-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VdHrhPR3UB0b2BVCfTiZUICsZE584subTU3Is/wHS+lHPIPMrDmX7E4bBKk+zs2q IO6UpHC7VzkXN8u89SgJaw== 0000744455-97-000003.txt : 19970329 0000744455-97-000003.hdr.sgml : 19970329 ACCESSION NUMBER: 0000744455-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT WEST LIFE & ANNUITY INSURANCE CO CENTRAL INDEX KEY: 0000744455 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 840467907 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 812-06167 FILM NUMBER: 97566098 BUSINESS ADDRESS: STREET 1: 8515 E ORCHARD RD CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3036893831 MAIL ADDRESS: STREET 1: 8515 E ORCHARD RD CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For The Fiscal Year Ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______________ to _____________ Commission file number __________________________ GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (Exact name of registrant as specified in its charter) Colorado 84-0467907 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 8515 East Orchard Road, Englewood, Colorado 80111 (Address of principal executive offices) (Zip Code) (303) 689-4649 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 1, 1997, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was $0. As of March 1, 1997, 7,032,000 shares of the registrant's common stock were outstanding, all of which were owned by the registrant's parent company. Note: This Form 10-K is filed by the registrant only as a consequence of the sale by the registrant of a market value adjusted annuity product. TABLE OF CONTENTS Page PART I Item 1. Business 1 A. Organization and Corporate Structure 1 B. Business of the Company 1 C. Description of Business Units 3 Item 2. Properties 16 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 A. Equity Security Holders and Market Information 17 B. Dividends 17 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 A. Company Results of Operations 19 B. Business Unit Results of Operations 21 C. Liquidity and Capital Resources 27 D. Accounting Pronouncements 28 Item 8. Financial Statements and Supplementary Data 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 54 PART III Item 10. Directors and Executive Officers of the Registrant 55 A. Identification of Directors 55 B. Identification of Executive Officers 57 i Item 11. Executive Compensation 59 A. Summary Compensation Table 59 B. Options 60 C. Pension Plan Table 61 D. Compensation of Directors 62 E. Compensation Committee Interlocks and Insider Participation 63 Item 12. Security Ownership of Certain Beneficial Owners and Management 64 A. Security Ownership of Certain Beneficial Owners 64 B. Security Ownership of Management 64 Item 13. Certain Relationships and Related Transactions 66 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 66 A. Index to Financial Statements 66 B. Index to Financial Statement Schedules 66 C. Index to Exhibits 67 D. Reports on Form 8-K 67 Signatures 68 ii PART I ITEM 1. BUSINESS A. ORGANIZATION AND CORPORATE STRUCTURE Great-West Life & Annuity Insurance Company (the "Company") is a stock life insurance company originally organized under the laws of the State of Kansas in 1907 as the National Interment Association. Its name was changed to Ranger National Life Insurance Company in 1963 and to Insuramerica Corporation prior to changing to its current name in 1982. In September of 1990, the Company redomesticated and is now organized under the laws of the State of Colorado. The Company ranks in the top 2% of all U.S. life insurers in terms of net assets. The Company is a wholly-owned subsidiary of The Great-West Life Assurance Company ("Great-West Life"), a Canadian life insurance company. Great-West Life is a subsidiary of Great-West Lifeco Inc. ("Great-West Lifeco"), a Canadian holding company. Great-West Lifeco is in turn a subsidiary of Power Financial Corporation ("Power Financial"), a Canadian holding company with substantial interests in the financial services industry. Power Corporation of Canada ("Power Corporation"), a Canadian holding and management company, has voting control of Power Financial. Mr. Paul Desmarais, through a group of private holding companies, which he controls, has voting control of Power Corporation. Common and preferred shares of Great-West Life, Great-West Lifeco, Power Financial and Power Corporation are traded publicly in Canada. B. BUSINESS OF THE COMPANY The Company is authorized to engage in the sale of life insurance, accident and health insurance and annuities. It is qualified to do business in the District of Columbia, Puerto Rico, and in all states in the United States except New York. The Company operates in one business segment as a provider of life, health and annuity products; however, the business operations of the Company will be discussed in terms of its major business units, which are: Employee Benefits - - life, health, disability income and 401(k) products for group clients. Financial Services - - accumulation and payout annuity products for both group and individual clients, primarily in the public/non-profit sector, as well as insurance products for individual clients. Investment Operations - - management of assets, both general funds and separate accounts which segregate, from the Company's general account, the assets and liabilities of contractholders of variable products ("Separate Accounts"). The table that follows summarizes premiums and deposits for the years indicated. For further consolidated financial information concerning the Company, see Item 6 on page 18 (Selected Financial Data), and Item 8 on page 29 (Financial Statements and Supplementary Data). For commentary on the information in the following table, see page 21 (Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Unit Results of Operations). Millions (1) 1996 1995 1994 Employee Benefits Group Life $ 121 $ 138 $ 133 Group Health 642 679 638 401(k) 41 30 21 Financial Services Savings 51 50 40 Individual Insurance 344(2) 171 168 Premium and other income $ 1,199 $ 1,068 $ 1,000 Deposits for Investment-type Contracts: 401(k) $ 34 $ 47 $ 50 Savings 215 364 384 Individual Insurance 566 457 572 Total investment-type deposits $ 815 $ 868 $ 1,006 Deposits to Separate Accounts: 401(k) $ 1,109 $ 883 $ 704 Savings 329 282 309 Total separate accounts deposits $ 1,438 $ 1,165 $ 1,013 ASO equivalents (3) $ 1,940 $ 2,140 $ 1,907 (1) All information in the above table and other tables herein is presented in conformity with generally accepted accounting principles, unless otherwise indicated. (2) This amount includes the recapture of $164 million of participating policy reserves previously coinsured with Great-West Life under a participating life coinsurance agreement. (3) ASO equivalents generally represent paid claims under minimum premium and administrative services only contracts, which amounts approximate the premiums that would have been earned under such contracts if they had been written as traditional indemnity or HMO programs. C. DESCRIPTION OF BUSINESS UNITS 1. Employee Benefits Principal Products The Employee Benefits division is responsible for marketing group life, health, disability income and 401(k) products, primarily to small and medium sized employers. The Company offers employers a total benefits approach - an integrated package of comprehensive employee benefits products and services through a single administrator. Through integrated pricing, administration and funding, the Company helps employers provide cost-effective benefits aimed at attracting and retaining quality employees, while offering employees benefit choices and the information they need to make wise decisions. The Company offers customers a variety of options to help them maximize the value of their employee benefits investment. This ranges from fully-insured products, whereby the Company assumes all or a portion of the health care cost and utilization risk, to self-funded, whereby the employer assumes all or a significant portion of the risk. Employee Benefits also provides administration and claims services and, in many cases, stop-loss insurance protection, for an appropriate fee or premium charge (Administrative Services Only plans - "ASO"). The Company offers a full range of managed care products and services. These products range from Health Maintenance Organization ("HMO") plans, which provide a high degree of managed care, to Preferred Provider Organization ("PPO") plans and Point-of-Service ("POS") plans which offer more flexibility in provider choice than HMO plans. Because many employers want to offer employees a choice in health plans while containing costs, the Company packages managed care health plans as a dual option package which allows the employer to offer either a PPO/HMO or a PPO/POS package to their employees. In addition, the Company maintains a fully insured product to meet customer demand for traditional health care products. Under HMO plans, health care for the member is coordinated by a primary care physician who is responsible for managing all aspects of the member's care. HMO plans offer a broad scope of benefits coverage including routine office visits and preventive care, as well as lower premiums and low copayments which minimize out-of-pocket costs. Services for care not coordinated with the primary care physician are not covered, with the exception of emergency care. There are no claims to file when services are received through a primary care physician. Physicians are reimbursed on a monthly capitated rate per HMO patient for most services. POS plans also require that a member enroll with a primary care physician who is responsible for coordinating the member's health care. Similar to an HMO, members receive the highest benefit coverage and the lowest out-of-pocket costs when they use their primary care physician to coordinate their health care. In contrast to an HMO, members can seek care outside of the primary physician's direction, at a reduced level of benefits in terms of increased cost sharing. Some benefits may not be covered outside the in-network POS plan. PPO plans offer members a greater choice of physicians and hospitals. Members do not need to enroll with a primary care physician - they simply select a contracted PPO provider at the time of service to receive the highest level of benefits. If members seek care outside of the PPO network, they receive a lower level of benefits in terms of increased cost sharing. A traditional fully insured plan allows complete freedom of choice for covered services. After meeting an annual deductible, insureds pay their share of coinsurance for all covered services. These plans are not typically considered managed care, although they may include some medical management features, such as inpatient certification, reasonable and customary charges, and some benefits for preventive care. During 1996, the Company continued to develop its managed care operations, licensing five One Health Plan HMO subsidiaries in California, Texas, Illinois, Colorado, and Georgia. Through each One Health Plan subsidiary, the Company centralized all provider relations and contracting, medical management, member services and quality assurance for all of the Company's medical members (PPO, POS, and HMO) in each of those states. The type of coverage provided by the Company continues to move toward the higher forms of managed care. As of December 31, 1996, of the 1,554,142 lives covered, 350,185 were in POS/HMO type plans, 1,003,333 were in PPO plans, and 200,624 were in fully insured plans. At December 31, 1995, of the 1,621,170 lives covered, 258,930 were in POS/HMO type plans, 1,047,028 were in PPO plans, and 315,212 were in fully insured plans. The Company offers group term, whole and universal life insurance. Sales of group life insurance consist principally of renewable term coverage, the amounts of which are usually linked to individual employee wage levels. The following table shows group life insurance in force prior to reinsurance ceded for the years indicated: Years Ended December 31, Millions 1996 1995 1994 1993 1992 In force, end of year $49,500 $50,370 $51,051 $39,898 $39,485 The Company's 401(k) product is offered by way of a group fixed and variable deferred annuity contract. The product provides a variety of funding and distribution options for employer-approved retirement plans that qualify under Internal Revenue Code Section 401(k). The 401(k) product investment options for the contractholder include guaranteed interest rates for various lengths of time and variable investment options. For the fully guaranteed option, the difference between the income earned on investments in the Company's general account and the interest credited to the participant's account balance flows through to operating income. Variable investment options utilize Separate Accounts to provide contractholders with a vehicle to assume the investment risks. Assets held under these options are invested, as designated by the participant, in Separate Accounts which in turn invest in shares of mutual funds managed by a subsidiary of the Company or by selected external fund managers. The participant currently has up to 29 different variable investment options. Of the total 401(k) assets contributed by participants in 1996, 97% were allocated to variable investment options. The Company is compensated by the Separate Accounts for bearing expense risks pertaining to the variable annuity contract, and for providing administrative services to contractholders. A subsidiary of the Company also receives fees for serving as an investment advisor. Product retention is a key factor for the profitability of the Company's 401(k) product. The annuity contracts impose a charge for termination during a certain period of time after the contract's inception. The charge is determined in accordance with a formula in the contract. Existing tax penalties on annuity distributions prior to age 59 1/2 provide an additional disincentive to premature surrenders of account balances, but do not impact rollovers to products of competitors. Employee Benefits introduced a rollover Individual Retirement Annuity product in 1995, which allows individuals to move retirement funds from a 401(k) plan to a qualified Individual Retirement Account. In the following table, the amount of 401(k) business in force is measured by the total of individual account balances: Millions Year Ended December 31, Fixed Annuities Variable Annuities 1992 $ 365 $ 433 1993 357 868 1994 345 1,324 1995 358 2,227 1996 347 3,229 Method of Distribution Products are sold principally through field representatives and home office marketing personnel. These individuals work with independent insurance agents, brokers and consultants who assist in the production and servicing of business. Competition The employee benefits industry is highly competitive. Market share remains fragmented because of the large number of insurance carriers, third-party administrators and HMOs serving the various public and private sectors. No one competitor is dominant across the country. With managed care enrollment expected to increase dramatically over the remainder of the decade, many indemnity carriers are transitioning their members into managed care products. The highly competitive marketplace creates pricing pressures which encourage employers to seek competitive bids each year. Although most employers are looking for affordably priced employee benefits products, they want to offer product choice because employee needs differ. In many cases it is more cost-effective and efficient for an employer to contract with a carrier such as the Company, which offers multiple product lines and centralized administration. In addition to price, there are a number of other factors which influence employer decision-making. These factors include quality of services; scope, cost-effectiveness and quality of provider networks; product responsiveness to customers' needs; cost-containment services; and effectiveness of marketing and sales. The Company has 33 sales and service offices located throughout the United States to service local customer needs. Each of the Company's sales representative works with local insurance agents, brokers and consultants to sell and service local employers. Reserves For group whole life and term insurance products, policy reserve liabilities are equal to the present value of future benefits and expenses less the present value of future net premiums using best estimate assumptions for interest, mortality and expenses (including margins for adverse deviation). For disability waiver of premium and paid up group whole life contracts, the policy reserves equal the present value of future benefits and expenses using best estimate assumptions for interest, mortality and expenses (including margins for adverse deviation). For group universal life, the policy reserves equal the accumulated fund balance (which reflects cumulative deposits plus credited interest less charges thereon). Reserves for long-term disability products are established for lives currently in payment status using standard industry morbidity and experience interest rates. In addition, reserves are held for lives that have not satisfied their waiting period and for claims that have been incurred but not reported. For medical, dental and vision insurance products, reserves reflect the ultimate cost of claims including, on an estimated basis, (i) claims that have been reported but not settled, and (ii) claims that have been incurred but not reported. Claim reserves are based upon factors derived from past experience. Reserves also reflect retrospective experience rating that is done on certain types of business. Reserves for investment contracts (401(k) deferred annuities) are equal to cumulative deposits, less withdrawals and charges, plus credited interest thereon. Assumptions for mortality and morbidity experience are periodically reviewed against published industry data and company experience. The above mentioned reserves are computed amounts that, with additions from premiums and deposits to be received, and with interest on such reserves, are expected to be sufficient to meet the Company's policy obligations at their maturities, pay expected death or retirement benefits or surrender requests. Reinsurance The Company has a joint venture with New England Life Insurance Company and its parent company ("New England"). Under reinsurance agreements, New England issues group life and health and 401(k) products and then immediately reinsures 50% of its group life and health business, and nearly 100% of its guaranteed 401(k) business, with the Company. 2. Financial Services Principal Products The Financial Services division markets and administers savings and life insurance products. Savings products include (i) individual and group annuity contracts which offer a variety of funding and distribution options for personal and employer-sponsored retirement plans that qualify under Internal Revenue Code Sections 401, 403, 408, and 457, and (ii) individual and group non-qualified annuity contracts. These contracts may be immediate or deferred and are offered primarily to individuals and employers of public and non-profit sector employees. The Company also provides pension plan administrative services through a subsidiary company, Financial Administrative Services Corporation ("FASCorp"), and marketing and communication services through a subsidiary company, Benefits Communication Corporation ("BenefitsCorp"). The primary marketing emphasis for the Company's savings products is the public/non-profit market for defined contribution pension plans. Defined contribution plans provide for participant accounts with benefits based upon the value of contributions to, and investment returns on, the individual's account. This has been the fastest growing portion of the pension marketplace in recent years. The Company's variable annuity products provide the opportunity for contractholders to assume the risks of, and receive all the benefits from, the investment of retirement assets. The variable product assets are invested, as designated by the participant, in Separate Accounts which in turn invest in shares of mutual funds managed by a subsidiary of the Company or by selected external fund managers. Demand for investment diversification for customers and their participants continued to grow during 1996. The Company continues to expand the annuity products available through its subsidiary mutual fund company, Maxim Series Fund, Inc., and arrangements with external fund managers. This array of funds allows customers to diversify their investments across a wide range of investment products, including fixed income, stock, and international equity fund offerings. The Company also offers single premium annuities and guaranteed certificates on a very limited basis, which provide guarantees of principal and interest with a fixed maturity date. During the fourth quarter of 1996, the Company entered into a marketing agreement with Charles Schwab & Co., Inc. to sell individual fixed and variable qualified and non-qualified deferred annuities. The variable annuity product offers 21 investment options. The fixed product is a Guarantee Period Fund which was established as a non-unitized Separate Account in which the owner does not participate in the performance of the assets. The assets accrue solely to the benefit of the Company and any gain or loss in the Guarantee Period Fund is borne entirely by the Company. Guarantee period durations of one to ten years are currently being offered by the Company. Distributions from the amounts allocated to a Guarantee Period Fund more than six months prior to the maturity date results in a market value adjustment ("MVA"). The MVA reflects the relationship as of the time of its calculation between the current U.S. Treasury Strip ask side yield and the U.S. Treasury Strip ask side yield at the inception of the contract. Product retention is a key factor for the profitability of annuity products. To encourage product retention, annuity contracts typically impose a surrender charge on policyholder balances withdrawn for a period of time after the contract's inception. The period of time and level of the charge vary by product. Existing tax penalties on annuity distributions prior to age 59 1/2 provide an additional disincentive to premature surrenders of annuity balances, but do not impede transfers of those balances to products of competitors. Savings products generate earnings from the investment spreads on the guaranteed investment options and from the fees collected for mortality and expense risks associated with the variable options. The Company also receives fees for providing administration services to contractholders. A subsidiary of the Company receives fees for serving as an investment advisor. The Company's annuity products are supported by the general account assets of the Company for guaranteed investment options, and the Separate Accounts for the variable investment options. The amount of annuity products in force is measured by account balances. The following table shows guaranteed investment contract and annuity account balances for the years indicated: Millions Year Ended December 31, Guaranteed Investment Contracts Fixed Annuities Variable Annuities 1992 $ 1,674 $ 5,433 $ 504 1993 1,263 5,671 812 1994 930 5,672 1,231 1995 664 5,722 1,772 1996 525 5,502 2,256 In addition to providing administrative services to customers of the Company's annuities, FASCorp also provides comprehensive third-party administrative and recordkeeping services for other financial institutions and employer-sponsored retirement plans. Assets under administration with unaffiliated organizations totaled $4.4 billion at December 31, 1996. Life insurance products in force include participating and non participating term life, whole life, and universal life. These products were offered primarily to individuals, small businesses and employer-sponsored groups. Term life provides coverage for a stated period and pays a death benefit only if the insured dies within the period. Whole life provides guaranteed death benefits and level premium payments for the life of the insured. Universal life products include a cash value component that is credited with interest at regular intervals. The Company's earnings result from the difference between the investment income and interest credited on customer cash values. Universal life cash values are charged for the cost of insurance coverage and for administrative expenses. At December 31, 1996, the Company had $3.1 billion of policy reserves on individual insurance products sold to corporations to provide coverage on the lives of certain employees. Due to legislation enacted during 1996 which phases out the interest deductions on policy loans for Corporate-Owned Life Insurance ("COLI") over a two-year period ending 1998, the sales for this product have essentially ceased. While this curtailment of new business is expected to have an effect on the results of operations of the Financial Services division, it is not expected to be material to the Company's consolidated results of operations, liquidity or financial condition. In anticipation of this change in tax laws, the Company has shifted its emphasis to the more stable market of Bank-Owned Life Insurance ("BOLI"). BOLI was not affected by the legislation. This product funds long-term benefits for banks. Sales of life insurance products typically have high initial marketing expenses. Retention, an important factor in profitability, is encouraged through product features. For example, the Company's universal and whole life insurance contracts typically impose a surrender charge on policyholder balances withdrawn within the first 10 years of the contract's inception. The period of time and level of the charge vary by product. In addition, more favorable credited rates may be offered after policies have been in force for a period of time. To further encourage retention, life insurance agents are typically paid renewal commissions or service fees. Certain of the Company's life insurance and group annuity products allow policyowners to borrow against their policies. At December 31, 1996, approximately 5% of outstanding policy loans were on individual life policies that had fixed interest rates ranging from 5% to 8%. The remaining 95% of outstanding policy loans had variable interest rates averaging 7.67% at December 31, 1996. Investment income from policy loans was $175.7 million for the year ended December 31, 1996. The following table summarizes changes in life insurance in force prior to reinsurance ceded for the years indicated: Years Ended December 31, Millions 1996 1995 1994 1993 1992 In force, beginning of year $25,865 $24,877 $20,259 $18,192 $0 (1) Sales and additions 2,695 2,520 6,302 2,842 18,665 Terminations 1,668 1,532 1,684 775 473 Net 1,027 988 4,618 2,067 18,192 In Force, end of year 26,892 25,865 24,877 20,259 18,192 (1) At December 31, 1992, all participating life insurance and annuity business previously underwritten by Great-West Life in the U.S. was transferred to the Company through assumption reinsurance. At the same time, the Company ceded some of the acquired participating life insurance reserves back to Great-West Life under a coinsurance agreement. Method of Distribution Financial Services primarily uses its subsidiary, BenefitsCorp, to distribute pension products to the public/non-profit market. BenefitsCorp also provides communication and enrollment services to employers. Prior to January 1, 1997, life insurance sold to individuals was distributed through a general agency system. During 1996, the Company began distributing term, universal and joint survivor life insurance, as well as individual fixed and variable qualified and non-qualified deferred annuities, through Charles Schwab and Co., Inc. COLI and BOLI products are currently marketed through one broker. Competition The life insurance, savings and investments marketplace is highly competitive. The Company's competitors include mutual fund companies, insurance companies, banks, investment advisors, and certain service and professional organizations. No one competitor or small number of competitors is dominant. Competition focuses on service, technology, cost, variety of investment options, investment performance, product features, price and financial strength as indicated by ratings issued by nationally recognized agencies. For more information on the Company's ratings see page 16. Reserves Reserves for universal life and interest-sensitive whole life products are equal to cumulative deposits less withdrawals and charges plus credited interest. Reserves for all fixed individual life insurance contracts are computed on the basis of assumed investment yield, mortality, morbidity and expenses (including a margin for adverse deviation). These reserves are calculated as the present value of future benefits (including dividends) and expenses less the present value of future net premiums. The assumptions used in calculating the reserves generally vary by plan, year of issue and policy duration. For all life insurance contracts (including universal life insurance), reserves are established for claims that have been incurred but not reported based on factors derived from past experience. Reserves for limited payment contracts (immediate annuities with life contingent payouts) are computed on the basis of assumed investment yield, mortality, morbidity and expenses. These assumptions generally vary by plan, year of issue and policy duration. Reserves for investment contracts (deferred annuities and immediate annuities without life contingent payouts) are equal to cumulative deposits plus credited interest less withdrawals and other charges. The above-mentioned reserves are computed amounts that, with additions from premiums and deposits to be received, and with interest on such reserves, are expected to be sufficient to meet the Company's policy obligations at their maturities, pay expected death or retirement benefits or surrender requests. Reinsurance The Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage and coinsurance contracts. The Company retains a maximum of $1.5 million of coverage per individual life. 3. Investment Operations The Company's investment operations division manages the Company's general and Separate Account funds in support of cash and liquidity requirements of the Company's insurance and investment products. Investments under management at year-end 1996 totaled $18.2 billion, comprised of corporate and insurance-related investments assets ("investment assets") of $12.7 billion and Separate Account assets of $5.5 billion. The Company invests in a broad range of asset classes, including domestic and international fixed maturities and common stocks, mortgage loans, real estate, and short-term investments. Fixed maturity investments include publicly traded and private placement corporate bonds, government bonds, publicly traded and private placement structured assets and redeemable preferred stocks. The Company's portfolio of structured assets is primarily invested in mortgage-backed securities and secondarily in other asset-backed securities. Mortgage-backed securities include collateralized mortgage obligations ("CMOs"). CMO holdings are concentrated in securities with limited prepayment, extension and default risk, such as planned amortization class bonds. The Company generally manages the characteristics of its investment assets, such as liquidity, currency, yield and duration to reflect the underlying characteristics of related insurance and contractholder liabilities, which vary among the Company's principal product lines. The Company observes strict asset and liability matching guidelines, which are designed to ensure that the investment portfolio will appropriately meet the cash flow and income requirements of its liabilities. In connection with its investment strategy, the Company may use derivative instruments in hedging applications to manage market risk. Derivative instruments are not used for speculative purposes. For more information on derivatives see Note 6 to the financial statements on page 46. The Company routinely monitors and evaluates the status of its investments in light of current economic conditions, trends in capital markets, and other factors. These other factors include investment size, quality, concentration by industry segment, and other diversification considerations for fixed maturity investments, and geographic and property-type considerations for mortgage loan investments. The Company's fixed maturity investments constituted 64% of investment assets as of December 31, 1996. The Company reduces credit risk for the portfolio as a whole by investing primarily in investment grade fixed maturities rated by either third-party rating agencies, or in the case of securities which may not be rated by third-parties, by the Company (for private investments). See page 25 for more information on the credit rating of the fixed maturity portfolio. The Company's mortgage loan investments constituted 12% of investment assets as of December 31, 1996. The Company's mortgage investment policy emphasizes a broadly diversified portfolio of commercial and industrial mortgages. Mortgage loan investments are subject to underwriting criteria addressing loan-to-value ratios, debt service coverage, cash flow, tenant quality, leasing, market, location, and financial strength of borrower. Since 1986, the Company has reduced the overall weighting of its mortgage portfolio with a greater emphasis in bond investments (see Management's Discussion and Analysis of Financial Condition and Results of Operations - Investment Operations, on page 24). At December 31, 1996 only .5% of invested assets were invested in real estate. The following table sets forth the distribution of invested assets, cash and accrued investment income as of the end of the years indicated: [Carrying Value in Millions] 1996 1995 1994 1993 1992 *Debt Securities: Bonds U.S. Government Securities and obligations of U.S. Government Agencies $ 1,947 $ 1,990 $ 1,672 $ 1,553 $ 1,730 Corporate bonds 6,133 6,168 5,079 5,128 4,510 Foreign governments 119 159 368 375 330 Total 8,199 8,317 7,119 7,056 6,570 Common Stock 20 9 5 3 8 Mortgage loans 1,488 1,713 2,011 2,378 2,713 Real estate 68 61 44 41 63 Policy loans 2,523 2,238 1,905 1,431 1,035 Short-term investments 419 135 707 683 343 Total investments 12,717 12,473 11,791 11,592 10,732 Cash 125 91 132 86 87 Accrued investment income 198 212 196 183 169 * The majority (in value) of debt securities are carried at fair value in 1996, 1995, and 1994 due to the adoption of Statement of Financial Accounting Standards No. 115 at January 1, 1994. The following table summarizes investment results of the Company's continuing operations: Net Investment Income Earned Net Investment Income Rate [Millions] For the year: 1996 $837 7.07% 1995 835 7.36 1994 768 7.23 1993 792 7.76 1992 661 8.32 4. Regulation General The Company must comply with the insurance laws of all jurisdictions in which it is licensed to do business. Although the intent of regulation varies, most jurisdictions have laws and regulations governing rates, solvency, standards of business conduct and various insurance and investment products. The form and content of statutory financial reports and the type and concentration of investments are also regulated. The Company's operations and accounts are subject to examination by the Colorado Insurance Division and other regulators at specified intervals. The latest financial examination by the Colorado Insurance Division was completed in 1997, and covered the 5-year period ending December 31, 1995. This examination produced no significant adverse findings regarding the Company. Solvency Regulation The National Association of Insurance Commissioners has adopted risk-based capital rules for life insurance companies. These rules recommend a specified level of capital depending upon the types and quality of investments held, the types of business written, and the types of liabilities maintained. Depending on the ratio of the insurer's adjusted capital to its risk based capital, the insurer could be subject to various regulatory actions ranging from increased scrutiny to conservatorship. Based on the Company's December 31, 1996 statutory financial reports, the Company was well within these rules. The National Association of Insurance Commissioners Insurance Regulatory Information System ratios are another set of tools used by regulators to provide an "early warning" as to when a company may require special attention. There are twelve categories of financial data with defined usual ranges for each. For 1996, the Company was within the usual ranges in all categories. Insurance Holding Company Regulations The Company is subject to insurance holding company regulations in Colorado. These regulations contain certain restrictions and reporting requirements for transactions between an insurer and its affiliates, including the payments of dividends. They also regulate changes in control of an insurance company. Securities Laws The Company is subject to various levels of regulation under federal securities laws. The Company's broker-dealer subsidiaries are regulated by the Securities and Exchange Commission ("SEC") and the National Association of Securities Dealers, Inc. The Company's investment advisor subsidiary is regulated by the SEC. Certain of the Company's Separate Accounts, mutual funds, and variable insurance and annuity products, are registered under the Investment Company Act of 1940 and the Securities Act of 1933. HMO Regulation The Company's HMO subsidiaries are subject to regulation by various government agencies in the states in which they are licensed to do business. This involves the regulation of solvency, contracts, rates, quality assurance, minimum levels of benefits, and the availability and continuity of care. Guaranty Funds Under insurance guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies. The Company has established a reserve of $9.1 million as of December 31, 1996 to cover future assessments of known insolvencies. The Company has historically recovered more than half of the guaranty fund assessments through statutorily permitted premium tax offsets. The Company has a prepaid asset associated with guaranty fund assessments of $5.6 million at December 31, 1996. Canadian Regulation Because the Company is a subsidiary of Great-West Life, which is a Canadian company, the Office of the Superintendent of Financial Institutions Canada conducts periodic examinations of the Company and approves certain investments in subsidiary companies. 5. Ratings The Company is rated by a number of nationally recognized rating agencies. The ratings represent the opinion of the rating agencies on the financial strength of the Company and its ability to meet the obligations of its insurance policies. Rating Agency Measurement Rating A.M. Best Company Financial Condition and Operating Performance A++ * Duff & Phelps Corporation Claims Paying Ability AAA * Standard & Poor's Corporation Claims Paying Ability AA+ ** Moody's Investors Service Insurance Financial Strength Aa2 *** * Highest ratings available. ** Second highest rating out of 17 rating categories. *** Third highest rating out of 19 rating categories. 6. Miscellaneous A portion of the Company's business is "seasonal" in nature in the sense that reported claims in the group health line of business are generally higher in the first quarter. No customer accounted for 10% or more of the Company's consolidated revenues in 1996. In addition, no unit of the Company's business is dependent on a single customer or a few customers, the loss of which would have a significant effect on the Company or any of its business units. The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the Company or any of its business units. The Company had approximately 4,200 employees at January 1, 1997. ITEM 2. PROPERTIES The executive offices of the Company consist of a 517,633 square foot office complex located in Englewood, Colorado. The office complex is owned by a subsidiary of the Company. The Company leases sales and claims offices throughout the United States. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 1996 to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION All of the Company's outstanding common shares are owned by Great-West Life. Accordingly, there is no established public trading market for the Company's common equity. B. DIVIDENDS In the two most recent fiscal years, the Company has paid quarterly dividends on its common shares. Dividends totaled $48,082,915 in 1996 and $39,763,499 in 1995. Under Colorado law, the Company cannot, without the approval of the Colorado Commissioner of Insurance, pay a dividend if, as a result of such payment, the total of all dividends paid in the preceding twelve months would exceed the greater of (i) 10% of the Company's surplus as regards policyholders as at the preceding December 31; or (ii) the Company's net gain from operations as at the preceding December 31. ITEM 6. SELECTED FINANCIAL DATA The following is a summary of certain financial data of the Company. This summary has been derived in part from, and should be read in conjunction with, the financial statements of the Company included in Item 8 on page 29. Millions Years Ended December 31 1996 1995 1994 1993 1992 INCOME STATEMENT DATA Premiums and other income $ 1,199 $ 1,067 $ 1,000 $ 696 $ 245 Net investment income 837 835 768 792 661 Realized investment gains (losses) (21) 8 (72) 25 (4) Total Revenues 2,015 1,910 1,696 1,513 $ 902 Total benefits and expenses 1,824 $ 1,733 $ 1,593 $ 1,417 $ 844 Income tax expense 56 49 29 31 18 Cumulative effect of adopting a new accounting method for income taxes (23) Net Income $ 135 $ 128 $ 74 $ 65 $ 63 BALANCE SHEET DATA Investment assets $12,717 $12,473 $11,791 $11,592 $10,732 Separate account assets 5,485 3,999 2,555 1,680 937 Total assets 19,351 17,682 15,616 14,296 12,948 Total policyholder liabilities 11,687 11,492 10,929 10,592 10,352 Total shareholder's equity 1,034 993 777 821 769 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 1996 follows. In connection with, and because it desires to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in the following discussion and elsewhere in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the SEC. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. In particular, statements using verbs such as "expect," "anticipate," "believe," or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future or projected levels of sales of the Company's products, investment spreads or yields, or the earnings or profitability of the Company's activities. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio, and other factors. Readers are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligations to update forward-looking information. A. COMPANY RESULTS OF OPERATIONS 1. Comparison of Years Ended December 31, 1996 and 1995 The Company's consolidated net income increased 5% to $134.6 million, when compared to 1995. Premiums and other income increased 12% from $1,067.4 million in 1995 to $1,199.2 million in 1996. The 1996 premiums included $164.8 million of reinsurance premium associated with the recapture of a block of participating individual insurance business from Great-West Life. This transaction did not impact consolidated net income, as it was offset by an increase in reserves (see discussion of policy benefits below). Therefore, premiums and other income from operations were down from 1995 levels, which reflects a 7% reduction in group life and health premiums due to high termination rates associated with price sensitivity and competition from managed care companies. Net investment income increased $1.5 million from $835.1 million in 1995 to $836.6 million in 1996. This change reflected an increase in the amount of invested assets of $243.8 million, which was largely offset by a lower effective yield on investments purchased in late 1995 and early 1996. The increase in invested assets is primarily the result of growth in policy loans on the Corporate-Owned Life Insurance ("COLI") business. The Company's realized investment gains (losses) changed from a net realized gain of $7.5 million in 1995 to a net realized loss of $21.1 million in 1996. The increase in interest rates in 1996 resulted in realized losses on the sale of fixed maturities totaling $11.6 million, while lower interest rates contributed to $28.2 million of fixed maturity gains recorded in 1995. The 50% improvement in the provision for asset losses helped to partially offset the fixed maturities capital losses, as the change in provision was reduced from $22.0 million in 1995 to $10.6 million in 1996. Total benefits and expenses includes life and other policy benefits, increase in reserves, interest paid or credited to contractholders, expenses, and dividends to policyholders. The increase of 5% from $1,733.3 million in 1995 to $1,824.3 million in 1996 is primarily the result of the increase in reserves of $164.8 million associated with the recapture of insurance from Great-West Life. After this adjustment the total benefits and expenses actually decreased from 1995 to 1996. This is the result of a reduction in group health claims which is consistent with the premium decrease discussed previously. Net income in 1996 also reflects a $25.6 million release of a previously recorded contingent liability that the Company assumed from Great-West Life in 1993. The release was triggered by the resolution of 1988 and 1989 tax issues with the Internal Revenue Service. The effective income tax rates were reduced in 1996 by the release of the contingent liability which was not taxable and in 1995 by the release of a $13.3 million deferred tax valuation allowance in a subsidiary investment company. 2. Comparison of Years Ended December 31, 1995 and 1994 The Company's consolidated net income increased 73% in 1995, compared with 1994. The majority of the increase was in the Financial Services unit where the asset intensive lines benefited from a combination of lower mortgage writedowns and capital gains from sales in the fixed maturities portfolio, as described below. Premiums and other income increased 7% from $1,000.1 million in 1994 to $1,067.4 million in 1995, as the result of an increase in group life and health premiums which were augmented by the acquisition of blocks of business from Confederation Life Insurance Company and Life of Georgia. Net investment income increased $67.4 million in 1995 to a total of $835.1 million reflecting an increase in invested assets from $11.8 billion to $12.5 billion in 1995. The increase was driven by the growth in policy loans associated with COLI business. The Company's realized gains (losses) changed from a net realized loss of $71.9 million in 1994 to a net realized gain of $7.5 million in 1995. The provision for asset losses, included in realized losses, continued to decline as the $22.0 million in 1995 was $12.2 million lower than the $34.2 million recorded in 1994, as the mortgage portfolio continued to improve. Interest rates decreased in 1995, leading to capital gains on the sale of fixed maturities of $28.2 million which were better than the $39.8 million of losses recorded in 1994. Total benefits and expenses increased 9% in 1995 to a total of $1,733.3 million. This increase reflects the growth in the group life and health block of business, and its impact on the increase in group health claims and operating expenses. The effective income tax in 1995 and 1994 was lower than the statutory rate due to a reduction of $13.3 million and $7.1 million, respectively, in the deferred tax asset valuation allowance held in a real estate subsidiary. B. BUSINESS UNIT RESULTS OF OPERATIONS The following discussion of results from operations is presented in terms of the major business units of the Company, and the financial information regarding such business units, described on pages 1 and 2 (Business of the Company). 