<PAGE> 1
MAINSTAY VARIABLE ANNUITY
INVESTING IN NYLIAC VARIABLE ANNUITY SEPARATE ACCOUNT-III
SUPPLEMENT TO THE ANNUAL REPORT DATED DECEMBER 31, 1997
This Supplement contains financial statements for the period May 1, 1997
(commencement of operations) through December 31, 1997 and the report thereon
of Price Waterhouse LLP, independent accountants for the M Enhanced U.S. Equity
and M Frontier Capital Appreciation Investment Divisions of the NYLIAC Variable
Annuity Separate Account-III. As of December 31, 1997, there were no premium
payments allocated to the M Edinburgh Overseas Equity and M Turner Core Growth
Investment Divisions; therefore, no financial statements are presented for
those Investment Divisions. These four Investment Divisions constitute the
four additional Investment Divisions to which Policyowners may allocate premium
payments under their MainStay Variable Annuity Policies. The Annual Report for
the year ended December 31,1997 for the M Fund, Inc. (of which the four
Investment Divisions described above are portfolios) has been attached to this
Supplement.
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
(A DELAWARE CORPORATION)
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
<PAGE> 2
MAINSTAY VARIABLE ANNUITY INVESTING IN
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
VARIABLE ANNUITY SEPARATE ACCOUNT-III
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 1997
<TABLE>
<CAPTION>
M Enhanced M Frontier
ASSETS: U.S. Equity Capital Appreciation
----------- --------------------
<S> <C> <C>
Investment at net asset value
(Identified Cost: $20,030;
$40,489, respectively) $20,124 $38,469
LIABILITIES:
Liability for mortality and expense risk charges 1 64
------------ -----------
Total equity $20,123 $38,405
======= -------
TOTAL EQUITY REPRESENTED BY:
Equity of Policyowners:
Variable accumulation units outstanding:
2,003; 4,246, respectively $20,123 $38,405
======= =======
Variable accumulation unit value: $10.05 $9.04
========= ==========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
PAGE 2
<PAGE> 3
MAINSTAY VARIABLE ANNUITY INVESTING IN
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
VARIABLE ANNUITY SEPARATE ACCOUNT-III
STATEMENT OF OPERATIONS
For the period May 1, 1997 (commencement of operations)
through December 31, 1997
<TABLE>
<CAPTION>
M Enhanced M Frontier
U.S. Equity Capital Appreciation
----------- --------------------
INVESTMENT LOSS:
<S> <C> <C>
Mortality and expense risk charges $(1) $(67)
----------------- --------------
Net investment loss $(1) $(67)
----------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS):
Realized gain distribution received --- 428
Change in unrealized appreciation (depreciation)
on investment 94 (2,020)
----------------- --------------
Net gain (loss) on investments 94 (1,592)
Increase attributable to funds of New York Life
Insurance and Annuity Corporation
retained by Separate Account --- 3
----------------- --------------
Net increase (decrease) in total equity
resulting from operations $93 $(1,656)
================= ==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
PAGE 3
<PAGE> 4
MAINSTAY VARIABLE ANNUITY INVESTING IN
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
VARIABLE ANNUITY SEPARATE ACCOUNT-III
STATEMENT OF CHANGES IN TOTAL EQUITY
For the period May 1, 1997 (commencement
of operations) through December 31, 1997
<TABLE>
<CAPTION>
M Enhanced M Frontier
U.S. Equity Capital Appreciation
----------- --------------------
<S> <C> <C>
INCREASE IN TOTAL EQUITY:
Operations:
Net investment loss $(1) $(67)
Realized gain distribution received --- 428
Change in unrealized appreciation/
(depreciation) on investments 94 (2,020)
Increase attributable to funds of New York Life
Insurance and Annuity Corporation retained by
Separate Account --- 3
-------------- -------------
Net increase (decrease) in total equity resulting
from operations 93 (1,656)
-------------- -------------
Contributions and Withdrawals:
Transfers between Investment Divisions 20,030 40,061
-------------- -------------
Net contributions and withdrawals 20,030 40,061
-------------- -------------
Increase in total equity 20,123 38,405
TOTAL EQUITY:
Beginning of period --- ---
-------------- -------------
End of period $20,123 $38,405
============== =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
PAGE 4
<PAGE> 5
MAINSTAY VARIABLE ANNUITY INVESTING IN
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
VARIABLE ANNUITY SEPARATE ACCOUNT-III
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Organization and Accounting Policies:
MainStay Variable Annuity commenced in May of 1997, with the first sale
occurring on October 2, 1997. MainStay Variable Annuity invests in New York
Life Insurance and Annuity Corporation Variable Annuity Separate Account-III
("Separate Account" formerly, "LifeStages(SM) Annuity Separate Account"). The
Separate Account was established on November 30, 1994, under Delaware law by
New York Life Insurance and Annuity Corporation, a wholly-owned subsidiary of
New York Life Insurance Company. This account was established to receive and
invest premium payments under Non-Qualified and Qualified Flexible Premium
Variable Retirement Annuity Policies issued by New York Life Insurance and
Annuity Corporation. The non-qualified policies are designed to establish
retirement benefits to provide individuals with supplemental retirement income.
