are primarily related
to the production of new business, have been deferred to the extent that such
costs are deemed recoverable. Such costs include commissions, certain costs of
policy underwriting and issue, and certain variable agency expenses. These costs
are amortized with interest as follows:
For participating whole life insurance products, over the lesser of 30
years or the lifetime of the policy in relation to the present value of
estimated gross margins from expenses, investments and mortality,
discounted using the expected investment yield.
For universal life type policies and investment contracts, over the lesser
of the lifetime of the policy or 30 years for life policies or 20 years for
other policies in relation to the present value of estimated gross profits
from surrender charges and investment, mortality and expense margins,
discounted using the interest rate credited to the policy.
For term life insurance products and life reinsurance policies, over the
lesser of the benefit period or 30 years for term life or 20 years for life
reinsurance policies in relation to the ratio of anticipated annual premium
revenue to the anticipated total premium revenue, using the same
assumptions used in calculating policy benefits.
For miscellaneous group life and individual and group health policies,
straight line over the expected life of the policy.
For credit insurance policies, the deferred acquisition cost balance is
primarily equal to the unearned premium reserve multiplied by the ratio of
deferrable commissions to premiums written.
Recoverability of the unamortized balance of deferred policy acquisition costs
is evaluated regularly. For universal life-type contracts, investment contracts
and participating whole life policies, the accumulated amortization is adjusted
(increased or decreased) whenever there is a material change in the estimated
gross profits or gross margins expected over the life of a block of business to
maintain a constant relationship between cumulative amortization and the present
value of gross profits or gross margins. For most other contracts, the
unamortized asset balance is reduced by a charge to income only when the present
value of future cash flows, net of the policy liabilities, is not sufficient to
cover such asset balance.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (continued)
Assets Held in Separate Accounts
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policies, primarily variable annuity contracts,
equity-based pension and profit sharing plans and variable universal life
policies. The assets of these accounts are legally segregated and are valued at
fair value. The related liabilities are recorded at amounts equal to the
underlying assets; the fair value of these liabilities is equal to their
carrying amount.
Property and Equipment
Property and equipment includes real estate owned and occupied by the Company.
Property and equipment is carried at cost, net of accumulated depreciation of
$54.2 million and $47.1 million as of December 31, 1999 and 1998, respectively.
The Company provides for depreciation of property and equipment using the
straight-line method over its estimated useful life. Depreciation expense for
1999 and 1998 was $9.6 million and $8.8 million, respectively.
Premium Revenue and Benefits to Policyholders
The premiums and benefits for whole life and term insurance products and certain
annuities with life contingencies (immediate annuities) are fixed and
guaranteed. Such premiums are recognized as premium revenue when due. Group
insurance premiums are recognized as premium revenue over the time period to
which the premiums relate. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the life of the
contracts. This association is accomplished by means of the provision for
liabilities for future policy benefits and the amortization of deferred policy
acquisition costs.
Universal life policies and investment contracts are policies with terms that
are not fixed and guaranteed. The terms that may be changed could include one or
more of the amounts assessed the policyholder, premiums paid by the policyholder
or interest accrued to policyholder balances. The amounts collected from
policyholders for these policies are considered deposits, and only the
deductions during the period for cost of insurance, policy administration and
surrenders are included in revenue. Policy benefits and claims that are charged
to expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
Reserves for Future Policy and Contract Benefits
Liabilities for future policy benefits for participating whole life policies are
calculated using the net level premium method and assumptions as to interest and
mortality. The interest rate is the dividend fund interest rate, and the
mortality rates are those guaranteed in the calculation of cash surrender values
described in the contract. Liabilities for future policy benefits for term life
insurance and life reinsurance policies are calculated using the net level
premium method and assumptions as to investment yields, mortality and
withdrawals. The assumptions are based on projections of past experience and
include provisions for possible unfavorable deviation. These assumptions are
made at the time the contract is issued. Liabilities for future policy benefits
on universal life and investment contracts consist principally of policy account
values plus certain deferred policy fees, which are amortized using the same
assumptions and factors used to amortize the deferred policy acquisition costs.