1. Employee Benefits 401(k) premiums and deposits increased 23% to $1.2 billion in 1996. Total revenue premium income (including premium equivalents) for group life and health decreased 9% from 1995 levels, however, the Company experienced an increase in premium growth during the last half of 1996. Assets under administration in 401(k) increased 40% over 1995, to $3.9 billion. Employee benefits operating income increased in 1996, with favorable mortality and morbidity results, strong 401(k) asset growth, and effective expense management. The Company increased expenses to fund HMO development and computer systems enhancements. The managed care industry in the United States experienced frequent acquisitions and mergers in 1996. To position itself for the future, the Company focused on putting in place the products, strategies and processes that will strengthen its competitive position in the evolving managed care environment. As a result of heightened price sensitivity and competition from managed care companies, the rate of growth in the Company's life and health business slowed. New life and health case sales in 1996 of 1,125 were higher than the 1,031 recorded in 1995, however termination rates were high resulting in a 7% reduction in the premiums associated with this block of business. Employers' heightened sensitivity to price has led to a demand for more tightly controlled managed care plans, which is why HMO development remains Employee Benefits' most important product development initiative. In 1996 the Company received state approval for HMO's in California, Texas, Illinois, Colorado, and Georgia and applied for licenses in additional states. The Company also entered into three agreements with other carriers, which will exclusively market the One Health Plan HMO in various states. These agreements, and others like them, will augment growth in the Company's HMO programs in the years to come. The Company's One Health Plan subsidiary organization will also play an important role in network contracting and administration medical management, member services and quality assurance for the Company's other managed care products. In addition to day-to-day operations of the HMO, each One Health Plan subsidiary will administer Preferred Provider Organization ("PPO") and Point-of-Service ("POS") plan provider networks for the Company and its joint-venture partner, New England. As well as providing economies of scale, this "pooling" of PPO, POS, and HMO membership benefits the Company in negotiating favorable provider reimbursement arrangements. The Company experienced a 4% decrease in total covered lives, from 1,621,170 at the end of 1995 to 1,554,142 at year-end 1996. However, gatekeeper (i.e., POS and HMO) members grew 35% from 258,930 in 1995 to 350,185 in 1996, as employers moved from fully insured and PPO products. As additional HMO licenses are obtained, the Company expects this segment of the business to grow. The number of new 401(k) case sales, including business generated through the Company's joint venture with New England, continued to climb to 1,156 in 1996 from 960 in 1995 and 953 in 1994. This brings the total 401(k) block of business under administration to 4,942 employer groups and more than 350,000 individual participants. During 1996, the in-force block of 401(k) business also performed well, with persistency of 93%. This, combined with a strong stock market, resulted in a 40% increase in assets under management, to $3.9 billion. To promote long-term asset retention, the Company enhanced a number of products and services during 1996, including prepackaged "lifestyle" funds (The Profile Series), "Account Credits" for high-balance accounts, a rollover Individual Retirement Account product, strong enrollment communications, one-on-one retirement planning assistance and personal plan illustrations. In 1997, the Company will continue to enhance managed care programs and services by furthering HMO development, implementing a new claims adjudication system, seeking National Committee for Quality Assurance accreditation and introducing quality assurance programs and member communication directed at health improvements. The Company will continue to build on its 401(k) product, placing more emphasis on participant education and enrollment strategies, as well as introducing new investment options. Finally, the Company will introduce a non-qualified deferred compensation program designed to allow key executives to defer salary for retirement savings beyond 401(k) contribution limits. 2. Financial Services Savings The Company's core savings business is the public/non-profit ("P/NP") pension market, providing investment products, administrative and communication services to employees of state and local governments (Internal Revenue Code Section 457 Deferred Compensation Plans), as well as employees of hospitals and public school districts (Internal Revenue Code Sections 403(b) Tax Deferred Annuities and 401(k) Cash or Deferred Arrangements). Assets under management in the P/NP business, including Separate Accounts, increased 4.6% during 1996 to $6.6 billion. Much of the growth came from the variable annuity business, which was driven by good sales results and strong investment returns in the equity markets. The Company's P/NP lives under administration were 462,914 in 1996, compared to 410,843 in 1995, and 340,079 in 1994. The Company primarily used BenefitsCorp, its communication and marketing subsidiary, to sell 12 new large employer (100 lives or larger) cases and to increase the penetration of existing cases by enrolling new employees. The Company experienced a 100% retention rate in P/NP contract renewals in 1996. The Company attributes part of this customer loyalty to initiatives to provide high-quality service while controlling expenses. Unit costs declined 11%, the result of further automation in policyholder recordkeeping and aggressive expense management. The Company continued to limit sales of Guaranteed Investment Contracts ("GICs") and allow this block of business to contract. This decision was taken in 1993 in response to the highly competitive GIC market. As a result, GIC assets decreased 21% in 1996, to $524.6 million, and decreased 29% in 1995. Customer demand for investment diversification continued to grow during 1996. New contributions to variable business represented 69% of the total 1996 deposits, compared to 54% in 1995. The Company continues to expand the investment products available through its subsidiary mutual fund company, Maxim Series Fund, Inc., and arrangements with external fund managers. This array of funds allows customers to diversify their investments across a wide range of investment products, including fixed income, stock, and international equity fund offerings. FASCorp, a subsidiary of the Company formed in 1993, provides comprehensive administrative and recordkeeping services for financial institutions and employer-sponsored retirement plans. FASCorp administered records for more than 7,700 groups in 1996 versus 7,000 in 1995, representing approximately 800,000 participants (700,000 in 1995). During the fourth quarter of 1996, the Company entered into a marketing agreement with Charles Schwab & Co., Inc., to sell individual fixed and variable qualified and non-qualified deferred annuities. Sales of the products commenced in November 1996, resulting in variable annuity deposits of $9.3 million during the last two months of 1996. Premium deposits associated with the Company's individual deferred annuities were $5.3 million in 1996, compared to $112.7 million in 1995. The Company discontinued the distribution of the product early in 1996 with the intention of replacing these sales through the Charles Schwab distribution channel. Insurance Individual life insurance premiums and deposits of $910.1 million in 1996 increased 45% from 1995 primarily due to the $164.8 million of reinsurance premium associated with the recapture of a block of participating individual insurance business from Great-West Life. The remaining growth was due to BOLI premium. The Company continued to de-emphasize the development and distribution of traditional life insurance products, while focusing on customer retention and expense management. Aggressive expense management and favorable individual life insurance policy persistency resulted in unit costs improving significantly during the year. In late 1996, the Company announced that it would no longer sell insurance products through general agents. The Company began test marketing the sale of term, universal, and joint survivor life insurance products under its marketing agreement with Charles Schwab & Co., Inc. The results of this test program will be evaluated in 1997. As of year end, legislation was in place which phases out the tax deductibility of interest on policy loans on COLI products during 1997 and 1998. However, the Company has shifted its emphasis from new sales of COLI business to the more stable BOLI market. This product provides long term benefits for bank employees and was not affected by the legislative changes. COLI sales were discontinued in 1996, but renewal premiums and deposits totaled $370.9 million. BOLI revenue premiums and deposits increased to $190.5 million during 1996, compared to $97.2 million in 1995. The Company is working closely with existing COLI customers to determine the options available to them. The effect of these legislative changes is not expected to be material to the Company's operations. 3. Investment Operations The Company's primary investment objective is to acquire assets whose durations and cash flows reflect the characteristics of the Company's liabilities, while meeting industry, size, issuer and geographic diversification standards. Formal liquidity and credit quality parameters have also been established. The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines. These guidelines are designed to ensure that even in changing interest rate environments the Company's assets will always be able to meet the cash flow and income requirements of its liabilities. Through dynamic modeling, using state-of-the-art software to analyze the effects of a wide range of possible market changes upon investments and policyholder benefits, the Company ensures that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders. A summary of the Company's invested assets (Millions) follows: 1996 1995 Fixed maturities, available for sale, at fair value $6,206 $6,263 Fixed maturities, held at maturity, at amortized cost 1,993 2,054 Mortgage loans 1,488 1,713 Real estate and common stock 88 70 Short-term investments 419 135 Policy loans 2,523 2,238 $12,717 $12,473 Fixed Maturities Fixed maturity investments include publicly traded bonds, privately placed bonds and public and private structured assets. This latter category contains both asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). The Company's strategy related to structured assets is to focus on those with lower volatility and minimal credit risk. The Company does not invest in higher risk CMOs such as interest-only and principal-only strips, and currently has no plans to invest in such securities. Private placement investments are generally less marketable than publicly traded assets, yet they typically offer covenant protection which allows the Company, if necessary, to take appropriate action to protect its investment. The Company believes that the cost of the additional monitoring and analysis required by private placements is more than offset by their enhanced yield. One of the Company's primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average quality, so as to limit credit risk. In excess of 85% of the value of the securities in this portfolio are rated by external rating agencies. If not externally rated, the securities are rated by the Company on a basis intended to be similar to that of the rating agencies. The distribution of the fixed maturity portfolio (both available for sale and held to maturity) by credit rating is summarized as: Credit Rating 1996 1995 AAA 45.9% 43.9% AA 8.1 8.0 A 23.7 26.8 BBB 20.9 19.2 BB and Below (non-investment grade) 1.4 2.1 TOTAL 100.0% 100.0% At December 31, 1996, the Company had one bond in default in the amount of $8 million, and one potentially problematic bond, with a carrying value of $6.4 million, which, although current, is judged by management as likely to require either restructuring or other types of relief. Both bonds are carried at their estimated net realizable values. Their combined total of $14.4 million is a relatively low proportion of the total fixed maturity portfolio (less than .2%) as the high credit quality of the portfolio limits the Company's exposure to problematic bonds. At December 31, 1995, there were no bonds in default and only one potentially problematic security, with a carrying value of $7.4 million. Mortgage Loans During 1996, the mortgage portfolio declined 13% to $1.5 billion, net of impairment reserves. The Company has not actively sought new loan opportunities since 1989 and, as such, has experienced an ongoing reduction in this portfolio's balance. The Company follows a comprehensive approach to the management of mortgage loans which includes ongoing analysis of key mortgage characteristics such as debt service coverage, net collateral cash flow, property condition, loan to value ratios and market conditions. Collateral valuations are performed for those mortgages which, after review, are determined by management to present possible risks and exposures. These valuations are then incorporated into the determination of the Company's allowance for credit losses. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards Nos. 114 and 118 (see Note 1 to the financial statements - page 38), both of which deal with accounting for impaired loans (defined as those loans upon which the Company will likely collect less than all amounts due according to the contractual terms of the agreement). As the Company already provided for impairment reserves through its allowance procedures, the adoption of the new standards had no material effect upon the Company's financial position. The average balance of impaired loans continued to remain low at $39.1 million in 1996 compared with $29.1 million in 1995, and foreclosures totaled $14.0 million and $37.0 million in 1996 and 1995, respectively. The low levels of problematic mortgages relative to the Company's overall balance sheet are due to the ongoing decrease in the size of the mortgage portfolio, the Company's active loan management program and improvement in market conditions. Occasionally, the Company elects to restructure certain loans if the economic benefits to the Company are believed to be more advantageous than those achieved by acquiring the collateral through foreclosure. At December 31, 1996 and 1995, the Company's loan portfolio included $68.3 million and $89.2 million, respectively, of non-impaired restructured loans. Real Estate and Common Stock The Company's real estate portfolio is composed primarily of properties acquired through the foreclosure of troubled mortgages. The Company operates a wholly owned real estate subsidiary which attempts to maximize the value of these properties through rehabilitation, leasing and sale. The Company anticipates limited, if any, investments in voluntary real estate assets during 1997. The common stock portfolio is composed of mutual fund seed money and some private equity investments. The Company anticipates a limited participation in the stock markets in 1997. Derivatives The Company uses certain derivatives, such as futures, options, and swaps, for purposes of hedging interest rate and foreign exchange risk. These derivatives, when taken alone, may subject the Company to varying degrees of market and credit risk; however, when used for hedging, these instruments typically reduce risk. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures. Note 6 to the financial statements (page 46) contains a summary of the Company's outstanding financial hedging derivatives. Other General economic conditions improved during 1996, including improvement or stabilization in many real estate markets. If present market conditions continue, the Company does not expect to recognize any asset chargeoffs or restructurings which would result in a material adverse effect upon the Company's financial condition in 1997. C. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have liquidity requirements that vary among the principal product lines. Life insurance and pension plan reserves are primarily long-term liabilities. Accident and health reserves, including long-term disability, consist of both short-term and long-term liabilities. Life insurance and pension plan reserve requirements are usually stable and predictable, and are supported primarily by long-term, fixed income investments. Accident and health claim demands are stable and predictable but generally shorter term, requiring greater liquidity. Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and utilizing positive cash flows from operations. Liquidity for the Company has remained strong, as evidenced by significant amounts of short-term investments and cash, which totaled $544.2 million and $225.8 million as of December 31, 1996 and 1995, respectively. During 1996, cash increased $34.2 million to $125.2 million as of December 31, 1996. This increase primarily reflects the positive cash flow from operating activities ($712.4 million). The increase was partially offset by net investment purchases ($127.7 million), contract withdrawals ($413.6 million), net repurchase agreement payments ($88.6 million) and payment of dividends on stock ($56.7 million). During 1995, cash decreased $40.7 million due to contract withdrawals ($217.2 million), net repurchase agreement payments ($191.2 million), net investment purchases ($27.4 million), and payment of dividends on stock ($49.0 million). Cash flow from operating activities was $458.1 million. The 1994 increase in cash primarily reflects cash flows from operating activities net of withdrawals and net investment purchases. Funds provided from premiums and fees, investment income and maturities of investment assets are reasonably predictable and normally exceed liquidity requirements for payment of claims, benefits and expenses. However, since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand. Also, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The Company's capital resources represent funds available for long-term business commitments and primarily consist of retained earnings and proceeds from the issuance of commercial paper and equity securities. Capital resources provide protection for policyholders and the financial strength to support the underwriting of insurance risks, and allow for continued business growth. The amount of capital resources that may be needed is determined by the Company's senior management and Board of Directors as well as by regulatory requirements. The allocation of resources to new long-term business commitments is designed to achieve an attractive return, tempered by considerations of risk and the need to support the Company's existing business. The Company's financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of commercial paper. The Company continues to be well capitalized, with sufficient borrowing capacity to meet the anticipated needs of its business. The Company had $84.7 million of commercial paper outstanding at December 31, 1996, compared with $84.9 million at December 31, 1995. The commercial paper has been given a rating of A-1+ by Standard & Poor's Corporation and a rating of P-1 by Moody's Investors Service, each being the highest rating available. D. ACCOUNTING PRONOUNCEMENTS In 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The implementation of this statement had no material effect on the Company's results of operations, liquidity or financial condition. Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". As the Company was already providing for impairment of loans through an allowance for credit losses, the implementation of these statements had no material effect on the Company's financial condition. See Note 6 to the financial statements for further information (page 46). In 1994, the Company implemented SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The cumulative effect as of January 1, 1994 of adopting SFAS No. 115 increased the opening balance of stockholder's equity by $6.5 million to reflect the net unrealized gains on securities classified as available-for-sale (previously carried at the lower of aggregated amortized cost or fair value) and the corresponding adjustments to deferred policy acquisition costs, policy reserves, and amounts allocable to the liability for undistributed earnings on participating business, all net of income taxes. During the fourth quarter of 1995, the Financial Accounting Standards Board issued a guide to implementation of SFAS No. 115, which permits a one-time opportunity to reclassify securities subject to SFAS No. 115. Consequently, the Company reassessed the classification of its investment portfolio in December 1995 and reclassed securities totaling $2.1 billion from held-to-maturity to available-for-sale. In connection with this reclassification, an unrealized gain, net of related policyholder amounts and deferred income taxes, of $23.4 million was recognized in stockholder's equity at the date of transfer. In connection with the employee transfer discussed in Note 2 to the financial statements on page 42, the Company in 1997 will apply the provisions of SFAS No. 87, "Employers Accounting for Pensions", SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", and SFAS No. 123, "Accounting for Stock-Based Compensation". Previously employee expenses (including costs for benefit plans) were transferred from Great-West Life to the Company through administrative services agreements. Accordingly, the implementation of these standards will have no material effect on the financial results of the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements for the Years Ended December 31, 1996, 1995, and 1994 and Independent Auditors' Report, and certain supplementary financial data, are set out below. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (A wholly-owned subsidiary of The Great-West Life Assurance Company) Consolidated Financial Statements for the Years Ended December 31, 1996, 1995, and 1994 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Great-West Life & Annuity Insurance Company: We have audited the accompanying consolidated balance sheets of Great-West Life & Annuity Insurance Company (a wholly-owned subsidiary of The Great-West Life Assurance Company) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Great-West Life & Annuity Insurance Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Denver, Colorado January 25, 1997 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (Dollars in Thousands) ASSETS 1996 1995 INVESTMENTS: Fixed Maturities: Held-to-maturity, at amortized cost (fair value $2,041,064 and $2,158,043) $ 1,992,681 $ 2,054,204 Available-for-sale, at fair value (amortized cost $6,151,519 and $6,087,969) 6,206,478 6,263,187 Common stock 19,715 9,440 Mortgage loans on real estate, net 1,487,575 1,713,195 Real estate, net 67,967 60,454 Policy loans 2,523,477 2,237,745 Short-term investments, available-for-sale (cost approximates fair value) 419,008 134,835 Total Investments 12,716,901 12,473,060 Cash 125,182 90,939 Reinsurance receivable 196,958 333,924 Deferred policy acquisition costs 282,780 278,526 Investment income due and accrued 198,441 211,922 Other assets 57,244 40,038 Premiums in course of collection 74,693 85,990 Deferred income taxes 214,404 168,941 Separate account assets 5,484,631 3,998,878 TOTAL ASSETS $19,351,234 $17,682,218 See notes to consolidated financial statements. LIABILITIES AND STOCKHOLDER'S EQUITY 1996 1995 POLICY BENEFIT LIABILITIES: Policy reserves $11,022,595 $10,845,935 Policy and contract claims 372,327 359,791 Policyholders' funds 153,867 154,872 Experience refunds 87,399 83,562 Provision for policyholders' dividends 51,279 47,760 GENERAL LIABILITIES: Due to Parent Corporation 151,431 149,974 Repurchase agreements 286,736 375,299 Commercial paper 84,682 84,854 Other liabilities 488,818 451,555 Undistributed earnings on participating business 133,255 136,617 Separate account liabilities 5,484,631 3,998,878 Total Liabilities 18,317,020 16,689,097 STOCKHOLDER'S EQUITY: Preferred stock, $1 par value, 50,000,000 shares authorized: Series A, cumulative, 1500 shares authorized, liquidation value of $100,000 per share, 600 shares issued and outstanding 60,000 60,000 Series B, cumulative, 1500 shares authorized, liquidation value of $100,000 per share, 200 shares issued and outstanding 20,000 20,000 Series C, cumulative, 1500 shares authorized, none outstanding Series D, cumulative, 1500 shares authorized, none outstanding Series E, non-cumulative, 2,000,000 shares authorized, liquidation value of $20.90 per share, issued, and outstanding 41,800 41,800 Common stock, $1 par value; 50,000,000 shares authorized; 7,032,000 shares issued and outstanding 7,032 7,032 Additional paid-in capital 664,265 657,265 Net unrealized gains on securities available-for-sale, net 14,951 58,763 Retained earnings 226,166 148,261 Total Stockholder's Equity 1,034,214 993,121 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $19,351,234 $17,682,218 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (Dollars in Thousands) 1996 1995 1994 REVENUES: Annuity contract charges and premiums $91,881 $79,816 $61,122 Life, accident, and health premiums earned (net of premiums ceded totaling $(104,250), $60,880 and $48,115) 1,107,367 987,611 938,947 Net investment income 836,642 835,046 767,646 Net realized gains (losses) on investments (21,078) 7,465 (71,939) 2,014,812 1,909,938 1,695,776 BENEFITS AND EXPENSES: Life and other policy benefits (net of reinsurance recoveries totaling $52,675, $43,574, and $18,937) 515,750 557,469 548,950 Increase in reserves 229,198 98,797 64,834 Interest paid or credited to contractholders 561,786 562,263 529,118 Provision for policyholders' share of earnings (losses) on participating business (7) 2,027 (725) Dividends to policyholders 49,237 48,150 42,094 1,355,964 1,268,706 1,184,271 Commissions 106,561 122,926 120,058 Operating expenses 336,719 314,810 261,311 Premium taxes 25,021 26,884 27,402 1,824,265 1,733,326 1,593,042 INCOME BEFORE INCOME TAXES 190,547 176,612 102,734 PROVISION FOR INCOME TAXES: Current 77,134 88,366 65,070 Deferred (21,162) (39,434) (36,614) 55,972 48,932 28,456 NET INCOME $134,575 $127,680 $74,278 See notes to consolidated financial statements. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (Dollars in Thousands) Preferred Stock Shares Amount Common Stock Shares Amount Additional Paid-In Capital Net Unrealized Gains (Losses) Retained Earnings (Deficit) Total BALANCE, JANUARY 1, 1994 2,000,800 $121,800 7,032,000 $7,032 $656,793 $0 $35,721 $821,346 Adjustment to beginning balance for change in accounting method for investment securities 6,515 6,515 Change in net unrealized gains (losses) (84,942) (84,942) Capital contributions 472 472 Dividends (40,438) (40,438) Net income 74,278 74,278 BALANCE, DECEMBER 31, 1994 2,000,800 121,800 7,032,000 7,032 657,265 (78,427) 69,561 777,231 Change in net realized gains (losses) 137,190 137,190 Dividends (48,980) (48,980) Net income 127,680 27,680 BALANCE, DECEMBER 31, 1995 2,000,800 121,800 7,032,000 7,032 657,265 58,763 148,261 993,121 Change in net unrealized gains (losses) (43,812) (43,812) Capital contributions 7,000 7,000 Dividends (56,670) (56,670) Net income 134,575 134,575 BALANCE, DECEMBER 31, 1996 2,000,800 $121,800 7,032,000 $7,032 $664,265 $14,951 $226,166 $1,034,214 See notes to consolidated financial statements. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (Dollars in Thousands) 1996 1995 1994 OPERATING ACTIVITIES: Net income $134,575 $127,680 $74,278 Adjustments to reconcile net income to net cash provided by operating activities: Gain (loss) allocated to participating policyholders (7) 2,027 (725) Amortization of investments 15,518 26,725 36,978 Realized losses (gains) on disposal of investments and write-downs of mortgage loans and real estate 21,078 (7,465) 71,939 Amortization 49,454 49,464 29,197 Deferred income taxes (20,258) (39,763) (38,631) Changes in assets and liabilities: Policy benefit liabilities 358,393 346,975 93,998 Reinsurance receivable 136,966 (38,776) (25,868) Accrued interest and other receivables 24,778 (17,617) (26,032) Other, net (8,076) 8,834 96,950 Net cash provided by operating activities 712,421 458,084 312,084 INVESTING ACTIVITIES: Proceeds from sales, maturities, and redemptions of investments: Fixed maturities Held-to-maturity Sales 18,821 16,014 Maturities and redemptions 516,838 655,993 1,034,324 Available-for-sale Sales 3,569,608 4,211,649 1,753,445 Maturities and redemptions 803,369 253,747 141,299 Mortgage loans 235,907 260,960 291,102 Real estate 2,607 4,401 29,868 Common stock 1,888 178 Purchases of investments: Fixed maturities Held-to-maturity (453,787) (490,228) (673,567) Available-for-sale (4,753,154) (4,932,566) (2,606,028) Mortgage loans (23,237) (683) (9) Real estate (15,588) (5,302) (9,253) Common stock (12,113) (4,218) (2,063) Net cash used in investing activities (127,662) (27,426) (24,690) (Continued) GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (Dollars in Thousands) 1996 1995 1994 FINANCING ACTIVITIES: Contract withdrawals, net of deposits $(413,568) $(217,190) $(238,166) Due to Parent Corporation 1,457 (9,143) (13,078) Dividends paid (56,670) (48,980) (40,438) Net commercial paper (repayments) borrowings (172) (4,832) 89,686 Net repurchase agreements repayments (88,563) (191,195) (39,244) Capital contributions 7,000 Net cash used in financing activities (550,516) (471,340) (241,240) NET INCREASE (DECREASE) IN CASH 34,243 (40,682) 46,154 CASH, BEGINNING OF YEAR 90,939 131,621 85,467 CASH, END OF YEAR $125,182 $90,939 $131,621 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $103,700 $83,841 $68,892 Interest 15,414 17,016 12,229 See notes to consolidated financial statements. (Concluded) GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (Amounts in Thousands, except Share Amounts) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization - Great-West Life & Annuity Insurance Company (the Company) is a wholly-owned subsidiary of The Great-West Life Assurance Company (the Parent Corporation). The Company is an insurance company domiciled in the State of Colorado. The Company offers a wide range of life insurance, health insurance, and retirement and investment products to individuals, businesses, and other private and public organizations throughout the United States. Basis of Presentation - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the 1995 and 1994 financial statements to conform with the basis of presentation used in 1996. Investments - Investments are reported as follows: 1. Management determines the classification of fixed maturities at the time of purchase. Fixed maturities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost unless fair value is less than cost and the decline is deemed to be other than temporary, in which case they are written down to fair value and a new cost basis is established. Fixed maturities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the net unrealized gains and losses reported as a separate component of stockholder's equity. The net unrealized gains and losses in derivative financial instruments used to hedge available-for-sale securities are included in the separate component of stockholder's equity. The amortized cost of fixed maturities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts using the effective interest method over the estimated life of the related bonds. Such amortization is included in net investment income. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains (losses) on investments. 2. Mortgage loans on real estate are carried at their unpaid balances adjusted for any unamortized premiums or discounts and any valuation reserves. Interest income is accrued on the unpaid principal balance. Discounts and premiums are amortized to net investment income using the effective interest method. Accrual of interest is discontinued on any impaired loans where collection of interest is doubtful. The Company maintains an allowance for credit losses at a level that, in management's opinion, is sufficient to absorb possible credit losses on its impaired loans and to provide adequate provision for any possible future losses in the portfolio. Management's judgment is based on past loss experience, current and projected economic conditions, and extensive situational analysis of each individual loan. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". In accordance with these standards, a mortgage loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on the fair value of the collateral. As the Company was already providing for impairment of loans through an allowance for credit losses, the implementation of these statements had no material effect on the Company's financial statements. 3. Real estate is carried at the lower of cost or fair value, net of costs of disposal. Effective January 1, 1996, the Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The implementation of this statement had no material effect on the Company's financial statements. 4. Investments in common stock are carried at fair value. 5. Policy loans are carried at their unpaid balances. 6. Short-term investments include securities purchased with initial maturities of one year or less and are carried at amortized cost. The Company considers short-term investments to be available-for-sale and amortized cost approximates fair value. Gains and losses realized on disposal of investments are determined on a specific identification basis. Cash - Cash includes only amounts in demand deposit accounts. Deferred Policy Acquisition Costs - Policy acquisition costs, which consist of sales commissions and other costs that vary with and are primarily related to the production of new and renewal business, have been deferred to the extent recoverable. Deferred costs associated with the annuity products are being amortized over the life of the contracts in proportion to the emergence of gross profits. Retrospective adjustments of these amounts are made when the Company revises its estimates of current or future gross profits. Deferred costs associated with traditional life insurance are amortized over the premium paying period of the related policies in proportion to premium revenues recognized. Amortization of deferred policy acquisition costs totaled $47,089, $48,054, and $28,199 in 1996, 1995, and 1994, respectively. Separate Account - Separate account assets and related liabilities are carried at fair value. The Company's separate accounts invest in shares of Maxim Series Fund, Inc., a diversified, open-end management investment company which is an affiliate of the Company, shares of other external mutual funds, or government or corporate bonds. Life Insurance and Annuity Reserves - Life insurance and annuity policy reserves with life contingencies of $5,242,753, and $4,675,175 at December 31, 1996 and 1995, respectively, are computed on the basis of estimated mortality, investment yield, withdrawals, future maintenance and settlement expenses, and retrospective experience rating premium refunds. Annuity contract reserves without life contingencies of $5,779,842 and $6,170,760, at December 31, 1996 and 1995, respectively, are established at the contractholder's account value. Reinsurance - Policy reserves ceded to other insurance companies are carried as reinsurance receivable on the balance sheet (See Note 3). The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. Policy and Contract Claims - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the related policies and contracts, as well as provisions for claims incurred and unreported based primarily on prior experience of the Company. Participating Fund Account - Participating life and annuity policy reserves are $3,591,077 and $3,339,316 at December 31, 1996 and 1995, respectively. Participating business approximates 50.3% of the Company's ordinary life insurance in force and 92.2% of ordinary life insurance premium income at December 31, 1996. The liability for undistributed earnings on participating business was decreased by $3,362 in 1996, which represented $7 of losses on participating business, a reduction of $2,924 to reflect the net change in unrealized gains on securities classified as available-for-sale, net of certain adjustments to policy reserves and income taxes, and a decrease of $431 due to reinsurance transactions (See Note 2). The amount of dividends to be paid from undistributed earnings on participating business is determined annually by the Board of Directors. Amounts allocable to participating policyholders are consistent with established Company practice. The Company has established a Participating Policyholder Experience Account (PPEA) for the benefit of all participating policyholders which is included in the accompanying consolidated balance sheet. Earnings associated with the operation of the PPEA are credited to the benefit of all participating policyholders. In the event that the assets of the PPEA are insufficient to provide contractually guaranteed benefits, the Company must provide such benefits from its general assets. The Company has also established a Participation Fund Account (PFA) for the benefit of the participating policyholders previously transferred to the Company from the Parent under an assumption reinsurance transaction. The PFA is part of the PPEA. The assets and liabilities associated with these policies are segregated in the accounting records of the Company. Earnings derived from the operation of the PFA accrue solely for the benefit of the acquired participating policyholders. Recognition of Premium Income and Benefits and Expenses - Life insurance premiums are recognized as earned. Annuity premiums with life contingencies are recognized as received. Accident and health premiums are earned on a monthly pro rata basis. Revenues for annuity and other contracts without significant life contingencies consist of contract charges for the cost of insurance, contract administration, and surrender fees that have been assessed against the contract account balance during the period. Benefits and expenses on policies with life contingencies are associated with premium income by means of the provision for future policy benefit reserves, resulting in recognition of profits over the life of the contracts. The average crediting rate on annuity products was approximately 6.8% in 1996. Income Taxes - Income taxes are recorded using the asset and liability approach which requires, among other provisions, the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events (other than the enactments or changes in the tax laws or rules) are considered. Although realization is not assured, management believes it is more likely than not that the deferred tax asset, net of a valuation allowance, will be realized. Repurchase Agreements and Securities Lending - The Company enters into repurchase agreements with third-party broker-dealers in which the Company sells securities and agrees to repurchase substantially similar securities at a specified date and price. Such agreements are accounted for as collateralized borrowings. Interest expense on repurchase agreements is recorded at the coupon interest rate on the underlying securities. The repurchase fee received or paid is amortized over the term of the related agreement and recognized as an adjustment to investment income. The Company will implement Statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" in 1998 as it relates to repurchase agreements and securities lending arrangements. Management estimates the effect of the change will not be material. Derivatives - The Company engages in hedging activities to manage interest rate and foreign exchange risk (See Note 6). 2. RELATED-PARTY TRANSACTIONS On October 31, 1996 the Company recaptured certain pieces of an individual participating insurance block of business previously reinsured to the Parent Corporation on December 31, 1992. The Company recorded, at estimated fair value, the following at October 31, 1996 as a result of this transaction: Assets Liabilities and Stockholder's Equity Cash $162,000 Policy reserves $164,839 Mortgages 19,753 Due to parent corporation 9,180 Other 18 Deferred income taxes 1,283 Undistributed earnings on Stockholder's equity 7,000 participating business 431 $182,302 $182,302 The Company and the Parent Corporation have a number of service agreements whereby the Parent Corporation administers, distributes, and underwrites business for the Company and administers the Company's investment portfolio. Certain operating expenses represent allocations made by the Parent Corporation to the Company for services provided pursuant to these service agreements. These transactions are summarized as follows: Years Ended December 31, 1996 1995 1994 Investment management expense (included in net investment income) $14,800 $15,182 $13,841 Administrative and underwriting payments (included in operating expenses) 304,599 301,529 269,020 Effective January 1, 1997 all employees of the U.S. operations of the Parent Corporation and the related benefit plans were transferred to the Company. All related employee benefit plan assets and liabilities were transferred from the Parent Corporation to the Company with no material impact on the Company's financial position. There will not be any material effect on the Company's operating expenses as the costs associated with the employees and these benefit plans are reflected in the present service agreements. At December 31, 1996 and 1995, due to Parent Corporation includes $31,639 and $27,814 due on demand and $119,792 and $122,160 of notes payable which bear interest and mature at various dates. These notes may be prepaid in whole or in part at any time without penalty; the issuer may not demand payment before the maturity date. The Company also has available an arrangement to obtain advances from the Parent Corporation to fund short-term liquidity needs. The due on demand to the Parent Corporation bears interest at the public bond rate (7.0% and 6.4% at December 31, 1996 and 1995, respectively) while the remainder bear interest at various rates. 3. REINSURANCE In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage and co-insurance contracts. The Company retains a maximum of $1.5 million of coverage per individual life. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 1996 and 1995, reinsurance receivables with a carrying value of $196,958 and $333,924, respectively, were due primarily from the Parent Corporation. Total reinsurance premiums assumed from the Parent Corporation were $1,693, $1,606 and $2,438, in 1996, 1995, and 1994, respectively. The Company considers all accident and health policies to be short-duration contracts. The following schedule details life insurance in force and life and accident/health premiums: Gross Amount Ceded Primarily to the Parent Corporation Assumed Primarily From Other Companies Net Amount Percentage of Amount Assumed to Net December 31, 1996: Life insurance in force: Individual $23,409,823 $5,246,079 $3,482,118 $21,645,862 16.1% Group 47,682,237 1,817,511 49,499,748 3.7% Total $71,092,060 $5,246,079 $5,299,629 $71,145,610 Premiums: Life insurance $334,127 $(111,743) $19,633 $465,503 4.2% Accident/health 592,577 7,493 56,780 641,864 8.8% Total $926,704 $(104,250) $76,413 $1,107,367 December 31, 1995: Life insurance in force: Individual $22,388,520 $7,200,882 $3,476,784 $18,664,422 18.6% Group 48,415,592 1,954,313 50,369,905 3.9% Total $70,804,112 $7,200,882 $5,431,097 $69,034,327 Premiums: Life insurance $339,342 $51,688 $21,028 $308,682 6.8% Accident/health 623,626 9,192 64,495 678,929 9.5% Total $962,968 $60,880 $85,523 $987,611 December 31, 1994: Life insurance in force: Individual $21,461,590 $7,411,811 $3,415,596 $17,465,375 19.6% Group 48,948,669 2,102,228 51,050,897 4.1% Total $70,410,259 $7,411,811 $5,517,824 $68,516,272 Premiums: Life insurance $322,263 $42,946 $22,009 $301,326 7.3% Accident/health 579,650 5,169 63,140 637,621 9.9% Total $901,913 $48,115 $85,149 $938,947 4. NET INVESTMENT INCOME Net investment income is summarized as follows: Years Ended December 31, 1996 1995 1994 Investment income: Fixed maturities and short-term investments $601,913 $591,561 $555,103 Mortgage loans on real estate 140,823 171,008 182,544 Real estate 5,292 3,936 5,700 Policy loans 175,746 163,547 116,060 Other 3,319 927,095 930,052 859,407 Investment expenses, including interest on amounts charged by the Parent Corporation of $11,282, $10,778, and $11,145 90,453 95,006 91,761 Net investment income $836,642 $835,046 $767,646 5. NET REALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments are as follows: Years Ended December 31, 1996 1995 1994 Realized gains (losses): Fixed Maturities $(11,624) $28,166 $(39,775) Mortgage loans on real estate 1,143 1,309 2,120 Real estate (10) (102) Provisions (10,597) (22,000) (34,182) Net realized gains (losses) on investments $(21,078) $7,465 $(71,939) 6. SUMMARY OF INVESTMENTS Fixed maturities owned at December 31, 1996 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Carrying Value Held-to-Maturity: U.S. Treasury Securities and obligations of U.S. Government Agencies: Collateralized mortgage obligations $ $ $ $ $ Direct mortgage pass-through certificates Other 10,935 630 106 11,459 10,935 Collateralized mortgage obligations Public utilities 284,954 12,755 320 297,389 284,954 Corporate bonds 1,634,745 41,195 7,360 1,668,580 1,634,745 Foreign governments 12,577 556 3 13,130 12,577 State and municipalities 49,470 1,051 15 50,506 49,470 $ 1,992,681 $ 56,187 $ 7,804 $ 2,041,064 $1,992,681 Available-for-Sale: U.S. Treasury Securities and obligations of U.S. Government Agencies: Collateralized mortgage obligations $ 658,612 $ 8,058 $ 3,700 $ 662,970 $ 662,970 Direct mortgage pass-through certificates 844,291 5,093 10,908 838,476 838,476 Other 359,220 596 2,686 357,130 357,130 Collateralized mortgage obligations 614,773 13,619 3,553 624,839 624,839 Public utilities 628,382 6,523 5,375 629,530 629,530 Corporate bonds 2,907,875 56,551 5,250 2,959,176 2,959,176 Foreign governments 110,013 1,762 5,673 106,102 106,102 State and municipalities 28,353 21 119 28,255 28,255 $ 6,151,519 $ 92,223 $ 37,264 $ 6,206,478 $6,206,478 6. SUMMARY OF INVESTMENTS [Continued] Fixed maturities owned at December 31, 1995 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Carrying Value Held-to-Maturity: U.S. Treasury Securities and obligations of U.S. Government Agencies: Collateralized mortgage obligations $ $ $ $ $ Direct mortgage pass-through certificates Other 11,107 1,093 12,200 11,107 Collateralized mortgage obligations Public utilities 269,671 22,084 95 291,660 269,671 Corporate bonds 1,732,046 83,583 5,867 1,809,762 1,732,046 Foreign governments 18,596 1,087 12 19,671 18,596 State and municipalities 22,784 1,966 24,750 22,784 $ 2,054,204 $ 109,813 $ 5,974 $2,158,043 $ 2,054,204 Available-for-Sale: U.S. Treasury Securities and obligations of U.S. Government Agencies: Collateralized mortgage obligations $ 561,475 $ 9,983 $ 1,948 $ 569,510 $ 569,510 Direct mortgage pass-through certificates 794,056 11,980 2,233 803,803 803,803 Other 561,736 7,703 39 569,400 569,400 Collateralized mortgage obligations 490,074 18,044 3,304 504,814 504,814 Public utilities 581,482 16,607 2,425 595,664 595,664 Corporate bonds 2,943,918 121,537 26 3,065,429 3,065,429 Foreign governments 141,362 5,021 5,644 140,739 140,739 State and municipalities 13,866 22 60 13,828 13,828 $ 6,087,969 $ 190,897 $ 15,679 $6,263,187 $ 6,263,187 Most of the collateralized mortgage obligations consist of planned amortization classes with final stated maturities of two to thirty years and average lives of less than one to fourteen years. Prepayments on all mortgage-backed securities are monitored monthly and amortization of the premium and/or the accretion of the discount associated with the purchase of such securities is adjusted by such prepayments. The cumulative effect as of January 1, 1994 of adopting SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities," increased the opening balance of stockholders' equity by $6,515 to reflect the net unrealized gains on securities classified as available-for-sale (previously carried at the lower of aggregate amortized cost or fair value) and the corresponding adjustments to deferred policy acquisition costs, policy reserves, and amounts allocable to the liability for undistributed earnings on participating business, all net of income taxes. In November 1995, the Financial Accounting Standards Board issued a special report entitled "A Guide to Implementation of SFAS 115 on Accounting for Certain Investments in Debt and Equity Securities". In accordance with the adoption of this guidance, the Company reassessed the classification of its investment portfolio in December 1995 and reclassed securities totaling $2,119,814 from held-to-maturity to available-for-sale. In connection with this reclassification, an unrealized gain, net of related adjustments (see above), of $23,449 was recognized in stockholder's equity at the date of transfer. The estimated fair value of fixed maturities that are publicly traded are obtained from an independent pricing service. To determine fair value for fixed maturities not actively traded, the Company utilized discounted cash flows calculated at current market rates on investments of similar quality and term. The amortized cost and estimated fair value of fixed maturity investments at December 31, 1996, by projected maturity, are shown below. Actual maturities will likely differ from these projections because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Held-to-Maturity Amortized Cost Estimated Fair Value Available-for-Sale Amortized Cost Estimated Fair Value Due in one year or less $197,135 $200,356 $294,236 $308,805 Due after one year through five years 840,192 860,192 1,294,892 1,300,473 Due after five years through ten years 621,900 641,103 934,312 940,880 Due after ten years 140,061 145,287 422,179 432,721 Mortgage-backed securities 2,117,676 2,126,285 Asset-backed securities 193,393 194,126 1,088,224 1,097,314 $1,992,681 $2,041,064 $6,151,519 $6,206,478 Proceeds from sales of securities available-for-sale were $3,569,608, $4,211,649, and $1,753,445 during 1996, 1995, and 1994, respectively. The realized gains on such sales totaled $24,919, $39,755, and $7,030 for 1996, 1995, and 1994, respectively. The realized losses totaled $40,748, $15,516, and $50,612 for 1996, 1995, and 1994, respectively. During 1996, 1995, and 1994 held-to-maturity securities with an amortized cost of $0, $18,087, and $15,300 were sold due to credit deterioration with insignificant realized gains and losses. At December 31, 1996 and 1995, pursuant to fully collateralized securities lending arrangements, the Company had loaned $230,419 and $343,351 of fixed maturities, respectively. The Company makes limited use of derivative financial instruments to manage interest rate and foreign exchange risk. Such hedging activity consists of interest rate swap agreements, interest rate floors and caps, and foreign currency exchange contracts. Interest rate floors and caps are interest rate protection instruments that require the payment by a counter-party to the Company of an interest differential. This differential represents the difference between current interest rates and an agreed-upon rate, the strike rate, applied to a notional principal amount. Interest rate swap agreements are used to convert the interest rate on certain fixed maturities from a floating rate to a fixed rate. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Foreign currency exchange contracts are used to hedge the foreign exchange rate risk associated with bonds denominated in other than U.S. dollars. The differential paid or received on interest rate and amounts received under interest rate floor and cap agreements are recognized as an adjustment to net investment income on the accrual method. Gains and losses on foreign exchange contracts are deferred and recognized in net investment income when the hedged transactions are realized. Although derivative financial instruments taken alone may expose the Company to varying degrees of market and credit risk when used solely for hedging purposes, these instruments typically reduce overall market and interest rate risk. The Company controls the credit risk of its financial contracts through credit approvals, limits, and monitoring procedures. As the Company generally enters into transactions only with high quality institutions, no losses associated with non-performance on derivative financial instruments have occurred or are expected to occur. The following table summarizes the financial hedge instruments: December 31, 1996 Notional Amount Strike/Swap Rate Maturity Interest Rate Floor $100,000 4.5% [LIBOR] 1999 Interest Rate Caps 260,000 11.0% to 11.82%[CMT] 2000 to 2001 Interest Rate Swaps 187,847 6.203% to 9.35% 01/98 to 02/2003 Foreign Currency Exchange Contracts 61,012 N/A 09/98 to 03/2003 December 31, 1995 Notional Amount Strike/Swap Rate Maturity Interest Rate Floor $100,000 4.5% [LIBOR] 1999 Interest Rate Cap 100,000 11.0% [CMT] 2000 Interest Rate Swaps 165,000 6.203% to 9.35% 01/98 to 2/2002 Foreign Currency Exchange Contracts 66,650 N/A 10/96 to 09/98 LIBOR - London Interbank Offered Rate CMT - Constant Maturity Treasury Rate The Company has established specific investment guidelines designed to emphasize a diversified and geographically dispersed portfolio of mortgages collateralized by commercial and industrial properties located in the United States. The Company's policy is to obtain collateral sufficient to provide loan-to-value ratios of not greater than 75% at the inception of the mortgages. At December 31, 1996 approximately 32% and 10% of the Company's mortgage loans were collateralized by real estate located in California and Michigan, respectively. The following represents impairments and other information under SFAS No. 114: 1996 1995 Impaired Loans Loans with related allowance for credit losses of $2,793 and $654 $16,443 $3,254 Loans with no related allowance for credit losses 31,709 20,424 Average balance of impaired loans during the year 39,064 29,150 Interest income recognized [while impaired] 923 675 Interest income received and recorded [while impaired] using the cash basis method of recognition 1,130 857 As part of an active loan management policy and in the interest of maximizing the future return of each individual loan, the Company may from time to time alter the original terms of certain loans. These restructured loans, all performing in accordance with their modified terms that are not impaired, aggregated $68,254, and $89,160 at December 31, 1996, and 1995, respectively. The following table presents changes in the allowance for credit losses since January 1, 1995 (date of the adoption of SFAS No. 114): 1996 1995 Balance, beginning of year $63,994 $57,987 Provision for loan losses 4,470 15,877 Chargeoffs (3,468) (10,480) Recoveries 246 610 Balance, end of year $65,242 $63,994 7. COMMERCIAL PAPER The Company has a commercial paper program which is partially supported by a $50,000 standby letter-of-credit. At December 31, 1996, commercial paper outstanding has maturities ranging from 49 to 123 days and interest rates ranging from 5.4% to 5.6%. At December 31, 1995, maturities ranged from 25 to 160 days and interest rates ranged from 5.7% to 5.9%. 8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The following table provides estimated fair value for all assets and liabilities and hedge contracts considered to be financial instruments: December 31, 1996 Carrying Amount Estimated Fair Amount 1995 Carrying Amount Estimated Fair Value ASSETS: Fixed maturities and short-term investments $8,618,167 $8,666,550 $8,452,226 $8,556,065 Mortgage loans on real estate 1,487,575 1,506,162 1,713,195 1,749,514 Policy loans 2,523,477 2,523,477 2,237,745 2,237,745 Common stock 19,715 19,715 9,440 9,440 LIABILITIES: Annuity contract reserves without life contingencies 5,779,842 5,821,404 6,170,760 6,268,749 Policyholders' funds 153,867 153,867 154,872 154,872 Due to Parent Corporation 151,431 154,479 149,974 152,347 Repurchase agreements 286,736 286,736 375,299 375,299 Commercial paper 84,682 84,682 84,854 84,854 HEDGE CONTRACTS: Interest rate floor 62 124 84 1,320 Interest rate cap 173 173 90 90 Interest rate swaps 4,746 4,746 10,052 10,052 Foreign currency exchange contracts (8,954) (8,954) (4,604) (4,604) The estimated fair value of financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Mortgage loans fair value estimates generally are based on a discounted cash flow basis. A discount rate "matrix" is incorporated whereby the discount rate used in valuing a specific mortgage generally corresponds to that mortgage's remaining term. The rates selected for inclusion in the discount rate "matrix" reflect rates that the Company would quote if placing loans representative in size and quality to those currently in the portfolio. Policy loans accrue interest generally at variable rates with no fixed maturity dates and, therefore, estimated fair value approximates carrying value. The fair value of annuity contract reserves without life contingencies is estimated by discounting the cash flows to maturity of the contracts, utilizing current credited rates for similar products. The estimated fair value of policyholders' funds is the same as the carrying amount as the Company can change the crediting rates with 30 days notice. The estimated fair value of due to Parent Corporation is based on discounted cash flows at current market spread rates on high quality investments. The carrying value of repurchase agreements and commercial paper is a reasonable estimate of fair value due to the short-term nature of the liabilities. The estimated fair value of financial hedge instruments, all of which are held for other than trading purposes, is the estimated amount the Company would receive or pay to terminate the agreement at each year-end, taking into consideration current interest rates and other relevant factors. Included in the net gain position for interest rates swaps are $160 and $0 of unrealized losses in 1996 and 1995, respectively. Included in the net loss position for foreign currencies exchange contracts are $8,954 and $5,497 loss exposures in 1996 and 1995, respectively. See note 6 for additional information on policies regarding estimated fair value of fixed maturities. 9. FEDERAL INCOME TAXES The following is a reconciliation between the federal income tax rate and the Company's effective rate: 1996 1995 1994 Federal tax rate 35.0% 35.0% 35.0% Change in tax rate resulting from: Investment income not subject to federal tax (1.0) (0.5) (1.0) Release of contingent liability (4.7) Change in valuation allowance 0.8 (7.8) (6.9) State and environmental taxes 0.7 0.7 0.9 Other, net (1.4) 0.3 (0.3) Total 29.4% 27.7% 27.7% Temporary differences which give rise to the deferred tax assets and liabilities as of December 31, 1996 and 1995 are as follows: 1996 Deferred Tax Asset Deferred Tax Liability 1995 Deferred Tax Asset Deferred Tax Liability Policyholder reserves $151,239 $ $162,073 $ Deferred policy acquisition costs 57,031 55,542 Deferred acquisition cost proxy tax 70,413 58,481 Investment assets 35,658 16,372 Net operating loss carryforwards 12,295 17,588 Tax credits and other 5,366 4,786 Subtotal 274,971 57,031 242,928 71,914 Valuation allowance (3,536) (2,073) Total Deferred Taxes $271,435 $57,031 $240,855 $71,914 Amounts related to investment assets above include $8,530 and $33,735 related to the unrealized gains on the Company's fixed maturities available-for-sale at December 31, 1996 and 1995, respectively. The Company files a separate tax return and, therefore, losses incurred by subsidiaries cannot be offset against operating income of the Company. At December 31, 1996, the Company's subsidiaries have approximately $35,128 of net operating loss carryforwards, expiring through the year 2011. The tax benefit of subsidiaries' net operating loss carryforwards, net of a valuation allowance of $1,612 are included in the deferred tax assets. The Company's valuation allowance was increased/(decreased) in 1996, 1995, and 1994 by $1,463, $(13,145), and $(6,278), respectively, primarily as a result of taxable income in subsidiaries which was greater than expected and the resulting re-evaluation by management of future estimated taxable income in the subsidiaries. Under pre-1984 life insurance company income tax laws, a portion of life insurance company gain from operations was not subject to current income taxation but was accumulated, for tax purposes, in a memorandum account designated as "policyholders' surplus account." The aggregate accumulation in the account is $7,742 and the Company does not anticipate any transactions which would cause any part of the amount to become taxable. Accordingly, no provision has been made for possible future federal income taxes on this accumulation. Pursuant to a December 31, 1993 agreement between the Company and its Parent whereby the Company assumed responsibility for the Parent Corporation's income tax liability for fiscal years prior to 1994, the Company had previously recorded a contingent liability provision. The Company's 1996 results of operations include a release of $25,600 from the provision, to reflect the resolution of 1988 and l989 tax issues with the Internal Revenue Service (IRS). Audits of tax years 1990 and 1991 are in the process of being finalized. The IRS is currently auditing tax years 1992 and 1993. In the opinion of Company management, the amounts paid or accrued are adequate; however, it is possible that the Company's accrued amounts may change as a result of the completion of the IRS audits. 10. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS All of the Company's outstanding series of preferred stock are owned by the Parent Corporation. The dividend rate on the Series A Stated Rate Auction Preferred Stock (STRAPS) is 7.3% through December 30, 2002. The Series A STRAPS are redeemable at the option of the Company on or after December 29, 2002 at a price of $100,000 per share, plus accumulated and unpaid dividends. The dividend rate on the Series B Straps is 5.8% through December 30, 1997. The Series B STRAPS are redeemable at the option of the Company on or after December 29, 1997 at a price of $100,000 per share, plus accumulated and unpaid dividends. The Company's Series E 7.5% non-cumulative, non-redeemable preferred shares are redeemable by the Company after April 1, 1999. The shares are convertible into common shares at the option of the holder on or after September 30, 1999, at a conversion price negotiated between the holder and the Company or at a formula determined conversion price in accordance with the share conditions. The Company received $472 of contributed capital in the form of deferred tax assets from the Parent Corporation during 1994 in connection with reinsurance transactions with the Parent. The Company's net income and capital and surplus, as determined in accordance with statutory accounting principles and practices for December 31 are as follows: 1996 1995 1994 (Unaudited) Net Income $180,635 $114,931 $70,091 Capital and Surplus 713,324 653,479 621,589 The maximum amount of dividends which can be paid to stockholders by insurance companies domiciled in the State of Colorado is subject to restrictions relating to statutory surplus and statutory net gain from operations. Statutory surplus and net gains from operations at December 31, 1996 were $584,492 and $182,044 (unaudited), respectively. The Company should be able to pay up to $182,044 (unaudited) of dividends without regulatory approval in 1997. Dividends of $8,587, $9,217, and $7,475, were paid on preferred stock in 1996, 1995, and 1994, respectively. In addition, dividends of $48,083, $39,763, and $32,963, were paid on common stock in 1996, 1995 and 1994, respectively. Dividends are paid as determined by the Board of Directors. The Company is involved in various legal proceedings which arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the resolution of these proceedings should not have a material adverse effect on its financial position or results of operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In the two most recent fiscal years or any subsequent interim period, there has been no change in the Company's independent accountants or resulting disagreements on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A. IDENTIFICATION OF DIRECTORS Director Age Served as Director From Principal Occupation(s) For Last Five Years James Balog (1)(2) 68 1993 Company Director since March 1993; previously Chairman, Lambert Brussels Capital Corporation (an investment advisory company) James W. Burns, O.C. (1)(2) 67 1991 Chairman of the Boards of Great-West Lifeco and Great-West Life; Deputy Chairman, Power Corporation Orest T. Dackow (1)(2) 60 1991 President and Chief Executive Officer, Great-West Lifeco since April 1992; previously President, Great-West Life Paul Desmarais, Jr. (1)(2) 42 1991 Chairman and Co-Chief Executive Officer, Power Corporation; Chairman, Power Financial Robert G. Graham (1)(2) 65 1991 Company Director since January 1996; previously Chairman and Chief Executive Officer, Inter-City Products Corporation (a company engaged in the manufacture and distribution of air conditioning, heating and related products) Robert Gratton (1)(2) 53 1991 Chairman of the Board of the Company; President and Chief Executive Officer, Power Financial N. Berne Hart (1)(2)(3) 67 1991 Company Director since February 1992; previously Chairman of the Board, United Banks of Colorado, Inc. (a multi-bank holding company) Kevin P. Kavanagh (1) 64 1986 Company Director since April 1992; previously President and Chief Executive Officer, Great-West Lifeco William Mackness (1)(2) 58 1991 Company Director since July 1995; previously Dean, Faculty of Management, University of Manitoba William T. McCallum (1)(2) 54 1990 President and Chief Executive Officer of the Company; President and Chief Executive Officer, United States Operations, Great-West Life Jerry E.A. Nickerson (3) 60 1994 Chairman of the Board, H.B. Nickerson & Sons Limited (a management and holding company) The Honourable P. Michael Pitfield, P.C., Q.C. (1)(2) 59 1991 Vice-Chairman, Power Corporation; Member of the Senate of Canada Michel Plessis-Belair, F.C.A. (2)(3) 54 1991 Vice-Chairman and Chief Financial Officer, Power Corporation; Executive Vice-President and Chief Financial Officer, Power Financial Ross J. Turner (1)(2)(3) 66 1991 Chairman, Genstar Investment Corporation (an investment company) Brian E. Walsh (1)(2) 43 1995 Partner, Trinity L.P. since January 1996 (an investment company); previously Managing Director and Co-head, Global Investment Bank, Bankers Trust Company (an investment/commercial bank) (1) Member of the Executive Committee (2) Member of the Investment and Credit Committee (3) Member of the Audit Committee Unless otherwise indicated, all of the directors have been engaged for not less than five years in their present principal occupations or in another executive capacity with the companies or firms identified. Directors are elected annually to serve until the following annual meeting of shareholders. The following lists directorships held by the directors of the Company, on companies whose securities are traded publicly in the United States or that are investment companies registered under the Investment Company Act of 1940. J. Balog Transatlantic Holdings Elan plc W. Mackness Russel Metals Inc. J.E.A. Nickerson Bank of Montreal R.J. Turner Guy F. Atkinson Company of California Rio Algom Limited B. IDENTIFICATION OF EXECUTIVE OFFICERS Executive Officer Age Served as Executive Officer From Principal Occupation(s) For Last Five Years William T. McCallum President and Chief Executive Officer 54 1982 President and Chief Executive Officer of the Company; President and Chief Executive Officer, United States Operations, Great-West Life Dennis Low Executive Vice President, Financial Services 53 1987 Executive Vice President, Financial Services of the Company and Great-West Life Alan D. MacLennan Executive Vice President, Employee Benefits 53 1984 Executive Vice President, Employee Benefits of the Company and Great-West Life Robert D. Bond Senior Vice President, Financial Services 46 1995 Senior Vice President, Financial Services of the Company and Great-West Life; prior to May 1992, National Director, Public Marketing, Aetna Life Insurance Company John A. Brown Senior Vice President, Sales, Financial Services 49 1991 Senior Vice President, Sales, Financial Services of the Company and Great-West Life John T. Hughes Senior Vice President, Chief Investment Officer 60 1989 Senior Vice President, Chief Investment Officer of the Company and Great-West Life Robert E. Kavanagh Senior Vice President, Employee Benefits Sales 58 1991 Senior Vice President, Employee Benefits Sales of the Company and Great-West Life D. Craig Lennox Senior Vice President, General Counsel and Secretary 49 1979 Senior Vice President, General Counsel and Secretary of the Company; Senior Vice President and Chief U.S. Legal Officer, Great-West Life James D. Motz Senior Vice President, Employee Benefits Operations 47 1991 Senior Vice President, Employee Benefits Operations of the Company and Great-West Life Douglas L. Wooden Senior Vice President, Financial Services 40 1990 Senior Vice President, Financial Services of the Company and Great-West Life Unless otherwise indicated, all of the executive officers have been engaged for not less than five years in their present principal occupations or in another executive capacity with the companies or firms identified. The appointments of executive officers are confirmed annually. ITEM 11. EXECUTIVE COMPENSATION A. SUMMARY COMPENSATION TABLE The following table sets out all compensation paid by Great-West Life in respect of the individuals who were, at December 31, 1996, the Chief Executive Officer and the other four most highly compensated executive officers of the Company (collectively the "Named Executive Officers") for services rendered to the Company and its subsidiaries, and Great-West Life, in all capacities for fiscal years ended 1994, 1995 and 1996 respectively. SUMMARY COMPENSATION TABLE Annual compensation (1) Long-term compensation awards Name and principal position Year Salary ($) Bonus ($) Options (2) (#) W.T. McCallum, President and Chief Executive Officer 1996 561,818 370,500 300,000 1995 523,958 351,000 225,000 (3) None 1994 476,750 318,500 None D. Low, Executive Vice President, Financial Services 1996 325,000 146,250 150,000 1995 305,000 150,500 None 1994 285,000 145,500 None J.T. Hughes, Senior Vice President, Chief Investment Officer 1996 312,000 136,968 80,000 1995 301,000 150,500 None 1994 290,000 145,000 None A.D. MacLennan, Executive Vice President, Employee Benefits 1996 325,000 115,000 150,000 1995 312,000 125,000 None 1994 265,000 142,500 None D.L. Wooden, Senior Vice President, Financial Services 1996 287,000 143,500 100,000 1995 275,500 137,500 None 1994 265,000 142,500 None (1) The aggregate of perquisites and other personal benefits, securities or property provided to each Named Executive Officer in 1996 did not exceed the lesser of $50,000 and 10% of the total of the individual's annual salary and bonus. (2) The options set out are options for common shares of Great-West Lifeco ("Lifeco Options"). Lifeco Options are granted by Great-West Lifeco pursuant to the Great-West Lifeco Stock Option Plan which was approved by the Great-West Lifeco shareholders on April 24, 1996. Lifeco Options become exercisable 20% per year commencing on the first anniversary of the date of the grant and expire 10 years after the date of the grant. (3) A special one-time bonus payment with respect to long-term performance. B. OPTIONS The following table describes options granted to the Named Executive Officers during the most recently completed fiscal year. All options are Lifeco Options granted pursuant to the Great-West Lifeco Stock Option Plan. Lifeco Options are issued with an exercise price in Canadian dollars. Canadian dollar amounts have been translated to U.S. dollars at a rate of 1/1.37. OPTION GRANTS IN LAST FISCAL YEAR Individual grants Name Options granted (#) Percent of total options granted to employees in fiscal year Exercise or base price ($/share) Expiration date Potential realizable value at assumed annual rates of stock price appreciation for option term 5% ($) 10% ($) W.T. McCallum 300,000 10.42 12.376697 July 22, 2006 2,335,080 5,917,590 D. Low 150,000 5.21 12.376697 July 22, 2006 1,167,540 2,958,795 J.T. Hughes 80,000 2.78 12.376697 July 22, 2006 622,688 1,578,024 A.D. MacLennan 150,000 5.21 12.376697 July 22, 2006 1,167,540 2,958,795 D.L. Wooden 100,000 3.47 12.376697 July 22, 2006 778,360 1,972,530 Prior to April 24,1996, the Named Executive Officers participated in the Power Financial Employee Share Option Plan pursuant to which options to acquire commons shares of Power Financial ("PFC Options") were granted. The following table describes all Lifeco Options and all PFC Options exercised in 1996, and all unexercised Lifeco Options and PFC Options held as of December 31, 1996, by the Named Executive Officers. PFC Options and Lifeco Options are issued with an exercise price in Canadian dollars. Canadian dollar amounts have been translated to U.S. dollars at a rate of 1/1.37. AGGREGATED PFC OPTION AND LIFECO OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Name Shares acquired on exercise (#) Value realized ($) Unexercised options at fiscal year-end (#) Exercisable Unexercisable Value of unexercised in-the-money options at fiscal year-end ($) Exercisable Unexerciseable W.T. McCallum 26,000 (1) 300,000 (2) 658,659 (1) 940,276 (2) D. Low 6,700 (1) 100,892 37,300 (1) 150,000 (2) 944,922 (1) 470,138 (2) J.T. Hughes 60,000 (1) 80,000 (2) 1,214,781 (1) 250,740 (2) A.D. MacLennan 150,000 (2) 470,138 (2) D.L. Wooden 44,000 (1) 100,000 (2) 911,916 (1) 313,425 (2) (1) PFC Options granted pursuant to the Power Financial Employee Share Option Plan. (2) Lifeco Options granted pursuant to the Great-West Lifeco Stock Option Plan. C. PENSION PLAN TABLE The following table sets out the pension benefits payable to the Named Executive Officers by Great-West Life or the Company. PENSION PLAN TABLE Remuneration ($) Years of Service 15 20 25 30 35 400,000 120,000 160,000 200,000 240,000 240,000 500,000 150,000 200,000 250,000 300,000 300,000 600,000 180,000 240,000 300,000 360,000 360,000 700,000 210,000 280,000 350,000 420,000 420,000 800,000 240,000 320,000 400,000 480,000 480,000 900,000 270,000 360,000 450,000 540,000 540,000 1,000,000 300,000 400,000 500,000 600,000 600,000 The Named Executive Officers have the following years of service. Name Years of Service W.T. McCallum 30 D. Low 31 J.T. Hughes 6 A.D. MacLennan 30 D.L. Wooden 5 For W.T. McCallum, the benefits shown are payable commencing December 31, 2000, and remuneration is the average of the highest 36 consecutive months of compensation during the last 84 months of employment. For D. Low, J.T. Hughes, A.D. MacLennan and D.L. Wooden, the benefits shown are payable upon the attainment of age 62, and remuneration is the average of the highest 60 consecutive months of compensation during the last 84 months of employment. Compensation includes salary and bonuses prior to any deferrals. The normal form of pension is a life only annuity. Other optional forms of pension payment are available on an actuarially equivalent basis. The benefits listed in the table are subject to deduction for social security and other retirement benefits. D. COMPENSATION OF DIRECTORS 1. Great-West Life Directors The following sets out remuneration paid by Great-West Life to its directors. Great-West Life pays an annual fee of $12,500 to each director. Great-West Life pays an annual fee of $10,000 to the Chairman of each of the Audit Committee, the Conduct Review Committee and the Corporate Management Committee, $20,000 to the Chairman of each of the Canadian Investment and Credit Committee and the United States Investment and Credit Committee, $25,000 to the Chairman of each of the Canadian Executive Committee and the United States Executive Committee, and $25,000 to the Chairman of the Board. With the exception of the President and Chief Executive Officer of Great-West Lifeco, the President and Chief Executive Officer of Great-West Life, and the President and Chief Executive Officer of the Company, Great-West Life pays a meeting fee of $1,000 to each director for each meeting of the Board of Directors or a committee thereof attended. In addition, all directors are reimbursed for incidental expenses. In 1996, Great-West Life paid $17,833 to the consulting company of W. Mackness, a director of Great-West Life, for consulting services. This arrangement was terminated on April 24, 1996. The above amounts are paid in the currency of the country of residence of the director. 2. Directors of the Company The following sets out remuneration paid by the Company to its directors. For each director of the Company who is not also a director of Great-West Life, the Company pays an annual fee of $12,500, and a meeting fee of $1,000 for each meeting of the Board of Directors or a committee thereof attended. With the exception of the President and Chief Executive Officer of Great-West Lifeco, and the President and Chief Executive Officer of the Company, for each director of the Company who is also a director of Great-West Life, the Company pays a meeting fee of $1,000 for each meeting of the Board of Directors or a committee thereof attended which is not coincident with a Great-West Life meeting. In addition, all directors are reimbursed for incidental expenses. The above amounts are paid in the currency of the country of residence of the director. E. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to January 1, 1997, all of the Company's executive officers were employees of Great-West Life (effective January 1, 1997, they became employees of the Company). For 1996, executive officer compensation was paid by Great-West Life and compensation was determined by the United States Executive Committee of the Board of Directors of Great-West Life (the "U.S. Executive Committee"). The following individuals served as members of the U.S. Executive Committee during 1996. R. Gratton J.W. Burns O.T. Dackow P. Desmarais, Jr. R.G. Graham N.B. Hart K.P. Kavanagh W. Mackness W.T. McCallum P.M. Pitfield W.T. McCallum, President and Chief Executive Officer of the Company, is a member of the U.S. Executive Committee. Mr. McCallum participated in executive compensation matters generally but was not present when his own compensation was discussed or determined. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS As of March 1, 1997, the following sets out the beneficial owners of more than 5% of the Company's voting securities: (1) 100% of the Company's 7,032,000 outstanding common shares are owned by The Great-West Life Assurance Company, 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. (2) 99.5% of the outstanding common shares of The Great-West Life Assurance Company are owned by Great-West Lifeco Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. (3) 86.5% of the outstanding common shares of Great-West Lifeco Inc. are owned by Power Financial Corporation, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (4) 68.1% of the outstanding common shares of Power Financial Corporation are owned by 171263 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (5) 100% of the outstanding common shares of 171263 Canada Inc. are owned by Marquette Communications Corporation, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (6) 100% of the outstanding common shares of Marquette Communications Corporation are owned by Power Corporation of Canada, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3. (7) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3, through a group of private holding companies, which he controls, has voting control of Power Corporation of Canada. B. SECURITY OWNERSHIP OF MANAGEMENT The following table sets out the number of equity securities, and exercisable options for equity securities, of the Company or any of its parents or subsidiaries, beneficially owned, as of March 1, 1997, by (i) the directors of the Company; (ii) the Named Executive Officers; and (iii) the directors and executive officers of the Company as a group. Company The Great-West Life Assurance Company (1) Great-West Lifeco Inc. (2) Power Financial Corporation (3) Power Corporation of Canada (4) Directors J. Balog - - - - - - - - J. W. Burns 50 56,000 4,000 203,320 164,500 options O.T. Dackow 16 35,089 5,400 40,000 options - - P. Desmarais, Jr. 50 30,000 - - 120,000 188,250 options R.G. Graham - - - - - - - - R. Gratton - - 165,000 155,000 2,500 150,000 options N.B. Hart - - - - - - - - K. P. Kavanagh 50 23,626 - - - - W. Mackness - - - - - - - - W.T. McCallum 17 34,202 16,000 52,000 options - - J.E.A. Nickerson - - - - - - - - P.M. Pitfield - - 50,000 40,000 80,000 99,500 options M. Plessis-Belair - - 10,000 1,000 32,900 58,250 options R.J. Turner - - - - - - - - B.E. Walsh - - - - - - - - Named Executive Officers W.T. McCallum 17 34,200 16,000 52,000 options - - D. Low - - 7,846 74,600 options - - J.T. Hughes - - 4,467 120,000 options - - A.D. MacLennan - - 9,011 - - - - D.L. Wooden - - - - 88,000 options - - Directors and Executive Officers as a Group 183 484,381 221,400 494,600 options 438,720 660,500 options (1) All holdings are common shares of The Great-West Life Assurance Company. (2) All holdings are common shares of Great-West Lifeco Inc. (3) All holdings are common shares, or where indicated, exercisable options for common shares, of Power Financial Corporation. (4) All holdings are subordinate voting shares, or where indicated, exercisable options for subordinate voting shares, of Power Corporation of Canada. None of the share holdings set out above exceed 1% of the total shares of the class outstanding. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The documents identified below are filed as a part of this report: Page A. INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report On Consolidated Financial Statements for the Years Ended December 31, 1996, 1995, and 1994 31 Consolidated Balance Sheets as of December 31, 1996 and 1995 32 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995, and 1994 34 Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1996, 1995, and 1994 35 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994 36 Notes to Consolidated Financial Statements for the Years Ended December 31, 1996, 1995, and 1994 38 B. INDEX TO FINANCIAL STATEMENT SCHEDULES Independent Auditors' Report on Schedule I - Summary of Investments Other Than Investments in Related Parties as of December 31, 1996 71 Schedule I - Summary of Investments Other Than Investments in Related Parties as of December 31, 1996 73 C. INDEX TO EXHIBITS Exhibit Number Title Page 3(i) Articles of Redomestication of Great-West Life & Annuity Insurance Company 75 3(ii) Bylaws of Great-West Life & Annuity Insurance Company 181 21 Subsidiaries of Great-West Life & Annuity Insurance Company 191 24 Directors' Powers of Attorney 193 27 Financial Data Schedule 208 D. REPORTS ON FORM 8-K No reports on Form 8-K have been filed during the fourth quarter of 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/ W.T. McCallum William T. McCallum President and Chief Executive Officer Date: March 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature and Title Date /s/ W.T. McCallum March 27, 1997 William T. McCallum President and Chief Executive Officer and a Director /s/ G.R. Derback March 27, 1997 Glen R. Derback Vice President and Controller, and principal financial officer Signature and Title Date /s/ James Balog * March 27, 1997 James Balog, Director /s/ James W. Burns * March 27, 1997 James W. Burns, Director /s/ Orest T. Dackow * March 27, 1997 Orest T. Dackow, Director /s/ Paul Desmarais, Jr. * March 27, 1997 Paul Desmarais, Jr., Director ______________________ ____________ Robert G. Graham, Director /s/ Robert Gratton * March 27, 1997 Robert Gratton, Director /s/ N. Berne Hart * March 27, 1997 N. Berne Hart, Director /s/ Kevin P. Kavanagh * March 27, 1997 Kevin P. Kavanagh, Director /s/ William Mackness * March 27, 1997 William Mackness, Director /s/ Jerry E.A. Nickerson * March 27, 1997 Jerry E.A. Nickerson, Director /s/ P. Michael Pitfield * March 27, 1997 P. Michael Pitfield, Director Signature and Title Date /s/ Michel Plessis-Belair * March 27, 1997 Michel Plessis-Belair, Director /s/ Ross J. Turner * March 27, 1997 Ross J. Turner, Director /s/ Brian E. Walsh * March 27, 1997 Brian E. Walsh, Director * By: /s/ D. Craig Lennox March 27, 1997 D. Craig Lennox Attorney-in-fact pursuant to Powers of Attorney filed herewith. INDEPENDENT AUDITORS' REPORT ON SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1996 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Great-West Life & Annuity Insurance Company: We have audited the consolidated financial statements of Great-West Life & Annuity Insurance Company as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated January 25, 1997; such financial statements and report are included herein. Our audits also included the financial statement schedule of Great-West Life & Annuity Insurance Company, listed in Item 14. This financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Denver, Colorado January 25, 1997 SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1996 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1996 Cost Fair Value Amount at which Shown in Consolidated Balance Sheet Fixed maturities ~ Held-to-Maturity: United States government and government agencies and authorities $10,935 $11,459 $10,935 States municipalities and political subdivisions 49,470 50,506 49,470 Foreign governments 12,577 13,131 12,577 Public utilities 284,954 297,388 284,954 All other corporate bonds 1,634,745 1,668,580 1,634,745 Total fixed maturities $1,992,681 $2,041,064 $1,992,681 Fixed maturities ~ Available-for-Sale: United States government and government agencies and authorities $1,862,123 $1,858,576 $1,858,576 States municipalities and political subdivisions 28,353 28,255 28,255 Foreign governments 110,013 106,102 106,102 Public utilities 628,382 629,530 629,530 All other corporate bonds 3,522,648 3,584,015 3,584,015 Total fixed maturities $6,151,519 $6,206,478 $6,206,478 Equities Common stocks Industrial, miscellaneous and all other $19,715 $19,715 $19,715 Total equity securities $19,715 $19,715 $19,715 Mortgage loans on real estate $1,487,575 $1,487,575 Real estate 67,967 67,967 Policy loans 2,523,477 2,523,477 Short-term investments 419,008 419,008 Total investments $12,661,942 $12,716,901 EX-3.(I) 2 EXHIBIT 3(i) ARTICLES OF REDOMESTICATION OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY ARTICLES OF REDOMESTICATION OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Appendices 1 through 10, described below and attached hereto, are the Articles of Redomestication of Great-West Life & Annuity Insurance Company, as amended. Appendix 1 - Articles of Redomestication effective September 25, 1990 Appendix 2 - Articles of Amendment to Articles of Redomestication effective December 17, 1990 Appendix 3 - Articles of Amendment to Articles of Redomestication effective September 30, 1991 Appendix 4 - Statement of Resolution effective September 30, 1991 Appendix 5 - Articles of Merger effective December 13, 1991 Appendix 6 - Articles of Amendment to Articles of Redomestication effective June 30, 1992 Appendix 7 - Articles of Amendment to Articles of Redomestication effective September 29, 1992 Appendix 8 - Statement of Resolution effective September 29, 1992 Appendix 9 - Articles of Amendment to Articles of Redomestication effective February 7, 1995 Appendix 10 - Articles of Amendment to Articles of Redomestication effective May 6, 1996 Appendix 1 Articles of Redomestication effective September 25, 1990 ARTICLES OF REDOMESTICATION OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY ARTICLE I NAME The name of the corporation is Great-West Life & Annuity Insurance Company. ARTICLE II STATE OF ORIGINAL INCORPORATION The corporation was originally incorporated as the National Interment Association on March 28, 1907, in the State of Kansas. The corporation was authorized to do business as an insurance company in the State of Kansas on April 24, 1907. On April 19, 1910, the name of the corporation was changed to the National Industrial Insurance Company. On September 14, 1956, the name of the corporation was changed to Liberty Life & Casualty Company, Inc. On February 15, 1963, the name of the corporation was changed to Ranger National Life Insurance Company. On May 29, 1980, the name of the corporation was changed to Insuramerica Corporation. On April 6, 1982, the name of the corporation was changed to Great-West Life & Annuity Insurance Company. ARTICLE III PERPETUAL DURATION The corporation shall have perpetual duration. ARTICLE IV PURPOSES A. The business of the corporation is serving as an insurance company relating to life, accident, and health insurance formerly under the laws of the State of Kansas and, upon redomestication to Colorado, under the laws of the State of Colorado. B. The corporation shall have the power to issue both participating and nonparticipating insurance policies. C. The corporation may engage in any lawful act or activity for which corporations may be organized under the Colorado Corporation Code which are not in conflict with the laws of the State of Colorado applicable to insurance companies or with the Regulations of the Colorado Commissioner of Insurance. D. The purpose for which the corporation is being redomesticated is to carry on, under the laws of the State of Colorado, the business for which it was incorporated under the laws of the State of Kansas. ARTICLE V REGISTERED OFFICE AND REGISTERED AGENT The registered office is at 8515 E. Orchard Road, Englewood, Colorado 80111. The registered agent is Ruth B. Lurie at said address. ARTICLE VI NAMES AND ADDRESSES OF DIRECTORS AND OFFICERS The following persons shall serve as the directors on the date of the redomestication of the corporation. Frank J. Becker 2818 West Central El Dorado, Kansas 67042 Martin B. Dickinson, Jr. 1211 Massachusetts Lawrence, Kansas 66044 George R. Dinney 2232 Ridge Plaza Castle Rock, Colorado 80104 Dawn H. Grohs 225 N. Market, Suite 200 Wichita, Kansas 67201 Nelson L. Hartman 520 West 27th Topeka, Kansas 66601 Kevin P. Kavanagh 100 Osborne North Winnipeg, Manitoba Canada R3C 3A5 William T. McCallum 8515 E. Orchard Road Englewood, Colorado 80111 The following persons shall serve as officers on the date of the redomestication of the corporation. William T. McCallum President and Chief Executive Officer 8515 E. Orchard Road Englewood, Colorado 80111 David E. Morrison Senior Vice President and Actuary 100 Osborne North Winnipeg, Manitoba, Canada R3C 3A5 Glen R. Derback Senior Vice President and Treasurer 8515 E. Orchard Road Englewood, Colorado 80111 John T. Hughes Sr. V.P., Chief Investment Officer 8515 E. Orchard Road Englewood, Colorado 80111 D. Craig Lennox Sr. V. P., General Counsel and Secretary 100 Osborne Street North Winnipeg, Manitoba, Canada R3C 3A5 Dennis Low Senior Vice President, Individual 8515 E. Orchard Road Englewood, Colorado 80111 Graham R. McDonald Senior Vice President 8505 E. Orchard Road Englewood, Colorado 80111 Edward J. Ransby Senior Vice President, Capital Markets & Pension Investments 100 Osborne Street North Winnipeg, Manitoba Canada R3C 3A5 ARTICLE VII CUMULATIVE VOTING IN THE ELECTION OF DIRECTORS Cumulative voting is not allowed in the election of Directors. ARTICLE VIII PREEMPTIVE RIGHTS FOR SHAREHOLDERS Ownership of shares of any class of the capital stock of the corporation shall not entitle the holders thereof to any preemptive right to subscribe for or purchase or to have offered to them for subscription or purchase any additional shares of capital stock of any class of the corporation or any securities convertible into any class of capital stock of the corporation, however acquired, issued, or sold by the corporation, it being the purpose and the intent that the Board of Directors shall have full right, power, and authority to offer for subscription or sale or to make any disposal of any or all unissued shares of the capital stock of the corporation or any securities convertible into stock or any or all shares of stock or convertible securities issued and thereafter acquired by the corporation, for such consideration, not less than the par value of shares having a par value, in money or property, as the Board of Directors shall determine. ARTICLE IX AUTHORIZED CAPITAL STOCK The corporation is authorized to issue 5,000,000 shares of common stock of a par value of $1 (one dollar) per share. ARTICLE X PERSONAL LIABILITY OF DIRECTORS No director of this corporation shall have any personal liability for monetary damages to the corporation or its shareholders for breach of his/her fiduciary duty as a director except that this provision shall not eliminate or limit the liability of a director to the corporation or its shareholders for monetary damages for (i) any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) payment of a dividend or approval of a stock repurchase in contravention of C.R.S. 7-5-114, or (iv) any transaction from which the director derives an improper personal benefit. ARTICLE XI GOVERNING LAW Upon redomestication of the corporation to the State of Colorado, the corporation accepts and will be subject to the laws of the State of Colorado. ARTICLE XII EFFECTIVE DATE, AMENDMENT AND RESTATEMENT These Articles of Redomestication become effective immediately upon the redomestication of the corporation to the State of Colorado. They thereafter constitute an amendment and restatement of all prior Articles of Incorporation of Great West Life & Annuity Insurance Company under the laws of the State of Kansas. ARTICLE XIII SIGNATURES These Articles of Redomestication are executed on behalf of the corporation by its President and its Secretary as evidenced by their signatures appearing below. Dated: August 23, 1990 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/ W.T. McCallum William T. McCallum, President* ATTEST: /s/ D.C. Lennox D. Craig Lennox, Secretary* *These Articles of Redomestication are verified by the signatures of the President and Secretary of the Corporation as provided in the Colorado Corporation Code. Appendix 2 Articles of Amendment to Articles of Redomestication effective December 17, 1990 ARTICLES OF AMENDMENT TO ARTICLES OF REDOMESTICATION Pursuant to the provisions of the Colorado Corporation Code, Great-West Life & Annuity Insurance Company (the "Corporation") hereby adopts the following Articles of Amendment to its Articles of Redomestication: FIRST: the name of the Corporation is Great-West Life & Annuity Insurance Company. SECOND: the amendment set forth on Exhibit A attached hereto was adopted by a vote of the sole shareholder of the Corporation on December 6, 1990. The number of shares voted for the Amendment was sufficient for approval. THIRD: the amendment does not effect an exchange, reclassification, or cancellation of issued shares of the Corporation. FOURTH: the amendment does not effect a change in the amount of stated capital of the Corporation. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Dated: December 6, 1990 By: /s/ W.T. McCallum William T. McCallum, its Presi- dent & Chief Executive Officer By: /s/ D.C. Lennox Craig Lennox, its Senior Vice President, General Counsel and Secretary EXHIBIT A Great-West Life & Annuity Insurance Company hereby amends and restates ARTICLE IX of its Articles of Redomestication to read in its entirety as follows: ARTICLE IX AUTHORIZED CAPITAL STOCK The total number of shares of all classes of capital stock which the corporation is authorized to issue is 100,000,000 shares, of which 50,000,000 shares shall be Common Stock, of a par value of $1 (one dollar) per share (the "Common Stock"), and 50,000,000 shares shall be Preferred Stock, of a par value of $1 (one dollar) per share (the "Preferred Stock"). A. COMMON STOCK The powers, designations, preferences and relative, participating, optional or other special rights (and the qualifications, limitations or restrictions thereof) in respect of the Common Stock are as follows: 1. Rank. The Common Stock shall rank junior to the Preferred Stock with respect to payment of dividends and distributions on liquidation or dissolution and shall have such other qualifications, limitations or restrictions as provided in this Article IX. 2. Voting Rights. Except as otherwise expressly provided by law or as provided for any series of Preferred Stock by the board of directors of the corporation in accordance with this Article IX, all voting rights shall be vested in the holders shares of the Common Stock, and at every meeting of stockholders of the corporation (or with respect to any action by consent in lieu of a meeting of stockholders), each share of Common Stock shall be entitled to one vote (whether voted in person by the holder thereof or by proxy or pursuant to a stockholders' consent) on all matters to come before such meeting of the stockholders of the corporation. 3. Dividend and Liquidation Preference as between the Common Stock and the Preferred Stock. For so long as any shares of Preferred Stock are outstanding, the corporation shall not declare, pay or set apart for payment any dividend or other distribution (other than any dividend or distribution payable solely in shares of Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends and liquidation) in respect of the Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of the Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends or upon liquidation, unless (i) full cumulative dividends on all shares of Preferred Stock for all past dividend periods have been (a) paid or (b) declared and a sum sufficient irrevocably deposited with the paying agent for the payment of such dividends, and (ii) the corporation has redeemed the full number of shares of Preferred Stock, if any, it is then obligated to redeem in accordance with the terms of any series of Preferred Stock as fixed by the board of directors of the corporation in accordance with this Article IX. 4. Assets Remaining After Liquidation. In the event of the dissolution, liquidation or winding up of the corporation, whether voluntary or involuntary, after payment in full of the amounts, if any, required to be paid to the holders of the Preferred Stock, the holders of shares of the Common Stock shall be entitled, to the exclusion of the holders of shares of the Preferred Stock, to share ratably in all remaining assets of the corporation. B. PREFERRED STOCK 1. The Preferred Stock may be divided into and issued in series. The board of directors of the corporation is authorized to divide the authorized shares of Preferred Stock into one or more series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. The board of directors of the corporation is authorized, within any limitations prescribed by law and this Article IX, to fix and determine the designations, rights, qualifications, preferences, limitations and terms of the shares of any series of Preferred Stock including but not limited to the following: (a) The rate of dividend, the time of payment of dividends, whether dividends are cumulative, and the date from which any dividends shall accrue; (b) Whether shares may be redeemed, and, if so, the redemption price and the terms and conditions of redemption; (c) The amount payable upon shares in event of involuntary liquidation; (d) The amount payable upon shares in event of voluntary liquidation; (e) Sinking fund or other provisions, if any, for the redemption or purchase of shares; (f) The terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion; (g) Voting powers, if any; and (h) Such other terms, qualifications, privileges, limitations, options, restrictions, and special or relative rights and preferences, if any, of shares of such series as the board of directors of the corporation may, at the time so acting, lawfully fix and determine under the laws of the State of Colorado. 2. No Dividend Preference Between Series of Preferred Stock. No dividends shall be declared on shares of any series of Preferred Stock for any dividend period or part thereof unless full cumulative dividends have been or contemporaneously are declared on the shares of each other series of Preferred Stock through the most recent dividend payment date for each such other series. If at any time any accrued dividends on shares of any series of Preferred Stock have not been paid in full, then the corporation will, if paying any dividends on any shares of any series of Preferred Stock, pay dividends on shares of all series of Preferred Stock pro rata in proportion to the sums which would be payable on such series if all accrued but unpaid dividends, if any, were declared and paid in full. Dividends on any series of Preferred Stock shall be cumulative only to the extent provided in the terms of that series. 3. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, holders of shares of any series of Preferred Stock shall be entitled to receive, out of the assets of the corporation available for distribution to stockholders after satisfying claims of creditors but before any payment or distribution on the Common Stock or on any other class of stock ranking junior to the shares of Preferred Stock upon liquidation, a liquidation distribution per share in the amount of the liquidation preference fixed or determined in accordance with the terms of the shares of such series of Preferred Stock plus, if so provided in such terms, an amount equal to accumulated and unpaid dividends on each share of such series (whether or not earned or declared) to the date of such distribution. If upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the assets of the corporation are insufficient to pay in full the holders of shares of any series of Preferred Stock the preferential amount to which they are entitled, holders of shares of all series of Preferred Stock will share ratably in any such distribution of such assets in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. Unless and until payment in full has been made to holders of shares of all series of Preferred Stock of the liquidation distributions to which they are entitled as provided in this Article IX, no dividends or distributions will be made to holders of the Common Stock or any other stock ranking junior to the shares of any series of Preferred Stock on liquidation and no purchase redemption or other acquisition for any consideration by the corporation will be made in respect of the Common Stock or any stock ranking junior to the shares of any series of Preferred Stock upon liquidation. After the payment to all holders of series of Preferred Stock of the full amount of the liquidation distributions to which they are entitled pursuant to the preceding sentences, such holders (in their capacity as such holders) shall have no right or claim to any of the remaining assets of the corporation. (b) Neither the sale, lease or exchange (for cash, stock, securities or other consideration) of all or substantially all of the property and assets of the corporation, nor the consolidation or merger of the corporation with or into any other entity, nor the merger or consolidation of any other entity with or into the corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Article IX. 4. Conversion Rights. Preferred Stock of any series may be convertible into shares of any other class or into shares of any series of the same or any other class, except as may otherwise be limited by law, if the terms and conditions of such conversion are fixed and determined by the board of directors of the corporation in establishing such series of Preferred Stock. 5. Dividend Rate Periods of the Preferred Stock. The periods during which a dividend rate would be applicable for any series of the Preferred Stock shall be determined in accordance with the terms of that series. Such terms may provide that the board of directors of the corporation shall have the discretion to establish the duration of the period during which a dividend rate would be applicable. Such terms may provide that a dividend rate may be applicable during all or part of the time any shares of such series are outstanding. If a dividend rate is applicable during only part of the time any shares of a series are outstanding, such terms may provide that the board of directors of the corporation may select, from time to time, one or more subsequent time periods of the same or varying lengths during which a dividend rate will be applicable; provided, that the board of directors of the corporation at the time of establishing such series shall state in the terms of such series a minimum and a maximum length for such time periods. 6. Redemption Provisions. (a) Shares of any series of the Preferred Stock shall be subject to the right of the corporation to redeem any of such shares if so provided in the terms of such series. Such terms may provide that the board of directors of the corporation may change from time to time, the redemption terms and conditions, including the redemption price, for shares of such series, provided, that the board of directors of the corporation at the time of establishing such series state in the terms of such series a minimum and a maximum redemption price. (b) The corporation shall not purchase or otherwise acquire any shares of any series of Preferred Stock while any accumulated and unpaid dividends exist with respect to such series or any other series of Preferred Stock, unless contemporaneously with such purchase or acquisition such accumulated and unpaid dividends are (i) paid or (ii) declared and a sum sufficient irrevocably deposited with the paying agent for payment of such dividends; provided, however, that (a) the corporation may redeem shares of any series of Preferred Stock in accordance with the terms of such series, and (b) the corporation may purchase or otherwise acquire shares pursuant to a voluntary purchase or exchange offer made on an equal basis to all holders of shares of all series of Preferred Stock. Appendix 3 Articles of Amendment to Articles of Redomestication effective September 30, 1991 ARTICLES OF AMENDMENT TO ARTICLES OF REDOMESTICATION Pursuant to the provisions of the Colorado Corporation Code, Great-West Life & Annuity Insurance Company (the "Corporation") hereby adopts the following Articles of Amendment to its Articles of Redomestication: FIRST: the name of the Corporation is Great-West Life & Annuity Insurance Company. SECOND: the amendment set forth on Exhibit 1 attached hereto was adopted by a vote of the sole shareholder of the Corporation on September 18, 1991. The number of shares voted for the Amendment was sufficient for approval. THIRD: the amendment does not effect an exchange, reclassification, or cancellation of issued shares of the Corporation. FOURTH: the amendment does not effect a change in the amount of stated capital of the Corporation. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Dated: September 18, 1991 By: /s/ W.T. McCallum William T. McCallum, its Presi- dent & Chief Executive Officer By: /s/ D. Craig Lennox D. Craig Lennox, its Senior Vice President, General Counsel and Secretary Exhibit 1 Great-West Life & Annuity Insurance Company hereby amends and restates ARTICLE IX of its Articles of Redomestication to read in its entirety as follows: ARTICLE IX AUTHORIZED CAPITAL STOCK The total number of shares of all classes of capital stock which the corporation is authorized to issue is 100,000,000 shares, of which 50,000,000 shares shall be Common Stock, of a par value of $1 (one dollar) per share (the "Common Stock"), and 50,000,000 shares shall be Preferred Stock, of a par value of $1 (one dollar) per share (the "Preferred Stock"). A. COMMON STOCK The powers, designations, preferences and relative, participating, optional or other special rights (and the qualifications, limitations or restrictions thereof) in respect of the Common Stock are as follows: 1. Rank. The Common Stock shall rank junior to the Preferred Stock with respect to payment of dividends and distributions on liquidation or dissolution and shall have such other qualifications, limitations or restrictions as provided in this Article IX. 2. Voting Rights. Except as otherwise expressly provided by law or as provided for any series of Preferred Stock by the board of directors of the corporation in accordance with this Article IX, all voting rights shall be vested in the holders of shares of the Common Stock, and at every meeting of stockholders of the corporation (or with respect to any action by written consent in lieu of a meeting of stockholders), each share of Common Stock shall be entitled to one vote (whether voted in person by the holder thereof or by proxy or pursuant to a stock- holders' consent) on all matters to come before such meeting of the stockholders of the corporation. 3. Dividend and Liquidation Preference as between the Common Stock and the Preferred Stock. For so long as any shares of Preferred Stock are outstanding, the corporation shall not declare, pay or set apart for payment any dividend or other distribution (other than any dividend or distribution payable solely in shares of Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends and liquidation) in respect of the Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of the Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends or upon liquidation, unless (i) full cumulative dividends on all shares of Preferred Stock for all past dividend periods have been (a) paid or (b) declared and a sum sufficient irrevocably deposited with the paying agent for the payment of such dividends, and (ii) the corporation has redeemed the full number of shares of Preferred Stock, if any, it is then obligated to redeem in accordance with the terms of any series of Preferred Stock as fixed by the board of directors of the corporation in accordance with this Article IX. 4. Assets Remaining After Liquidation. In the event of the dissolution, liquidation or winding up of the corporation, whether voluntary or involuntary, after payment in full of the amounts, if any, required to be paid to the holders of the Preferred Stock, the holders of shares of the Common Stock shall be entitled, to the exclusion of the holders of shares of the Preferred Stock, to share ratably in all remaining assets of the corporation. B. PREFERRED STOCK 1. The Preferred Stock may be divided into and issued in series. The board of directors of the corporation is authorized to divide the authorized shares of Preferred Stock into one or more series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. The board of directors of the corporation is authorized, within any limitations prescribed by law and this Article IX, to fix and determine the designations, rights, qualifications, preferences, limitations and terms of the shares of any series of Preferred Stock including but not limited to the following: (a) The rate of dividend, the time of payment of dividends, whether dividends are cumulative, and the date from which any dividends shall accrue; (b) Whether shares may be redeemed, and, if so, the redemption price and the terms and conditions of redemption; (c) The amount payable upon shares in event of involuntary liquidation; (d) The amount payable upon shares in event of voluntary liquidation; (e) Sinking fund or other provisions, if any, for the redemption or purchase of shares; (f) The terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion; (g) Voting powers, if any; and (h) Such other terms, qualifications, privileges, limitations, options, restrictions, and special or relative rights and preferences, if any, of shares of such series as the board of directors of the corporation may, at the time so acting, lawfully fix and determine under the laws of the State of Colorado. 2. No Dividend Preference Between Series of Preferred Stock. No dividends shall be declared on shares of any series of Preferred Stock for any dividend period or part thereof unless full cumulative dividends have been or contemporaneously are declared on the shares of each other series of Preferred Stock through the most recent dividend payment date for each such other series. If at any time any accrued dividends on shares of any series of Preferred Stock have not been paid in full, then the corporation will, if paying any dividends on any shares of any series of Preferred Stock, pay dividends on shares of all series of Preferred Stock pro rata in proportion to the sums which would be payable on such series if all accrued but unpaid dividends, if any, were declared and paid in full. Dividends on any series of Preferred Stock shall be cumulative only to the extent provided in the terms of that series. 3. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, holders of shares of any series of Preferred Stock shall be entitled to receive, out of the assets of the corporation available for distribution to stockholders after satisfying claims of creditors but before any payment or distribution on the Common Stock or on any other class of stock ranking junior to the shares of Preferred Stock upon liquidation, a liquidation distribution per share in the amount of the liquidation preference fixed or determined in accordance with the terms of the shares of such series of Preferred Stock plus, if so provided in such terms, an amount equal to accumulated and unpaid dividends on each share of such series (whether or not earned or declared) to the date of such distribution. If upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the assets of the corporation are insufficient to pay in full the holders of shares of any series of Preferred Stock the preferential amount to which they are entitled, holders of shares of all series of Preferred Stock will share ratably in any such distribution of such assets in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. Unless and until payment in full has been made to holders of shares of all series of Preferred Stock of the liquidation distributions to which they are entitled as provided in this Article IX, no dividends or distributions will be made to holders of the Common Stock or any other stock ranking junior to the shares of any series of Preferred Stock on liquidation and no purchase, redemption or other acquisition for any consideration by the corporation will be made in respect of the Common Stock or any stock ranking junior to the shares of any series of Preferred Stock upon liquidation. After the payment to all holders of series of Preferred Stock of the full amount of the liquidation distributions to which they are entitled pursuant to the preceding sentences, such holders (in their capacity as such holders) shall have no right or claim to any of the remaining assets of the corporation. (b) Neither the sale, lease or exchange (for cash, stock, securities or other consideration) of all or substantially all of the property and assets of the corporation, nor the consolidation or merger of the corporation with or into any other entity, nor the merger or consolidation of any other entity with or into the corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Article IX. 4. Conversion Rights. Preferred Stock of any series may be convertible into shares of any other class or into shares of any series of the same or any other class, except as may otherwise be limited by law, if the terms and conditions of such conversion are fixed and determined by the board of directors of the corporation in establishing such series of Preferred Stock. 5. Dividend Rate Periods of the Preferred Stock. The periods during which a dividend rate would be applicable for any series of the Preferred Stock shall be determined in accordance with the terms of that series. Such terms may provide that the board of directors of the corporation shall have the discretion to establish the duration of the period during which a dividend rate would be applicable. Such terms may provide that a dividend rate may be applicable during all or part of the time any shares of such series are outstanding. If a dividend rate is applicable during only part of the time any shares of a series are outstanding, such terms may provide that the board of directors of the corporation may select, from time to time, one or more subsequent time periods of the same or varying lengths during which a dividend rate will be applicable; provided, that the board of directors of the corporation at the time of establishing such series shall state in the terms of such series a minimum and a maximum length for such time periods. 6. Redemption Provisions. (a) Shares of any series of the Preferred Stock shall be subject to the right of the corporation to redeem any of such shares if so provided in the terms of such series. Such terms may provide that the board of directors of the corporation may change from time to time, the redemption terms and conditions, including the redemption price, for shares of such series, provided, that the board of directors of the corporation at the time of establishing such series shall state in the terms of such series a minimum and a maximum redemption price. (b) The corporation shall not purchase or otherwise acquire any shares of any series of Preferred Stock while any accumulated and unpaid dividends exist with respect to such series or any other series of Preferred Stock, unless contemporaneously with such purchase or acquisition such accumulated and unpaid dividends are (i) paid or (ii) declared and a sum sufficient irrevocably deposited with the paying agent for payment of such dividends; provided, however, that (a) the corporation may redeem shares of any series of Preferred Stock in accordance with the terms of such series, and (b) the corporation may purchase or otherwise acquire shares pursuant to a voluntary purchase or exchange offer made on an equal basis to all holders of shares of all series of Preferred Stock. Appendix 4 Statement of Resolution effective September 30, 1991 STATEMENT OF RESOLUTION ESTABLISHING FOUR SERIES OF PREFERRED STOCK Pursuant to Section 7-4-102 of the Colorado Corporation Code, Great-West Life & Annuity Insurance Company, a Colorado corporation (the "Corporation"), hereby submits the following statement for the purpose of establishing and designating four series of preferred stock and fixing and determining the relative rights and preferences thereof. 1. The name of the Corporation is Great-West Life & Annuity Insurance Company. 2. On September 18, 1991, the following resolution establishing and designating four series of shares of the Corporation's preferred stock was duly adopted by the Board of Directors of the Corporation pursuant to authority conferred upon the Board by the Corporation's Articles of Redomestication: RESOLVED, that the Board of Directors hereby creates and establishes four series of Stated Rate Auction Preferred Stock in accordance with the terms set forth in Exhibit A attached hereto [a copy of which is attached to this Statement of Resolution and is incorporated herein by this reference], and authorized the officers of the Corporation to file this resolution with the Colorado Secretary of State in accordance with the Colorado Corporation Code. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Dated: September 18, 1991 By: /s/ W.T. McCallum William T. McCallum, President and Chief Executive Officer By: /s/ D.C. Lennox D. Craig Lennox, Senior Vice President, General Counsel and Secretary EXHIBIT A 1. Creation and Designation of Series. The Board of Directors of Great-West Life & Annuity Insurance Company (the "Corporation") hereby creates four series of Stated Rate Auction Preferred Stock ("STRAPS"). The four series are designated as follows: "Stated Rate Auction Preferred Stock, Series A," consisting of 1,500 shares ("Series A STRAPS"), "Stated Rate Auction Preferred Stock, Series B," consisting of 1,500 shares ("Series B STRAPS"), "Stated Rate Auction Preferred Stock, Series C," consisting of 1,500 shares ("Series C STRAPS") and "Stated Rate Auction Preferred Stock, Series D," consisting of 1,500 shares ("Series D STRAPS"). Each share of Series A STRAPS shall be identical and equal in all respects to every other share of Series A STRAPS, each share of Series B STRAPS, shall be identical and equal in all respects to every other share of Series B STRAPS, each share of Series C STRAPS shall be identical and equal in all respects to every other share of Series C STRAPS, each share of Series D STRAPS shall be identical and equal in all respects to every other share of Series D STRAPS, and the shares of Series A STRAPS, Series B STRAPS, Series C STRAPS and Series D STRAPS shall, except as expressly provided in this Statement of Designation, be identical and equal in all respects. The Series A STRAPS, Series B STRAPS, Series C STRAPS and Series D STRAPS shall be subject to and governed by the provisions of the Articles of Redomestication of the Corporation as amended from time to time in accordance with applicable law (including, but not limited to, the provisions of the Articles of Redomestication concerning dividend and liquidation preferences). 2. Definitions. Unless the context or use indicates another or different meaning, the following terms shall have the following meanings, whether used in the singular or plural: "Affiliate", as used in paragraphs 1 through 7, means any entity other than the Corporation (i) which owns beneficially, directly or indirectly, 10% or more of the outstanding shares of the Common Stock, (ii) which is in control of the Corporation, as "control" is defined under Section 230.405 of the Rules and Regulations of the Securities and Exchange Commission, 17 C.F.R. S 230.405, as in effect on the date of this Statement of Designation, (iii) of which 10% of more of the outstanding shares of Common Stock, or in which a 10% or greater general partnership or joint venture interest, is owned beneficially, directly or indirectly, by any entity described in clause (i) or (ii) above, or (iv) which is controlled by any entity described in clause (i) or (ii) above, as "controlled by" is defined under such Section 230.405. "Applicable Rate" has the meaning specified in paragraph 3(c)(i) below. "Applicable Treasury Rate" on any date, with respect to any series of STRAPS with a Long-Term Dividend Period, means the interest equivalent of the rate for direct obligations of the United States Treasury having an original maturity which is equal to, or next lower than, the length of such Long-Term Dividend Period, as published weekly by the Federal Reserve Board in "Federal Reserve Statistical Release H.15 (519) Selected Interest Rates," or any successor publication by the Federal Reserve Board within five Business Days preceding such date. In the event that the Federal Reserve Board does not publish such weekly per annum interest rate, or if the release is not yet available, the Applicable Treasury Rate will be the arithmetic mean of the secondary market bid rates as of approximately 3:30 p.m., New York City time, on the Business Day next preceding such date of the U.S. Government Securities Dealers obtained by the Auction Agent (in the case of a determination of the Applicable Treasury Rate on any Auction Date) or the Corporation (in the case of a determination of such rate on any other day) for the issue of United States Treasury Bills with a remaining maturity equal to, or next lower than, the length of such Long-Term Dividend Period. If any U.S. Government Securities Dealer does not quote a rate required to determine the Applicable Treasury Rate, the Applicable Treasury Rate shall be determined on the basis of the quotation or quotations furnished by the remaining U.S. Government Securities Dealer or U.S. Government Securities Dealers and any Substitute U.S. Government Securities Dealer or Substitute U.S. Government Securities Dealers selected by the Corporation to provide such rate or rates not being supplied by any U.S. Government Securities Dealer or Government Securities Dealers, as the case may be, or, if the Corporation does not select any such Substitute U.S. Government Securities Dealer or Substitute U.S. Government Securities Dealers, by the remaining U.S. Government Securities Dealer or U.S. Government Securities Dealers; provided that, in the event the Corporation is unable to cause such quotations to be furnished to the Auction Agent, (or, if applicable, to the Corporation) by such sources, the Corporation may cause the Applicable Treasury Rate to be furnished to the Auction Agent (or, if applicable, the Corporation) by such alternative source or sources as the Corporation in good faith deems to be reliable. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis shall be equal to the quotient of (A) the discount rate divided by (B) the difference between 1.00 and the discount rate. "Auction" means each periodic operation of the Auction Procedures. "Auction Agent" means the bank or trust company appointed as auction agent by a resolution of the Board of Directors. "Auction Date" has the meaning specified in paragraph 8(a) below. "Auction Procedures" means the procedures set forth in paragraph 8 below. "Board of Directors" means the Board of Directors of the Corporation. "Business Day" means a day on which the New York Stock Exchange is open for trading and which is not a Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to close. "Code" means the Internal Revenue Code of 1986, as amended. "Commercial Paper Dealers" means Goldman, Sachs & Co., Shearson Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, or in lieu of any thereof, their respective affiliates or successors, provided that such entity is then a commercial paper dealer. "Common Stock" means the common stock, par value $1.00, of the Corporation. "Cut-Off Date" means the last day of the first taxable year of the Corporation as of which the accumulated earnings and profits of the Corporation, as calculated for federal income tax purposes, exceed three times the aggregate amount of all distributions on the STRAPS for such taxable year. "Date of Original Issue" means the date on which the Corporation originally issues the shares of STRAPS. "Default in Preferred Stock Dividends" has the meaning specified in paragraph 6(c) below. "Dividend Payment Date" has the meaning specified in paragraph 3 (b) (vi) below. "Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Dividend Period Days" has the meaning specified in paragraph 3 (b) (ix) below. "Dividend Quarter" has the meaning specified in paragraph 3 (b) (vi) below. "Dividends Received Deduction" means, with respect to any share of STRAPS and any dividend paid thereon to the Holder of such share, the deduction generally allowed to a corporate holder of stock in a taxable domestic business corporation in computing such Holder's taxable income for purposes of the regular federal corporate income tax under section 243(a)(1) of the Code, or any successor provision, equal to a percentage rate multiplied by the dividends (as defined in section 316(a) of the Code) received on such stock, determined (1) without regard to the amount of the issuer's stock owned by such Holder and (2) assuming that any limitations on such deduction based on the facts or circumstances relating to particular Holders (such as limitations based on a minimum holding period, the allocation of interest expense or debt to the purchase of stock, or the Holder's taxable income or status as a taxpayer) do not apply. "Eight-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Failure to Deposit" means the failure by the Corporation to pay to the Paying Agent, not later than noon (A) on the Business Day next preceding any Dividend Payment Date in funds available on such Dividend Payment Date in the City of New York, New York, the full amount of any dividend (whether or not earned or declared) to be paid on such Dividend Payment Date on any shares of STRAPS or (B) on the Business Day next preceding any redemption date in funds available on such redemption date in the City of New York, New York, the Redemption Price of any shares of STRAPS to be redeemed on such redemption date, plus accumulated and unpaid dividends thereon to the redemption date. In the event that the Corporation is acting as the Paying Agent, Failure to Deposit shall mean that the Corporation has not, on the applicable Dividend Payment Date for any Series of STRAPS, deposited with the United States Postal Service for delivery by first class mail, postage prepaid, to the registered holders of the STRAPS, the dividend payment checks with respect to such Dividend Payment Date. "Five-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Four-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Gross-Up Payment" means a payment to a Qualified Investor of an amount which, when taken together with the aggregate Non-Qualifying Distributions paid to such Qualified Investor during any taxable year ending on or before the Cut-Off Date, would cause such Qualified Investor's net yield in dollars (after federal income tax consequences and treating, for purposes of calculating net yield in dollars, that portion of the Non-Qualifying Distributions otherwise treated as a return of capital as capital gain received upon the taxable sales of shares of STRAPS at the time of such Non-Qualifying Distributions) from the aggregate of both the Non-Qualifying Distribution and the Gross-Up Payment to be equal to the net yield in dollars (after federal income tax consequences) which would have been received by such Qualified Investor if the amount of the aggregate Non-Qualifying Distributions treated as a return of capital had instead been treated as a dividend for federal income tax purposes. Such Gross-Up Payments shall be calculated (1) without consideration being given to the time value of money, (2) assuming that no federal minimum tax or similar tax is imposed with respect to dividends received from the Corporation, and (3) assuming that the Qualified Investor is taxable at all times at the maximum marginal regular federal income tax rate applicable to corporations in effect during the taxable year in question on the Non-Qualifying Distributions and the Gross-Up Payment and is able to take full advantage of the Dividends Received Deduction with respect to dividends received from the Corporation. "Holder" means an individual or entity in whose name an outstanding share of STRAPS is registered on the Stock Books. "Holders' Dividend Period Notice" has the meaning specified in paragraph 3 (b) (viii) (B) below. "Initial Long-Term Dividend Period" means, with respect to each of the Series A STRAPS, the Series B STRAPS, the Series C STRAPS and the Series D STRAPS, the period from and including the Date of Original Issue to and excluding December 31, 1993. "Long-Term Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Maximum Rate" has the meaning specified in paragraph 8(a) below. "Minimum Holding Period" has the meaning specified in paragraph 3(b)(ix) below. "Moody's" means Moody' 8 Investors Service or any successor thereto. "Nine-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Non-Qualifying Distribution" means a distribution on the shares of STRAPS with respect to any fiscal year of the Corporation ended on or before the Cut-Off Date that constitutes, in whole or in part, a return of capital. "Normal Dividend Payment Date" has the meaning specified in paragraph 3 (b) (ii) below. "Notice of Dividend Period" has the meaning specified in paragraph 3 (b) (viii) below. "Notice of Redemption" has the meaning specified in paragraph 5(e) below. "Notice of Revocation" has the meaning specified in paragraph 3 (b) (viii) below. "One-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Paying Agent" means the bank or trust company that has been appointed as paying agent by a resolution of the Board of Directors, or, if the Corporation shall have elected not to appoint a bank or trust company as Paying Agent for the initial Dividend Period with respect to any series of STRAPS, the Corporation. "Qualified Investor" means a Holder that is or was a Holder of the shares of STRAPS of any Series on the record date for a Non-Qualifying Distribution. "Rating Agencies," on any date of determination, means (i) each of Moody's and Standard & Poor's, or (ii) if only one of such rating agencies is then rating the shares of STRAPS, such rating agency, or (iii) if neither of such rating agencies is then rating the shares of STRAPS, any nationally recognized statistical rating organization designated by the Corporation with the consent of Goldman, Sachs & Co. provided such consent is not unreasonably withheld. "Securities Depository" has the meaning specified in paragraph 8(a) below. "Seven-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii ) below. "Short-Term Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Six-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Standard & Poor's" means Standard & Poor's Corporation or any successor thereto. "Stock Books" means the stock transfer books of the Corporation maintained by the Paying Agent with respect to the shares of STRAPS. "Substitute Commercial Paper Dealers" means The First Boston Corporation or Morgan Stanley & Co. Incorporated, or in lieu thereof, their respective affiliates or successors, provided that such entity is then a commercial paper dealer. "Substitute U.S. Government Securities Dealers" means The First Boston Corporation and Morgan Stanley & Co. Incorporated, or in lieu thereof, their respective affiliates or successors, provided that such entity is then a U.S. government securities dealer. Ten-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Thirty-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Three-year Dividend Period" has the meaning specified in paragraph 3 (b) (vii ) below. "Twenty-year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "Two-Year Dividend Period" has the meaning specified in paragraph 3 (b) (vii) below. "U.S. Government Securities Dealers" means Goldman, Sachs & Co., Shearson Lehman Government Securities Incorporated, Salomon Brothers Inc. and Morgan Guaranty Trust Company of New York, or in lieu of any thereof, their respective affiliates or successors, provided that such entity is then a government securities dealer. "Voting Parity Preferred Stock" has the meaning specified in paragraph 6(c) below. "Voting Period" has the meaning specified in paragraph 60-day "AA" Composite Commercial Paper Rate," on any date, means (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated AA by Standard & Poor's, or the equivalent of such rating by another nationally recognized statistical rating organization, as such 60-day rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date, or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the interest equivalent of the 60-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Auction Agent (in the case of determination of the 60-day "AA" Composite Commercial Paper Rate on any Auction Date) or the Corporation (in the case of determination of such rate on any other day) as of the close of business on the Business Day immediately preceding such date. If any of the Commercial Paper Dealers do not quote a rate required to determine the 60-day "AA" Composite Commercial Paper Rate, such 60-day "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotations or quotations furnished by the remaining Commercial Paper Dealers or Commercial Paper Dealer and any Substitute Commercial Paper Dealers or Substitute Commercial Paper Dealer selected by the Corporation to provide such quotation not being supplied by any Commercial Paper Dealer or, if the Corporation does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealers or Commercial Paper Dealer; provided that, in the event the Corporation is unable to cause such quotations to be furnished to the Auction Agent (or, if applicable, to the Corporation) by such sources, the Corporation may cause the 60-day "AA" Composite Commercial Paper Rate to be furnished to the Auction Agent (or, if applicable, to the Corporation) by such alternative source or sources as the Corporation in good faith deems to be reliable. If the Board of Directors shall adjust the number of days in a Short-Term Dividend Period pursuant to paragraph (3)(b)(ix) below, then (i) if the number of days in a Short-Term Dividend Period after such adjustment shall be fewer than 70 days, such rate shall be the interest equivalent of the 60-day rate on such commercial paper, (ii) if the number of days in a Short-Term Dividend Period after such adjustment shall be 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the interest equivalent of the 60-day and 90-day rates on such commercial paper, (iii) if the number of days in a Short-Term Dividend Period shall be 85 or more days but fewer than 99 days, such rate shall be the interest equivalent of the 90-day rate on such commercial paper, and (iv) if the number of days in a Short-Term Dividend Period after such adjustment shall be 99 or more days, such rate shall be determined on the basis of the interest equivalent of such commercial paper with a maturity (or an average maturity of such commercial paper with different maturities) as nearly as practicable equal to such number of days in a Short-Term Dividend Period, as determined by the Corporation in good faith. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis shall be equal to the quotient of (A) the discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction the numerator of which shall be the product of the discount rate times the number of days in which such commercial paper matures and the denominator of which shall be 360. 