The qualified policies are designed to establish retirement benefits for
individuals who participate in qualified pension, profit sharing or annuity
plans. MainStay Variable Annuity policies are distributed by NYLIFE
Distributors Inc. and sold by registered representatives of unaffiliated
broker-dealers. NYLIFE Distributors Inc. is a wholly-owned subsidiary of New
York Life Insurance Company. The Separate Account is registered under the
Investment Company Act of 1940, as amended, as a unit investment trust.
The assets of the MainStay Variable Annuity policies are invested in the
shares of the MainStay VP Series Fund, Inc. (formerly, "New York Life MFA
Series Fund, Inc."), the Alger American Fund, the Acacia Capital Corporation,
the Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance
Products Fund II, the Janus Aspen Series, the Morgan Stanley Universal Funds,
Inc. and the M Fund, Inc. (collectively, "Funds"). These assets are clearly
identified and distinguished from the other assets and liabilities of New York
Life Insurance and Annuity Corporation.
The Separate Account offers twenty-two variable Investment Divisions, with
their respective fund portfolios, for Policyowners to invest premium payments.
These financial statements and notes relate only to the following four
Investment Divisions: M Enhanced U.S. Equity, M Frontier Capital Appreciation,
M Edinburgh Overseas Equity and M Turner Core Growth Investment Divisions (the
"M Divisions"). Each Investment Division of the Separate Account will invest
exclusively in the corresponding eligible portfolio of the Funds. As of
December 31, 1997, there were no premium payments allocated to the M Edinburgh
Overseas Equity and M Turner Core Growth Investment Divisions.
<PAGE> 6
Initial premium payments received are allocated to the MainStay VP Cash
Management Investment Division until 15 days after the policy issue date.
Thereafter, premium payments will be allocated to the Investment Divisions of
the Separate Account in accordance with the Policyowner's instructions. In
addition, the Policyowner has the option to transfer amounts between the
Investment Divisions of the Separate Account and the Fixed Account of New York
Life Insurance and Annuity Corporation.
No Federal income tax is payable on investment income or capital gains of
the Separate Account under current Federal income tax law.
PAGE 5
<PAGE> 7
MAINSTAY VARIABLE ANNUITY INVESTING IN
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
VARIABLE ANNUITY SEPARATE ACCOUNT-III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - Organization and Accounting Policies (continued):
Security Valuation - The investments are valued at the net asset value of
shares of the respective Fund portfolios.
Security Transactions - Realized gains and losses from security
transactions are reported on the identified cost basis. Security transactions
are accounted for as of the date the securities are purchased or sold (trade
date).
Distributions Received - Dividend income and capital gain distributions are
recorded on the ex-dividend date and reinvested in the corresponding portfolio.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 - Investments (in 000's):
At December 31, 1997, the investment in the M Divisions of the Separate Account
are as follows:
<TABLE>
<CAPTION>
M Enhanced M Frontier
U.S. Equity Capital Appreciation
----------- --------------------
<S> <C> <C>
Number of Shares 1 3
Identified Cost* $20 $40
</TABLE>
*The cost stated also represents the aggregate cost for Federal income tax
purposes.