If the future benefits on investment contracts are guaranteed (immediate
annuities with benefits paid for a period certain), the liability for future
benefits is the present value of such guaranteed benefits. Claim liabilities
include provisions for reported claims and estimates based on historical
experience for claims incurred but not reported.
Income Taxes
The provision for income taxes includes amounts currently payable and deferred
income taxes resulting from the temporary differences in the assets and
liabilities determined on a tax and financial reporting basis.
Comprehensive Income
Comprehensive income is the change in policyholder surplus of the Company that
results from recognized transactions and other economic events of the period
other than transactions with the policyholders. Comprehensive income includes
net income and net unrealized gains (losses) on securities.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
2. Investments:
The book value and fair value of investments in fixed maturity securities by
type of investment were as follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale: (in millions)
Obligations of U.S. government, states,
political subdivisions and
foreign governments $ 39.7 $ 1.0 $ 1.6 $ 39.1
Corporate securities 1,318.7 8.2 57.1 1,269.8
Mortgage-backed securities 556.5 7.4 13.2 550.7
----------------------------------------------------------------------------------------------------------------------------------
$ 1,914.9 $ 16.6 $ 71.9 $ 1,859.6
----------------------------------------------------------------------------------------------------------------------------------
Held to maturity:
Obligations of U.S. government, states,
political subdivisions and
foreign governments $ 90.7 $ 1.3 $ 1.2 $ 90.8
Corporate securities 1,448.1 34.1 35.5 1,446.7
Mortgage-backed securities 613.1 14.1 6.9 620.3
----------------------------------------------------------------------------------------------------------------------------------
$ 2,151.9 $ 49.5 $ 43.6 $ 2,157.8
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale: (in millions)
Obligations of U.S. government, states,
political subdivisions and
foreign governments $ 42.7 $ 5.4 $ 0.0 $ 48.1
Corporate securities 1,119.7 65.5 4.3 1,180.9
Mortgage-backed securities 440.7 26.0 0.3 466.4
----------------------------------------------------------------------------------------------------------------------------------
$ 1,603.1 $ 96.9 $ 4.6 $ 1,695.4
----------------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
Obligations of U.S. government, stats,
political subdivisions and
foreign governments $ 108.8 $ 7.6 $ 0.0 $ 116.4
Corporate securities 1,656.4 141.0 2.9 1,794.5
Mortgage-backed securities 771.0 50.3 0.3 821.0
----------------------------------------------------------------------------------------------------------------------------------
$ 2,536.2 $ 198.9 $ 3.2 $ 2,731.9
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of fixed maturity securities at December 31,
1999, by contractual average maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity Total
------------------------ ------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
(in millions) Cost Value Cost Value Cost Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 58.2 $ 58.2 $ 111.0 $ 111.2 $ 169.2 $ 169.4
Due after one year
through five years 408.2 401.8 668.0 664.6 1,076.2 1,066.4
Due after five years
through 10 years 438.3 417.6 439.0 447.3 877.3 864.9
Due after 10 years 453.7 431.3 320.8 314.4 774.5 745.7
----------------------------------------------------------------------------------------------------------------------------------
1,358.4 1,308.9 1,538.8 1,537.5 2,897.2 2,846.4
Mortgage-backed securities 556.5 550.7 613.1 620.3 1,169.6 1,171.0
----------------------------------------------------------------------------------------------------------------------------------
$ 1,914.9 $ 1,859.6 $2,151.9 $2,157.8 $ 4,066.8 $ 4,018.4
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
2. Investments (continued)
Net investment income consisted of the following:
for years ended December 31 1999 (in millions) 1998
--------------------------------------------------------------------------------
Fixed maturity securities $318.0 $341.0
Equity securities 4.3 2.3
Mortgage loans 99.9 98.5
Real estate 11.3 10.7
Policy loans 9.0 8.8
Other 8.5 10.0
--------------------------------------------------------------------------------
Gross investment income 451.0 471.3
Investment expenses 20.0 19.2
--------------------------------------------------------------------------------
Net investment income $431.0 $452.1
--------------------------------------------------------------------------------
Proceeds from the sales, maturities or calls of Investments In fixed maturities
during 1999 and 1998 were approximately $700.3 million and $850.5 million,
respectively. Gross gains of $4.4 million and $14.9 million, and gross losses of
$3.0 million and $0.6 million were realized in 1999 and 1998, respectively. The
change in unrealized appreciation (depreciation) of fixed maturities amounted to
approximately $(147.6) million and $7.2 million in 1999 and 1998, respectively.