3. Dividends. (a) Holders of shares of STRAPS shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, cumulative cash dividends at the applicable dividend rate determined as set forth in paragraph 3(c)(i) below, and no more, payable on the respective dates set forth below. Accrued and unpaid dividends shall not bear interest. (b) (i) Dividends on the shares of each series of STRAPS shall accumulate at the respective Applicable Rates for such series (whether or not declared) from the Date of Original Issue. (ii) During the Initial Long Term Dividend Period, dividends on the shares of each series of STRAPS shall be payable quarterly on the last day of each March, June, September and December of each year, commencing December 31, 1991, and the last dividend during this Period will be payable on December 30, 1993, unless any such date is not a Business Day, in which case, dividends on the STRAPS will be payable on the next succeeding Business Day. Thereafter, dividends on the shares of each series of STRAPS with a Short-Term Dividend Period shall be payable, except as provided below in this paragraph 3(b), on the seventh Thursday following the immediately preceding Dividend Payment Date for such series, and dividends on the shares of each series of STRAPS with a Long-Term Dividend Period shall be payable, except as provided below in this paragraph 3(b), on the first day of the fourth month after the commencement of such Long-Term Dividend Period, on the first day of each succeeding third month thereafter and on the 49th (in the case of a One-Year Dividend Period), 102nd (in the case of a Two-Year Dividend Period), 158th (in the case of a Three-Year Dividend Period), 206th (in the case of a Four-Year Dividend Period), 259th (in the case of a Five-Year Dividend Period), 310th (in the case of a Six-Year Dividend Period), 364th (in the case of a Seven-Year Dividend Period), 416th (in the case of an Eight-Year Dividend Period), 468th (in the case of a Nine-Year Dividend Period), 520th (in the case of a Ten-Year Dividend Period), 1040th (in the case of a Twenty-Year Dividend Period), or 1560th (in the case of a Thirty-Year Dividend Period) Thursday after the commencement of such Long-Term Dividend Period. Each day on which dividends on shares of a series of STRAPS would be payable as determined as set forth in this clause (ii) but for the provisions set forth below in this paragraph 3(b) is referred to herein as a "Normal Dividend Payment Date." (iii) In the case of dividends payable on the shares of a series of STRAPS with a Short-Term Dividend Period, if: (A) (I) The Securities Depository shall make available to its members and participants the amounts due as dividends on the shares of such series of STRAPS in next-day funds on the dates on which such dividends are payable and (II) a Normal Dividend Payment Date for such series is not a Business Day or the day next succeeding such Normal Dividend Payment Date is not a Business Day, then dividends shall be payable on the first Business Day preceding such Normal Dividend Payment Date that is next succeeded by a Business Day; or (B) (I) The Securities Depository shall make available to its members and participants the amounts due as dividends on the shares of such series of STRAPS in immediately available funds on the dates on which such dividends are payable (and the Securities Depository shall have so advised the Auction Agent) and (II) a Normal Dividend Payment Date for such series is not a Business Day, then dividends shall be payable on the first Business Day following such Normal Dividend Payment Date. (iv) In the case of dividends payable on the shares of a series of STRAPS with a Long-Term Dividend Period (other than the Initial Long-Term Dividend Period), if: (A) (I) The Securities Depository shall make available to its members and participants the amounts due as dividends on the shares of such series of STRAPS in next-day funds on the dates on which such dividends are payable and (II) a Normal Dividend Payment Date for such series is not a Business Day or the day next succeeding such Normal Dividend Payment Date is not a Business Day, then dividends shall be payable on the first Business Day following such Normal Dividend Payment Date that is next succeeded by a Business Day; or (B) (I) The Securities Depository shall make available to its members and participants the amounts due as dividends on the shares of such series of STRAPS in immediately available funds on the dates on which such dividends are payable (and the Securities Depository shall have so advised the Auction Agent) and (II) a Normal Dividend Payment Date for such series is not a Business Day, then dividends shall be payable on the first Business Day following such Normal Dividend Payment Date. (v) Notwithstanding the foregoing, if the date on which the dividends on the shares of any Series of STRAPS would be payable as determined as set forth in clauses (ii), (iii) or (iv) above is a day that would result in the number of days between successive Auction Dates for such series (determined by excluding the first Auction Date and including the second Auction Date) not being at least equal to the then-current Minimum Holding Period, then dividends on such shares shall be payable, if either of clauses (iii)(A) or (iv)(A) above would be applicable to such series, on the first Business Day following such date on which dividends would be so payable that is next succeeded by a Business Day or, if either of clauses (iii)(B) or (iv)(B) above would be applicable to such series, on the first Business Day following such day on which dividends would be so payable, that in either case results in the number of days between such successive Auction Dates for such series (determined as set forth above) being at least equal to the then-current Minimum Holding Period. (vi) Each date on which dividends on the shares of a series of STRAPS shall be payable as determined as set forth above shall be referred to herein as a "Dividend Payment Date" for such series. The period from the preceding Dividend Payment Date to the next Dividend Payment Date for any series of STRAPS with a Long-Term Dividend Period is herein referred to as "Dividend Quarter." Although any particular Dividend Payment Date for a series of STRAPS may not occur on the originally scheduled Normal Dividend Payment Date for such series because of the foregoing provisions, each succeeding Dividend Payment Date for such series shall be, subject to such provision, the date determined as set forth in clause (ii) above as if all preceding Dividend Payment Dates had occurred on their respective originally scheduled Normal Dividend Payment Dates. (vii) After the Initial Long-Term Dividend Period for each series of STRAPS, each subsequent Dividend Period for such series will be, at the option of the Corporation by action of its Board of Directors, a period of 49 days (each such 49-day period, subject to any adjustment as a result of a change in law lengthening the Minimum Holding Period as provided in clause (ix) below, being referred to herein as a "Short-Term Dividend Period"), 49 weeks (a "One-Year 11 Dividend Period"), 102 weeks (a "Two-Year Dividend Period"), 158 weeks (a "Three-Year Dividend Period"), 206 weeks (a "Four-Year Dividend Period"), 259 weeks (a "Five-Year Dividend Period"), 310 weeks (a "Six-Year Dividend Period"), 364 weeks (a "Seven-Year Dividend Period"), 416 weeks (an "Eight-Year Dividend Period"), 468 weeks (a "Nine-Year Dividend Period"), 520 weeks (a "Ten-Year Dividend Period"), 1040 weeks (a "Twenty-Year Dividend Period") or 1560 weeks (a "Thirty-Year Dividend Period") (each such One-Year Dividend Period, Two-Year Dividend Period, Three-Year Dividend Period, Four-Year Dividend Period, Five-Year Dividend Period, Six-Year Dividend Period, Seven-Year Dividend Period, Eight-Year Dividend Period, Nine-Year Dividend Period, Ten-Year Dividend Period, Twenty-Year Dividend Period and Thirty-Year Dividend Period, together with the Initial Long-Term Dividend Periods being referred to herein as a "Long-Term Dividend Period," and each such Short-Term Dividend Period and Long-Term Dividend Period, being referred to herein as a "Dividend Period"). After the Initial Long-Term Dividend Period for a series of STRAPS, each successive Dividend Period for such series will commence on the Dividend Payment Date ending the preceding Dividend Period and will end (i) in the case of any series of STRAPS with a Short-Term Dividend Period, on the next Dividend Payment Date for such series and (ii) in the case of any series of STRAPS with a Long-Term Dividend Period, on the 49th (in the case of a One-Year Dividend Period), 102nd (in the case of a Two-Year Dividend Period), 158th (in the case of a Three-Year Dividend Period), 206th (in the case of a Four-Year Dividend Period), 259th (in the case of a Five- Year Dividend Period), 310th (in the case of a Six-Year Dividend Period, 364th (in the case of a Seven-Year Dividend Period, 416th (in the case of an Eight-Year Dividend Period, 468th (in the case of a Nine-Year Dividend Period, 520th (in the case of a Ten-Year Dividend Period), 1040th (in the case of a Twenty-Year Dividend Period), or 1560th (in the case of a Thirty-Year Dividend Period) Thursday thereafter. (viii) (A) On or prior to the 10th day but not more than 30 days prior to an Auction Date for any series of STRAPS, the Corporation shall, in accordance with the action of its Board of Directors, by telephonic and written notice (a "Notice of Dividend Period") to the Auction Agent and the Securities Depository, specify the length of the next succeeding Dividend Period for such series and, in accordance with Section 5(b) hereof, the redemption provisions that will apply to the series of STRAPS for such Dividend Period; provided, that, with respect to any Auction Date for any series of STRAPS occurring during a Short-Term Dividend Period, the Corporation may not select a Long-Term Dividend Period for such series (and any such notice shall be null and void) unless Sufficient Clearing Bids were made in the last occurring Auction for such series and full cumulative dividends for all series of STRAPS payable prior to such date have been paid in full. Any Notice of Dividend Period may be revoked by the Corporation by action of its Board of Directors by giving telephonic or written notice (a "Notice of Revocation") to the Auction Agent and the Securities Depository not less than two hours prior to the Submission Deadline (as defined in paragraph 8 hereof) on the related Auction Date, in which case the next Dividend Period shall be a Short-Term Dividend Period. If the Corporation does not give a Notice of Dividend Period with respect to the next succeeding Dividend Period for any series of STRAPS by the 10th day prior to the Auction Date for such series, or gives a Notice of Revocation with respect thereto, such next succeeding Dividend Period will be a Short-Term Dividend Period. In addition, in the event the Corporation has selected a Long-Term Dividend Period in any Notice of Dividend Period with respect to the next succeeding Dividend Period for any series of STRAPS, but Sufficient Clearing Bids are not made in the related Auction for such series or such Auction is not held for any reason, such next succeeding Dividend Period will, notwithstanding such Notice of Dividend Period, be a Short-Term Dividend Period and the Corporation may not again select a Long-Term Dividend Period (and any such Notice of Dividend Period shall be null and void) for such series until Sufficient Clearing Bids have been made in an Auction with respect to a Short-Term Dividend Period for such series. (B) At least 30 days prior to the initial Auction Date with respect to any series of STRAPS, the Corporation shall cause to be mailed by first-class mail, postage prepaid, to each Holder of shares of such series as its name and address appears on the Stock Books, a written notice of the commencement of the next succeeding Dividend Period (a "Holders' Dividend Period Notice"). The Holders' Dividend Period Notice shall set forth, among other things: (1) the date and day of the week of the initial Auction Date, and, if then known, the length of the next succeeding Dividend Period and the redemption provisions applicable to such series of STRAPS for such Dividend Period; (2) the then-current credit ratings of the STRAPS; (3) the name and address of the initial Broker-Dealer or Broker-Dealers who will solicit bids for the Auction for such series of STRAPS; (4) the name and address of the Auction Agent; (5) the name and address of the Securities Depository; (6) the names and addresses of members of or participants in the Securities Depository who have consented to be appointed to act on behalf of the Holders of the STRAPS; (7) that each Holder must deposit the certificates representing the shares of STRAPS of such series in exchange for evidence of such shares of STRAPS thereafter to be held in book entry form by the Securities Depository; (8) that unless a Holder submits a Bid or a Hold Order with respect to each share of STRAPS of such series held by such Holder, the Auction Agent will deem a Sell Order to have been submitted by such Holder with respect to any shares of STRAPS of such series not covered by a Bid or Hold Order; and (9) that each Holder must appoint a member of or participant in the Securities Depository in order (x) to submit Bids in the initial Auction and (y) to receive payment for any shares of STRAPS such Holder sells in the initial Auction. (ix) Notwithstanding the foregoing, in the event of a change in law altering the minimum holding period (the "Minimum Holding Period") required for corporate taxpayers generally to be entitled to the dividends received deduction for federal income tax purposes in respect of dividends (other than extraordinary dividends) paid on preferred stock held by non-affiliated corporations, the Board of Directors shall adjust the number of days in a Short-Term Dividend Period commencing after the effective date of such change in law such that the number of days (such number of days without giving effect to the exceptions referred to above being hereinafter referred to as "Dividend Period Days") in a Short-Term Dividend Period shall equal or exceed the Minimum Holding Period; provided that the number of Dividend Period Days shall not exceed by more than nine days the length of such Minimum Holding Period and in no event shall be less than 15 days, and will be evenly divisible by seven. Upon any such change in the number of days in a Short-Term Dividend Period as a result of a change in law, the Corporation shall cause to be mailed notice of such change by first-class mail, postage prepaid, to the Auction Agent, the Paying Agent and each Holder at such Holder's address as it appears on the Stock Books, and to the Rating Agencies. (x) Not later than noon on the Business Day immediately preceding each Dividend Payment Date with respect to which dividends on any shares of STRAPS have been declared, the Corporation shall irrevocably deposit with the Paying Agent sufficient funds for the payment of such dividends and shall give the Paying Agent irrevocable instructions to apply such funds and, if applicable, the income and proceeds therefrom, to the payment of such dividends. (xi) Each dividend on the shares of any series of STRAPS declared by the Board of Directors shall be paid to Holders of such shares as such Holders' names appear on the Stock Books on the related record date, which shall be (A) during the Initial Long-Term Dividend Period for each series of STRAPS, the opening of business on the fifteenth day of the calendar month which next precedes the Dividend Payment Date for such dividend, or if such day is not a Business Day, on the next succeeding Business Day, and (B) thereafter, the opening of business on the Business Day immediately preceding the Dividend Payment Date for such dividend. Subject to paragraph 3(d)(i) below, dividends on the shares of any series of STRAPS in arrears for any past Dividend Period (and for any Dividend Quarter during a Long-Term Dividend Period) may be declared by the Board of Directors and paid on any date fixed by the Board of Directors, on a regular Dividend Payment Date or otherwise, to Holders of such shares as such Holders' names appear on the Stock Books on the related record date fixed by the Board of Directors, which shall not be more than 15 days before the date fixed for the payment of such dividends. (c) (i) Subject to paragraph 3 (c) ( ii), (I) during the Initial Long Term Dividend Period, the dividend rate per annum applicable to each series of STRAPS shall be 8.0%, and (II) the dividend rate on the shares of each series of STRAPS (the "Applicable Rate") for each subsequent Dividend Period shall be the rate per annum determined for such series pursuant to the operation of the Auction Procedures set forth in paragraph 8 below. Notwithstanding the foregoing, in the event (A) that an Auction with respect to any Dividend Period for any series is not held for any reason (including the existence of a Failure to Deposit on the Auction Date with respect to such Dividend Period), then the next succeeding Dividend Period shall be a Short-Term Dividend Period, and the dividend rate on the shares of such series for such Dividend Period shall be equal to the Maximum Rate on the Auction Date with respect to such Dividend Period, provided that if an Auction is not held due to the existence of a Failure to Deposit which is not cured within three Business Days, the dividend rate will be as provided in the immediately following clause (B), or (B) any Failure to Deposit shall have occurred and the amounts to be paid by the Corporation to the Paying Agent shall not been paid within three Business Days following the Failure to Deposit (or, in the event that the Corporation shall act as the Paying Agent, the checks for such amounts shall not have been deposited with the United States Postal Service for delivery to the registered holders within three Business Days following the Failure to Deposit), (w) Auctions for all series of STRAPS will be suspended, (x) each Dividend Period for each series of STRAPS commencing after the occurrence of a Failure to Deposit shall be a Short-Term Dividend Period, (y) the dividend rate on the shares of each series of STRAPS for each Short-Term Dividend Period or part thereof commencing thereafter shall be equal to 250% of the 60-day "AA" Composite Commercial Paper Rate on the first day of each such Dividend Period and (z) if such Failure to Deposit occurs during a Long-Term Dividend Period with respect to any series of STRAPS, then, for each series of STRAPS for which a Long-Term Dividend Period is then applicable, the dividend rate on the shares of such series of STRAPS for each Dividend Quarter or part thereof commencing thereafter until the Dividend Quarter within such Dividend Period commencing after such Failure to Deposit has been cured will be equal to 250% of the Applicable Treasury Rate on the Auction Date for such Series (or, in the case of the Initial Long-Term Dividend Period, on the date of issuance of such Series). Any Failure to Deposit shall be deemed cured if the Corporation shall have paid to the Paying Agent (or, in the event that the Corporation shall act as the Paying Agent, have deposited checks for such amounts with the United States Postal Service for delivery by first class mail, postage prepaid, to the registered holders) (i) all accumulated and unpaid dividends on the shares of STRAPS of each series to but excluding the immediately preceding Dividend Payment Date therefor, including the full amount of any dividends to be paid in respect of the Dividend Period (or Dividend Quarter) with respect to which such failure occurred and (ii) without duplication, the redemption price, plus accumulated and unpaid dividends thereon to the redemption date, of any shares of STRAPS called for redemption. Notwithstanding the foregoing, if the Company shall have cured a Failure to Deposit by making the aforedescribed payment to the Paying Agent, the Paying Agent will give notice of such cure to the holders of the STRAPS and (i) Auctions will resume, (ii) the Applicable Rate for each Series for each Dividend Period commencing thereafter will be determined thereafter as if such Failure to Deposit had not occurred and (iii) in the case of each Series with a Long-Term Dividend Period, the Applicable Rate for each Dividend Quarter therefor commencing thereafter will equal the Applicable Rate for such Series in effect prior to the occurrence of such Failure to Deposit (ii) The amount of dividends per share of any series of STRAPS during any Long-Term Dividend Period (including the Initial Long-Term Dividend Period) shall be computed on the basis of a year consisting of twelve 30-day months. The amount of dividends per share of any series of STRAPS payable for each Short-Term Dividend Period for such series will be computed by multiplying the Applicable Rate for such series for such Dividend Period by a fraction, the numerator of which shall be the number of days in such Dividend Period (determined by including the first day thereof and excluding the last day thereof) during which such share was outstanding and the denominator of which shall be 360, and multiplying the result by $100,000. Provisions regarding the dividend preferences and rights of the Holders of STRAPS are set forth in Article IX of the Articles of Redomestication of the Corporation. (d) If any notice given by the Corporation pursuant to paragraph 7(c) states that any distributions made by the Corporation to Holders as dividends during any taxable year were Non-Qualifying Distributions, the Corporation shall, within 30 days of the date of such notice make a Gross-Up Payment to each Qualified Investor. 4. Liquidation Rights. (a) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, Holders shall be entitled to receive, out of the assets of the Corporation available for distribution to stockholders after satisfying claims of creditors but before any payment or distribution on the Common Stock or on any other class of stock ranking junior to the shares of STRAPS upon liquidation, a liquidation distribution in the amount of $100,000 per share plus an amount equal to accumulated and unpaid dividends on each share (whether or not earned or declared) to the date of such distribution. Additional provisions regarding the preferences and rights of the Holders of STRAPS to receive liquidating distributions are set forth in Article IX of the Articles of Redomestication of the Corporation. (b) Neither the sale, lease or exchange (for cash, stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the consolidation or merger of the Corporation with or into any other entity, nor the merger or consolidation of any other entity with or into the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the affairs of the Corporation, either voluntary or involuntary, for purposes of this paragraph 4. 5. Redemption. Shares of STRAPS shall be redeemable by the Corporation as provided below: (a) The Corporation may, at its option, out of funds legally available therefor, upon at least 15 but not more than 45 days' notice pursuant to a Notice of Redemption, redeem the shares of any series of STRAPS, as a whole or in part (I) during the Initial Long-Term Dividend Period for such series, on the second Business Day preceding the last Dividend Payment for such Initial Long-Term Dividend Period, (II) during a Short-Term Dividend Period for such series, on the second Business Day preceding any Dividend Payment Date for such series and (III) during any Long-Term Dividend Period other than the Initial Long-Term Dividend Period for such series, on the second Business Day preceding the last Dividend Payment Date for such Long-Term Dividend Period, in each case at a redemption price equal to $100,000 per share plus an amount equal to the accumulated and unpaid dividends on such shares (whether or not earned or declared) to the redemption date. (b) In addition, the Corporation may, at its option, out of funds legally available therefor, during any Long-Term Dividend Period with respect to any series of STRAPS other than an Initial Long-Term Dividend Period, upon at least 15 but not more than 45 days' notice pursuant to a Notice of Redemption, redeem the shares of such series as a whole or from time to time in part, pursuant to redemption provisions applicable to such Long-Term Dividend Period selected by the Corporation by action of its Board of Directors and specified in the Notice of Dividend Period with respect to such Long-Term Dividend Period pursuant to paragraph 3(b)(viii); Provided, that the redemption price so selected by the Corporation shall be at least $100,000 per share, and no more than $250,000 per share, plus any accumulated and unpaid dividends thereon. (c) In the event that fewer than all of the outstanding shares of STRAPS are to be redeemed, the Corporation may, at its option, determine to redeem all or a portion of the shares of one series of STRAPS without redeeming shares of another series, and/or may select by lot or other such method as the Corporation shall deem to be fair and equitable the shares of (d) Notwithstanding the other provisions of this paragraph 5, the Corporation shall not redeem any shares of STRAPS unless all accumulated and unpaid dividends on all outstanding shares of STRAPS for all applicable past Dividend Periods (and all past Dividend Quarters during any Long-Term Dividend Period) shall have been or are contemporaneously paid or declared and a sum sufficient irrevocably deposited with the Paying Agent for payment of such dividends. (e) Whenever shares of STRAPS are to be redeemed, the Corporation shall cause to be mailed, within the time period specified in paragraphs 5(a) or 5(b) above, a written notice of redemption (a "Notice of Redemption") by first-class mail, postage prepaid, to each Holder of shares of STRAPS to be redeemed as its name and address appear on the Stock Books and to the Paying Agent. Each Notice of Redemption shall state (A) the redemption date, (B) the redemption price, (C) the series and number of shares of such series of STRAPS to be redeemed and, in the event of redemption of less than all of the outstanding shares of STRAPS of a series, identification (by certificate number or otherwise) of the shares of STRAPS to be redeemed, (D) the place or places where shares of STRAPS to be redeemed are to be surrendered for payment of the redemption price, (E) that dividends on the shares of STRAPS to be redeemed will cease to accumulate on such redemption date and (F) if applicable, that the Holders of shares of STRAPS being called for redemption will not be entitled to participate, with respect to such shares, in any Auction held subsequent to the date of such Notice of Redemption. No defect in the Notice of Redemption or in the mailing or publication thereof shall affect the validity of the redemption proceedings, except as required by applicable law. A Notice of Redemption shall be deemed given on the day that it is mailed in accordance with the first sentence of this paragraph 5(e). (f) On or after the redemption date, each Holder of shares of STRAPS that were called for redemption shall surrender the certificate or other instrument evidencing such shares properly endorsed in blank for transfer or accompanied by proper instruments of assignment or transfer in blank, and bearing all necessary transfer tax stamps thereto affixed and canceled, to the Corporation at the place designated in the Notice of Redemption and shall then be entitled to receive payment of the redemption price for such shares. If less than all of the shares represented by one share certificate or other instrument are to be redeemed, the Corporation shall issue a new share certificate for the shares not redeemed. (g) Not later than the close of business on the Business Day immediately preceding the redemption date, the Corporation shall irrevocably deposit with the Paying Agent sufficient funds to redeem the shares of STRAPS to be redeemed and shall give the Paying Agent irrevocable instructions to apply such funds and, if applicable, the income and proceeds therefrom, to the payment of the redemption price. (h) If the Corporation shall have given or caused to be given a Notice of Redemption as aforesaid, shall have irrevocably deposited with the Paying Agent a sum sufficient to redeem the shares of STRAPS as to which such Notice of Redemption was given and shall have given the Paying Agent irrevocable instructions and authority to pay the redemption price to the Holders of such shares, then on the date of such deposit (or, if no such deposit shall have been made, then on the date fixed for redemption, unless the Corporation shall have defaulted in making payment of the redemption price), all rights of the Holders of such shares by reason of their ownership of such shares (except their right to receive the redemption price thereof, but without interest) shall terminate, and such shares shall no longer be deemed outstanding for any purpose, including, without limitation, the right of the Holders of such shares to vote on any matter or to participate in any subsequent Auctions. In addition, any shares of STRAPS as to which a Notice of Redemption has been given by the Corporation will be deemed to be not outstanding for purposes of any Auction held subsequent to the date of such Notice of Redemption. The Corporation shall be entitled to receive, from time to time, from the Paying Agent, the income, if any, derived from the investment of monies and/or other assets deposited with it (to the extent that such income is not required to pay the redemption price of the shares to be redeemed), and the Holders of shares to be redeemed shall have no claim to any such income. In case the Holder of any shares called for redemption shall not claim the redemption price for his shares within two years after the redemption date, the Paying Agent shall, upon demand, pay over to the Corporation such amount remaining on deposit and the Paying Agent shall thereupon be relieved of all responsibility to the Holder with respect to such shares, and such Holder shall thereafter look only to the Corporation for payment of the redemption price of such shares. (i) Nothing in this paragraph 5 shall limit any right of the Corporation to purchase or otherwise acquire outside of any Auction any shares of any series of Preferred Stock from any holder thereof who consents to such purchase or other acquisition, except as provided in Article IX of the Articles of Redomestication of the Corporation. (j) The Corporation shall not give a Notice of Redemption unless at the time of giving of such notice the Corporation shall in good faith believe that it will have sufficient funds to effect the redemption of all of the shares of STRAPS to be redeemed pursuant to such notice. The giving of a Notice of Redemption shall obligate the Corporation to redeem the shares of STRAPS specified in such Notice of Redemption on the terms and conditions specified therein. 6. Voting Rights. (a) General. Holders shall have no voting rights, either general or special, except as provided by applicable law or specified in this paragraph 6. (b) Right to Vote in Certain Events. In addition to any other vote or consent of Shareholders of the Corporation then required by applicable law or by the Articles of Redomestication of the Corporation, so long as any shares of a series of STRAPS remain outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of such series of the STRAPS outstanding at that time, given in person or by proxy, either in writing or at a meeting (i) authorize, create or issue, or increase the authorized or issued amount, of any class or series of stock ranking prior to such series of STRAPS with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up of the Corporation, or reclassify any authorized stock of the Corporation into any such shares, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such shares, or (ii) amend, alter or repeal any of the provisions of the Corporation's Articles of Redomestication of the Corporation or this Statement of Designation so as to adversely affect any right, preference, privilege or voting power of such series of the STRAPS; provided, however, that any increase in the amount of the authorized preferred stock or the creation or issuance of any series of preferred stock or any increase in the amount of authorized shares of such series or of any other series of preferred stock, in each case ranking on a parity with or junior to each series of the STRAPS with regard to dividends, or upon liquidation, dissolution or winding up of the Corporation, shall not be deemed to adversely affect such rights, preferences, privileges or voting powers. (c) During any period (a "Voting Period") when a "Default in Preferred Dividends" (as hereinafter defined) shall exist on the shares of any series of the STRAPS, or any series of preferred stock ranking on a parity with the shares of the STRAPS as to dividends or upon liquidation, dissolution or winding up of the Corporation and the terms of which expressly provide that such shares are "Voting Parity Preferred Stock" within the meaning of this paragraph and voting rights thereunder are then exercisable (all such shares, and all shares of each series of the STRAPS, being hereinafter referred to collectively as the "Voting Parity Preferred Stock"), the authorized number of members of the Board of Directors shall automatically be increased by two. The two vacancies so created shall be filled by the vote of the holders of the Voting Parity Preferred Stock, voting together as a single class without regard to series, to the exclusion of the holders of the Common Stock of the Corporation and any other class or series of stock other than Voting Parity Preferred Stock. A "Default in Preferred Stock Dividends" shall be deemed to have occurred whenever the amount of unpaid accumulated dividends upon any series of the Voting Parity Preferred Stock through the last preceding dividend period therefor shall be equivalent to six quarterly dividends (which with respect to any series of the STRAPS or any other series of Voting Parity Preferred Stock, shall be deemed to be dividends with respect to a number of dividend periods containing not less than 540 days) or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accumulated and unpaid dividends (whether or not earned or declared) on all shares of all Voting Parity Preferred Stock of each and every series then outstanding shall have been paid to the end of the last preceding dividend period. Upon the termination of a Voting Period, the voting rights described in this paragraph 6(c) shall cease, subject always, however, to revesting of such voting rights in the holders of Voting Parity Preferred Stock upon the further occurrence of a Default in Preferred Dividends. If any Voting Period shall have terminated before the holders of Voting Parity Preferred Stock shall have exercised the voting rights provided in this paragraph 6(c), the holders of such Voting Parity Preferred Stock shall be deemed not to have acquired such voting rights. (d) Voting Procedures. (i) As soon as practicable after the commencement of a Voting Period, the Corporation shall call or cause to be called a special meeting of the holders of the Voting Parity Preferred Stock by mailing or causing to be mailed a notice of such special meeting to such holders not less than 10 nor more than 45 days after the date such notice is given. If the Corporation does not call or cause to be called such a special meeting, it may be called by any of such holders on like notice. The record date for determining the holders of Voting Parity Preferred Stock entitled to notice of and to vote at such meeting shall be the close of business on the Business Day preceding the day on which such notice is mailed. At any such special meeting and at each meeting of stockholders held during a Voting Period at which directors are to be elected, removed or replaced, the holders of the Voting Parity Preferred Stock of all series, voting together as a single class (to the exclusion of the holders of all other securities and classes of capital stock of the Corporation), voting by a majority of the votes of shares present in person or by proxy, shall be entitled to elect two directors. In regard to such elections, each share of STRAPS, and each share of any other Voting Parity Preferred Stock, shall be entitled to one vote on the basis of each $100,000 of liquidation preference (excluding amounts in respect of accumulated and unpaid dividends). Cumulative voting in such elections shall not be permitted. Shares of Voting Parity Preferred Stock then outstanding, present in person or represented by proxy, representing one-third of the votes of the Voting Parity Preferred Stock, will constitute a quorum for the election of directors. Notice of all meetings at which holders of the Voting Parity Preferred Stock of any series shall be entitled to vote will be given to such holders at their addresses as they appear on the Stock Books. At any such meeting or adjournment thereof in the absence of a quorum, holders of shares of Voting Parity Preferred Stock representing a majority of the votes present in person or represented by proxy shall have the power to adjourn the meeting for the election of directors without notice, other than an announcement at the meeting, until a quorum is present. If any Voting Period shall terminate after the notice of special meeting provided for in this paragraph 6(d)(i) has been given but before the special meeting shall have been held, the Corporation shall, as soon as practicable after such termination, mail or cause to be mailed to the holders of the Voting Parity Preferred Stock a notice of cancellation of such special meeting. (ii) The term of office of all persons who are directors of the Corporation at the time of a special meeting of the holders of the Voting Parity Preferred Stock to elect directors shall continue, notwithstanding the election at such meeting by such holders of the two additional directors. The persons elected by holders of the Voting Parity Preferred Stock, together with the incumbent directors elected by the holders of the Common Stock, shall constitute the duly elected directors of the Corporation. (iii) Simultaneously with the expiration of a Voting Period, the term of office of the directors elected by the holders of the Voting Parity Preferred Stock shall terminate, the persons who shall have been elected by the holders of the Common Stock (or by the Board of Directors prior to the beginning of the Voting Period) and who are incumbent shall constitute the directors of the Corporation, and the voting rights of the holders of the Voting Parity Preferred Stock to elect directors shall cease. (iv) For so long as a Voting Period continues, the directors elected by the holders of the Voting Parity Preferred Stock may be removed without cause by, and shall not be removed without cause except by, the vote of the holders of record of the outstanding shares of Voting Parity Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Voting Parity Preferred Stock, called for such purpose. So long as a Voting Period continues, (A) any vacancy in the office of a director elected by the holders of the Voting Parity Preferred Stock may be filled (except as provided in the following clause (B)) by the person appointed by an instrument in writing signed by the remaining director elected by the holders of the Voting Parity Preferred Stock and filed with the Corporation or, in the event there is no remaining director elected by the holders of the Voting Parity Preferred Stock, by vote of the holders of the outstanding shares of Voting Parity Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders or at a meeting of the holders of shares of Voting Parity Preferred Stock called for such purpose, and (B) in the case of the removal of any director elected by the holders of the Voting Parity Preferred Stock, the vacancy may be filled by the person elected by the vote of the holders of the outstanding shares of Voting Parity Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted or at any subsequent meeting. (e) Additional Vote. If any matter (including, without limitation, election, removal or replacement of directors) requires the consent or affirmative vote of shares of any series of STRAPS, of all series of STRAPS, or of all Preferred Stock of the Corporation, whether pursuant to the provisions of such series, all such series or such Preferred Stock or pursuant to the provisions of the Articles of Redomestication of the Corporation or pursuant to applicable law, and if any shares of any series of STRAPS entitled to vote are held by the Corporation or by any of its Affiliates, then the following additional consent or vote will be required: the same consent or affirmative vote of shares otherwise required, except that shares of STRAPS held by the Corporation and/or its Affiliates shall be deemed not to be outstanding for purposes of such additional consent or vote; provided, such additional consent or vote will not be applicable if all outstanding shares of the STRAPS of such series (in the case of a class vote of such series) or of all series of STRAPS (in the case of a vote of all series of STRAPS) are held by the Corporation and/or its Affiliates. 7. Miscellaneous Provisions Relating to Dividends. (a) Maintaining Shares of STRAPS in Book Entry Form. Promptly after receiving the Holders' Dividend Period Notice specified in paragraph 3(b)(viii), each Holder of shares of the related series of STRAPS shall take such actions and shall execute and deliver such documents and agreements as the Corporation shall have reasonably requested in such Holders' Dividend Period Notice, which actions, documents and/or agreements may include but shall not be limited to the following: (i) appointing a participant in or agent member of the Securities Depository to act on its behalf; (ii) delivering an executed copy of the Purchaser's Letter, as described in paragraph 8(a), to the Auction Agent; and (iii) if the customary procedures of the Securities Depository shall so require, surrendering the certificates representing the shares of STRAPS of such series to the Corporation, the Auction Agent, the Paying Agent or the Securities Depository, as described in the Holders' Dividend Period Notice. (b) Initial Auctions. (i) At least 30 days prior to the initial Auction for Series A STRAPS, the Corporation will: (A) appoint a bank or trust company to act as the Auction Agent and enter into an Auction Agency Agreement with such bank or trust company to conduct Auctions for the STRAPS pursuant to the Auction procedures set forth in paragraph 8 hereof; and (B) request one or more broker-dealers to enter into Broker-Dealer Agreements with the Auction Agent and to solicit bids for the shares of STRAPS in the initial Auction for each series and each subsequent Auction therefor. (ii) At least 30 days prior to the initial Auction any series of STRAPS, the Corporation will: (A) request The Depository Trust Company (HDTC") to act as the Securities Depository to maintain the shares of STRAPS of such series in book entry form for the account of each Holder's agent member which in turn will maintain records of the Holder's beneficial ownership and, if DTC declines to act as the Securities Depository, use its best efforts to appoint another securities depository or bank or trust company to act in such capacity; and (B) if the Corporation theretofore has acted as the Paying Agent with respect to such series, appoint a bank or trust company to act as the Paying Agent and enter into a Paying Agency Agreement with such bank or trust company to make dividend and redemption payments in accordance with the provisions of this Statement of Designation. (c) (i) Annual Notice Concerning Return of Capital. The Corporation shall, on or before January 31 of each year prior to the Cut-Off Date, cause to be mailed by first-class mail, postage prepaid, to each Holder a written notice stating whether, to the best of its knowledge, based upon information then available to the Corporation, any distributions made as dividends on the shares of STRAPS during the previous taxable year constituted Non-Qualifying Distributions. In issuing such notice and making such determination, the Corporation shall be entitled to rely conclusively on the advice of its legal counsel and independent public accountants. The Corporation may correct any information in such notice that it determines to be inaccurate by mailing in the same manner a corrected notice, in which case such corrected notice shall be the notice delivered under this provision. (ii) The Corporation shall, promptly after the occurrence thereof, cause to be mailed, by first-class mail, postage prepaid, to the Paying Agent and each registered Holder of shares of STRAPS, a written notice stating that it has determined that the Cut-Off Date has occurred. 