Investment activity for the period May 1, 1997 (commencement of operations)
through December 31, 1997 was as follows:
<TABLE>
<CAPTION>
M Enhanced M Frontier
U.S. Equity Capital Appreciation
----------- --------------------
<S> <C> <C>
Purchases $20 $40
</TABLE>
PAGE 6
<PAGE> 8
MAINSTAY VARIABLE ANNUITY INVESTING IN
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
VARIABLE ANNUITY SEPARATE ACCOUNT-III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - Mortality and Expense Risk Charges:
The Separate Account is charged for administrative services provided and the
mortality and expense risks assumed by New York Life Insurance and Annuity
Corporation. These charges are made daily at an annual rate of 1.40% of the
daily net asset value of each Investment Division. The amounts of these
charges retained in the Investment Divisions represent funds of the New York
Life Insurance and Annuity Corporation. Accordingly, New York Life Insurance
and Annuity Corporation participates in the results of each Investment Division
ratably with the Policyowners.
NOTE 4 - Distribution of Net Income
The Separate Account does not expect to declare dividends to Policyowners from
accumulated net investment income and realized gains. The income and gains are
distributed to Policyowners as part of withdrawals of amounts (in the form of
surrenders, death benefits, transfers, or annuity payments) in excess of net
premium payments.
NOTE 5 - Cost to Policyowners (in 000's):
At December 31, 1997, the cost to Policyowners for accumulation units
outstanding, with adjustments for net investment income, market appreciation
(depreciation) and deduction for expenses is as follows:
<TABLE>
<CAPTION>
M Enhanced M Frontier
U.S. Equity Capital Appreciation
----------- --------------------
<S> <C> <C>
Cost to Policyowners (net of withdrawals) $20 $40
Unrealized appreciation (depreciation)
on investments --- (2)
----------- -------------
Net amount applicable to Policyowners $20 $38
=========== =============
</TABLE>
PAGE 7
<PAGE> 9
MAINSTAY VARIABLE ANNUITY INVESTING IN
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
VARIABLE ANNUITY SEPARATE ACCOUNT-III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - Unit Transactions (in 000's):
Transactions in accumulated units for the period May 1, 1997 (commencement of
operations) through December 31, 1997 were as follows:
<TABLE>
<CAPTION>
M Enhanced M Frontier
U.S. Equity Capital Appreciation
----------- --------------------
<S> <C> <C>
Units issued on transfers between
Investment Divisions 2 4
-------- --------
Net Increase 2 4
Units outstanding, beginning of period --- ---
-------- --------
Units outstanding, end of period 2 4
======== ========
</TABLE>
NOTE 7 - Selected Per Unit Data*:
The following table presents selected per accumulation unit income and capital
changes (for an accumulation unit outstanding throughout the period May 1, 1997
(commencement of operations) through December 31, 1997) with respect to the M
Divisions of the Separate Account.
<TABLE>
<CAPTION>
M Enhanced M Frontier
U.S. Equity Capital Appreciation
----------- --------------------
<S> <C> <C>
Unit value, beginning of period $10.00 $10.00
Net investment loss --- (.03)
Net realized and unrealized gains (losses)
on security transactions and realized
capital gain distributions received
(includes the effect of capital share
transactions) .05 (.93)
----------- --------
Unit value, end of period $10.05 $9.04
=========== =========
</TABLE>
*Per unit data based on average daily units outstanding during the period.
PAGE 8
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of New York Life Insurance and
Annuity Corporation and the Variable Annuity Separate Account-III Policyowners:
In our opinion, the accompanying statement of assets and liabilities, and the
related statements of operations, of changes in total equity and the selected
per unit data present fairly, in all material respects, the financial position
of the New York Life Insurance and Annuity Corporation Variable Annuity
Separate Account-III insofar as it relates to the M Enhanced U.S. Equity
Investment Division, the M Frontier Capital Appreciation Investment Division,
the M Edinburgh Overseas Equity Investment Division and the M Turner Core
Growth Investment Division at December 31, 1997, and the results of each of
their operations, the changes in each of their total equity, and the selected
per unit data for the period May 1, 1997 (commencement of operations) through
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements and the selected per unit data (herein referred to
as the "financial statements") are the responsibility of management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards 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 audit, which included confirmation of
investments at December 31, 1997 with the M Fund, Inc., provides a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 23, 1998