Accumulated comprehensive income consisted of the following:
for years ended December 31 1999 (in millions) 1998
--------------------------------------------------------------------------------
Unrealized appreciation (depreciation):
Fixed income securities $(55.3) $ 92.3
Equity securities 2.6 2.3
Valuation allowances 15.5 (30.1)
Deferred taxes 13.6 (25.0)
--------------------------------------------------------------------------------
Accumulated other comprehensive income $(23.6) 39.5
--------------------------------------------------------------------------------
At December 31, 1999, the unrealized appreciation on equity securities of
approximately $2.6 million is comprised of $2.7 million in unrealized gains and
$.1 million of unrealized losses and has been reflected directly in
policyholders' surplus. The change in the unrealized appreciation of equity
securities amounted to approximately $.3 million and $.l million in 1999 and
1998, respectively.
The Company maintains a diversified mortgage loan portfolio and exercises
internal limits on concentrations of loans by geographic area, industry, use and
individual mortgagor. At December 31, 1999, the largest geographic concentration
of commercial mortgage loans was in Indiana, California and Florida, where
approximately 29 percent of the portfolio was invested. A total of 36 percent of
the mortgage loans have been issued on retail properties, primarily backed by
long-term leases or guarantees from strong credits.
The Company has outstanding mortgage loan commitments at December 31, 1999, of
approximately $91.5 million.
As of December 31, 1999, there were no investments that were non-income
producing for the previous 12-month period.
14
<PAGE>
NOTES TO FINANCIAL STATEMENT (Continued)
3. Insurance Liabilities:
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
(in millions)
___________________________________________________________________________________________________________________________
Mortality or
Withdrawal Morbidity Interest Rate December 31,
Assumption Assumption Assumption 1999 1998
___________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Participating whole life Companys Company 2.5% to 6.0% $ 672.4 $ 632.7
experience experience
Universal life-type contracts n/a n/a 384.6 381.2
Other individual life contracts Company Company 2.5% to 8.0% 305.4 271.1
experience experience
Accident and health n/a n/a n/a 138.2 55.2
Annuity products n/a n/a n/a 3,670.1 3,803.7
Group life and health n/a n/a n/a 177.0 195.2
Other policyholder funds n/a n/a n/a 158.6 203.9
Pending policyholder claims n/a n/a n/a 292.2 209.2
___________________________________________________________________________________________________________________________
Total insurance liabilities $5,798.5 $5,752.2
___________________________________________________________________________________________________________________________
</TABLE>
Participating life insurance policies under generally accepted accounting
principles represent approximately 5 percent and 7 percent of the total
individual life insurance in force at December 31, 1999 and 1998, respectively.
Participating policies represented approximately 29 percent and 34 percent of
life premium income for 1999 and 1998, respectively. The amount of dividends to
be paid is determined annually by the board of directors.