8. Auction Procedures. (a) Certain Definitions. Capitalized terms not defined in this paragraph 8 shall have the respective meanings specified in paragraph 1 through paragraph 7 above. As used in this paragraph 8, the following terms shall have the following meanings, unless the context otherwise requires, and all defined terms, unless the context otherwise requires, shall be deemed to refer to Series A STRAPS, Series B STRAPS, Series C STRAPS or Series D STRAPS, as the case may be: "Affiliate" means any Person known to the Auction Agent to be controlled by, in control of, or under common control with, the Corporation. "Agent Member" means the member of the Securities Depository that will act on behalf of a Bidder and/or an Existing Holder. "Auction" means the periodic operation of the procedures set forth in this paragraph 8. "Auction Date" means the Business Day next preceding the first day of a Dividend Period. "Available STRAPS" has the meaning specified in paragraph 8(d)(i) below. "Bid" has the meaning specified in paragraph 8(b)(i) below. "Bidder" has the meaning specified in paragraph 8(b)(i) below. "Broker-Dealer" means any broker-dealer, or other entity permitted by law to perform the functions required of a Broker-Dealer in this paragraph 8, that is a member of, or a participant in, the Securities Depository, that has been selected by the Corporation and that has entered into a Broker-Dealer Agreement with the Auction Agent that remains effective. "Broker-Dealer Agreement" means an agreement between the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in this paragraph 8. "Existing Holder", when used with respect to shares of STRAPS, means a Person who has executed a Purchaser's Letter and is listed as the Existing Holder of such shares of STRAPS in the records of the Auction Agent. "Hold Order" has the meaning specified in paragraph 8(b)(i) below. "Maximum Rate", means, on any date of determination, with respect to a series of STRAPS with a Short-Term Dividend Period, the percentage of the 60-day "AA" Composite Commercial Paper Rate in effect on such date, and with respect to a series of the STRAPS with a Long-Term Dividend Period, the percentage of the Applicable Treasury Rate in effect on such date, determined as set forth below based on the Prevailing Credit Ratings of the STRAPS on the Business Day immediately preceding such date of determination: Prevailing Credit Ratings of STRAPS Percentage AA/ aa or Above 125% A/a 150% BBB / baa 175% BB/ba 200% Below BB/ba 250 Unless the context otherwise requires, "Maximum Rate," when used in this paragraph 8, shall mean the Maximum Rate on the Auction Date. "Order" has the meaning specified in paragraph 8(b)(i) below. "Outstanding," with respect to shares of STRAPS, means, as of any date, shares of STRAPS theretofore issued by the Corporation except, without duplication, (A) any shares of STRAPS theretofore canceled or delivered to the Auction Agent for cancellation, or redeemed by the Corporation, (B) except as provided in paragraph 5 above, any shares of STRAPS as to which a Notice of Redemption shall have been given by the Corporation, (C) any shares of STRAPS as to which the Corporation or any Affiliate shall be an Existing Holder and (D) any shares of STRAPS represented by any certificate which has been replaced by a new certificate executed and delivered by the Corporation. "Person" means and includes an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or an agency or political subdivision thereof. "Potential Holder" means any Person, including any Existing Holder, (A) who shall have executed a Purchaser's Letter and (B) who may be interested in acquiring shares of STRAPS (or, in the case of an Existing Holder, additional shares of STRAPS). "Prevailing Credit Ratings" means (A) AA/aa or above if the shares of STRAPS have ratings of AA- or better by Standard & Poor's and "aa3 n or better by Moody's or the equivalent of either or both of such ratings by the applicable Rating Agencies, (B) if not AA/aa or above, then A/a if the shares of STRAPS have a rating of A- or better by Standard & Poors and "a3" or better by Moody's or the equivalent of either or both of such ratings by the applicable Rating Agencies, (C) if not AA/aa or above or A/a, then BBB/baa, if the shares of STRAPS have ratings of BBB- or better by Standard & Poor's and "baa3" or better by Moody's or the equivalent of either or both of such ratings by the applicable Rating Agencies, (D) if not AA/aa or above, A/a, or BBB/baa, then BB/ba if the shares of STRAPS have a rating of BB- or better by Standard & Poor's and Hba3 H or better by Moody's or the equivalent of either or both of such ratings by the applicable Rating Agencies, and (E) if not AA/aa or above, A/a, BBB/baa or BB/ba, then below BB/ba. In the event of credit ratings in different categories, the lower credit rating shall control. "Purchaser's Letter" means a purchaser's letter in which a Person agrees, among other things, to offer to purchase, purchase, offer to sell and/or sell shares of STRAPS as set forth in this paragraph 8. "Securities Depository" means the securities depository appointed as such by the Corporation pursuant to paragraph 7(b) that agrees to follow the procedures required to be followed by such securities depository in connection with shares of STRAPS. "Sell Order" has the meaning specified in paragraph 8(b)(i) below. "STRAPS" means Series A STRAPS, Series B STRAPS, Series C STRAPS or Series D STRAPS, as the case may be. "Submission Deadline" means 1:00 p.m., New York City Time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as from time to time specified by the Auction Agent, with the consent of the Corporation, which consent shall not be unreasonably withheld. "Submitted Bid" has the meaning specified in paragraph 8(d)(i) below. "Submitted Hold Order" has the meaning specified in paragraph 8(d)(i) below. "Submitted Order" has the meaning specified in paragraph 8(d)(i) below. "Submitted Sell Order" has the meaning specified in paragraph 8(d)(i) below. "Sufficient Clearing Bids" has the meaning specified in paragraph 8(d)(i) below. "Winning Bid Rate" has the meaning specified in paragraph 8(d)(i) below. (b) Orders by Existing Holders and Potential Holders. (i) On or prior to the Submission Deadline on each Auction Date: (A) each Existing Holder may submit to a Broker-Dealer information as to: (1) the number of Outstanding shares, if any, of STRAPS held by such Existing Holder which such Existing Holder desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period; (2) the number of Outstanding shares, if any, of STRAPS held by such Existing Holder which such Existing Holder desires to continue to hold, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Existing Holder; and/or (3) the number of Outstanding shares, if any, of STRAPS held by such Existing Holder which such Existing Holder offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and (B) each Broker-Dealer, using a list of Potential Holders that shall be maintained by such Broker-Dealer in good faith for the purpose of conducting a competitive Auction, shall contact Potential Holders, including Persons who are not Existing Holders, on such list to determine the number of Outstanding shares, if any, of STRAPS which each such Potential Holder offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purposes hereof, the communication to a Broker-Dealer of the information referred to in clause (A) or (B) of this paragraph 8(b)(i) is hereinafter referred to as an "Order" and each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a "Bidder"; an Order containing the information referred to in clause (A)(1) of this paragraph 8(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the information referred to in clause (A)(2) or (B) of this paragraph 8(b)(i) is hereinafter referred to as a "Bid"; and an Order containing the information referred to in clause (A)(3) of this paragraph 8(b)(i) is hereinafter referred to as a "Sell Order". (ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (1) the number of Outstanding shares of STRAPS specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate specified in such Bid; or (2) such number or a lesser number of Outstanding shares of STRAPS determined as set forth in paragraph 8(e)(i)(D) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified in such Bid; or (3) such number or a lesser number of Outstanding shares of STRAPS to be determined as set forth in paragraph 8(e)(ii)(C) if the rate specified in such Bid shall be higher than the Maximum Rate and Sufficient Clearing Bids have not been made. (B) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (1) the number of Outstanding shares of STRAPS specified in such Sell Order; or (2) such number or a lesser number of Outstanding shares of STRAPS as set forth in paragraph 8(e)(ii)(C) if Sufficient Clearing Bids have not been made. (C) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase: (1) the number of Outstanding shares of STRAPS specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate specified in such Bid; or (2) such number or a lesser number of Outstanding shares of STRAPS as set forth in paragraph 8(e)(i)(E) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified in such Bid. (c) Submission of Orders by Broker-Dealers to Auction Agent. (i) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and shall specify with respect to each Order; (A) the name of the Bidder placing such Order; (B) the aggregate number of Outstanding shares of STRAPS that are the subject of such Order; (C) to the extent that such Bidder is an Existing Holder: (1) the number of Outstanding shares, if any, of STRAPS subject to any Hold Order placed by such Existing Holder; and (2) the number of Outstanding shares, if any, of STRAPS subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (3) the number of Outstanding shares, if any, of STRAPS subject to any Sell Order placed by such Existing Holder; and (D) to the extent that such Bidder is a Potential Holder, the rate specified in such Potential Holder's Bid. (ii) If any rate specified in any Bid contains more than three digits to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one-thousandth (.001) of 1%. (iii) (A) With respect to an Auction for a Dividend Period immediately succeeding a Long-Term Dividend Period and for each Auction thereafter until an Auction occurs at which Sufficient Clearing Bids exist, if a Bid or a Hold Order covering all of the Outstanding shares of STRAPS held by an Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Sell Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of STRAPS held by such Existing Holder not subject to a Bid or Hold Order submitted to the Auction Agent and (B) with respect to any other Auction, if an Order or Orders covering all of the Outstanding shares of STRAPS held by an Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of STRAPS held by such Existing Holder and not subject to Orders submitted to the Auction Agent. (iv) If one or more Orders covering in the aggregate more than the number of Outstanding shares of STRAPS held by an Existing Holder are submitted to the Auction Agent, such Order or Orders shall be considered valid as follows and in the following order of priority: (A) any Hold Order submitted on behalf of such Existing Holder shall be considered valid up to and including the number of Outstanding shares of STRAPS held by such Existing Holder; provided that if more than one Hold Order is submitted on behalf of such Existing Holder and the number of shares of STRAPS subject to such Hold Orders exceeds the number of Outstanding shares of STRAPS held by such Existing Holder, the number of shares of STRAPS subject to such Hold Orders shall be reduced pro rata so that such Hold Orders shall cover the number of Outstanding shares of STRAPS held by such Existing Holder; (B) (1) any Bid shall be considered valid up to and including the excess of the number of Outstanding shares of STRAPS held by such Existing Holder over the number of shares of STRAPS subject to Hold Orders referred to in paragraph 8(c)(iv)(A), (2) subject to subclause (1) above, if more than one Bid specifying the same rate is submitted on behalf of such Existing Holder and the number of Outstanding shares of STRAPS subject to such Bids is greater than such excess, the number of shares of STRAPS subject to such Bids shall be reduced pro rata so that such Bids shall cover the number of shares of STRAPS equal to such excess, and (3) subject to subclause (1) above, if more than one Bid specifying different rates is submitted on behalf of such Existing Holder, such Bids shall be considered valid in the ascending order of their respective rates and in any such event the number, if any, of such Outstanding shares subject to Bids not valid under this clause (B) shall be treated as the subject of a Bid by a Potential Holder; and (C) any Sell Order shall be considered valid up to and including the excess of the number of Outstanding shares of STRAPS held by such Existing Holder over the number of shares of STRAPS subject to Hold Orders referred to in paragraph 8(c)(iv)(A) and Bids referred to in paragraph 8(c)(iv)(B). (v) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate and the number of shares of STRAPS therein specified. (d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate. (i) The Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order") and shall, after the Submission Deadline on each Auction Date, determine: (A) the excess of the total number of Outstanding shares of STRAPS over the number of Outstanding shares of STRAPS that are the subject of Submitted Hold Orders (such excess being hereinafter to as the "Available STRAPS"); (B) from the Submitted Orders whether: (1) the number of Outstanding shares of STRAPS that are the subject of Submitted Bids by Potential Holders specifying one or more rates equal to or lower than the Maximum Rate exceeds or is equal to: (2) the sum of (x) the number of Outstanding shares of STRAPS that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Rate and (y) the number of Outstanding shares of STRAPS that are the subject of Submitted Sell Orders (if such excess or such equality exists (other than because the number of shares of STRAPS in subclauses (x) and (y) above are each zero because all of the Outstanding shares of STRAPS are the subject of Submitted Hold Orders), such Submitted Bids in subclause (1) above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (C) If Sufficient Clearing Bids have been made, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") that, if: (1) each Submitted Bid from Existing Holders specifying such lowest rate and all other Submitted Bids from Existing Holders specifying lower rates were rejected, thus entitling such Existing Holders to continue to hold the shares of STRAPS that are the subject of such Submitted Bids, and (2) each Submitted Bid from Potential Holders specifying such lowest rate and all other Submitted Bids from Potential Holders specifying lower rates were accepted, thus requiring such Potential Holders to purchase the shares of STRAPS that are the subject of such Submitted Bids, would result in the number of shares subject to all Submitted Bids specifying such lowest rate or such lower rates being not less than the Available STRAPS. (ii) Promptly after the Auction Agent has made the determinations pursuant to paragraph 8(d)(i), the Auction Agent shall advise the Corporation of the Maximum Rate and the Applicable Rate for the next succeeding Dividend Period, which shall be determined as follows: (A) If Sufficient Clearing Bids have been made, the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate so determined; (B) If Sufficient Clearing Bids have not been made (other than because all the Outstanding shares of STRAPS are the subject of Submitted Hold Orders), in an Auction for a Short-Term Dividend Period (regardless of whether such Dividend Period is a Short- Term Dividend Period because the Corporation did not submit a Notice of Dividend Period, selected a Short- Term Dividend Period in its Notice of Dividend Period or submitted a Notice of Revocation earlier than two hours prior to the Submission Deadline or because Sufficient Clearing Bids did not exist at the previous Auction) or if the Auction is not held for any reason, (i) notwithstanding any Notice of Dividend Period submitted with respect thereto, such next succeeding Dividend Period will be a Short-Term Dividend Period and (ii) the Applicable Rate for the next succeeding Dividend Period will be the Maximum Rate on the Auction Date for a Short-Term Dividend Period; (C) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of STRAPS are the subject of Submitted Hold Orders) in an Auction for a Long-Term Dividend Period or if the Auction is not held for any reason, then (i) notwithstanding any Notice of Dividend Period submitted with respect thereto, such next succeeding Dividend Period will be a Short-Term Dividend Period, (ii) the Applicable Rate for the next succeeding Dividend Period will be the Maximum Rate on the Auction Date for a Short-Term Dividend Period and (iii) the Corporation may not again give a Notice of Dividend Period selecting a Long-Term Dividend Period until Sufficient Clearing Bids have been made with respect to a Short- Term Dividend Period; or (D) if all of the Outstanding shares of STRAPS are the subject of Submitted Hold Orders, the Applicable Rate for the next succeeding Dividend Period shall be equal to (i) for a Short-Term Dividend Period, 59% of the 60-day "AA" Composite Commercial Paper Rate on the date of such Auction or (ii) for a Long-Term Dividend Period, 50% of the Applicable Treasury Rate on the date of such Auction. (e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares. Based on the determinations made pursuant to paragraph 8(d)(i), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below: (i) If Sufficient Clearing Bids have been made, subject to the provisions of paragraph 8(e)(iv) and paragraph 8(e)(v), Submitted Bids and Submitted Sell Orders shall be accepted or rejected in the following order of priority and all Submitted Bids to the extent not accepted as provided in this clause (i) shall be rejected: (A) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the Outstanding shares of STRAPS that are the subject of such Submitted Bid; (B) the Submitted Bid of each of the Existing Holders specifying any rate that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Outstanding shares of STRAPS that are the subject of such Submitted Bid; (C) the Submitted Bid of each of the Potential Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Potential Holder to purchase the Outstanding shares of STRAPS that are the subject of such Submitted Bid; (D) the Submitted Bid of each of the Existing Holders specifying a rate that is equal to the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Outstanding shares of STRAPS that are the subject of such Submitted Bid, unless the number of Outstanding shares of STRAPS that are the subject of such Submitted Bids shall be greater than the number of shares of STRAPS ("remaining shares") equal to the excess of the Available STRAPS over the number of shares of STRAPS subject to Submitted Bids described in paragraph 8(e)(i)(B) and paragraph 8(e)(i)(C), in which event the Submitted Bids of each such Existing Holder shall be accepted, and each such Existing Holder shall be required to sell Outstanding shares of STRAPS, but only in an amount equal to the difference between (1) the number of Outstanding shares of STRAPS then held by such Existing Holder subject to such Submitted Bid and (2) the number of shares of STRAPS obtained by multiplying (x) the number of the remaining shares by (y) a fraction, the numerator of which shall be the number of Outstanding shares of STRAPS held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of STRAPS subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (E) the Submitted Bid of each of the Potential Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of Outstanding shares of STRAPS obtained by multiplying (x) the difference between the Available STRAPS and the number of Outstanding shares of STRAPS subject to Submitted Bids described in paragraph 8(e)(i)(B), paragraph 8(e)(i)(C) and paragraph 8(e)(i)(D) by (y) a fraction, the numerator of which shall be the number of Outstanding shares of STRAPS subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of STRAPS subject to such Submitted Bids made by all such Potential Holders that specified rates equal to the Winning Bid Rate. (ii) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of STRAPS are subject to Submitted Hold Orders) in an Auction for a Short-Term Dividend Period (regardless of whether such Dividend Period is a Short-Term Period because the Corporation did not submit a Notice of Dividend Period, selected a Short-Term Dividend Period in its Notice of Dividend Period or submitted a Notice of Revocation earlier than two hours prior to the Submission Deadline or because Sufficient Clearing Bids did not exist at the previous Auction), subject to the provisions of paragraph 8(e)(iv), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all Submitted Bids to the extent not accepted as provided in this clause (ii) shall be rejected: (A) the Submitted Bid of each Existing Holder specifying any rate that is equal to or lower than the Maximum Rate shall be rejected, thus entitling such Existing Holder to continue to hold the shares of STRAPS that are the subject of such Submitted Bid; (B) the Submitted Bid of each Potential Holder specifying any rate that is equal to or lower than the Maximum Rate shall be accepted, thus requiring such Potential Holder to purchase the shares of STRAPS that are the subject of such Submitted Bid; and (C) the Submitted Bid of each Existing Holder specifying any rate that is higher than the Maximum Rate shall be accepted, thus requiring each such Existing Holder to sell the Outstanding shares of STRAPS that are the subject of such Submitted Bid, and the Submitted Sell Order of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (1) the number of Outstanding shares of STRAPS then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (2) the number of shares of STRAPS obtained by multiplying (x) the difference between the Available STRAPS and the aggregate number of shares of STRAPS subject to Submitted Bids described in paragraph 8(e) (ii)(A) and paragraph 8(e) (ii) (B) by (y) a fraction, the numerator of which shall be the number of Outstanding shares of STRAPS held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of Outstanding shares of STRAPS subject to all such Submitted Bids and Submitted Sell Orders. (iii) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of STRAPS are subject to Submitted Hold Orders) in an Auction for a Long-Term Dividend Period: (A) Each Existing Holder that placed a Submitted Bid or a Submitted Hold Order (regardless of the rate specified therein) will continue to hold all Outstanding shares of STRAPS held by such Existing Holder immediately prior to the applicable Auction; (B) Each Submitted Bid placed by a Potential Holder will be rejected; (C) The next succeeding Dividend Period will be a Short-Term Dividend Period; and (D) The Corporation may not again give a Notice of Dividend Period selecting a Long-Term Dividend Period (and any such notice shall be null and void) until Sufficient Clearing Bids have been made in an Auction with respect to a Short-Term Dividend Period. (iv) If, as a result of the procedures described in paragraph 8(e)(i) and paragraph 8(e)(ii), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share of STRAPS on any Auction Date, the Auction Agent shall, in such manner as, in its sole discretion, it shall determine, round up or down the number of shares of STRAPS to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that the number of shares purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole shares of STRAPS. (v) If, as a result of the procedures described in paragraph 8(e)(i), any Potential Holder would be entitled or required to purchase less than a whole share of STRAPS on any Auction Date, the Auction Agent shall, in such manner as, in its sole discretion, it shall determine, allocate shares for purchase among Potential Holders so that only whole shares of STRAPS are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing shares of STRAPS on such Auction Date. (vi) Based on the results of each Auction, the Auction Agent shall determine the number of shares of STRAPS to be purchased and the aggregate number of shares of STRAPS to be sold by Potential Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders, and, with respect to each Broker-Dealer, to the extent that such aggregate number of shares to be purchased and such aggregate number of shares to be sold differ, determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, Outstanding shares of STRAPS. (vii) In no circumstance shall an Existing Holder be required to sell shares of STRAPS that are subject to a Hold Order submitted (or deemed to be submitted) by such Existing Holder. (f) Miscellaneous. The Board of Directors may interpret the provisions of this paragraph 8 to resolve any inconsistency or ambiguity. Neither the Corporation nor any Affiliate shall submit any Order in any Auction. At the time of the initial Auction for any Series of STRAPS, all of the Outstanding shares of such series of STRAPS shall, to the extent then required by the Securities Depository, be represented by a single certificate, registered in the name of the nominee of the Securities Depository. Neither the Corporation nor any of its agents, including, without limitation, the Auction Agent, shall have any liability with respect to the failure of a Potential Holder, Existing Holder or Agent Member to deliver, or to pay for, shares of STRAPS sold or purchased in an Auction or otherwise. (g) Headings of Subdivisions. The headings of the various subdivisions of this paragraph 8 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. Appendix 5 Articles of Merger effective December 13, 1991 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY ARTICLES OF MERGER Pursuant to the Provisions of the Colorado Corporation Code, Great-West Life & Annuity Insurance Company (the "Corporation") hereby adopts the following Articles of Merger: FIRST: Pursuant to C.R.S. Section 7-7-106, the plan of merger, attached as Exhibit A, and incorporated into and made a part of these Articles of Merger, was approved by unanimous vote of the Board of Directors of the Corporation on October 22, 1991. SECOND: The plan of merger was approved by unanimous vote of the Board of Directors of Great-West Life Financial Corp. ("Financial Corp."), the parent corporation and holder of 6,468,217 shares of the Corporation's common stock prior to the merger, which stock (1) constitutes more than ninety percent (90%) of the outstanding shares of common stock of the Corporation, (2) is the only class of stock eligible to vote on this issue, and (3) the vote of which is sufficient to approve the plan of merger. THIRD: The Great-West Life Assurance Company ("Great- West Life"), is the owner of 613,965 shares of the common stock of Financial Corp., which number represents all of the issued and outstanding shares of Financial Corp. The Board of Directors of Great-West Life, acting on its behalf as sole shareholder of Financial Corp., has (1) waived prior mailing of the plan of merger, and (2) voted unanimously to approve the plan of merger on October 24, 1991. FOURTH: The plan of merger was delivered to Financial Corp., the parent corporation and shareholder of the Corporation, on October 21, 1991. FIFTH: The Articles of Redomestication of the Corporation, as amended, to the extent that they are not affected by these Articles of Merger, remain unchanged. SIXTH: These Articles of Merger are to become effective on December 13, 1991, unless sooner withdrawn by a proper filing of a certificate of withdrawal prior to or on such date. SEVENTH: After the effective date of the merger, the surviving corporation is Great-West Life & Annuity Insurance Company. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Dated: November 22, 1991 By: /s/ W.T. McCallum William T. McCallum, its President & Chief Executive Officer By: /s/ D.C. Lennox D. Craig Lennox, its Senior Vice- President, General Counsel and Secretary PLAN AND AGREEMENT OF MERGER This PLAN AND AGREEMENT OF MERGER ("Agreement") is to be effective as of December 13, 1991, by and between GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY, a Colorado domestic insurance company ("GWL&A"), and GREAT-WEST LIFE FINANCIAL CORP., a Colorado holding company ("Financial Corp."). GWL&A and Financial Corp. shall sometimes be referred to collectively as the "Constituent Corporations." RECITALS A. GWL&A is a wholly-owned subsidiary of Financial Corp. As of the date hereof, GWL&A has 50,000,000 shares of stock authorized, $1.00 par value, of which 6,468,217 shares are currently issued and outstanding. B. Financial Corp. is an insurance holding company wholly owned by The Great-West Life Assurance Company, a Canadian corporation ("GWL"), with 100,000,000 shares of stock authorized, no par value, with 613,965 shares currently issued and outstanding. C. The purpose of this Agreement is to reposition certain United States operating subsidiaries of GWL as directly owned subsidiaries of GWL&A. D. In order to accomplish this, the Boards of Directors of the Constituent Corporations deem it advisable and in the best interests of both such corporations and their stockholders that Financial Corp. merge with and into GWL&A. The surviving corporation shall be GWL&A. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, and for the purpose of stating the terms and conditions of the merger, it is agreed, subject to the terms and conditions hereinafter set forth, as follows: 1. MERGER AND EFFECTIVE DATE. In accordance with the provisions of the laws of Colorado and subject to the terms and conditions of this Agreement, Financial Corp. shall be merged with and into GWL&A. The effect of the merger shall be as prescribed by Colorado law, and the effective date of the merger shall be December 13, 1991. The merger shall take place pursuant to the requirements of Colorado Revised Statutes, 10-3-801, et seq., titled Insurance Holding Company Systems, C.R.S. 10-3-101, and Article 7 of the Colorado Corporate Code. 2. DIRECTORS AND OFFICERS OF SURVIVING CORPORATION. 2.1 Directors. The directors of GWL&A in office on the effective date of the merger shall be the directors of GWL&A and shall hold office for the terms for which they have been elected until their successors are duly elected and qualified pursuant to the bylaws of GWL&A. 2.2 Officers and Committees. All persons who, on the effective date of the merger, are officers or members of any committee of GWL&A shall, after the effective date, hold the same office in GWL&A as they theretofore held in GWL&A, subject to the provisions of the bylaws of GWL&A. 3. CONDITIONS PRECEDENT TO MERGER. The merger shall not be effective unless and until the following conditions have been fulfilled: 3.1 Compliance with Holding Company Requirements. The requirements of C.R.S. 10-3-801, et seq., have been complied with and approval of the Colorado Division of Insurance has been obtained or an exemption therefrom under C.R.S. 10-3-803(8)(C) has been obtained. 3.2 Shareholder Approval. The merger has been submitted to and duly approved by The Great-West Life Assurance Company ("GWL") as the shareholder of Financial Corp. 3.3 Procedure. The procedure established in C.R.S. 7-7-106 for merging a parent and corporation, including adopting Articles of Merger, has been complied with. 3.4 State Regulatory Matters. When all necessary corporate and other consents, authorizations and approvals of this Agreement have been obtained and provided that this Agreement has not been terminated, the Constituent Corporations will each cause a copy of this Agreement, with officers' certificates of each Constituent Corporation along with Articles of Merger pursuant to C.R.S. 7-7- 106, to be filed with the Colorado Insurance Department in accordance with C.R.S. 10-3-101. Upon attaining approval of the Colorado Department, the Articles of Merger along with the Plan and Agreement of Merger shall be filed with the Secretary of State of Colorado. The filing of such documents will be coordinated and accomplished on the same date. Thereafter and without any further act or deed, Financial Corp. shall be merged into GWL&A, which shall continue its corporate existence under the laws of the State of Colorado. 3.5 Tax Matters. The merger will qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). GWL&A shall continue the same business and operations in which it is currently engaged, without substantial modifications. 4. CONVERSION OF SECURITIES UPON MERGER. On the effective date, GWL&A will transfer ownership of the 6,468,217 shares of GWL&A owned by Financial Corp. to GWL in consideration of the surrender by GWL to GWL&A of the 613,965 shares representing all of the issued and outstanding shares of stock in Financial Corp. 5. EFFECT OF MERGER. On the effective date, Financial Corp. and GWL&A shall be a single corporation, the separate existence of Financial Corp. shall cease and, in accordance with the terms of this Agreement, GWL&A shall possess all of the rights, privileges, powers, immunities and franchises, of both a public and a private nature, all property, real, personal and mixed, and all and every other interest of each of the Constituent Corporations, as effectually as did the respective Constituent Corporations. All debts due to either of the Constituent Corporations on whatever account, including stock subscriptions and all other things in action belonging to each Constituent Corporation shall be vested in GWL&A without further act or deed. The title to any real estate or interest therein, vested by deed or otherwise in either of the Constituent Corporations, shall not revert or be in any way impaired by reason of the merger. Neither the rights of creditors nor any liens upon the property of either of the Constituent Corporations shall be impaired by the merger, and all debts, liabilities, obligations, restrictions, disabilities and duties of each of said Constituent Corporations shall thenceforth attach to GWL&A and may be enforced against it to the same extent as if the same had been incurred or contracted by it. Any claim existing or action or proceeding pending by or against either of said Constituent Corporations may be prosecuted as if the merger had not taken place or GWL&A may be substituted in its place. 6. TERMINATION OR P0STPONMENT OF MERGER. Notwithstanding any of the provisions of this Agreement, at any time prior to the effective date, and notwithstanding the approval hereof by GWL as the sole shareholder of the Financial Corp., the Board of Directors of either of the Constituent Corporations may cause the merger and all transactions contemplated by this Agreement to be abandoned or delayed for any reason that such Board may deem sufficient and proper. 7. GENERAL PROVISIONS. 7.1 Further Instruments. Each party shall execute and deliver all further instruments, documents and papers, and shall perform any and all acts necessary, to give full force and effect to all of the terms and provisions of this Agreement 7.2 Severability. If any provision of this Agreement, as applied to any party or to any circumstance, shall be found by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall in no way affect any other provision of this Agreement, the application of any such provision in any other circumstance, or the validity or enforceability of this Agreement. 7.3 Notices. All notices, statements or demands shall be in writing and shall be served in person, by telegraph, by express mail, by certified mail or by private overnight delivery. Service shall be deemed conclusively made (a) at time of service, if personally served, (b) at the time (as confirmed in writing by the telegraphic agency) of delivery thereof to the addressee, if served telegraphically, (c) twenty-four (24) hours after deposit in the United States mail, properly addressed and postage prepaid, if served by express mail, (d) five (5) days after deposit in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by certified mail and (e) twenty-four (24) hours after delivery by the party giving the notice, statement or demand to the private overnight deliverer, if served by private overnight delivery. Any notice or demand to either of the Constituent Corporations shall be given to: Great-West Life & Annuity Insurance Company Attn.: William T. McCallum, President and Chief Executive Officer 8515 E. Orchard Road Englewood, Colorado 80112 Great-West Life Financial Corp. Attn.: D. Craig Lennox, Sr. Vice President and Secretary 8515 E. Orchard Road Englewood, Colorado 80112 Any party may, by virtue of written notice in compliance with this Paragraph, alter or change the address or the identity of the person to whom any notice, or copy thereof, is to be sent. 7.4 Waivers. A waiver by any party of any of the terms and conditions of this Agreement in any one instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach thereof, nor shall it be deemed a waiver of performance of any other obligation hereunder. 7.5 Entire Agreement. This Agreement contains the entire understanding of the parties hereto relating to the subject matter hereof and supersedes all prior and collateral agreements, understandings, statements and negotiations of the parties. Each party acknowledges that no representations, inducements, promises, or agreements, oral or written, with reference to the matter hereof have been made other than as expressly set forth herein. 7.6 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective estates, successors, legal or personal representatives, heirs, distributees, designees and assigns. 7.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 7.8 Gender and Number. In all matters of interpretation, whenever necessary to give effect to any provision of this Agreement, each gender shall include the other, the singular shall include the plural, and the plural shall include the singular. 7.9 Paragraph and Subparagraph Headings. The titles of the paragraphs of this Agreement are for convenience only and shall not in any way affect the interpretation of any provision or condition of this Agreement. 7.10 Third Parties. Except as may be expressly set forth herein, the parties hereto do not intend to confer any rights or remedies upon any person other than the parties hereto. 7.11 Legal Action. In the event of any litigation between or among the parties hereto respecting or arising out of this Agreement, the prevailing party or parties shall be entitled to recover reasonable attorneys' fees and costs, whether or not such litigation proceeds to final judgment or determination. 7.12 Counterparts. This Agreement may be executed in counterparts which, taken together, shall constitute the whole of the Agreement as between the parties. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY, a Colorado corporation By: /s/ W.T. McCallum Title: President and Chief Executive Officer By: /s/ Douglas L. Wooden Title: Senior Vice-President, Chief Financial Officer and Treasurer GREAT-WEST LIFE FINANCIAL CORP., a Colorado corporation By: /s/ W.T. McCallum Title: Executive Vice-President and Chief Operating Officer By: /s/ D.C. Lennox Title: Senior Vice-President and Secretary Appendix 6 Articles of Amendment to Articles of Redomestication effective June 30, 1992 ARTICLES OF AMENDMENT TO ARTICLES OF REDOMESTICATION Pursuant to the provisions of the Colorado Corporation Code, Great-West Life & Annuity Insurance Company (the "Corporation") hereby adopts the following Articles of Amendment to its Articles of Redomestication: FIRST: The name of the Corporation is Great-West Life & Annuity Insurance Company. SECOND: The Amendment set forth on Exhibit 1 attached hereto was adopted by a vote of the sole shareholder of the Corporation on June 16, 1992. The number of shares voted for the amendments was sufficient for approval. THIRD: The Amendment does not effect an exchange, reclassification, or cancellation of issued shares of the Corporation. FOURTH: The Amendment does not effect a change in the amount of stated capital of the Corporation. GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Dated: June 16, 1992 By: /s/ William T. McCallum William T. McCallum, President and Chief Executive Officer By: /s/ D.C. Lennox D. Craig Lennox, Senior Vice- President, General Counsel and Secretary EXHIBIT 1 Great-West Life & Annuity Insurance Company hereby amends parts of its Articles of Redomestication consisting of the Statement of Resolution Establishing Four Series of Preferred Stock dated as of September 18, 1991 and filed with the Secretary of State of Colorado on September 30, 1991 (the "Statement") as follows: 1. The definition of "Initial Long-Term Dividend Period" contained in paragraph 2 of the Statement is hereby amended to read in its entirety as follows: "Initial Long-Term Dividend Period" means (i) with respect to the Series A STRAPS, Series C STRAPS and Series D STRAPS, the period from and including the respective Dates of Original Issues for such series to and excluding December 31, 1993, and (ii) with respect to the Series B STRAPS, the period from and including the Date of Original Issue for such series to and excluding December 31, 1995. 2. The first sentence of paragraph 3(b)(ii) of the Statement is hereby amended to read as follows: (ii) During the Initial Long-Term Dividend Period, dividends on the shares of each series of STRAPS shall be payable quarterly on the last day of each March, June, September and December of each year, and the last dividend during this Period will be payable on the last day of the Initial Long-Term Dividend Period for such series, unless any such date is not a Business Day, in which case dividends on the STRAPS will be payable on the next succeeding Business Day. 3. The first sentence of paragraph 3(c)(i) of the Statement is hereby amended to read as follows: (c) (i) Subject to paragraph 3(c)(ii), (I) during the Initial Long-Term Dividend Period for each series of STRAPS, the respective dividend rates per annum applicable to such series shall be as follows: Series A, Series C and Series D, 8% and Series B, 7%; and (II) the respective dividend rates on the shares of each series of STRAPS (the "Applicable Rate") for each subsequent Dividend Period shall be the rate per annum determined for such series pursuant to the operation of the Auction Procedures set forth in paragraph 8 below. Appendix 7 Articles of Amendment to Articles of Redomestication effective September 29, 1992 ARTICLES OF AMENDMENT TO ARTICLES OF REDOMESTICATION Pursuant to the provisions of the Colorado Corporation Code, Great-West Life & Annuity Insurance Company (the "Corporation") hereby adopts the following Articles of Amendment to its Articles of Redomestication: FIRST: The name of the Corporation is Great-West Life & Annuity Insurance Company. SECOND: The Amendments set forth on Exhibit 1 and Exhibit 2 attached hereto were adopted by a vote of the sole shareholder of the Corporation on September 15, 1992. The number of shares voted for the Amendments was sufficient for approval. THIRD: The amendments do not effect an exchange, reclassification, or cancellation of issued shares of the Corporation. FOURTH: The amendments do not effect a change in the amount of stated capital of the Corporation. Dated: September 15, 1992 THE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/ W.T. McCallum William T. McCallum, President and Chief Executive Officer By: /s/ D.C. Lennox D. Craig Lennox, Senior Vice President, General Counsel and Secretary Exhibit 1 Great-West Life & Annuity Insurance Company hereby amends the following parts of the terms for four series of Stated Rate Option Preferred Stock as set forth in the Statement of Resolution Establishing Four Series of Preferred Stock dated as of September 18, 1991 and filed with the Secretary of State of Colorado on September 30, 1991: Paragraphs 6(c), 6(d) and 6(e) are hereby amended to read in their entirety as follows: (c) Default in Dividend. (i) During any period (a "Voting Period") when a "Default in Preferred Dividends" (as hereinafter defined) shall exist on the shares of any series of the STRAPS, or any class or series of preferred stock ranking on a parity with the shares of the STRAPS as to dividends or upon liquidation, dissolution or winding up of the Corporation and the terms of which expressly provide that such shares are "Voting Parity Preferred Stock" within the meaning of this paragraph and voting rights thereunder are then exercisable (all such shares, and all shares of each series of the STRAPS, being hereinafter referred to collectively as the "Voting Parity Preferred Stock"), the authorized number of members of the Board of Directors shall automatically be increased by two. The two vacancies so created shall be filled by the vote of the holders of the "Defaulted Voting Parity Preferred Stock" as hereinbelow defined, voting together as a single class without regard to class or series, to the exclusion of the holders of the Common Stock of the Corporation and any other class or series of stock other than such shares of Defaulted Voting Parity Preferred Stock. A "Default in Preferred Dividends" means any default or event specified in the terms of any class of preferred stock or series of preferred stock by reason of which the holders of such preferred stock are entitled to elect directors of the Corporation. A "Default in Preferred Dividends" with respect to any series of STRAPS shall be deemed to have occurred whenever the amount of unpaid accumulated dividends upon such series through the last preceding dividend period therefor shall be equivalent to six quarterly dividends (which, with respect to any series of the STRAPS, shall be deemed to be dividends with respect to a number of dividend periods containing not less than 540 days) or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accumulated and unpaid dividends (whether or not earned or declared) on all shares of all STRAPS of each and every series then outstanding shall have been paid to the end of the last preceding dividend period. "Defaulted Voting Parity Preferred Stock" at any time shall mean those classes and series of Voting Parity Preferred Stock in respect of which, at or prior to such time, a Default in Preferred Dividends has occurred and of which the holders are entitled at that time by the terms of such Voting Parity Preferred Stock to elect directors of the Corporation. Upon the termination of a Voting Period with respect to any class or series of Defaulted Voting Parity Preferred Stock, the voting rights described in this paragraph (c) shall cease for such class or series of Defaulted Voting Parity Preferred Stock, subject always, however, to revesting of such voting rights in the holders of such Voting Parity Preferred Stock upon the further occurrence of a Default in Preferred Dividends. If any Voting Period shall have terminated before the holders of a class or series of Voting Parity Preferred Stock shall have exercised the voting rights provided in this paragraph 6(c), the holders of such class or series of Voting Parity Preferred Stock shall be deemed not to have acquired such voting rights. (ii) If the holders of any class or series of Defaulted Voting Parity Preferred Stock (the "first Defaulted Voting Parity Preferred Stock") have elected one or more directors prior to the happening of the default or event permitting the holders of any other class or series of Defaulted Voting Parity Preferred Stock to elect directors, then the directors so previously elected will be deemed to have been elected by and on behalf of the holders of such other class or series of Defaulted Voting Parity Preferred Stock as well as the first Defaulted Voting Parity Preferred Stock, without prejudice to the right of the holders of such other class or series to vote for directors if such previously elected directors shall resign, cease to serve or stand for reelection while the holders of such other class or series are entitled to vote. If the holders of any first Defaulted Voting Parity Preferred Stock are entitled to elect in excess of two directors, the holders of such other class or series shall not participate in the election of more than two such directors. (iii) No shares of any Defaulted Voting Parity Preferred Stock held by the Corporation or any of the Corporation's Affiliates shall be voted, or counted in determining a quorum, for the election, removal or replacement of any director elected by any Defaulted Voting Parity Preferred Stock. (d) Voting Procedures. (i) As soon as practicable after the commencement of a Voting Period, the Corporation shall call or cause to be called a special meeting of the holders of Defaulted Voting Parity Preferred Stock by mailing or causing to be mailed a notice of such special meeting to such holders not less than 10 nor more than 45 days after the date such notice is given. If the Corporation does not call or cause to be called such a special meeting, it may be called by any of such holders on like notice. The record date for determining the holders of Defaulted Voting Parity Preferred Stock entitled to notice of and to vote at such meeting shall be the close of business on the Business Day preceding the day on which such notice is mailed. At any such special meeting and at each meeting of stockholders held during a Voting Period at which directors are to be elected, removed or replaced, the holders of Defaulted Voting Parity Preferred Stock, voting together as a single class (to the exclusion of the holders of all other securities, series and classes of capital stock of the Corporation), voting by a majority of the votes of shares present in person or by proxy, shall be entitled to elect two directors. In regard to such elections, holders of shares of Defaulted Voting Parity Preferred Stock shall be entitled to one or more votes and/or a fractional vote on the basis of one vote for each $100,000 of liquidation preference (excluding amounts in respect of accumulated and unpaid dividends) attributable to such shares. Cumulative voting in such elections shall not be permitted. Shares of Defaulted Voting Parity Preferred Stock then outstanding, present in person or represented by proxy, representing one-third of the votes of the Defaulted Voting Parity Preferred Stock, will constitute a quorum for the election of directors. Notice of all meetings at which holders of Defaulted Voting Parity Preferred Stock of any series shall be entitled to vote will be given to such holders at their addresses as they appear on the Stock Books. At any such meeting or adjournment thereof in the absence of a quorum, holders of shares of Defaulted Voting Parity Preferred Stock representing a majority of the votes present in person or represented by proxy shall have the power to adjourn the meeting for the election of directors without notice, other than an announcement at the meeting, until a quorum is present. If any Voting Period shall terminate after the notice of special meeting provided for in this paragraph 6(d)(i) has been given but before the special meeting shall have held, the Corporation shall, as soon as practicable after such termination, mail or cause to be mailed to the holders of Defaulted Voting Parity Preferred Stock a notice of cancellation of such special meeting. (ii) The term of office of all persons who are directors of the Corporation at the time of a special meeting of the holders of Defaulted Voting Parity Preferred Stock to elect directors shall continue, notwithstanding the election at such meeting by such holders of the two additional directors. (iii) Simultaneously with the expiration of a Voting Period for all classes and series of Defaulted Voting Parity Preferred Stock, the term of office of the directors elected by the holders of Defaulted Voting Parity Preferred Stock shall terminate, the other persons who shall have been elected by the holders of stock of the Corporation (or by the Board of Directors prior to the beginning of the Voting Period) and who are incumbent shall constitute the directors of the Corporation, and the voting rights of the holders of Voting Parity Preferred Stock to elect directors shall cease. (iv) For so long as a Voting Period continues, the directors elected at any time by the holders of Defaulted Voting Parity Preferred Stock may be removed without cause by, and shall not be removed without cause except by, the vote of the holders of record of the outstanding shares of Defaulted Voting Parity Preferred Stock at any subsequent time, voting together as a single class without regard to class or series, at a meeting of the stockholders, or of the holders of shares of Defaulted Voting Parity Preferred Stock, called for such purpose. So long as a Voting Period continues, (A) any vacancy in the office of a director elected by the holders of Defaulted Voting Parity Preferred Stock may be filled (except as provided in the following clause (B)) by the person appointed by an instrument in writing signed by the remaining director elected by the holders of Defaulted Voting Parity Preferred Stock and filed with the Corporation or, in the event there is no remaining director elected by the holders of Defaulted Voting Parity Preferred Stock, by vote of the holders of the outstanding shares of Defaulted Voting Parity Preferred Stock, voting together as a single class without regard to class or series, at a meeting of the stockholders or at a meeting of the then holders of shares of Defaulted Voting Parity Preferred Stock called for such purpose, and (B) in the case of the removal of any director elected by the holders of Defaulted Voting Parity Preferred Stock, the vacancy may be filled by the person elected by the vote of the holders of the outstanding shares of Defaulted Voting Parity Preferred Stock, voting together as a single class without regard to class or series, at the same meeting at which such removal shall be voted or at any subsequent meeting. (e) Additional Vote. If any matter (excluding the election, removal or replacement of directors) requires the consent or affirmative vote of shares of any series of STRAPS, of all series of STRAPS, or of all Preferred Stock of the Corporation, whether pursuant to the provisions of such series, all such series or such Preferred Stock or pursuant to the provisions of the Articles of Redomestication of the Corporation or pursuant to applicable law, and if any shares of any series of STRAPS entitled to vote are held by the Corporation or by any of its Affiliates, then the following additional consent or vote will be required: the same consent or affirmative vote of shares otherwise required, except that shares of STRAPS held by the Corporation and/or its Affiliates shall be deemed not to be outstanding for purposes of such additional consent or vote: provided, such additional consent or vote will not be applicable if all outstanding shares of the STRAPS of such series (in the case of a class vote of such series) or of all series STRAPS (in the case of a vote of all series of STRAPS) are held by the Corporation and/or its Affiliates. Exhibit 2 Great-West Life & Annuity Insurance Company hereby amends parts of ARTICLE IX of its Articles of Redomestication as follows: 1. Article IX, Section A, paragraph 3 is hereby amended to read in its entirety as follows: 3. Dividend and Liquidation Preference as between the Common Stock and the Preferred Stock. For so long as any shares of Preferred Stock are outstanding, the corporation shall not declare, pay or set apart for payment any dividend or other distribution (other than any dividend or distribution payable solely in shares of Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends and liquidation) in respect of the Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of the Common Stock or any other stock of the corporation ranking junior to the shares of Preferred Stock as to dividends or upon liquidation, unless (i) full cumulative dividends on all shares of Preferred Stock as to which dividends are cumulative for all past dividend periods have been (a) paid or (b) declared and a sum sufficient irrevocably deposited with the paying agent for the payment of such dividends, and (ii) the corporation has redeemed the full number of shares of Preferred Stock, if any, it is then obligated to redeem in accordance with the terms of any series of Preferred Stock as fixed by the board of directors of the corporation in accordance with this Article IX. 2. Article IX, Section B, paragraph 2 is hereby amended to read in its entirety as follows: 2. No Dividend Preference Between Series of Preferred Stock. No dividends shall be declared on shares of any series of Preferred Stock for any dividend period or part thereof unless full cumulative dividends have been or contemporaneously are declared on the shares of each other series of Preferred Stock as to which dividends are cumulative through the most recent dividend payment date for each such other series. If at any time any accrued dividends on shares of any series of Preferred Stock as to which dividends are cumulative (a "cumulative series") have not been paid in full, then the corporation will, if paying any dividends on any shares of any cumulative series of Preferred Stock, pay dividends on shares of all cumulative series of Preferred Stock pro rata in proportion to the sums which would be payable on such cumulative series if all accrued but unpaid dividends, if any, through the most recent dividend payment date were declared and paid in full. Dividends on any series of Preferred Stock shall be cumulative only to the extent provided in the terms of that series . Appendix 8 Statement of Resolution effective September 29, 1992 STATEMENT OF RESOLUTION ESTABLISHING SERIES E PREFERRED STOCK Pursuant to Section 7-4-102 of the Colorado Corporation Code, Great-West Life & Annuity Insurance Company, a Colorado corporation (the "Corporation"), hereby submits the following statement for the purpose of establishing and designating one series of preferred stock and fixing and determining the relative rights and preferences thereof. 