4. Employees' and Agents' Benefit Plans:
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. Company contributions to the employee plan are made
periodically in an amount between the minimum ERISA required contribution and
the maximum tax-deductible contribution. Such amounts are expensed as
contributed. Contributions made to the plan were $1.6 million in 1999 and $2.1
million in 1998. The following benefit information for the employees' defined
benefit plan was determined by independent actuaries as of January 1, 1999 and
1998, respectively, the most recent actuarial valuation dates:
1999 (in millions) 1998
________________________________________________________________________________
Actuarial present value of accumulated benefits
for the employees' defined benefit plan $37.1 $33.6
Fair value of plan assets 57.2 49.6
________________________________________________________________________________
Funded status $20.1 $16.0
________________________________________________________________________________
Net periodic pension cost $ 2.3 $ 2.1
________________________________________________________________________________
The assumed discount rate was 6.6 percent and 7.2 percent for 1999 and 1998,
respectively. For both 1999 and 1998, the expected return on plan assets was 8.0
percent and the rate of compensation increase assumed was 6.0 percent. Benefits
paid out of the plan were approximately $5.1 million in 1999 and $3.1 million in
1998.
The Company has a defined contribution plan and a 401(k) salary
reduction/savings plan for employees. Quarterly contributions covering employees
who have completed one full calendar year of service are made by the Company in
amounts based upon the Company's financial results. Company contributions to the
plan during 1999 and 1998 were $2.2 million and $1.7 million, respectively.
The Company has a defined contribution pension plan and a 401(k) plan covering
substantially all agents, except general agents. Contributions of 4.5 percent of
defined commissions (plus 4.5 percent for commissions over the Social Security
wage base) are made to the pension plan. An additional contribution of 3.0
percent of defined commissions is made to a 401(k) plan. Company contributions
expensed for these plans for 1999 and 1998 were $.3 million.
The funds for all plans are held by the Company under deposit administration and
group annuity contracts.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
4. Employees' and Agent's Benefit Plans: (continued)
AUL has entered into deferred compensation agreements with some employees,
agents and general agents. These deferred amounts are payable according to the
terms and subject to the conditions of said agreements. Annual costs of the
agreements are not material to AUL.
The Company also provides certain health care and life insurance benefits
(postretirement benefits) for retired employees and certain agents (retirees).
Employees and agents with at least 10 years of plan participation may become
eligible for such benefits if they reach retirement age while working for the
Company.
Accrued postretirement benefits as of December 31: 1999(in millions)1998
________________________________________________________________________________
Accumulated postretirement benefit obligation $11.5 $11.0
Net postretirement benefit cost 1.3 1.3
Company contributions .8 .8
________________________________________________________________________________
There are no specific plan assets for this postretirement liability as of
December 31, 1999 and 1998. Claims incurred for benefits were funded by company
contributions.
The assumed discount rate used in determining the accumulated postretirement
benefit was 7.0 percent and the assumed health care cost trend rate was 10.0
percent graded to 5.0 percent until 2004. Compensation rates were assumed to
increase 6.0 percent at each year end. The health coverage for retirees 65 and
over is capped in the year 2000 and for all future years. The health care cost
trend rate assumption has no effect on the amounts reported for 1999. An
increase in the assumed health care cost trend rates by one percentage point
would not affect the accumulated postretirement benefit obligation as of
December 31, 1999, and would increase the accumulated postretirement benefit
cost for 1998 by $.2 million.