1. The name of the Corporation is Great-West Life & Annuity Insurance Company. 2. On September 15, 1992, the following resolution establishing and designating one series of shares of the Corporation's preferred stock was duly adopted by the Board of Directors of the Corporation pursuant to authority conferred upon the Board by the Corporation's Articles of Redomestication: RESOLVED, that the Board of Directors hereby creates and establishes a series of Non-Cumulative Perpetual Preferred Stock, Series E, in accordance with the terms set forth in Exhibit A attached hereto [a copy of which is attached to this Statement of Resolution and is incorporated herein by this reference], and authorizes the officers of the Corporation to file this resolution with the Colorado Secretary of State in accordance with the Colorado Corporation Code. Dated: September 15, 1992 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/ W.T. McCallum William T. McCallum, President and Chief Executive Officer By: /s/ D.C. Lennox D. Craig Lennox, Senior Vice President, General Counsel and Secretary EXHIBIT A STATEMENT OF RESOLUTIONS ESTABLISHING A SERIES OF PREFERRED STOCK GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY PREFERRED STOCK, SERIES E RIGHTS, PRIVILEGES, RESTRICTIONS AND CONDITIONS The Board of Directors of Great-West Life & Annuity Insurance Company (the "Corporation") hereby creates a fifth series of Preferred Stock, designated as the Non-Cumulative Perpetual Preferred Stock, Series E (hereinafter referred to as the "Series E Preferred Stock") consisting of 2,000,000 shares of Preferred Stock The Series E Preferred Stock shall be subject to and governed by the provisions of the Articles of Redomestication of the Corporation as amended from time to time in accordance with applicable law (including, but not limited to, the provisions of the Articles of Redomestication concerning dividend and liquidation preferences) and shall, in addition to the rights, privileges, restrictions and conditions stated in such Articles of Redomestication for the Preferred Stock as a class, have the following rights, privileges, restrictions and conditions ARTICLE 1 INTERPRETATION AND APPLICATION 1.1 Definitions (a) "Affiliate," as used herein, means any entity other than the Corporation (i) which owns beneficially, directly or indirectly, 10% or more of the outstanding shares of the Common Stock, (ii) which is in control of the Corporation, as "control" is defined under Section 230.405 of the Rules and Regulations of the Securities and Exchange Commission, 17 C.F.R. 230.405, as in effect on the date of this Statement, (iii) of which 10% or more of the outstanding shares of common stock, or in which a 10% or greater general partnership or joint venture interest, is owned beneficially, directly or indirectly, by any entity described in clause (i) or (ii) above, or (iv) which is controlled by any entity described in clause (i) or (ii) above, as "controlled by" is defined under such Section 230.405. (b) "Common Stock" shall mean the shares of common stock, par value $1.00, in the capital of the Corporation; (c) "Corporation's Conversion Notice" shall have the meaning ascribed thereto in subsection 3.2(b) hereof; (d) "Conversion Number" shall mean the number of shares of Common Stock which are to be issued on a conversion of one share of the Series E Preferred Stock, which shall be either the Negotiated Conversion Number or the Formula Conversion Number; (e) "Formula Conversion Number" shall mean the number of shares of Common Stock used in connection with the conversion of Series E Preferred Stock into Common Stock determined in accordance with the provisions of section 4.6 hereof; (f) "Holder's Conversion Notice" shall have the meaning ascribed thereto in subsection 4.2(a) hereof; and (g) "Negotiated Conversion Number" shall mean that number of shares of Common Stock used in connection with the conversion of Series E Preferred Stock into Common Stock determined in accordance with the provisions of section 4.5 hereof. 1.2 Regulatory Approvals Notwithstanding anything to the contrary contained herein, the Corporation shall not redeem, purchase for cancellation or otherwise retire, reduce or make any return of capital in respect of any Series E Preferred Stock or exercise its option to convert the Series E Preferred Stock into shares of common stock or modify the rights, privileges, restrictions or conditions of the Series E Preferred Stock unless the same is in accordance with the Colorado law and all the necessary or appropriate consents of the Colorado Insurance Division and other regulatory authorities having jurisdiction have been obtained prior thereto. ARTICLE 2 DIVIDENDS 2.1 Dividend Payment Dates and Dividend Periods The dividend payment dates (the "Dividend Payment Dates") in respect of the dividends payable on the Series E Preferred Stock shall be the last day of each of the months of March, June, September and December in each year. A Dividend Period shall mean the period from and including the date of issue of the Series E Preferred Stock to but excluding the first Dividend Payment Date and, thereafter, the period from including each Dividend Payment Date to but excluding the next succeeding Dividend Payment Date. 2.2 Payment of Dividends The holders of Series E Preferred Stock shall be entitled to receive, and the Corporation shall pay thereon, as and when declared by the board of directors of the Corporation, out of moneys of the Corporation properly applicable to the payment of dividends, non-cumulative cash dividends (the "Quarterly Dividends") payable, with respect to each Dividend Period, on the Dividend Payment Date immediately following the end of such Dividend Period, the first of such dividends to be payable on December 31, 1992 and to be in an amount per share determined in accordance with section 2.3 hereof. For all subsequent Dividend Periods, dividends, subject to section 2.3 hereof, as and when declared by the board of directors of the Corporation, out of moneys of the Corporation properly applicable to the payment of dividends, shall be paid in an amount per share of Series E Preferred Stock equal to $0.39188. 2.3 Dividend for other than a Full Dividend Period The holders of Series E Preferred Stock shall be entitled to receive, and the Corporation shall pay thereon, as and when declared by the board of directors, out of moneys of the Corporation properly applicable to the payment of dividends, non-cumulative cash dividends for any period which is less than a full Dividend Period as follows: (a) an initial dividend per share in respect of the period from and including the date of the initial issue of the Series E Preferred Stock to but excluding December 31, 1992 (the "Initial Dividend Period") equal to $0.57976; and (b) a dividend in an amount per share with respect to any Series E Preferred Stock: (i) which is issued, redeemed or purchased by the Corporation or converted during any Dividend Period; or (ii) where the assets of the Corporation are distributed in the liquidation, dissolution or winding up of the Corporation to the holders of the Series E Preferred Stock with an effective date during any Dividend Period; equal to the amount obtained (rounded to five decimal places) when $1.5675 is multiplied by a fraction of which the numerator is the number of days in such Dividend Period that such share has been outstanding (excluding the date of issue, redemption, purchase or conversion or the effective date for the distribution of assets) and the denominator of which is the number of days in the year in which such Dividend Period falls. 2.4 Payment Procedure The Corporation shall pay the dividends on the Series E Preferred Stock to the holders of record thereof at the close of business on the second business day immediately preceding the relevant Dividend Payment Date (less any tax required to be deducted or withheld by the Corporation) by check drawn on a bank or trust company and payable in lawful money of the United States at any branch of such bank or trust company in the United States. The delivery or mailing of any check to a holder of Series E Preferred Stock shall be a full and complete discharge of the Corporation's obligation to pay the dividends to such holder (plus any tax required to be and in fact deducted and withheld therefrom and remitted to the proper taxing authority) unless such check is not honored when presented for payment. Dividends which are represented by a check which has not been presented to the Corporation's bankers for payment or that otherwise remain unclaimed for a period of two years from the date on which they were declared to be payable may be reclaimed (including without limitation by cancellation of any check) and after such reclaiming the holders of Series E Preferred Stock entitled to the funds so reclaimed shall look only to the Corporation for such payment, without interest. ARTICLE 3 REDEMPTION, CONVERSION AND PURCHASE 3.1 General (a) Subject to the Articles of Redomestication and to the extent permitted by applicable law, the Series E Preferred Stock may be redeemed, converted or purchased by the Corporation as provided in this Article 3 and Article 4 but not otherwise. (b) For the purposes hereof, the Common Stock of the Corporation (the "Common Stock") shall mean (i) such common stock as currently constituted and (ii) any shares attributable to such common stock and resulting from a reclassification of the common stock of the Corporation or from a capital reorganization of the Corporation or a consolidation or merger of the Corporation with or into any other corporation (other than a capital reorganization, consolidation or merger which does not result in any reclassification of the common stock or a change of the common stock into other stock, shares or securities). 3.2 Redemption and Conversion Rights (a) The Series E Preferred Stock shall not be redeemable prior to April 1, 1999. The Corporation may, upon giving notice as hereinafter provided, redeem on or after April 1, 1999 at any time the whole or from time to time any part of the then outstanding Series E Preferred Stock, by the payment of an amount in cash for each share of Series E Preferred Stock so redeemed equal to the sum of $20.90 plus an amount equal to all declared and unpaid dividends thereon up to but excluding the date fixed for redemption (the "Redemption Price"). (b) The Series E Preferred Stock shall not be convertible at the option of the Corporation prior to April 1, 1999. Subject to compliance with the rights, privileges, restrictions and conditions of the Common Stock and receipt of any required regulatory approval, the Corporation may, by giving notice as hereinafter provided (the "Corporation's Conversion Notice"), convert the whole or from time to time any part of the then outstanding Series E Preferred Stock into fully paid and non-assessable shares of Common Stock on the basis that the Series E Preferred Stock of each holder called for conversion by the Corporation will be converted into (subject to that exception as to fractions contained in section 3.7 hereof) that number (the "Conversion Number") of shares of Common Stock determined pursuant to Article 4 and that the Formula Conversion Number as provided in section 4.6 shall be used for this purpose. (c) If less than all of the outstanding Series E Preferred Stock are to be redeemed or converted, the shares to be redeemed or converted shall be selected by lot, pro rata (disregarding fractions) or in such other manner as the board of directors or a committee thereof in its sole discretion shall by resolution determine. 3.3 Manner of Redemption or Conversion (a) Notice of redemption or conversion of Series E Preferred Stock shall be given by the Corporation not less than 25 nor more than 60 calendar days prior to the date fixed for redemption and not less than 35 nor more than 60 calendar days prior to the date fixed for conversion, to each holder of Series E Preferred Stock to be redeemed or converted, as the case may be. Such notice shall set out (i) the date (the "Redemption Date" or the "Conversion Date", as the case may be) on which the redemption or conversion is to take place; (ii) unless all the Series E Preferred Stock held by the holder to whom it is addressed is to be redeemed or converted, the number of shares of Series E Preferred Stock so held which are to be redeemed or converted: (iii) whether the Corporation shall redeem or convert such Series E Preferred stock; (iv) the Redemption Price or the method of determining the Conversion Number, as the case may be; and (v) where the Series E Preferred Stock is to be converted into Common Stock, the advice that such Common Stock will be registered in the name of the registered holder of the Series E Preferred Stock to be converted unless the Corporation receives from such holder, on or before the tenth calendar day prior to the Conversion Date (the "Transferee Notice Date"), at the head office of the Corporation, written notice in a form and executed in a manner satisfactory to the Corporation directing the Corporation to register such Common Stock in some other name or names (the "Transferee") and stating the name or names (with addresses) accompanied by payment to the Corporation of any transfer tax that may be payable by reason thereof and a written declaration of such matters as may be required by law in order to determine the entitlement of such Transferee to hold such Common Stock. (b) In the case of a redemption, on and after the Redemption Date the Corporation shall pay or cause to be paid to the holders of the Series E Preferred Stock so called for redemption the Redemption Price therefor on presentation and delivery at the head office of the Corporation or such other place or places in the United States designated in the notice referred to in subsection 3.3(a), of the certificate or certificates representing the Series E Preferred Stock so called for redemption. Such payment shall be made by check and shall be a full and complete discharge of the Corporation's obligation to pay the Redemption Price owed to the holders of Series E Preferred Stock so called for redemption unless the check is not honored when presented for payment. From and after the Redemption Date, the holders of Series E Preferred Stock called for redemption shall cease to be entitled to dividends or to exercise any of the rights of holders of Series E Preferred Stock in respect of such shares except the right to receive therefor the Redemption Price, provided that if payment of such Redemption Price is not duly made in accordance with the provisions hereof, then the rights of such holders shall remain unimpaired. (c) In the case of a redemption, the Corporation shall have the right at any time after mailing a notice of redemption to deposit irrevocably (subject to the repayment right set forth below in this subsection) the aggregate Redemption Price of the Series E Preferred Stock thereby called for redemption, or such part thereof as at the time of deposit has not been claimed by the holders entitled thereto, in a special account with a bank or trust company designated by the Corporation for the holders of such shares, and upon such deposit being made or upon the date fixed for redemption, whichever is the later, the Series E Preferred Stock in respect of which such deposit shall have been made shall be deemed to be redeemed and the rights of each holder thereof shall be limited to receiving, without interest, his proportionate part of the Redemption Price so deposited upon presentation and surrender of the certificates representing the Series E Preferred Stock so redeemed. Any interest on any such deposit shall belong to the Corporation. Redemption moneys which remain unclaimed for a period of two years from the Redemption Date shall be repaid to the Corporation, and after such repayment, the holders of Series E Preferred Stock entitled to the funds so repaid to the Corporation shall look only to the Corporation for such payment, without interest. (d) In the case of a conversion of Series E Preferred Stock into Common Stock, on and after the Conversion Date the Corporation shall deliver the Conversion Number of Common Stock on presentation and delivery by the holders at the head office of the Corporation or such other place or places in the United States designated in the notice referred to in subsection 3.3(a), of the certificate or certificates representing the Series E Preferred Stock so called for conversion. The Corporation shall deliver or cause to be delivered certificates representing such Common Stock registered in the name of the holders of Series E Preferred Stock to be converted, or as such holders shall have directed as aforesaid. Series E Preferred Stock so converted shall be converted effective on the Conversion Date. From and after the Conversion Date, the holders of Series E Preferred stock so converted who have not presented and delivered the certificate or certificates representing such shares as herein required shall cease to be entitled to dividends on such Series E Preferred Stock or to exercise any of the rights of holders of Series E Preferred Stock in respect of such shares except the right to receive a certificate for the Conversion Number of Common Stock and any payment with respect to a fraction of a share of Series E Preferred Stock. (e) If less than all the Series E Preferred Stock represented by any certificate shall be redeemed or converted, a new certificate for the balance shall be issued without cost to the holder. 3.4 Purchase The Corporation may purchase at any time all or from time to time any part of the outstanding Series E Preferred Stock in the open market (including purchases through or from an investment dealer or firm holding membership on a stock exchange) or pursuant to tenders received by the Corporation upon an invitation for tenders addressed to all holders of the Series E Preferred Stock, at a price per share in each case not exceeding the applicable Redemption Price at the time of purchase plus costs of purchase. If upon any invitation for tenders the Corporation receives tenders for Series E Preferred Stock at the same price in an aggregate number greater than the number for which the Corporation is prepared to accept tenders, the shares to be purchased shall be selected from the shares offered at such price as nearly as may be pro rata (to the nearest 10 shares) according to the number of shares of Series E Preferred Stock offered in each such tender, in such manner as the board of directors or a committee thereof in its sole discretion shall by resolution determine. If part only of the Series E Preferred Stock represented by any certificate shall be purchased, a new certificate for the balance of such shares shall be issued without cost to the holder. 3.5 Conversion into Another Series of Preferred Stock To the extent permitted by applicable law and the Articles of Redomestication and by-laws of the corporation, and with any required approval of the Colorado Insurance Division, the Corporation may at any time on or after September 30, 1997, designate a further series of preferred stock of the same class as the Series E Preferred Stock which qualifies as regulatory capital for Canadian insurance law purposes (the "New Preferred Stock") and notify the holders of Series E Preferred Stock that they have the right pursuant to the terms of the Series E Preferred Stock, at their option, to convert their Series E Preferred Stock into fully paid and non-assessable New Preferred Stock on a share for share basis on a date specified by the Corporation in such notice (the "Exchange Date"). Such notice shall provide the details of the terms and conditions of the New Preferred Stock and instructions on how to convert Series E Preferred Stock into New Preferred Stock and shall be accompanied by the proper form of instrument of surrender. 3.6 Manner of Conversion into Another Series of Preferred Stock Series E Preferred Stock may be converted by the holder of such shares tendering to the Corporation on or prior to the Exchange Date the certificate or certificates representing the Series E Preferred Stock to be so converted accompanied by a written instrument of surrender in form satisfactory to the Corporation and duly executed by the registered holder of the Series E Preferred Stock represented by the certificate or certificates so surrendered in which instrument the holder may elect to convert all or a portion of the Series E Preferred Stock represented by such certificate or certificates into New Preferred Stock. The Corporation shall, on presentation and delivery at the head office of the Corporation or such other place or places in the United States as the Corporation may agree of the certificate or certificates representing the Series E Preferred Stock to be converted, issue and deliver or cause to be delivered as soon as is reasonably practicable after the Exchange Date a certificate or certificates representing the New Preferred Stock into which such Series E Preferred Stock have been converted. Such certificate or certificates shall be registered in the name of the holder of the Series E Preferred Stock so converted or in such name or names as the holder may specify in the written instrument accompanying the Series E Preferred Stock to be converted. The Series E Preferred Stock so converted shall be converted, and the holder thereof shall become a holder of record of New Preferred Stock, effective on the Exchange Date. The provisions of subsection 3.3(e) shall apply, mutatis mutandis, in the event of a conversion into New Preferred Stock of less than all of the Series E Preferred Stock represented by a particular share certificate. 3.7 Avoidance of Fractional Shares In any case where a fraction of a share of Common Stock would otherwise be issuable on conversion of one or more shares of Series E Preferred Stock, the Corporation shall adjust such fractional interest by payment by check in an amount equal to the value of such fractional interest computed on the basis of $20.90 divided by the Conversion Number determined in respect of the relevant Conversion Date. ARTICLE 4 HOLDER'S CONVERSION RIGHT 4.1 Conversion Right Subject to the option of the Corporation in section 4.3 hereof and to the provisions of section 1.2 hereof, each share of Series E Preferred Stock shall, on and after September 30, 1999, at the option of the holder, be convertible on the last day of March, June, September and December in each year (a "permitted conversion date") into (subject to the exception as to fractions contained in section 4.4) that number of shares of fully paid and non-assessable Common Stock as is equal to the Conversion Number. The holder of Series E Preferred Stock to be converted is entitled to receive any dividend which has been declared and is payable on the date of such conversion. Not less than 90 nor more than 120 calendar days prior to September 30, 1999, the Corporation shall give to the registered holders of the Series E Preferred Stock notice of the conversion right containing instructions to such holders as to the method by which such conversion right may be exercised, as set out in section 4.2. However, a failure to give such notice shall not affect the conversion rights of the Series E Preferred Stock. 4.2 Manner of Conversion (a) Series E Preferred Stock may be converted by the holder of such shares tendering to the Corporation not less than 55 calendar days prior to the date (which must be a permitted conversion date) fixed for conversion by such holder the certificate or certificates for the Series E Preferred Stock to be converted with the notice of conversion on the reverse side thereof (the "Holder's Conversion Notice") duly completed. Subject to section 4.3 and to the right to accept an offer to convert Series E Preferred Stock into New Preferred Stock under section 3.5, such Conversion Notice shall be irrevocable and shall set out: (i) the date (the "Conversion Date") on which the conversion is to take place; (ii) unless all the Series E Preferred Stock held by the holder by whom such notice is given is to be converted, the number of shares of Series E Preferred Stock so held which are to be converted; and (iii) an acknowledgment that the Common Stock into which the Series E Preferred Stock is to be converted is to be registered in the name of the registered holder of the Series E Preferred Stock to be converted unless such holder, on or before the tenth calendar day prior to the Conversion Date (the "Transferee Notice Date") provides to the Corporation written notice in the form and executed in a manner satisfactory to the Corporation directing the Corporation to register such Common Stock in some other name or names (the "Transferee") and stating the name or names (with addresses) accompanied by payment to the Corporation of any transfer tax that may be payable by reason thereof and a written declaration of any matters as may be required by law in order to determine the entitlement of such Transferee to hold such common Stock. (b) Subject to section 4.3 hereof, the Corporation shall, on presentation and delivery at the head office of the corporation or such other place or places in the United States as the Corporation may agree of the certificate or certificates representing the Series E Preferred Stock so surrendered for conversion, issue and deliver or cause to be delivered certificates representing the number of whole shares of Common Stock into which such Series E Preferred Stock is to be converted, registered in the name of the holder of the Series E Preferred Stock to be converted, or as such holder shall have directed as aforesaid, as the case may be, on the Conversion Date. The Series E Preferred Stock so converted shall be converted, and the holder thereof shall become a holder of Common Stock of record, effective on the Conversion Date. (c) If less than all the Series E Preferred Stock represented by any certificate shall be converted, a new certificate for the balance shall be issued without cost to the holder. 4.3 Option of the Corporation Prior to any Conversion Date, the Corporation may, by notice given not less than 35 calendar days before such Conversion Date to all holders who have given a Conversion Notice, (a) redeem on the Conversion Date all but not less than all of the Series E Preferred Stock forming the subject matter of the applicable Conversion Notice at the Redemption Price provided for in Article 3 hereof; or (b) request such holders to sell on the Conversion Date such Series E Preferred Stock to another purchaser or purchasers in the event that a purchaser or purchasers willing to purchase all but not less than all of such Series E Preferred Stock at a price equal to the Redemption Price is or are found by the Corporation and such holders shall sell such Series E Preferred Stock at a price equal to the Redemption Price to such purchaser or purchasers. Any such redemption or purchase shall be made on the Conversion Date by mailing a check of the Corporation or the Corporation's causing such purchaser to mail a check (as the case may be) in an amount equal to the Redemption Price to the holder of the Series E Preferred Stock entitled thereto. The provisions of subsection 3.3(e) shall apply, mutatis mutandis, in the event of a redemption or purchase of less than all the Series E Preferred Stock represented by a particular share certificate. The Series E Preferred Stock so purchased or redeemed shall not be converted on the Conversion Date. In the event that for any reason the redemption or purchase provided for in this section is not effected in respect of a share or shares of Series E Preferred Stock on the Conversion Date, the option of the Corporation in respect of such Series E Preferred Stock shall lapse and such Series E Preferred Stock shall be deemed to have been converted on the Conversion Date. 4.4 Avoidance of Fractional Shares In any case where a fraction of a share of Common Stock would otherwise be issuable on conversion of one or more shares of Series E Preferred Stock under this Article 4, the Corporation shall adjust such fractional interest by the payment by check in an amount equal to the value of such fractional interest computed on the basis of $20.90 divided by the Conversion Number determined in respect of the relevant Conversion Date. 4.5 Negotiated Conversion Number (a) No later than 10 days following the receipt of a Holder's Conversion Notice, the Corporation may notify the holders of the Series E Preferred Stock, or such holders as have delivered a Holder's Conversion Notice, of a proposed Conversion Number in connection with the conversion of the Series E Preferred Stock into Common Stock. Such notification to holders shall also: (i) specify a date by which each holder must notify the Corporation in writing of its acceptance of the proposed Conversion Number, if such holder intends to accept such number, which date shall beat least 25 days prior to the Conversion Date, and (ii) specify that the proposed Conversion Number shall become effective for the purposes of determining the number of Common Stock to be issued upon the conversion of the Series E Preferred Stock only if all of the holders of Series E Preferred Stock who have delivered a Holder's Conversion Notice accept such number. (b) If, by the time prescribed in clause (a)(i), all of the holders of Series E Preferred Stock who have delivered a Holder's Conversion Notice have accepted the proposed Conversion Number, as evidenced by notice in writing to the Corporation, and at least 20 days prior to the Conversion Date the Corporation has notified all of such holders that each of them has agreed with the Corporation as to such number, then such Conversion Number (the "Negotiated Conversion Number") shall apply for the purposes of determining the number of shares of Common Stock to be issued upon the conversion of the Series E Preferred Stock in respect of the Holder's Conversion Notice then outstanding in accordance with the provisions of section 4.7 hereof. 4.6 Formula Conversion Number (a) Subject to the provisions of subsection (b) hereof, the Corporation shall determine a Conversion Number (the "Formula Conversion Number") which shall be equal to the quotient obtained when (i) an amount equal to the total assets minus all preferred stock minus undistributed participating policyholder earnings as shown on the Corporation's balance sheet as at the end of the most recently completed calendar quarter, prepared in accordance with U.S. generally accepted accounting principles as in effect at the time of determination and applicable to the Corporation, is divided by (ii) the number of shares of Common Stock outstanding, on a fully diluted basis (excluding any shares issuable upon conversion of the Series E Preferred Stock), at such quarter-end. (b) In the event that the Corporation proposes to utilize the Formula Conversion Number, it shall so notify all of the holders of Series E Preferred Stock (in the case of the issuance of a Corporation's Conversion Notice) or each holder of Series E Preferred Stock who has submitted a Holder's Conversion Notice, not less than 5 days prior to the Conversion Date, that the Corporation intends to use the Formula Conversion Number in respect of such Conversion Date and notifying such holders of the basis upon which such Number has been determined. The Corporation will, if requested by any holder of Series E Preferred Stock converting the same into Common Stock, provide such holder with a letter from the auditors of the Corporation stating that: (i) if the above-referenced quarter-end is not also the end of a fiscal year of the Corporation, (A) on the basis of a review of such unaudited quarter-end financial statements, nothing has come to the attention of the auditors that cause them to believe that the unaudited financial statements for the completed quarter referenced above are not in conformity with generally accepted accounting principles, and (B) in using the numbers contained in such unaudited quarter-end financial statements and information provided by the Corporation's management, the auditors have recalculated the Financial Conversion Number and found it to be accurate or (ii) if the above-referenced quarter is the end of a fiscal year of the Corporation, (A) the auditors indicate that they have issued their opinion on the audited financial statement for such fiscal year and (B) in using the numbers contained in such audited financial statements and information provided by the Corporation's management, the auditors have recalculated the Financial Conversion Number and found it to be accurate. 4.7 Conversion Ratio Each share of Series E Preferred Stock shall be convertible into that number of shares of Common Stock which is equal to the Conversion Number, with the result of such calculation being rounded down to the nearest share of Common Stock. For these purposes, the Conversion Number shall be the Negotiated Conversion Number agreed to in accordance with the provisions of section 4.5 hereof with respect to shares of Series E Preferred Stock subject to a Holder's Conversion Notice or, if no such number be agreed upon, the Formula Conversion Number determined pursuant to the provisions of section 4.6 hereof. 4.8 Reservation of Shares The Corporation shall at all times reserve and keep available, free from preemptive rights, out of its authorized Common Stock, for the purpose of effecting the conversion of shares of Series E Preferred Stock, at least the full number of shares of Common Stock then deliverable upon conversion of all shares of Series E Preferred Stock then outstanding on the basis of the Formula Conversion Number. 4.9 Governmental Approvals If any shares of Common Stock to be reserved for the purpose of conversion of shares of Series E Preferred Stock require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued or delivered upon conversion, then the Corporation will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. ARTICLE 5 VOTING RIGHTS 5.1 No Voting Except as required by law and except as otherwise provided herein or in the Corporation's Articles of Redomestication, the holders of Series E Preferred Stock shall have no voting rights and shall not be entitled as such to receive notice of or to attend any meeting of shareholders of the corporation. 5.2 Default in Dividend (a) The shares of Series E Preferred Stock are intended to be "Voting Parity Preferred Stock" as that term is used in the Voting Rights of Stated Rate Auction Preferred Stock, Series A through Series D, of the Corporation (the " STRAPS n ) . During any period (a "Voting Period") when a "Default in Preferred Dividends" (as hereinafter defined) shall exist on the shares of Series E Preferred Stock, or any class or series of preferred stock ranking on a parity with the shares of Series E Preferred Stock as to dividends or upon liquidation, dissolution or winding up of the Corporation and the terms of which expressly provide that such shares are "Voting Parity Preferred Stock" within the meaning of this paragraph or the terms of the STRAPS and voting rights thereunder are then exercisable (all such shares, and all shares of Series E Preferred Stock, being hereinafter referred to collectively as the "Voting Parity Preferred Stock"), the authorized number of members of the Board of Directors shall automatically be increased by two. The two vacancies so created shall be filled by the vote of the holders of the "Defaulted Voting Parity Preferred Stock" as hereinbelow defined, voting together as a single class without regard to class or series, to the exclusion of the holders of the Common Stock of the Corporation and any other class or series of stock other than such shares of Defaulted Voting Parity Preferred Stock. A Default in Preferred Dividends" means any default or event specified in the terms of any class of preferred stock or series of preferred stock by reason of which the holders of such preferred stock are entitled to elect directors of the Corporation. A "Default in Preferred Dividends" with respect to Series E Preferred Stock shall be deemed to have occurred whenever the Corporation fails to declare and pay the whole amount of Quarterly Dividend for any Dividend Period on or before the last day of such Dividend Period, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, the Corporation declares and pays the full amount of Quarterly Dividend for a Dividend Period. At such time as the Corporation may again fail to declare the full amount of any Quarterly Dividend upon any Series E Preferred Stock for any Dividend Period, a "Default in Preferred Dividends" shall again have occurred. "Defaulted Voting Parity Preferred Stock" at any time shall mean those classes and series of Voting Parity Preferred Stock in respect of which, at or prior to such time, a Default in Preferred Dividends has occurred and of which the holders are entitled at that time by the terms of such Voting Parity Preferred Stock to elect directors of the Corporation. Upon the termination of a Voting Period with respect to any class or series of Defaulted Voting Parity Preferred Stock, the voting rights described in this section 5.2 shall cease for such class or series of Defaulted Voting Parity Preferred Stock, subject always, however, to revesting of such voting rights in the holders of such Voting Parity Preferred Stock upon the further occurrence of a Default in Preferred Dividends. If any Voting Period shall have terminated before the holders of a class or series of Voting Parity Preferred Stock shall have exercised the voting rights provided in this section 5.2, the holders of such class or series of Voting Parity Preferred Stock shall be deemed not to have acquired such voting rights. (b) If the holders of any class or series of Defaulted Voting Parity Preferred Stock (the "first Defaulted Voting Parity Preferred Stock") have elected one or more directors prior to the happening of the default or event permitting the holders of any other class or series of Defaulted Voting Parity Preferred Stock to elect directors, then the directors so previously elected will be deemed to have been elected by and on behalf of the holders of such other class or series of Defaulted Voting Parity Preferred Stock as well as the first Defaulted Voting Parity Preferred Stock, without prejudice to the right of the holders of such other class or series to vote for directors if such previously elected directors shall resign, cease to serve or stand for reelection while the holders of such other class or series are entitled to vote. If the holders of any first Defaulted Voting Parity Preferred Stock are entitled to elect in excess of two directors, the holders of such other class or series shall not participate in the election of more than two such directors. (c) No shares of any Defaulted Voting Parity Preferred Stock held by the Corporation or any of the Corporation's Affiliates shall be voted, or counted in determining a quorum, for the election, removal or replacement of any director elected by any Defaulted Voting Parity Preferred Stock. 