5. Federal Income Taxes:
A reconciliation of the income tax attributable to continuing operations
computed at U.S. federal statutory tax rates to the income tax expense included
in the statement of operations follows:
for years ended December 31 1999(in millions) 1998
________________________________________________________________________________
Income tax computed at statutory tax rate $37.2 $31.0
Tax-exempt income (1.5) (2.0)
Mutual company differential earnings amount 6.7 4.3
Prior year differential earnings amount (4.2) (10.2)
Other (0.0) (0.8)
________________________________________________________________________________
Income tax expense $38.2 $22.3
________________________________________________________________________________
The components of the provision for income taxes on earnings included current
tax provisions of $16.2 million and $14.2 million for the years ended December
31, 1999 and 1998, respectively, and deferred tax expense of $22.0 million and
$8.1 million for the years ended December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Deferred income tax assets (liabilities) as of December 31 1999 (in millions) 1998
______________________________________________________________________________________
<S> <C> <C>
Deferred policy acquisition costs $(170.5) $(148.8)
Investments (5.4) (11.1)
Insurance liabilities 149.3 158.9
Unrealized depreciation (appreciation) of securities 12.9 (23.6)
Other (2.6) (6.1)
________________________________________________________________________________________
Deferred income tax assets (liabilities) $ (16.3) $ (30.7)
________________________________________________________________________________________
</TABLE>
Federal income taxes paid were $10.6 million for both 1999 and 1998.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
6. Reinsurance:
The Company is a party to various reinsurance contracts under which it receives
premiums as a reinsurer and reimburses the ceding companies for portions of the
claims incurred. At December 31, 1999 and 1998, life reinsurance assumed was
approximately 78 percent and 74 percent, respectively, of life insurance in
force.
For individual life policies, the Company cedes the portion of the total risk in
excess of $1,500,000. For other policies, the Company has established various
limits of coverage it will retain on any one policyholder and cedes the
remainder of such coverage.
Certain statistical data with respect to reinsurance follows:
for years ended December 31 1999 (in millions)1998
_________________________________________________________________________
Direct statutory premiums $399.8 $374.1
Reinsurance assumed 385.4 329.7
Reinsurance ceded (166.2) (150.2)
_________________________________________________________________________
Net premiums 619.0 553.6
_________________________________________________________________________
Reinsurance recoveries $158.8 $146.4
_________________________________________________________________________
The Company accounts for all reinsurance agreements as transfers of risk. If
companies to which reinsurance has been ceded are unable to meet obligations
under the reinsurance agreements, the Company would remain liable. Six
reinsurers account for approximately 64 percent of the Company's December 31,
1999, ceded reserves for life and accident and health insurance. The remainder
of such ceded reserves is spread among numerous reinsurers.
7. Surplus Notes and Lines of Credit:
On February 16, 1996, the Company issued $75 million of surplus notes, due March
30, 2026. Interest is payable semi-annually on March 30 and September 30 at a
7.75 percent annual rate. Any payment of interest on or principal of the notes
may be made only with the prior approval of the commissioner of the Indiana
Department of Insurance. The surplus notes may not be redeemed at the option of
AUL or any holder of the surplus notes. Interest paid during 1999 was $5.8
million.
The Company has available a $125 million credit facility. No amounts have been
drawn as of December 31, 1999.
8. Commitments and Contingencies:
Various lawsuits have arisen in the ordinary course of the Company's business.
In each of the matters, the Company believes the ultimate resolution of such
litigation will not result in any material adverse impact to operations or
financial condition of the Company.
9. Acquisitions:
During 1999, AUL entered into an agreement to purchase certain assets and
business operations of the North American accident and long-term care
reinsurance divisions of UnumProvident Corporation for approximately $39
million. AUL Reinsurance Management Services, LLC (AUL RMS), a newly formed
subsidiary of AUL as a result of this transaction, will continue the reinsurance
management activities of this business.
In a separate transaction, AUL assumed certain reinsurance liabilities related
to the participation in reinsurance pools from UnumProvident Corporation
amounting to approximately $117 million.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
10. Statutory Information:
AUL and State Life prepare statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the Indiana
Department of Insurance. Prescribed statutory accounting practices (SAP)
currently include state laws, regulations and general administrative rules
applicable to all insurance enterprises domiciled in a particular state, as well
as practices described in National Association of Insurance Commissioners'
(NAIC) publications.