5.3 Voting Procedures (a) As soon as practicable after the commencement of a Voting Period, the Corporation shall call or cause to be called a special meeting of the holders of Defaulted Voting Parity Preferred Stock by mailing or causing to be mailed a notice of such special meeting to such holders not less than 10 nor more than 45 days after the date such notice is given. If the Corporation does not call or cause to be called such a special meeting, it may be called by any of such holders on like notice. The record date for determining the holders of Defaulted Voting Parity Preferred Stock entitled to notice of and to vote at such meeting shall be the close of business on the Business Day preceding the day on which such notice is mailed. At any such special meeting and at each meeting of stockholders held during a Voting Period at which directors are to be elected, removed or replaced, the holders of Defaulted Voting Parity Preferred Stock, voting together as a single class (to the exclusion of the holders of all other securities, series and classes of capital stock of the Corporation), voting by a majority of the votes of shares present in person or by proxy, shall be entitled to elect two directors. In regard to such elections, each holder of shares of Defaulted Voting Parity Preferred Stock shall be entitled to one or more votes and/or a fractional vote on the basis of one vote for each $100,000 of liquidation preference (excluding amounts in respect of accumulated and unpaid dividends) attributable to such shares. Cumulative voting in such elections shall not be permitted. Shares of Defaulted Voting Parity Preferred Stock then outstanding, present in person or represented by proxy, representing one-third of the votes of the Defaulted Voting Parity Preferred Stock, will constitute a quorum for the election of directors. Notice of all meetings at which holders of Defaulted Voting Parity Preferred Stock of any series shall be entitled to vote will be given to such holders at their addresses as they appear on the Stock Books. At any such meeting or adjournment thereof in the absence of a quorum, holders of shares of Defaulted Voting Parity Preferred Stock representing a majority of the votes present in person or represented by proxy shall have the power to adjourn the meeting for the election of directors without notice, other than an announcement at the meeting, until a quorum is present. If any Voting Period shall terminate after the notice of special meeting provided for in this section 5.3 has been given but before the special meeting shall have been held, the Corporation shall, as soon as practicable after such termination, mail or cause to be mailed to the holders of Defaulted Voting Parity Preferred Stock a notice of cancellation of such special meeting. (b) The term of office of all persons who are directors of the Corporation at the time of a special meeting of the holders of Defaulted Voting Parity Preferred Stock to elect directors shall continue, notwithstanding the election at such meeting by such holders of the two additional directors. (c) Simultaneously with the expiration of a Voting Period for all classes and series of Defaulted Voting Parity Preferred Stock, the term of office of the directors elected by the holders of Defaulted Voting Parity Preferred Stock shall terminate, the other persons who shall have been elected by the holders of stock of the Corporation (or by the Board of Directors prior to the beginning of the Voting Period) and who are incumbent shall constitute the directors of the Corporation, and the voting rights of the holders of Voting Parity Preferred Stock to elect directors shall cease. (d) For so long as a Voting Period continues, the directors elected at any time by the holders of Defaulted Voting Parity Preferred Stock may be removed without cause by, and shall not be removed without cause except by, the vote of the holders of record of the outstanding shares of Defaulted Voting Parity Preferred Stock at any subsequent time, voting together as a single class without regard to class or series, at a meeting of the stockholders, or of the holders of shares of Defaulted Voting Parity Preferred Stock, called for such purpose. So long as a Voting Period continues, (A) any vacancy in the office of a director elected by the holders of Defaulted Voting Parity Preferred Stock may be filled (except as provided in the following clause (B)) by the person appointed by an instrument in writing signed by the remaining director elected by the holders of Defaulted Voting Parity Preferred Stock and filed with the Corporation or, in the event there is no remaining director elected by the holders of Defaulted Voting Parity Preferred Stock, by vote of the holders of the outstanding shares of Defaulted Voting Parity Preferred Stock, voting together as a single class without regard to class or series, at a meeting of the stockholders or at a meeting of the then holders of shares of Defaulted Voting Parity Preferred Stock called for such purpose, and (B) in the case of the removal of any director elected by the holders of Defaulted Voting Parity Preferred Stock, the vacancy may be filled by the person elected by the vote of the holders of the outstanding shares of Defaulted Voting Parity Preferred Stock, voting together as a single class without regard to class or series, at the same meeting at which such removal shall be voted or at any subsequent meeting. 5.4 Additional Vote If any matter (excluding the election, removal or replacement of directors) requires the consent or affirmative vote of shares of Series E Preferred Stock or of all Preferred Stock of the Corporation, whether pursuant to the provisions of such Series or such Preferred Stock or pursuant to the provisions of the Articles of Redomestication of the Corporation or pursuant to applicable law, and if any shares of Series E Preferred Stock entitled to vote are held by the Corporation or by any of its Affiliates, then the following additional consent or vote will be required: the same consent or affirmative vote of shares otherwise required, except that shares of Series E Preferred Stock held by the Corporation and/or its Affiliates shall be deemed not to be outstanding for purposes of such additional consent or vote; provided, such additional consent or vote will not be applicable if all outstanding shares of Series E Preferred Stock are held by the Corporation and/or its Affiliate. ARTICLE 6 ISSUE PRICE The price or consideration for which each share of Series E Preferred Stock shall be issued is $20.90 and, upon payment of such price, each such share shall be issued as fully paid and non-assessable. ARTICLE 7 NOTICE AND INTERPRETATION 7.1 Notices (a) Any notice, check, invitation for tenders or other Communication from the Corporation herein provided for shall be sufficiently given if delivered or if sent by first class unregistered mail, postage prepaid, to the holders of the Series E Preferred Stock at their respective addresses appearing on the books of the Corporation or, in the event of the address of any of such holders not so appearing, then at the last address of such holder known to the Corporation. Except for notices required by law, accidental failure to give such notice, invitation for tenders or other communication to one or more holders of the Series E Preferred Stock shall-not affect the validity of the notices, invitations for tenders or other communications properly given or any action taken pursuant to such notice, invitation for tenders or other communication but, upon such failure being discovered, the notice, invitation for tenders or other communication, as the case may be, shall be sent forthwith to such holder or holders. (b) If any notice, check, invitation for tenders or other communication from the Corporation given to a holder of Series E Preferred Stock pursuant to paragraph (a) is returned on three consecutive occasions because he cannot be found, the Corporation shall not be required to give or mail any further notices, checks, invitations for tenders or other communications, to such shareholder until another address for such shareholder is made known to the Corporation. 7.2 Interpretation (a) In the event that any day on which any dividend on the Series E Preferred Stock is payable or on or by which any other action is required to be taken hereunder is not a business day, then such dividend shall be payable or such other action shall be required to be taken on or before the next succeeding day that is a business day. A "business day" means a day other than a Saturday, a Sunday or any other day that is a legal holiday on which banking institutions in the place where the Corporation has its head office are closed. (b) All references herein to a holder of Series E Preferred stock shall be interpreted as referring to a registered holder of the Series E Preferred Stock. ARTICLE 8 CERTAIN MODIFICATIONS In addition to any other vote or consent of shareholders of the Corporation then required by applicable law or by the Articles of Redomestication of the Corporation, subject to any regulatory consents referred to in section 1.2 hereof, so long as any shares of Series E Preferred Stock remain outstanding, the Corporation shall not, without the prior approval of the holders of Series E Preferred Stock outstanding at that time, given in accordance with Article 9 below in person or by proxy, either in writing or at a meeting (i) authorize, create or issue, or increase the authorized or issued amount, of any class or series of stock ranking prior to Series E Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up of the Corporation, or reclassify any authorized stock of the Corporation into any such shares, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such shares, or (ii) amend, alter or repeal any of the provisions of the Corporation's Articles of Redomestication of the Corporation or this Statement of Designation so as to adversely affect any right, preference, privilege or voting power of Series E Preferred Stock: provided, however, that any increase in the amount of the authorized preferred stock or the creation or issuance of any series of preferred stock or any increase in the amount of authorized shares of such series or of any other series of preferred stock, in each case ranking on a parity with or junior to Series E Preferred Stock with regard to dividends, or upon liquidation, dissolution or winding up of the Corporation (which includes without limitation any shares of the same class of preferred stock as the Series E Preferred Stock, whether or not providing for cumulative dividends), shall not be deemed to adversely affect such rights, preferences, privileges or voting powers. ARTICES 9 APPROVAL OF SERIES E PREFERRED STOCKHOLDERS When holders of Series E Preferred Stock are voting separately as a class, any approval of the holders of Series E Preferred Stock with respect to any and all matters referred to herein or of any other matters requiring the consent of the holders of the Series E Preferred Stock may be given in such manner as may then be required by law, subject to a minimum requirement that such approval be given by resolution signed by the holders of a majority of the outstanding Series E Preferred Stock (or, if required at that time by applicable law, signed by all holders of the outstanding Series E Preferred Stock) or passed by the affirmative vote of a majority of the votes cast by the holders of Series E Preferred Stock who voted in respect of the resolution at a general meeting of the holders of the Series E Preferred Stock duly called for that purpose and held upon at least 10 days notice at which the holders of at least one-third of the outstanding Series E Preferred Stock (which shall constitute a quorum) are present in person or represented by proxy. The proxy rules applicable to the giving of notice of and the formalities to be observed in respect of the conduct of, any such meeting or any adjourned meeting shall be those from time to time prescribed by the Articles of Redomestication and by-laws of the Corporation with respect to meetings of the holders of Preferred Stock, or if not so prescribed, as required by the Colorado Corporation Code or by such other federal or state legislation as may be applicable in the circumstances. Subject to Article 5 hereof, on every vote taken at every meeting of holders of Series E Preferred Stock, each holder of Series E Preferred Stock entitled to vote thereat shall be entitled to one vote for each share of Series E Preferred Stock held. ARTICLE 10 RIGHTS ON LIQUIDATION In the event of the liquidation, dissolution or winding-up of the affairs of the Corporation, whether voluntary or involuntary, the holders of Series E Preferred Stock shall be entitled to receive, out of assets of the Corporation available for distribution to stockholders after satisfying claims of creditors but before any payment or distribution on the Common Stock or on any other class of stock ranking junior to the shares of Series E Preferred Stock upon liquidation, a liquidation distribution in the amount of $20.90 per share plus an amount equal to all dividends declared and unpaid on each share to the date of such distribution. Additional provisions regarding the preferences and rights of holders of Series E Preferred Stock to receive liquidating distributions are set forth in Article IX of the Articles of Redomestication of the Corporation. Neither the sale, lease or exchange (for cash, stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the consolidation or merger of the Corporation with or into any other entity, nor the merger or consolidation of any other entity with or into the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the affairs of the Corporation, either voluntary or involuntary, for purposes of this Article 10. Appendix 9 Articles of Amendment to Articles of Redomestication effective February 7, 1995 ARTICLES OF AMENDMENT TO ARTICLES OF REDOMESTICATION Pursuant to the provisions of the Colorado Business Corporation Act, Great-West Life & Annuity Insurance Company (the "Corporation") hereby adopts the following Articles of Amendment to its Articles of Redomestication: FIRST: The name of the Corporation is Great-West Life & Annuity Insurance Company. SECOND: The amendments to the Articles of Redomestication set forth on Exhibit 1 attached hereto were adopted on January 24, 1995 by the sole shareholder of the Corporation, as prescribed by the Colorado Business Corporation Act. The number of shares voted for the amendments was sufficient for approval. The number of votes cast for the amendments by each voting group entitled to vote separately on the amendments was sufficient for approval by that voting group. THIRD: The amendments do not effect an exchange, reclassification, or cancellation of issued shares of the Corporation. Dated: January 24, 1995 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By /s/ W. McCallum W.T. McCallum, President and Chief Executive Officer By /s/ D.C. Lennox D.C. Lennox, Senior President, General Counsel and Secretary Exhibit 1 Great-West Life & Annuity Insurance Company hereby amends, as set forth below, parts of its Articles of Redomestication consisting of the Statement of Resolution Establishing Four Series of Preferred Stock dated as of September 18, 1991 and filed with the Secretary of State of Colorado on September 30, 1991, as amended by Articles of Amendment to Articles of Redomestication dated as of June 16, 1992 and filed with the Secretary of State of Colorado on June 30, 1992, and by Articles of Amendment to Articles of Redomestication, dated September 15, 1992 and filed with the Secretary of State of Colorado on September 29, 1992 (as so amended, "the Statement"). 1. The definition of "Initial Long-Term Dividend Period" contained in paragraph 2 of the Statement is hereby amended to read in its entirety as follows: "'Initial Long-Term Dividend Period' means (i) with respect to the Series A STRAPS, Series C STRAPS and Series D STRAPS, the period from and including the respective Dates of Original Issue for such series to and excluding December 31, 2002 and (ii) with respect to Series B STRAPS, the period from and including the Date of Original Issue for such series to and excluding December 31, 1995." 2. Clause (I) of paragraph 3(c)(i) of the Statement is hereby amended to read in its entirety as follows: "(I) during the Initial Long-Term Dividend Period for each series of STRAPS, the respective dividend rates per annum applicable to such series shall be as follows: Series A, C and D: 8% to and excluding December 31, 1993, 4.05% from December 31, 1993 to and excluding February 18, 1994, 4.29% from February 18, 1994 to and excluding April 8, 1994, 4.7E% from April 8, 1994 to and excluding May 27, 1994, 5.46% from May 27, 1994 to and excluding July 15, 1994, 5.16% from July 15, 1994 to and excluding September 2, 1994, 6.00% from September 2, 1994 to and excluding October 21, 1994, 6.29% from October 21, 1994 to and excluding December 9, 1994, 7.58% from December 9, 1994 to and excluding January 27, 1995, and 7.30% for the balance of such Period; and Series B: 7% throughout such Period; and..." Appendix 10 Articles of Amendment to Articles of Redomestication effective May 6, 1996 ARTICLES OF AMENDMENT TO ARTICLES OF REDOMESTICATION Pursuant to the provisions of the Colorado Business Corporation Act, Great-West Life & Annuity Insurance Company (the "Corporation") hereby adopts the following Articles of Amendment to its Articles of Redomestication: FIRST: The name of the Corporation is Great-West Life & Annuity Insurance Company. SECOND: The amendments to the Articles of Redomestication set forth on Exhibit 1 attached hereto were adopted on April 22, 1996 by the sole shareholder of the Corporation, as prescribed by the Colorado Business Corporation Act. The number of shares voted for the amendments was sufficient for approval. The number of votes cast for the amendments by each voting group entitled to vote separately on the amendments was sufficient for approval by that voting group. THIRD: The amendments do not effect an exchange, reclassification, or cancellation of issued shares of the Corporation. Dated: April 22, 1996 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By /s/ W. McCallum W.T. McCallum, President and Chief Executive Officer By /s/ D.C. Lennox D.C. Lennox, Senior President, General Counsel and Secretary Exhibit 1 Great-West Life & Annuity Insurance Company hereby amends, as set forth below, parts of its Articles of Redomestication consisting of the Statement of Resolution Establishing Four Series of Preferred Stock dated as of September 18, 1991 and filed with the Secretary of State of Colorado on September 30, 1991, as amended by Articles of Amendment to Articles of Redomestication dated as of June 16, 1992, and filed with the Secretary of State of Colorado on June 30, 1996, by Articles of Amendment to Articles of Redomestication dated September 15, 1992 and filed with the Secretary of State of Colorado on September 29, 1992, and by Articles of Amendment to Articles of Redomestication dated January 24, 1995 and filed with the Secretary of State of Colorado on February 7, 1995 (as so amended, "the Statement"). 1. The definition of "Initial Long-Term Dividend Period" contained in paragraph 2 of the Statement is hereby amended to read in its entirety as follows: "'Initial Long-Term Dividend Period' means (i) with respect to the Series A STRAPS, Series C STRAPS and Series D STRAPS, the period from and including the respective Dates of Original Issue for such series to and excluding December 31, 2002 and (ii) with respect to Series B STRAPS, the period from and including the Date of Original Issue for such series to and excluding December 31, 1997." 2. Clause (I) of paragraph 3(c)(i) of the Statement is hereby amended to read in its entirety as follows: "(I) during the Initial Long-Term Dividend Period for each series of STRAPS, the respective dividend rates per annum applicable to such series shall be as follows: Series A, C and D: 8% to and excluding December 31, 1993, 4.05% from December 31, 1993 to and excluding February 18, 1994, 4.29% from February 18, 1994 to and excluding April 8, 1994, 4.75% from April 8, 1994 to and excluding May 27, 1994, 5.46% from May 27, 1994 to and excluding July 15, 1994, 5.16% from July 15, 1994 to and excluding September 2, 1994, 6.00% from September 2, 1994 to and excluding October 21, 1994, 6.29% from October 21, 1994 to and excluding December 9, 1994, 7.58% from December 9, 1994 to and excluding January 27, 1995, and 7.30% for the balance of such Period; and Series B: 7% to and excluding December 31, 1995, 7.16% from December 31, 1995 to and excluding February 16, 1996, 6.59% from February 16, 1996 to and excluding April 5, 1996, 6.79% from April 5, 1996 to and excluding May 24, 1996, and 5.80% for the balance of such Period; and . . . " EX-3.(II) 3 BYLAWS OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY ARTICLE I SHAREHOLDERS' MEETING SECTION 1. Annual Meeting. The Annual Meeting of the Shareholders for the election of the Directors and for the transaction of any other business pertaining to the corporation (whether or not stated in the notice of the meeting) shall be held at such time, date and place as the Board of Directors, by resolution, shall determine and set forth in the notice of the meeting. SECTION 2. Special Meetings. Special Meetings of the Shareholders shall be called whenever ordered by the Chairman of the Board, the President, a quorum of the Board of Directors, or the holders of at least one-quarter (1/4) of the total amount of stock issued and outstanding. Notice of the meeting may be waived and neither the business to be transacted at, nor the purpose of the meeting, need be specified in the waiver of notice. In the absence of waiver of notice, the purposes for which the meeting is called shall be stated in the notice and no other corporate action shall be taken without the consent of all Shareholders entitled to vote. SECTION 3. Place of Meetings. All meetings of the Shareholders shall be held at the office of the corporation in Englewood, Colorado, or at such other place or places, within or without the State of Colorado, as shall from time to time be designated by the Board of Directors. SECTION 4. Notice of Meetings. Notice of all meetings, regular or special, shall be given by mailing to each Shareholder entitled to vote thereat, directed to his address as it appears on the records of the corporation, at least ten days and not more than fifty days before such meeting, a written or printed notice of the time, place, and purpose or purposes thereof. SECTION 5. Quorum. The holders of a majority of the outstanding stock of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum for all purposes. In the absence of a quorum, the Shareholders entitled to vote thereat, represented in person or by proxy, may adjourn the meeting to a day certain. SECTION 6. Voting. At all meetings of Shareholders each share of stock held by a Shareholder, represented in person or by proxy, shall be entitled to one vote. Proxies shall be in writing and shall be signed by the Shareholder. Two judges of election shall be appointed by the Chairman of the meeting at any Shareholders' Meeting at which judges are required. The Directors shall be elected by ballot, and each full-paid share of stock shall be entitled to one vote. Shares may be voted by proxy, signed by the person legally entitled to vote the same. Each Shareholder shall have the right to cast as many votes in the aggregate as shall equal the number of shares of stock held by him, multiplied by the number of Directors to be elected. ARTICLE II BOARD OF DIRECTORS SECTION 1. Number and Authority. The business and property of this corporation shall be conducted and managed by a Board of Directors consisting of not more than 25 Directors and not less than 5 Directors, the exact number thereof to be fixed and determined by action taken from time to time by the Board of Directors. SECTION 2. Election. At each annual meeting of Shareholders, the Shareholders shall elect Directors to hold office until the next succeeding annual meeting. Each Director shall hold office for the term for which he is elected and until his successor has been elected and qualified, subject to removal as hereinafter provided. SECTION 3. Removal and Vacancies. Any or all Directors may be removed at any time, with or without cause, by a majority vote of the Shareholders who shall thereupon elect a successor Director or Directors to fill the vacancy or vacancies -- and in which case the election of such successor Directors may be at a Special Meeting of Shareholders called for such purpose. A vacancy in the Board of Directors, other than one occurring by reason of removal by Shareholders, shall be filled by the Board of Directors to serve until the next annual meeting of the Shareholders. Where the number of Directors is increased additional Directors may be elected by the Board of Directors to serve until the next annual meeting of the Shareholders. SECTION 4. Regular Meeting. The Regular Meeting of the Board of Directors shall be held immediately following the Annual Meeting of the Shareholders. SECTION 5. Special Meetings. Special Meetings of the Board of Directors may be called by order of the Chairman of the Board, the President, or the Secretary. SECTION 6. Place of Meetings. Meetings of the Board of Directors shall be held at the office of the corporation in Englewood, Colorado, or at such other place within or without the State of Colorado as may be designated in the notice thereof. SECTION 7. Notice of Meetings. Notice of meetings of the Board of Directors, except the regular meeting of the Board, shall be given by mailing to each member at least two days before such meeting, a written or printed notice of the time, and place thereof. Such notice may also be given by telegram sent at least one day before such meeting. SECTION 8. Business Transacted at Meetings. Any business may be transacted and any corporate action taken at any meeting of the Board of Directors whether stated in the notice of such meeting or not, except as otherwise expressly required by law. SECTION 9. Quorum. A majority of the number of Directors fixed by Section 1 shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice, for a period not to exceed 60 days at any one adjournment. SECTION 10. Interest of Directors. Except as prohibited by statute, any Director may vote or act on behalf of the corporation in contracting with any other company although he may be a Shareholder, Director, or Officer of such other company. SECTION 11. Indemnification of Directors. The corporation may, by resolution of the Board of Directors, indemnify and save harmless out of the funds of the corporation to the extent permitted by applicable law, any Director, Officer, or employee of the corporation or any member or officer of any Committee, and his heirs, executors, and administrators, from and against all claims, liabilities, costs, charges, and expenses whatsoever that any such Director, Officer, employee, or any such member or officer sustains or incurs in or about any action, suit, or proceeding that is brought, commenced, or prosecuted against him for or in respect of any act, deed, matter, or thing whatsoever, made, done, or permitted by him in or about the execution of the duties of his office or employment with the corporation, in or about the execution of his duties as a Director or Officer of another company which he so serves at the request and on behalf of the corporation, or in or about the execution of his duties as a member or officer of any such Committee, and all other claims, liabilities, costs, charges, and expenses that he sustains or incurs, in or about or in relation to any such duties or the affairs of the corporation, the affairs of such other company which he so serves or the affairs of such Committee, except such claims, liabilities, costs, charges, or expenses as are occasioned by his own willful neglect or default. The corporation may, by resolution of the Board of Directors, indemnify and save harmless out of the funds of the corporation to the extent permitted by applicable law, any Director, Officer, or employee of any subsidiary corporation of the corporation on the same basis and within the same constraints as described in the preceding sentence. ARTICLE III EXECUTIVE COMMITTEE SECTION 1. Membership. The Board of Directors shall elect from its own number an Executive Committee, to serve at the pleasure of the Board, consisting of not less than three members, the exact number to be fixed and determined by action taken from time to time by the Board of Directors. The Executive Committee shall elect from among its members a Chairman, and shall appoint a Secretary. SECTION 2. Powers of the Executive Committee. The Executive Committee shall have and may exercise all the powers of the Board with respect to the conduct and management of the business and property of the Company, except that the Executive Committee shall not have power to declare dividends on or distributions of the capital stock of the corporation, amend the Bylaws, fill vacancies in the Committee or the Board of Directors, or exercise any powers prohibited by C.R.S. 7-5-107 or which the Board of Directors may from time to time, by proper resolution, reserve to itself. SECTION 3. Meetings. The Committee may determine the times and places for the holding of meetings. The Committee shall prepare regular minutes of the transactions at its meetings and shall cause them to be recorded in books kept for that purpose. All actions of the Committee shall be reported to the Board of Directors at its next meeting succeeding the date of such action. SECTION 4. Place of Meetings. Meetings of the Executive Committee shall be held at the office of the corporation in Englewood, Colorado, or at such other place, within or without the State of Colorado, as may be designated in the notice or waiver of notice of the meeting. SECTION 5. Notice of Meetings. Notice of all meetings shall be given by mailing to each member at least two days before such meeting, a written or printed notice of the time and place thereof. Such notice may also be given by telegram at least one day before such meeting. SECTION 6. Quorum. A quorum shall consist of two members of the Committee. ARTICLE IV INVESTMENT AND CREDIT COMMITTEE SECTION 1. Membership. The Board of Directors shall elect from its own number an Investment and Credit Committee, to serve at the pleasure of the Board, consisting of not less than three members, the exact number to be fixed and determined by action taken from time to time by the Board of Directors. The Investment and Credit Committee shall elect from among its members a Chairman, and shall appoint a Secretary. SECTION 2. Powers of the Investment and Credit Committee. The Investment and Credit Committee shall have the authority to approve the investments of the funds of the corporation, except for all or any part of that authority which the Board of Directors may from time to time, by proper resolution, reserve to itself. SECTION 3. Meetings. The Committee may determine the times and places for the holding of meetings. The Committee shall prepare regular minutes of the transactions at its meetings and shall cause them to be recorded in books kept for that purpose. All actions of the Committee shall be reported to the Board of Directors at its next meeting succeeding the date of such action. SECTION 4. Place of Meetings. Meetings of the Investment and Credit Committee shall be held at the office of the corporation in Englewood, Colorado, or at such other place, within or without the State of Colorado, as may be designated in the notice thereof. SECTION 5. Notice of Meetings. Notice of all meetings shall be given by mailing to each member at least two days before such meetings, a written or printed notice of the time and place thereof. Such notice may also be given by telegram at least one day before such meetings. SECTION 6. Quorum. A quorum shall consist of three members of the Committee. ARTICLE V OFFICERS SECTION 1. Duties in General. All Officers of the corporation, in addition to the duties prescribed by the Bylaws, shall perform such duties in the conduct and management of the business and property of the corporation as may be determined by the Board of Directors. In the case of more than one person holding an office of the same title, any one of them may perform the duties of the office except insofar as the Board of Directors, or the President may otherwise direct. SECTION 2. Number and Designation. The Officers of the corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, one or more Secretaries, one or more Treasurers, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other Officers and Committees as the Board of Directors may from time to time deem advisable. It shall be permissible for the same person to hold more than one office, except that the offices of President and Secretary shall not be held by the same person. SECTION 3. Election and Term of Office. The Board of Directors shall elect from their number a President and Vice President, and shall appoint a Secretary, Treasurer, and such other Officers as shall be prescribed in the Bylaws, and shall fill any vacancy that may occur. SECTION 4. Chairman of the Board. The Chairman of the Board of Directors shall preside at all meetings of the Shareholders and at all meetings of the Board and shall perform such other duties as the Board of Directors may from time to time prescribe. SECTION 5. President. The President, in the absence of the Chairman of the Board, shall preside at all meetings of the Shareholders and of the Board of Directors. He shall have the powers and perform the duties usually pertaining to the Office of President. SECTION 6. Vice Presidents. The Vice Presidents shall have such powers and perform such duties as may be assigned to them from time to time by the Board of Directors or by the President. The Board of Directors or the President may from time to time determine the order of priority as between two or more Vice Presidents. SECTION 7. Secretary. The Secretary shall keep the minutes of the meetings of the Shareholders, of the Board of Directors, and of the Executive and Investment Committees; shall issue notices of meetings; shall have custody of the corporation's seal and corporate books and records; shall have charge of the issuance, transfer, and cancellation of stock certificates; shall have authority to attest and affix the corporate seal of any instruments executed on behalf of the corporation; and shall perform such other duties as are incident to his office and as are required by the Board of Directors or the President. SECTION 8. Assistant Secretaries. The Assistant Secretaries in order of their priority shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary, and shall have such other powers and perform such other duties as may be assigned to them from time to time by the Board of Directors or the President. SECTION 9. Treasurer. The Treasurer shall have custody of the funds and securities of the corporation and shall deposit the same in such banks or depositories as the Board of Directors or the President may direct. The Treasurer may, under the direction of the Board of Directors, disburse all monies and sign checks or other instruments drawn on or payable out of the funds of the corporation, which, however, shall be countersigned by the President, a Vice President, the Secretary, or an Assistant Secretary, or an Assistant Treasurer. He shall also make such transfers of the securities of the corporation as may be ordered by the Board of Directors or the President. In general, the Treasurer shall perform all of the duties incident to his office and such other duties as are required of him by the Board of Directors or the President. SECTION 10. Assistant Treasurers. The Assistant Treasurers in order of their priority shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer, and shall have such other powers and perform such other duties as may be assigned to them from time to time by the Board of Directors or the President. SECTION 11. Other Officers. Other Officers who may from time to time be elected by the Board of Directors shall have such powers and perform such duties as may be assigned to them by the Board of Directors or the President. SECTION 12. Compensation. The compensation of the Officers shall be fixed by the Chairman of the Board and the President. SECTION 13. Emergency Management Committee. Notwithstanding anything to the contrary contained in these Bylaws, during any period of emergency as contemplated by C.R.S. 7-5-118 or when the Board of Directors shall be unable to function by reason of vacancies therein and there shall be no Director remaining and able to fill such vacancies, the first two of the following who are readily available shall constitute an Emergency Management Committee: (a) Vice Presidents in order of priority based upon their period of service in such offices; (b) Other Officers in order of priority based upon their period of service in such offices. The Emergency Management Committee shall manage and control the business and property of the corporation and shall have and exercise all of the powers, rights, and prerogatives of the corporation until a Board of Directors shall have been duly constituted. The decisions of the Committee shall be final and shall be superior to the decisions of any other Officer of the corporation. In addition to, and not in modification or limitation of, its authority as stated above, the Emergency Management Committee shall have the power and authority: (a) To call meetings of Shareholders whether Annual or Special; (b) To elect and appoint Officers to fill vacancies; (c) To make rules and regulations of procedure for its operation. Any vacancy which occurs on the Emergency Management Committee shall be filled by the next Vice President or other Officers (as the case may be) in order of priority as provided above. ARTICLE VI CAPITAL STOCK SECTION 1. Certificates. Every Shareholder shall be entitled at his request to a certificate signed by the President or a Vice President, and also by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and under the seal of the corporation, certifying the number of shares to which he is entitled. SECTION 2. Transfers. Transfers of stock may be made on the books of the corporation only by the holder thereof in person or by his attorney duly authorized thereto in writing and upon surrender and cancellation of the certificate therefor duly assigned or accompanied by a duly executed stock power. SECTION 3. Lost or Destroyed Certificates. The Board of Directors may order a new certificate to be issued in place of a certificate lost or destroyed upon proof of such loss or destruction and upon tender to the corporation by the Shareholder of a bond in such amount and in such form and with or without surety as may be ordered, indemnifying the corporation against any liability, claim, loss, cost, or damage by reason of such loss or destruction and the issuance of a new certificate. SECTION 4. Dividends. Dividends may be declared from the legally available surplus of the corporation at such times and in such amounts as the Board of Directors may determine. Such dividends on the capital stock of the corporation may not be declared by a committee of the Board. ARTICLE VII CORPORATE FUNDS SECTION 1. Deposits. Checks, drafts, bills, notes, negotiable instruments or any other orders for the payment of money or evidence of indebtedness payable to and received by the corporation may be endorsed for deposit to the credit of the corporation by such Officers or agents of the corporation as the Board of Directors may determine and may be endorsed for deposit to the credit of agents of the corporation in such manner as the Board of Directors may direct. SECTION 2. Withdrawals. All disbursements of the funds of the corporation shall be made by check, draft, or other order signed by such Officers or other persons as the Board of Directors may from time to time authorize to sign the same. ARTICLE VIII MISCELLANEOUS PROVISIONS SECTION 1. Voting Stock of Other Corporations. The President, any Vice President, or any other Officer designated by the Board of Directors may execute in the name of the corporation and attach the corporate seal to any proxy or power of attorney authorizing the proxy or proxies or attorney or attorneys named therein to vote the stock of any corporation held in this corporation on any matter on which such stock may be voted. If any stock owned by this corporation is held in any name other than the name of this corporation, instructions as to the manner in which such stock is to be voted on behalf of this corporation may be given to the holder of record by the President, any Vice President, or any other Officer designated by the Board of Directors. SECTION 2. Notices. Any notice under these Bylaws may be given by mail by depositing the same in a post office or postal letter box or postal mail chute in a sealed postpaid wrapper addressed to the person entitled thereto at his address as the same appears upon the books or records of the corporation or at such other address as may be designated by such person except that notice which may be given by telegram may be telegraphed to such person at such address; and such notice shall be deemed to be given at the time such notice is mailed or telegraphed. SECTION 3. Waiver of Notice. Any Shareholder, Director, or member of the Executive or Investment Committees may at any time waive any notice required to be given under these Bylaws in accordance with the provisions of C.R.S. 7-4-119 and 7-5-108, including written waiver executed before, at, or after the meeting or by presence at the meeting. ARTICLE IX AMENDMENTS The Bylaws may be amended in whole or in part by the Board of Directors. No Bylaws shall be in conflict with the laws of the State of Colorado or with the Regulations of the Colorado Commissioner of Insurance. ARTICLE X EFFECTIVE DATE AND RESTATEMENT These Bylaws become effective immediately upon the redomestication of the corporation from the State of Kansas to the State of Colorado. They thereafter constitute an amendment and restatement of all prior Bylaws of the corporation under the laws of the State of Kansas. ************************** EX-21 4 EXHIBIT 21 SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY SUBSIDIARY JURISDICTION OF INCORPORATION OR OGRANIZATION Benefits Communication Corporation (1) Delaware BenefitsCorp Equities, Inc. Delaware Confed Admin Services, Inc. Delaware Financial Administrative Services Corporation (2) Colorado Great-West Benefit Services, Inc. Delaware Great-West Realty Investments, Inc. Delaware Greenwood Property Corporation Colorado GW Capital Management, Inc. Colorado GWL Properties, Inc. Colorado Maxim Series Fund, Inc. Maryland One Corporation Colorado One Health Plan of California, Inc. California One Health Plan of Colorado, Inc. Colorado One Health Plan of Georgia, Inc. Georgia One Health Plan of Illinois, Inc. Illinois One Health Plan of North Carolina, Inc. North Carolina One Health Plan of Texas, Inc. Texas One Orchard Equities, Inc. Colorado (1) Also doing business as Benefits Insurance Services, Inc. (2) Also doing business as Financial Administrative Services Corporation of Colorado. EX-24 5 EXHIBIT 24 DIRECTORS' POWERS OF ATTORNEY POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, James Balog, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of March, 1997. /s/ James Balog Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Stephen J. Balog Signature Stephen J. Balog Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, James W. Burns, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of March, 1997. /s/ J.W. Burns Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Louise D. Auriol Signature Louise D. Auriol Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Orest T. Dackow, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of March, 1997. /s/ O.T. Dackow Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ R. Schultz Signature Richard Schultz Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Paul Desmarais, Jr., a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 7th day of March, 1997. /s/ P. Desmarais, Jr. Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Lucie Filteau Signature Lucie Filteau Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Robert Gratton, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 11th day of March, 1997. /s/ R. Gratton Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Nicole Barolet Signature Nicole Barolet Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, N. Berne Hart, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 4th day of March, 1997. /s/ N. Berne Hart Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Wilma J. Hart Signature Wilma J. Hart Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Kevin P. Kavanagh, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of March, 1997. /s/ K.P. Kavanagh Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ J.A. Andrew Signature John A. Andrew Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, William Mackness, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of March, 1997. /s/ W. Mackness Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Carlyle Carey Signature Carlyle Carey Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, William T. McCallum, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of March, 1997. /s/ W. McCallum Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Joan Preyer Signature Joan Preyer Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Jerry E.A. Nickerson, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 8th day of March, 1997. /s/ J. Nickerson Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Loretta Capwell Signature Loretta Capwell Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, P. Michael Pitfield, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of March, 1997. /s/ P. Michael Pitfield Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Diane Meilleur Signature Diane Meilleur Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Michel Plessis-Belair, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 7th day of March, 1997. /s/ M. Plessis-Belair Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Danielle Dorocher Signature Danielle Dorocher Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Ross J. Turner, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of March, 1997. /s/ R.J. Turner Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ Doreen Cordell Signature Doreen Cordell Name Printed POWER OF ATTORNEY RE GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY Know all men by these presents, that I, Brian E. Walsh, a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, a Colorado corporation, do hereby constitute and appoint each of D.C. Lennox and G.R. Derback as my true and lawful attorney and agent for me and in my name and on my behalf to, individually and without the concurrence of the other attorney and agent, sign my name, in my capacity as a Member of the Board of Directors of Great-West Life & Annuity Insurance Company, on Form 10-K Annual Reports of Great-West Life & Annuity Insurance Company to be filed with the Securities and Exchange Commission from time to time, and to any and all amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand this 6th day of March, 1997. /s/ B.E. Walsh Member, Board of Directors of Great-West Life & Annuity Insurance Company Witness: /s/ R. Pascoe Signature Ricardo A. Pascoe Name Printed EX-27 6 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 1,000 12-MOS DEC-31-1996 DEC-31-1996 Fixed Maturities Held for Sale 6,206,478 Fixed Maturities Held to Maturity - Carrying Value 1,992,681 Fixed Maturities Held to Maturity - Market Value 2,041,064 Investment in Equity Securities 19,715 Mortgage Loans on Real Estate 1,487,575 Total Investments 12,716,901 Cash and Cash Equivalents 125,182 Reinsurance Recoverable on paid Losses 196,958 Deferred Policy Acquisition Costs 282,780 Total Assets 19,351,234 Policy Liabilities - Future Benefits, Losses, Claims 11,394,922 Policy Liabilities - Unearned Premiums Policy Liabilities - Other Claims and Benefits Other Policyholder Funds 425,800 Notes Payable, Bonds, Mortgages and Similar Debt 84,682 Preferred Stocks Mandatory Redemption Preferred Stocks - Not Mandatory 121,800 Common Stock 7,032 Other Stockholder's Equity 905,382 Total Liabilities and Stockholder's Equity 19,351,234 Premiums 1,199,248 Net Investment Income 836,642 Realized Investment Gains and Losses (21,078) Other Income Benefits, Claims, Losses, and Settlement Expenses 1,355,964 Underwriting Acquisition and Insurance Expenses - Amortization of Deferred Policy Acq. Costs 47,089 Underwriting Acquisition and Insurance Expense - Other 421,212 Income or Loss Before Income Taxes 190,547 Income Tax Expense 55,972 Income/Loss Continuing Operations 134,575 Discontinued Operations 0 Extraordinary Items 0 Cumulative Effect - Changes in Accounting Principles 0 Net Income or Loss 134,575 Earnings Per Share - Primary N/A Earnings Per Share - Fully Diluted N/A
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