A reconciliation of SAP surplus to GAAP surplus at December 31 follows:
for years ended December 31 1999 (in millions) 1998
_______________________________________________________________________________
SAP surplus $497.4 $496.5
Deferred policy acquisition costs 535.7 481.8
Adjustments to policy reserves (290.9) (306.0)
Asset valuation and interest maintenance reserves 85.8 88.9
Unrealized gain on invested assets, net (23.6) 39.5
Surplus notes (75.0) (75.0)
Deferred income taxes (27.5) (6.7)
Other, net 37.3 15.1
_______________________________________________________________________________
GAAP surplus $739.2 $734.1
_______________________________________________________________________________
A reconciliation of SAP net income to GAAP net income for the years ended
December 31 follows:
for years ended December 31 1999 ( in millions) 1998
________________________________________________________________________________
SAP income $27.9 $33.5
Deferred policy acquisition costs 53.7 34.5
Adjustments to policy reserves (7.4) (3.7)
Deferred income taxes (22.0) (8.1)
Other, net 16.0 10.3
_______________________________________________________________________________
GAAP net income $68.2 $66.5
_______________________________________________________________________________
Life insurance companies are required to maintain certain amounts of assets on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $4.9 million at December 31, 1999.
11. Fair Value of Financial Instruments:
The disclosure of fair value information about certain financial instruments is
based primarily on quoted market prices. The fair values of short-term
investments and policy loans approximate the carrying amounts reported in the
balance sheets. Fair values for fixed maturity and equity securities, and
surplus notes are based on quoted market prices where available. For fixed
maturity securities not actively traded, fair values are estimated using values
obtained from independent pricing services, or in the case of private
placements, are estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality and maturity of the
investments.
The fair value of the aggregate mortgage loan portfolio was estimated by
discounting the future cash flows using current rates at which similar loans
would be made to borrowers with similar credit ratings for similar maturities.
The estimated fair values of the liabilities for interest-bearing policyholder
funds approximate the statement values because interest rates credited to
account balances approximate current rates paid on similar funds and are not
generally guaranteed beyond one year. Fair values for other insurance reserves
are not required to be disclosed. However, the estimated fair values for all
insurance liabilities are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance contracts. The fair values of certain financial instruments, along
with their corresponding carrying values at December 31, 1999 and 1998 follow.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
11. Fair Value of Financial Instruments: (continued)
________________________________________________________________________________
1999 (in millions) 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
________________________________________________________________________________
Fixed maturity securities:
Available for sale $1,859.6 $1,859.6 $1,695.4 $1,695.4
Held to maturity 2,151.9 2,157.8 2,536.2 2,731.9
Equity securities 82.2 82.2 75.1 75.1
Mortgage loans 1,157.8 1,160.4 1,128.5 1,202.1
Policy loans 149.3 149.3 144.4 144.4
Surplus notes 75.0 70.2 75.0 80.5
_______________________________________________________________________________
12. Subsequent Events:
At December 31, 1999, the Company had invested $54.0 million with a carrying
value of $59.0 million in Indianapolis Life Group of Companies with the purpose
of creating an affiliation under a mutual holding structure. Subsequent to year
end, the Company redeemed the investment for $64.6 million and ended the
affiliation.
19
<PAGE>
================================================================================
No dealer, salesman or any other person is authorized by the AUL American
Individual Unit Trust to give any information or to make any representation
other than as contained in this Statement of Additional Information in
connection with the offering described herein.
AUL has filed a Registration Statement with the Securities and Exchange
Commission, Washington, D.C. For further information regarding the AUL American
Individual Unit Trust, AUL and its variable annuities, please reference the
Registration statement and the exhibits filed with it or incorporated into it.
All contracts referred to in this prospectus are also included in that filing.
================================================================================
AUL AMERICAN INDIVIDUAL UNIT TRUST
Individual Variable Annuity Contracts
Sold By
AMERICAN UNITED
LIFE INSURANCE COMPANY(R)
One American Square
Indianapolis, Indiana 46282
STATEMENT OF ADDITIONAL INFORMATION
Dated: May 1, 2000
================================================================================
20
<PAGE>
